Albania: Staff Concluding Statement of the 2023 Article IV Mission
October 27, 2023
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC:
Albania’s economic prospects are expected to remain robust.
Real GDP is projected to expand by 3.6 percent in 2023 and 3.3 percent in
2024, led by resilient private consumption, with notable strength in
tourism and construction activity. Inflation hovers around 4 percent amid
tight labor markets and is expected to revert only gradually to the Bank of
Albania’s target of 3 percent by early 2025. Heightened geopolitical
tensions represent a major potential headwind, even as the economy remains
vulnerable to the risks of weather-related energy sector shocks, a sudden
exchange rate reversal, and more persistent inflation.
The current favorable conjuncture creates an opportunity to advance on
a broad set of reforms to secure sustainable and inclusive growth.
An ambitious revenue-based consolidation would build fiscal
space for countercyclical policy in the future and support monetary policy.
Revenue reforms are also needed to generate resources for human capital
development, infrastructure, and climate adaptation. Further progress on
de-euroization is critical to strengthen the effectiveness of monetary
policy and reduce financial sector vulnerability. Structural reforms in the
fiscal and financial sectors, on governance, and the labor market, will
amplify the gains from sound and prudent policies.
Safeguarding fiscal sustainability
The authorities have undertaken considerable fiscal consolidation in
the post-pandemic years, with notable improvements in value-added tax
collection
. With a zero primary balance-to-GDP ratio expected in 2023, the fiscal
rule requiring a non-negative primary balance will be met one year ahead of
the deadline. Under the baseline, the mission projects limited additional
fiscal consolidation in the medium term with the 2024 budget aiming for a
small primary surplus. Public debt is expected at around 60 percent at the
end of 2023 and is projected to be sustainable over the medium-term.
A stronger fiscal effort than currently projected starting in 2024
remains critical as Albania continues to grapple with high gross
financing needs
. Additional frontloaded net fiscal measures of around 1½ percent of GDP
over the next five years would bring public debt on a clear downward path
towards the fiscal rule target of 45 percent, and lower gross financing
needs decisively. The bulk of the adjustment should be through revenue
mobilization and complemented by spending efficiency gains. Stronger public
investment management will also enable more resource allocation towards
productive investment, including on education and climate adaptation. These
measures should go hand-in-hand with the implementation of the debt
management strategy to lengthen maturities and reduce floating rate debt.
A sound medium-term revenue strategy is necessary for credible fiscal
consolidation.
The authorities have legislated several of the tax policy reforms in line
with past IMF technical assistance. Timely adoption of measures still in
the pipeline—including property and gambling tax reforms—is critical.
Frontloading measures slated for later introduction, such as removing
further VAT exemptions and the zero tax rate for small businesses, could
also be considered. Work to fulfill the prerequisites for a timely
introduction of property tax reforms, including fully operationalizing a
centralized fiscal cadaster, needs to be completed. Raising further revenues
will hinge on strengthening revenue administration, including on tax
compliance of high net-worth individuals and an action plan for the General
Directorate of Taxation. Progress in these areas would also support broader
efforts to reduce informality and expand the tax base.
Medium- and long-term spending pressures call for efficiency
improvements.
The recent increases in public wages and indexation to inflation will lead
to a higher wage bill for the government.Absent further
reforms, the pension system will impose a growing burden on public
resources. Higher public wages should be accompanied by a broader review of
public sector functions and linked to efficiency increases, including by
leveraging information technology and on-the-job training. The forthcoming
public expenditure review is an opportunity to set in train reforms that
reduce long-term spending pressures, including from pension obligations.
Continued progress in fiscal structural reforms will help strengthen
public financial management.
Operationalizing the 2022 public investment management guidelines will
enhance project classification, management, and monitoring. Integrating
public-private partnerships (PPPs) into the regular public investment
framework and budgetary process is urgently needed and will require legal
changes. The planned publication of a standalone fiscal risk statement in
2024 is an important step towards forward-looking monitoring of fiscal
risks, including those arising from PPPs, contingent implicit and legal
liabilities, and state-owned enterprises (SOEs). The fiscal risk statement
should also clearly identify risk mitigation measures, including enhancing
SOE oversight and governance.
