{
  "title": "Albania: 2021 Article IV Consultation Concluding Statement",
  "publication": "IMF News, October 12, 2021",
  "sourceUrl": "https://www.imf.org/en/news/articles/2021/10/12/mcs101221-albania-2021-article-iv-consultation-concluding-statement",
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  "summary": "Albania’s economy has shown considerable resilience to the 2019 earthquake and the pandemic; after a terrible 2020, activity is rebounding strongly.",
  "publishDate": "2021-10-12",
  "sections": [
    {
      "heading": "Key messages and priorities",
      "content": "- Albania’s economy has shown considerable resilience to the 2019 earthquake and the pandemic; after a terrible 2020, activity is rebounding strongly.\n- 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.\n- 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."
    },
    {
      "heading": "Economic outlook and risks",
      "content": "- Recent and projected growth:\n  - Contraction of 4 percent in 2020.\n  - Projected rebound of 7.8 percent in 2021.\n  - Projected normalization to 3.8 percent in 2022.\n- Inflation and drivers:\n  - Headline inflation has risen on account of higher food and energy prices; core inflation has thus far remained stable and inflationary pressures are subdued.\n  - A shift toward monetary tightening is warranted only if there are clear indications of inflationary pressures broadening and becoming persistent.\n- Downside risks:\n  - Emergence of vaccine-resistant variants globally or localized outbreaks in Albania.\n  - Potentially tighter global financial conditions.\n  - Elevated global energy prices.\n- Upside risk:\n  - Faster normalization from the pandemic."
    },
    {
      "heading": "Fiscal position, projections, and recommended adjustment",
      "content": "- 2021 fiscal stance and projections:\n  - Despite a strong rebound in tax revenue, the primary deficit would remain at 4.6 percent of GDP, similar to that in 2020.\n  - General government debt is projected to rise to almost 80 percent of GDP at end-2021.\n  - Government gross financing needs remain high at about 20 percent of GDP annually.\n- Medium-term path and targets:\n  - 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).\n  - Without further adjustment efforts, debt will still hover above 70 percent of GDP in the medium term.\n  - 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.\n  - With the strategy outlined, government debt could be brought back close to 65 percent of GDP by 2026.\n- Fiscal credibility and management:\n  - Adopt a credible medium-term fiscal adjustment plan, underpinned by a sound MTRS.\n  - Bolster the credibility of the budget and fiscal framework; changes to the OBL design and application should occur through normal parliamentary procedures.\n  - Discontinue the use of normative acts to amend the budget in-year, except for emergency circumstances.\n  - Strengthen debt management strategy and enhance MOFE cash management tools."
    },
    {
      "heading": "Revenue strategy and public spending quality",
      "content": "- Medium-Term Revenue Strategy (MTRS):\n  - The lynchpin of credible fiscal adjustment is a sound MTRS to broaden the tax base and remove loopholes.\n  - Government plans to finalize and adopt the MTRS following public consultation and begin implementation in early 2022 are welcomed.\n  - Recommendation: create a dedicated tax policy unit with adequate resourcing and staffing in the Ministry of Finance and Economy (MOFE).\n  - Advice against tax amnesty and ad hoc tax cuts, exemptions, and incentives.\n- Public spending priorities and efficiency:\n  - Pare back overly ambitious domestically financed (non-earthquake) public investment given weak capacity and low efficiency.\n  - 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.\n  - Windfall revenues should be saved for faster deficit and debt reduction; if the recovery suffers setbacks, higher targeted support can be deployed later.\n- Public Financial Management (PFM) and transparency:\n  - Transparency and accountability measures for emergency spending should be implemented as soon as possible; earthquake reconstruction funds must be subject to adequate PFM controls.\n  - Ongoing progress on a public registry of beneficial owners is welcomed.\n  - Imminent completion and publication of the Supreme Audit Institution’s audit of earthquake and pandemic-related spending in 2020 is anticipated."
    },
    {
      "heading": "Public investment management, PPPs, and fiscal risks",
      "content": "- PPPs and public investment trends:\n  - Rapidly rising stock of PPPs expected to reach 50 percent of GDP in 2021, up from 33 percent in 2018.\n  - Domestically financed (non-earthquake) public investment has also grown markedly since 2020.\n- Key PIM challenges:\n  - Lack of transparency on cost and schedule overruns.\n  - Noncompliance with established selection and approval processes, including use of PPPs to circumvent medium-term budgetary ceilings.\n  - Need to strengthen MOFE capacity to act as gatekeeper in project selection, evaluation, and monitoring.\n  - Align processes for PPPs and budget-funded projects.\n- Fiscal risks to monitor and manage:\n  - Lack of clear data on government’s true exposure to PPPs.\n  - Government guarantee schemes under discussion and rising sovereign guarantees and intermittent budget support to state-owned enterprises (especially in the utility sector).\n  - Recommendation: redouble efforts to strengthen public investment management and better monitor and manage rising fiscal risks.\n  - Reinvigorate electricity and related water sector reforms that have been delayed."
