Mission Concluding Statement 

Washington, DC: An International Monetary Fund (IMF) mission, led by Anke Weber and comprising David Bartolini, Stefan Kavan, Olti Mitre, Nora Neuteboom, Eyno Rots, Sebastian Sosa, and Eugena Topi visited Tirana during November 4-14 to conduct discussions on the 2025 Article IV consultation with the Albanian authorities. At the end of the visit, the mission issued the following statement:

Albania enjoys one of the highest growth rates in Europe, low inflation, declining public debt, and strong foreign reserves. Building on this foundation, Albania is now at a pivotal juncture, with the government advancing bold reforms to secure EU membership by 2030. While the near-term outlook remains favorable, the road to accession is marked by structural challenges. Significant reform gaps with the EU persist amid stagnant productivity, while a more volatile global environment—coupled with domestic pressures on wages and asset prices—pose risks to the sustainability of the tourism-led growth. Timely domestic reforms are essential to safeguard macroeconomic stability and enhance productivity. Key to this will be preserving fiscal buffers through sustained revenue mobilization with non-distortionary tax policy reforms alongside improvements to spending quality; maintaining price and financial stability through agile monetary policy and further refinement of prudential tools; and advancing comprehensive reforms in human capital, labor markets, and governance.

Economic Outlook

Albania’s tourism-led growth and macroeconomic prospects are expected to remain robust. After averaging 4¼ percent in the post-pandemic period, real GDP is projected to grow by 3.5 percent in 2025, primarily driven by private consumption, and 3.6 percent in 2026 reflecting a modest acceleration in growth in key euro area trading partners. Direct effects from U.S. tariffs are minimal, while indirect effects from global trade measures and uncertainty also appear limited so far. Despite some moderation, tourism continues to provide steady support to economic output. Headline inflation is projected to gradually increase from 2.2 percent in 2025 to the 3 percent target in the second half of 2026, amid a tight labor market and rising wages. The current account deficit is projected at 2.8 percent of GDP in 2025 and to gradually widen to about 3.5 percent of GDP over the medium term as rising disposable income and public capital expenditure boost imports.

Risks to the outlook have shifted to the downside amid a more unsettled external environment. Geopolitical tensions, escalating trade measures, commodity price volatility, and prolonged uncertainty could affect Albania’s key trading partners and weaken external demand. Global financial market volatility and asset price corrections could reduce demand for Albanian sovereign debt and may lead to rollover risks. Domestically, a sharper-than-anticipated decline in the working age population could exacerbate labor shortages, fuel inflation, necessitate a tighter monetary policy stance, and dampen growth prospects. On the upside, the sustained implementation of the EU reform agenda could boost productivity and growth.

Tax Policies and Structural Fiscal Reforms to Preserve Buffers

Under current policies, IMF staff project a small primary surplus in 2025 and 2026 and a zero primary balance thereafter. The planned increases in average pensions through monthly bonuses (e.g., from €270 to €400 for urban pensions) starting in 2026 will be partly financed by expected gains from the authorities’ Medium-Term Revenue Strategy (MTRS), current spending savings, and under-execution of capital spending. Public debt is projected to decline from 54 percent of GDP at end-2025 to around 50 percent of GDP by 2030. While debt dynamics have improved considerably over the last years, still relatively sizable gross financing needs—averaging 13 percent of GDP in 2025-30—underscore the importance of continued debt management reforms.

Like many other European countries, Albania faces fiscal spending pressures, which—if not addressed now—could jeopardize fiscal sustainability over the medium term. Demographic trends are expected to drive up pension and health spending, especially after 2030, while the NATO commitment to allocate 5 percent to defense and security spending by 2035 will further strain public finances. To bolster resilience and productivity, greater investment will also be needed in education, training, and climate adaptation. To address these challenges and safeguard fiscal buffers, staff recommend a package of growth-friendly measures centered on sustained revenue mobilization, tax policy reforms, and improvements in the quality of public spending.

Accordingly, revenue reforms should focus on streamlining tax expenditures, modernizing property taxes, and strengthening tax administration. Costly and regressive tax expenditures, such as high VAT exemption thresholds, sector-specific incentives, and preferential regimes for the self-employed, should be gradually phased out as their effectiveness is uncertain. Introducing a recurrent, value-based property tax and accelerating its implementation would support local finances. Stronger enforcement supported by risk-based audits and digitalization remains essential to realize the full MTRS gains. These measures together have the potential to raise up to 2 percent of GDP in revenues by 2030. The proposed Fiscal Peace Agreement—with its features of voluntary arrangement to pre-determine taxable profits and suspend tax audits for the agreement period, cancellation of tax and customs debts, and revaluation of past financial statements at a uniform low rate—risks undermining tax compliance, weakening audit credibility, and reversing hard-won gains in tax administration modernization.

Complementary measures are needed to enhance spending quality and fiscal transparency. Regular spending reviews—institutionalized as a core budgetary tool and supported by clear governance structures within line ministries and the central budget process—will help identify low-priority programs and redirect resources toward growth-enhancing areas, such as education, health, and infrastructure. Broad-based pension bonuses should be avoided, as they are hard to reverse, weaken the link with contributions and risk undermining fiscal sustainability. Instead, well-targeted social assistance programs should be used to support vulnerable groups. Regular monitoring of on-lending, PPPs, and off-balance-sheet entities remains critical, alongside stronger disclosure and governance standards for public funds and special-purpose vehicles. Aligning the publication of the standalone fiscal risk statement with the budget cycle, and providing timely updates, would further enhance transparency.

