Mission Concluding Statement 

Concluding Statement of the IMF Mission for Albania

November 11, 2008

This statement presents the conclusions of an IMF mission that visited Albania October 29-November 11, 2008, to discuss with the authorities the sixth and final review of the PRGF/EFF arrangement.

The Albanian economy in 2008 has so far performed strongly. Inflation has returned to the Bank of Albania's (BoA) 3±1 percent target range, while growth has remained buoyant and on track to reach 6 percent again this year. Debt consolidation has continued, and the underlying external position is sound, with the recent increase in the current account deficit reflecting mainly temporary factors.

Generally sound macroeconomic and structural policies have underpinned this favorable performance and laid the groundwork for future gains. Interest rates have been held consistently above inflation; budgetary policy has supported macroeconomic stability; supervisory regulations in the banking system have been tightened and updated; and there have been clear improvements in the business climate. However, growth in tax revenue has now slowed. Also, the privatization of the electricity distribution company has been successfully launched, although KESH's financial position is again worsening.

With a sharp deterioration of global growth prospects now under way (See World Economic Outlook Update), it is important that Albanian policy makers further strengthen economic fundamentals. Albania's still limited integration into global markets currently provides an important buffer, but the economy is not immune: export growth is expected to decline from recent heights, remittance payments could be affected, and investors may reassess risks. Obviously, the government cannot influence exogenous global events, but it can and should take extra steps to shore up confidence domestically as, in the current environment, policies should be erring on the side of caution. This would allow Albania to weather these turbulent times and still record significant growth of between 3.5 and 4 percent in 2009, with continued low inflation and an improved current account position.

At the current juncture, fiscal policy has to shoulder a particularly heavy burden. For 2008, the mission calls for a quick reallocation of spending to ensure sufficient attention is paid to priority areas, while limiting the deficit to 5.2 percent of GDP. Looking ahead, the mission recommends to contain the 2009 deficit at below 4 percent of GDP. Such a consolidation of the fiscal position will strengthen confidence, enhance debt sustainability, and limit any crowding out of the private sector's access to credit. The draft budget—complemented by an expected increase in KESH's wholesale electricity tariff and the envisaged postponement of the social security contribution rate cut until May 1, 2009—is consistent with this goal. Beyond macroeconomic necessity, the mission would recommend that any cut in contribution rates await comprehensive pension reform that would strengthen the link between contributions and benefits and provide important incentives for self enforcement. This would help combat informality, improve voluntary self compliance, and hence allow the authorities to rely less on administratively burdensome regulations that currently create significant scope for discretion and corruption. After the IMF program expires, the authorities are urged to commit to a clear fiscal rule to anchor budget policy, such as an appropriate expenditure, deficit, or debt ceiling.

With inflationary expectations still well anchored, and pressure from world food and energy prices easing, inflation is expected to remain firmly within the target range. The BoA should remain ready to counter any deterioration in inflation expectations, including through interest rate hikes. With a solvent, liquid, and profitable banking system, global trends are expected to be helpful in reining in so far very high domestic credit growth, an area of concern in the past. Nonetheless, it is important that the authorities continue their ongoing efforts to strengthen the regulatory and prudential regimes to further safeguard financial sector stability.

The successful launch of the privatization process for the electricity distribution company is heartening, but recent, more adverse, developments in the electricity sector will need to be addressed forcefully. The effective collection rate must be raised further, nonpayment by public institutions reversed, and financial losses more comprehensively tackled. Additional imports in excess of those in the power sector action plan would create further losses and, if they go ahead, effective tariffs should be raised. Moreover, given the anticipated finalization of the privatization process, it will be important that the final contract does not create any room for contingent claims on future budgets. To prevent undue delay in the finalization of the privatization negotiations, it is important that the Ministry of Economy, Trade, and Energy assumes lead responsibility.

We welcome recent efforts to improve national accounts data and encourage INSTAT to continue to make good use of the available external technical assistance in this area.

It is expected that the sixth and final review under the PRGF/EFF-supported program will be presented to the IMF's Executive Board before the arrangement expires on January 31, 2009.

The mission would like to thank the authorities for their continued close cooperation and warm hospitality.

Gerwin Bell, Mission Chief
Ann-Margret Westin, Resident Representative