    },
    {
      "heading": "Monetary policy and financial sector stability",
      "content": "- Monetary policy stance:\n  - 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.\n  - Monetary tightening should be data-driven and contingent on persistent, broad-based inflation.\n- Banking system resilience and supervision:\n  - The banking system has remained stable and liquid; continued vigilance is required to safeguard financial stability.\n  - Close monitoring of loan portfolio quality and timely identification and management of problem assets are warranted.\n  - Consider a focused Asset Quality Review (AQR) by the BoA to accurately assess the pandemic’s impact on banks’ asset quality and capital position.\n  - Preserve banks’ capital buffers until the pandemic’s full impact on asset quality is known.\n  - Strengthen resolution frameworks and implement the regulatory framework for dealing with large borrowers with NPLs (i.e., Tirana approach).\n  - Implement insolvency and resolution frameworks, including out-of-court loan restructuring; resolve the impasse in bailiff reform.\n- Supervisory vigilance in a changing banking landscape:\n  - 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.\n  - Continue strengthening and implementing licensing and supervisory frameworks, including fit-and-proper assessments of significant shareholders, controllers, beneficial owners, and senior managers.\n  - Enhance surveillance of potential financial-stability risks from the fast-growing real estate market.\n  - Continue aligning BoA’s regulatory and supervisory framework with international standards."
    },
    {
      "heading": "Governance, rule of law, AML/CFT, and competitiveness",
      "content": "- Rule of law and judicial reform:\n  - Implementation of comprehensive judicial reform launched in 2016 with EU support is progressing.\n  - Asset declaration platform is in final stages for operationalization and information will be publicly available.\n  - Vetting of judges has progressed further, but more trained judges and prosecutors are needed.\n  - Remaining reforms should be expeditiously implemented; corruption remains a key impediment to equitable growth.\n- AML/CFT status:\n  - 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.\n  - The country is making good progress on its action plan and should continue efforts to exit the grey list promptly.\n- Structural competitiveness and labor market:\n  - Albania’s structural competitiveness gaps vis-à-vis regional peers persist.\n  - Strengthening institutions, reducing vulnerabilities to corruption, addressing shortages of skilled labor, and closing infrastructure gaps will improve the business environment and productivity.\n  - Any further increase in the minimum wage needs to be accompanied by measures to reduce informality and increase productivity."
    },
    {
      "heading": "Closing acknowledgements",
      "content": "- The mission thanks the Albanian authorities and other counterparts for close collaboration and fruitful exchange of views.\n\nConcluding statement: Albania: 2021 Article IV Consultation Concluding Statement\n\n---\n\n Content in this bundle\n\n- Shqipëri: Deklaratë në Përfundim të Konsultimeve të Nenit IV me Shqiperinë për vitin 2021\n  - Shqipëri: Deklaratë në Përfundim të Konsultimeve të Nenit IV me Shqiperinë për vitin 2021 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Shqipëri: Deklaratë në Përfundim të Konsultimeve të Nenit IV me Shqiperinë për vitin 2021 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- Albania and the IMF\n- IMF Policy Advice -- A Factsheet\n- The IMF and Good Governance -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2021/10/12/mcs101221-albania-2021-article-iv-consultation-concluding-statement"
    }
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    "Published: October 12, 2021",
    "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.",
    "Recent and projected growth:",
    "Inflation and drivers:",
    "Downside risks:",
    "Upside risk:",
    "2021 fiscal stance and projections:",
    "Medium-term path and targets:",
    "Fiscal credibility and management:",
    "Medium-Term Revenue Strategy (MTRS):",
    "Public spending priorities and efficiency:",
    "Public Financial Management (PFM) and transparency:",
    "PPPs and public investment trends:",
    "Key PIM challenges:",
    "Fiscal risks to monitor and manage:",
    "Monetary policy stance:",
    "Banking system resilience and supervision:",
    "Supervisory vigilance in a changing banking landscape:",
    "Rule of law and judicial reform:",
    "AML/CFT status:",
    "Structural competitiveness and labor market:",
    "The mission thanks the Albanian authorities and other counterparts for close collaboration and fruitful exchange of views.",
    "**Shqipëri: Deklaratë në Përfundim të Konsultimeve të Nenit IV me Shqiperinë për vitin 2021**",
    "[Albania and the IMF](http://www.imf.org/external/country/alb/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[The IMF and Good Governance -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2023/the-imf-and-good-governance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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