Agile Monetary Policy and Exchange Rate Flexibility to Swiftly Respond to Evolving Conditions

In a more shock-prone world, the Bank of Albania (BoA) should stand ready to quickly respond to evolving market conditions. With inflation expectations and core inflation close to target, the current policy rate of 2.5 percent and monetary policy stance close to neutral is justified. However, the BoA should stand ready to swiftly adjust its monetary stance, including if second round effects from wage increases are stronger than expected. The recently introduced central bank subsidized credit line—albeit small at 1 percent of GDP—may lead to an inefficient allocation of resources. The objectives of this program can be better achieved through targeted fiscal policies and by tackling underlying structural issues.

The exchange rate should act as a shock absorber with greater flexibility, and further reserve accumulation guided by cost-benefit analysis. IMF staff analysis suggests that Albania’s real exchange rate appreciation is mainly driven by fundamentals, with speculative financial flows playing only a modest role. Accordingly, the BoA should allow greater exchange rate flexibility and rely on interest rates for price stability, while foreign exchange (FX) interventions should be reserved for rare cases of non-fundamental shocks. The benefits of reserve accumulation should be weighted against rising opportunity costs, interest rate risks, and potential FX revaluation losses.

Enhanced Prudential Tools to Navigate Financial Sector Risks

Systemic risks in the financial sector appear broadly contained. The banking system overall remains well capitalized, liquid, and profitable. However, there are some vulnerabilities, stemming from banks’ large borrower exposures, FX lending (17 percent of bank assets) and sovereign holdings (28 percent of banks’ assets). Together with the rapid growth of real estate lending, their effect on systemic risks will require careful monitoring.

Upholding strong supervisory standards is key to safeguarding financial stability. Supervisory efforts should prioritize strict adherence to bank capital requirements and, when necessary, include the temporary suspension of dividends and preparation of capital conservation plans. Recent relaxations in risk-adjusted capital adequacy and large exposure frameworks for loans supporting strategic transport infrastructure are not fully aligned with international standards and should be reconsidered, as prudential regulation should be risk-based and not be used to encourage lending to specific sectors. Ensuring sufficient staffing and resources will be key for a smooth transition to international financial reporting standards (IFRS 9).

While the BoA has made important strides in enhancing its macroprudential framework, further refinements would bolster resilience. The recent activation of borrower-based measures for new residential real estate loans fills a previous gap and should become a permanent tool. Staff also welcomes the planned increase in the countercyclical capital buffer to 0.5 percent (from 0.25 percent) in December 2025 and sees merit in moving to a positive neutral rate regime alongside finalizing the systemic risk buffer (SyRB) framework. Introducing a sectoral SyRB, higher risk weights or targeted borrower-based measures may be additional tools to address rising risks from commercial real estate lending.

As Albania’s financial sector becomes increasingly complex, careful oversight, effective institutional cooperation, and strengthening AML/CFT are essential. The Albanian Financial Supervisory Authority should enhance data collection and risk monitoring for non-bank entities, and ensure that mechanisms for inter-agency cooperation, such as the Financial Stability Advisory Group, are fully utilized. Timely implementation of the National Risk Assessment to mitigate identified AML/CFT risks is important. The establishment of the Albanian Development Bank (ADB) will add further complexity, making rigorous governance and operational provisions crucial to prevent fiscal and financial stability risks. Its activities should be time-bound and targeted at market failures to avoid crowding out private investment.

Productivity-Boosting Policies to Enhance EU Integration Benefits

A comprehensive set of productivity-enhancing reforms will be key to sustainable growth. Albania’s output per hour worked is below the EU average, with little improvement over the last decade. Without a decisive policy response, the outlook appears challenging. Emigration, potentially rising further with EU accession, risks deepening labor shortages. While the unemployment rate has reached a historical low, the rate of youth not in employment, education or training remains elevated, driven by informality and barriers to labor market entry. Persistent gaps in education and training, limited investment in research and development, governance challenges, and an uneven playing field could discourage the foreign investment needed for diversification and industrial advancement.

• Improving skills through broader training coverage and education quality. Strengthening digital tools and teacher development would improve learning outcomes. Expanding STEM curricula while accelerating vocational training and the Youth Guarantee scheme would boost skills and employability. Complementary measures to reduce informality, enforce labor laws, provide greater coverage of active labor market policies, and improve childcare accessibility will boost participation and create formal employment. Implementation of these programs will require adequate financial resourcing, and sustained improvements in administrative capacity.

• Boosting firm productivity and creating high-quality jobs. Reforms should aim at improving the business climate, reducing red tape, ensuring a level playing field through an adequately resourced and empowered competition authority, promoting investment in research and development and adoption of new technologies. This is even more important against the backdrop of steady exchange rate appreciation and wage growth, including through minimum wage increases, which without productivity increases will erode competitiveness.

• Enhancing the business environment through further governance reforms. The authorities should prioritize timely, merit-based, and impartial appointments to independent oversight bodies, accelerate the digitalization of court operations, and expand public access to judicial information. Anti-corruption efforts would benefit from stronger preventive legislation, and enhanced monitoring of public administration. Maintaining the Special Structure Against Corruption and Organized Crime’s (SPAK) operational independence and ensuring adequate resources remain critical to sustaining momentum in high-level corruption cases.

The mission thanks the Albanian authorities and our other interlocutors in Albania for the productive collaboration, constructive policy dialogue, and warm hospitality.