Albania: 2021 Article IV Consultation Concluding Statement
IMF News, October 12, 2021
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- Published: October 12, 2021
Key messages and priorities
- Albania’s economy has shown considerable resilience to the 2019 earthquake and the pandemic; after a terrible 2020, activity is rebounding strongly.
- Two principal challenges: (1) invest efficiently in people and the economy to support continued development; (2) rebuild room for fiscal policy maneuver by lowering the very high fiscal deficit and public debt ratios.
- The recommended policy framework: an ambitious Medium-Term Revenue Strategy (MTRS) and credible medium-term fiscal adjustment paired with improved transparency and quality of public spending.
Economic outlook and risks
- Recent and projected growth:
- Contraction of 4 percent in 2020.
- Projected rebound of 7.8 percent in 2021.
- Projected normalization to 3.8 percent in 2022.
- Inflation and drivers:
- Headline inflation has risen on account of higher food and energy prices; core inflation has thus far remained stable and inflationary pressures are subdued.
- A shift toward monetary tightening is warranted only if there are clear indications of inflationary pressures broadening and becoming persistent.
- Downside risks:
- Emergence of vaccine-resistant variants globally or localized outbreaks in Albania.
- Potentially tighter global financial conditions.
- Elevated global energy prices.
- Upside risk:
- Faster normalization from the pandemic.
Fiscal position, projections, and recommended adjustment
- 2021 fiscal stance and projections:
- Despite a strong rebound in tax revenue, the primary deficit would remain at 4.6 percent of GDP, similar to that in 2020.
- General government debt is projected to rise to almost 80 percent of GDP at end-2021.
- Government gross financing needs remain high at about 20 percent of GDP annually.
- Medium-term path and targets:
- The fiscal rule of a zero primary balance is to be adhered to starting 2024 as per the requirement of the Organic Budget Law (OBL).
- Without further adjustment efforts, debt will still hover above 70 percent of GDP in the medium term.
- Recommended adjustment: reduce the primary deficit to about 2 percent of GDP in 2022 and reach a primary surplus of about 1.5 percent of GDP in 2024.
- With the strategy outlined, government debt could be brought back close to 65 percent of GDP by 2026.
- Fiscal credibility and management:
- Adopt a credible medium-term fiscal adjustment plan, underpinned by a sound MTRS.
- Bolster the credibility of the budget and fiscal framework; changes to the OBL design and application should occur through normal parliamentary procedures.
- Discontinue the use of normative acts to amend the budget in-year, except for emergency circumstances.
- Strengthen debt management strategy and enhance MOFE cash management tools.
Revenue strategy and public spending quality
- Medium-Term Revenue Strategy (MTRS):
- The lynchpin of credible fiscal adjustment is a sound MTRS to broaden the tax base and remove loopholes.
- Government plans to finalize and adopt the MTRS following public consultation and begin implementation in early 2022 are welcomed.
- Recommendation: create a dedicated tax policy unit with adequate resourcing and staffing in the Ministry of Finance and Economy (MOFE).
- Advice against tax amnesty and ad hoc tax cuts, exemptions, and incentives.
- Public spending priorities and efficiency:
- Pare back overly ambitious domestically financed (non-earthquake) public investment given weak capacity and low efficiency.
- Use part of the fiscal room to provide health care (notably vaccination rollout) and targeted support to the most vulnerable amid rising food and energy prices.
- Windfall revenues should be saved for faster deficit and debt reduction; if the recovery suffers setbacks, higher targeted support can be deployed later.
- Public Financial Management (PFM) and transparency:
- Transparency and accountability measures for emergency spending should be implemented as soon as possible; earthquake reconstruction funds must be subject to adequate PFM controls.
- Ongoing progress on a public registry of beneficial owners is welcomed.
- Imminent completion and publication of the Supreme Audit Institution’s audit of earthquake and pandemic-related spending in 2020 is anticipated.
