Press Release No. 07/216

Press Release: Statement at the Conclusion of an IMF Mission to Albania

October 2, 2007

An International Monetary Fund (IMF) mission led by Mr. Gerwin Bell visited Tirana during September 19-25 to discuss with the authorities 2007 budget execution, the 2008 budget, and the fiscal, financial, and macroeconomic impact of the ongoing energy crisis. The mission met with Prime Minister Berisha, Minister Bode, Minister Ruli, Governor Fullani, other senior government officials, and representatives of the international community, and issues the following statement at the conclusion of the mission on September 25, 2007:

"The mission reached understandings with the government on the 2008 budget parameters amid increased fiscal risks. The adverse external shocks have so far not impacted on economic growth but have led to an increase in inflationary pressures. A stronger than projected exports performance, including tourism, has in part offset the negative impact of the energy crisis, and industrial production has in large part been shielded from the outages. The Bank of Albania's by now well established credibility should help it contain inflation.

"The 2007 budget remains on track. Despite an acceleration from last year, the implementation of capital spending, however, remains slow, hindering an efficient budget execution and complicating liquidity management.

"There is broad agreement on the 2008 budget objectives although there are increased risks. The mission and the government agreed on the key parameters for the 2008 budget, including net domestic borrowing, revenue projections, and priority spending areas, which will remain health, education, and infrastructure investment. Given the increased risks to the economy, appropriate expenditure contingencies were identified, including on wage and pension increases, to safeguard budget execution.

"Progress continues in key structural reform areas such as revenue policy and administration, and debt management. The mission welcomes planned steps to further broaden the tax base that together with other revenue-compensating measures will allow the government to sustainably reduce the corporate income tax rate. This, together with the planned improvements in the efficiency of the taxpayer registry and of social security administration, will help reduce informality and in turn allow the economy to reap the benefits of further financial market development in the future. We welcome the significant lengthening of maturities of government domestic debt and look forward to further deepening of the domestic money and bond markets.

"Notwithstanding the welcome efforts by the management of state-owned electricity company KESH, further measures will be needed in the electricity sector. The collection and loss targets under the Power Sector Action Plan are being met, apart from collection from water supply companies. In this context, we welcome the clearance of pre-2007 arrears of public-sector institutions to KESH. However, load shedding this year has been less than foreseen under the Action Plan. In light of this and the adverse impact of the drought on electricity production, significant additional measures, including better targeted load shedding, tariff increases, and further improvements in KESH's collection and loss performance, will be needed to safeguard 2007 budget execution. Looking ahead, this will also facilitate moving toward a continuous provision of electricity in 2008.

"An IMF review mission will visit Tirana October 31-November 13, 2007. Provided understandings on required policy measures are reached, it is expected that the fourth review under the current combined Poverty Reduction and Growth Facility and Extended Fund Facility will be presented to the IMF's Executive Board in January 2008.

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