## Albania: 2021 Article IV Consultation Concluding Statement

_IMF News, October 12, 2021_

## Source details

**Canonical URL:** [Albania: 2021 Article IV Consultation Concluding Statement](https://www.imf.org/en/news/articles/2021/10/12/mcs101221-albania-2021-article-iv-consultation-concluding-statement)

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## Bibliographic details
- Published: October 12, 2021

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### 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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## Content in this bundle

- **Shqipëri: Deklaratë në Përfundim të Konsultimeve të Nenit IV me Shqiperinë për vitin 2021**
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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2021/10/12/mcs101221-albania-2021-article-iv-consultation-concluding-statement_