Public investment management, PPPs, and fiscal risks
- PPPs and public investment trends:
- Rapidly rising stock of PPPs expected to reach 50 percent of GDP in 2021, up from 33 percent in 2018.
- Domestically financed (non-earthquake) public investment has also grown markedly since 2020.
- Key PIM challenges:
- Lack of transparency on cost and schedule overruns.
- Noncompliance with established selection and approval processes, including use of PPPs to circumvent medium-term budgetary ceilings.
- Need to strengthen MOFE capacity to act as gatekeeper in project selection, evaluation, and monitoring.
- Align processes for PPPs and budget-funded projects.
- Fiscal risks to monitor and manage:
- Lack of clear data on government’s true exposure to PPPs.
- Government guarantee schemes under discussion and rising sovereign guarantees and intermittent budget support to state-owned enterprises (especially in the utility sector).
- Recommendation: redouble efforts to strengthen public investment management and better monitor and manage rising fiscal risks.
- Reinvigorate electricity and related water sector reforms that have been delayed.
Monetary policy and financial sector stability
- Monetary policy stance:
- Bank of Albania’s accommodative monetary policy remains appropriate while inflationary pressures are contained; exchange rate flexibility should continue to act as a shock absorber.
- Monetary tightening should be data-driven and contingent on persistent, broad-based inflation.
- Banking system resilience and supervision:
- The banking system has remained stable and liquid; continued vigilance is required to safeguard financial stability.
- Close monitoring of loan portfolio quality and timely identification and management of problem assets are warranted.
- Consider a focused Asset Quality Review (AQR) by the BoA to accurately assess the pandemic’s impact on banks’ asset quality and capital position.
- Preserve banks’ capital buffers until the pandemic’s full impact on asset quality is known.
- Strengthen resolution frameworks and implement the regulatory framework for dealing with large borrowers with NPLs (i.e., Tirana approach).
- Implement insolvency and resolution frameworks, including out-of-court loan restructuring; resolve the impasse in bailiff reform.
- Supervisory vigilance in a changing banking landscape:
- Presence of more banks with significant shareholding by individuals and non-financial groups raises risks of capital shortfalls, related-party transactions, and growing large exposures.
- Continue strengthening and implementing licensing and supervisory frameworks, including fit-and-proper assessments of significant shareholders, controllers, beneficial owners, and senior managers.
- Enhance surveillance of potential financial-stability risks from the fast-growing real estate market.
- Continue aligning BoA’s regulatory and supervisory framework with international standards.
Governance, rule of law, AML/CFT, and competitiveness
- Rule of law and judicial reform:
- Implementation of comprehensive judicial reform launched in 2016 with EU support is progressing.
- Asset declaration platform is in final stages for operationalization and information will be publicly available.
- Vetting of judges has progressed further, but more trained judges and prosecutors are needed.
- Remaining reforms should be expeditiously implemented; corruption remains a key impediment to equitable growth.
- AML/CFT status:
- In February 2021, the FATF put Albania under increased monitoring (“grey list”) owing to concerns about the AML/CFT framework and its effectiveness; an action plan was agreed.
- The country is making good progress on its action plan and should continue efforts to exit the grey list promptly.
- Structural competitiveness and labor market:
- Albania’s structural competitiveness gaps vis-à-vis regional peers persist.
- Strengthening institutions, reducing vulnerabilities to corruption, addressing shortages of skilled labor, and closing infrastructure gaps will improve the business environment and productivity.
- Any further increase in the minimum wage needs to be accompanied by measures to reduce informality and increase productivity.
Closing acknowledgements
- The mission thanks the Albanian authorities and other counterparts for close collaboration and fruitful exchange of views.
Concluding statement: Albania: 2021 Article IV Consultation Concluding Statement
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- Shqipëri: Deklaratë në Përfundim të Konsultimeve të Nenit IV me Shqiperinë për vitin 2021