Public Information Notice No. 01/74

Public Information Notice: IMF Concludes 2001 Article IV Consultation with Albania

July 27, 2001

On July 13, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Albania.¹

Background

Sound macroeconomic management, supported by structural reform, has characterized Albania's performance under the current PRGF arrangement, although poverty and emigration remain pervasive. Policies have resulted in a significant easing of inflationary pressures and sizable reductions in the overall and domestically financed fiscal deficits. Strong economic activity continued in 2000, with GDP growth estimated at 7¾ percent. However, electricity shortages disrupted activity during the winter of 2000-01 and continue to threaten growth prospects. The external position strengthened further during 2000, reflected in higher official exchange reserves, as a worsening of the trade balance was offset by strong inflows of remittances. The effective exchange rate, which appreciated against the euro during most of 2000, has been stable in recent months

Fiscal policy remains on track, thanks mainly to a strong revenue performance. The overall deficit (excluding grants) declined to 9.1 percent in 2000 and targets for the domestically financed deficit—at 3.2 percent of GDP—and for total tax revenues were met. Fiscal performance so far in 2001 has been in line with the budget. Improved revenue collection has largely reflected the implementation of measures agreed under the program, with reductions in corruption and smuggling. Despite the fiscal efforts of the past three years, the domestic component of public debt remains relatively high, although overall debt is below the average for developing countries.

Monetary policy has eased considerably since the beginning of 2000, as T-bill rates have fallen by 6-7 percentage points since the beginning of 2000. Inflation has edged up since mid-2000, mainly on account of rising energy and housing costs, but it is within the authorities' 2-4 percent target range. In mid-2000, the Bank of Albania switched to indirect instruments of monetary policy, with weekly repo auctions.

Significant progress has been made in privatization of state-owned enterprises, and much-needed reforms in the electricity sector have been initiated. The tender for privatization of the Savings Bank was announced on June 29. Privatization is moving forward in the telecommunications sector and has largely been completed in the mining sector. In agriculture, the end-December 2000 target for land registration was met. The Law on Executive Offices has been implemented and a registry for collateral property started operating in January 2001. On the other hand, delays have occurred in the submission of the revised Bankruptcy Law and the establishment of a mediation center.

Executive Board Assessment

Directors commended the authorities' sound macroeconomic management and structural reforms that have supported continued strong growth and financial stability. Directors stressed, however, the need to build on these considerable achievements with further structural reforms and improvements in governance, in order to sustain rapid growth and alleviate poverty.

Directors supported the fiscal policy framework for the remainder of 2001. They welcomed the ongoing improvements in revenue collection, supported by the authorities' efforts to strengthen tax and customs administration. They emphasized the need to broaden the tax base. Directors also underscored the need for spending restraint, especially if revenues do not meet expectations. For the medium term, Directors considered that raising revenues would continue to be a key objective of fiscal policy so as to permit the needed expansion in social expenditures, while keeping the public debt within prudent limits.

Directors commended the authorities' monetary policy. Interest rates have been significantly lowered while inflation has remained low, the exchange rate has stabilized, and official reserves have risen to a comfortable level. However, with inflation having edged up since mid-2000, Directors considered that further monetary easing was not warranted. They recommended swift action in case inflationary pressures intensified. Directors also noted that the exchange rate had appreciated in real terms in recent years and advised the authorities to monitor developments closely to forestall any adverse effects on competitiveness. Directors observed that, although progress had been made, financial integration remains low and dollarization high. The effects of reintermediation would need to be taken into account in any eventual shift to an inflation-targeting framework for monetary policy.

Directors emphasized the importance of financial sector reform. They encouraged the authorities to give the highest priority to the successful and timely privatization of the Savings Bank and welcomed the recent announcement of a tender. They also encouraged further efforts to promote financial sector competition, to develop the banking sector in all parts of the country, to strengthen bank supervision, and to speed up implementation of the Anti-Money Laundering Law. They encouraged the authorities to implement the recommendations of the Phase One Safeguards Assessment.

Directors were concerned by problems in the energy sector, which are a potential constraint on growth and which, because of the resultant need for subsidies, are a drain on the budget. They considered the rise this year in subsidies for electricity imports only a temporary expedient, pending urgently needed and more fundamental reforms in the energy sector, including measures to revise tariffs and improve collections.

Regarding other structural reforms, Directors encouraged the authorities to persevere with their program of legal and institutional reforms to improve governance and the climate for business and investment. Enterprise privatization should be completed, including in the telecommunications and energy sectors. The legal framework for the provision of credit to the private sector should be strengthened, and a bankruptcy law adopted. Directors commended the authorities for maintaining an open trade regime and for their participation in recent initiatives toward regional free trade.

Directors welcomed progress in preparing the authorities' Growth and Poverty Reduction Strategy Paper (GPRS) through a broad-based participatory process. They observed that, despite recent progress, Albania still faces severe institutional and infrastructural weaknesses, requiring a bold reform agenda for the coming years to secure rapid growth and to reduce poverty, which is especially prevalent in rural areas. Directors noted the role that support from the international community could play in this regard.

Directors encouraged further improvements in economic data, including national accounts and price indices, and in the accuracy and timeliness of data on foreign-financed capital expenditures, which affect the monitoring of the fiscal position. They supported technical assistance in these areas.

Directors noted the progress Albania has made in regularizing relations with its creditors and encouraged all parties to work to resolve outstanding issues as soon as possible. They urged the authorities to promptly eliminate remaining exchange restrictions subject to Article XIV of the Fund's Articles of Agreement, and looked forward to Albania's intended move to Article VIII status.

Directors stressed the importance of a well-designed GPRS that identifies key expenditure priorities within the authorities Medium-Term Expenditure Framework.

Directors looked forward to discussing a successor arrangement after the Annual Meetings and emphasized the need for close coordination with the World Bank in this regard. They generally considered that, in view of Albania's economic progress, and subject to discussion with the authorities, a blend of concessional and nonconcessional resources could be appropriate under a successor arrangement.