Albania’sclimate vulnerability calls for timely
actions. Given the outsized role of hydroelectricity and the
dependence of energy SOEs on public support, gradual tariff adjustments to
cost recovery levels are needed with complementary measures to support the
vulnerable. It is also critical to enhance the electricity sector’s
transparency and SOEs’ corporate governance. In this context, efforts to
develop renewable sources of energy are a step in the right direction. The
implementation and integration of the National Climate Change Strategy 2030
into the budgetary process and medium-term planning will help direct
resources to green priorities.
Reducing inflation while reaping the benefits of the floating
exchange rate
Returning inflation to target will likely require some further
increases in the policy rate.
Following a rise of 250 basis points to 3 percent,the Bank
of Albania (BoA) appropriately paused its rate increases in March, amid
declining inflation and strong lek appreciation. With domestic inflation
pressures rising amid tight labor markets and real rates still negative,
there is scope to hike further. A gradual increase of the policy rate to a
broadly neutral stance—estimated at around 4½ percent—should help allow
inflation return to target by early 2025. There is, however, uncertainty
around the inflation path and a flexible meeting-by-meeting approach to
rate-setting is appropriate. The BoA has a strong statutory equity
position, and its recognition of recent unrealized revaluation losses should
not detract from its focus on reaching the inflation target.
A flexible exchange rate should remain the main shock absorber, with FX
interventions limited to respond to disorderly market conditions.
While the lek has been on a gradual appreciation trend since 2015 in line
with improved fundamentals, the steep appreciation since 2022 calls for
vigilance given the risk of a sudden reversal. Further de-euroization of
the economy would maximize the benefits from the flexible exchange rate and
inflation targeting regime. In addition to measures taken by the BoA,
effective de-euroization should be supported by government action to
promote the use of local currency for the pricing and payment of
non-tradable goods.
Preserving financial stability
The financial sector remains broadly resilient, but pockets of
vulnerability persist
. The banking system’s overall capital adequacy is well above required
levels, and profitability and asset quality have improved. However, there
is scope for further strengthening the capital positions of some banks, and
the sector continues to face lingering risks from the outsized role of
domestic government securities in banks’ portfolios and exposures to the
real estate sector, amid still significant unhedged foreign currency
lending. While there have been strains in 2022 in some non-bank financial
institutions, the sector is unlikely to pose systemic risks, given its
small size.
Continued nimble supervision and enhanced prudential tools will help
tide through current financial and economic uncertainties
. Bank heterogeneity calls for continued prudent provisioning on a
case-by-case basis as well as focused and timely asset quality reviews. The
BoA should continue efforts to strengthen bank capital buffers, including
by requiring temporary suspension of dividends for banks with shortfalls.
The recently adopted legislation that collects data on loan-to-value and
debt-to-income ratios is key to the introduction of borrower-based tools.
Differential requirements on such tools by FX and domestic currency would
help mitigate risks from FX lending. Over the medium-term, a positive
neutral countercyclical capital buffer rate could be considered to further
support financial stability.
Steady progress with financial structural reforms would help solidify
past achievements.
Key areas include: (i) aligning supervisory and regulatory frameworks with
EU standards, including related to cyber and climate risks, (ii) continuing
to strengthen the private debt resolution regime, including implementing
out-of-court settlements, (iii) continuing to promote sound corporate
governance in the financial sector, and (iv) gradually deepening capital
markets including increasing liquidity in government securities’ secondary
markets.
Bolstering inclusive growth
Albania has struggled with closing the income gap with EU countries.
Informality, shortcomings in governance and the rule of law, weaknesses in
the labor market, infrastructure gaps and demographic pressures have
hindered efficient allocation of resources and held back productivity.
Cognizant of these challenges, the authorities have made important
strides in key areas.
Thanks to substantial progress in addressing AML/CFT shortcomings, the
Financial Action Task Force (FATF) recently announced that Albania would
exit its list of jurisdictions under increased monitoring. A comprehensive
judicial reform program has progressed steadily. The National Employment
and Skills Strategy also rightly seeks to strengthen vocational training,
upskilling, and inclusion.
Further improvements to governance and the rule of law would enhance
the business environment.
Judicial reforms should be completed by the December 2024 constitutional
deadline and supported by measures to improve the efficiency of the courts
and addressing case backlog. The Structure Against Corruption and Organized
Crimes (SPAK) should have sufficient resources to fulfill its mandate. Work
should resume to formulate the Intersectoral Strategy Against Corruption
2023‒30 and implement recommendations by the Council of Europe’s Group of
States against Corruption (GRECO), including those related to police
reforms and post-employment restrictions for members of the Council of
Ministers and political advisors.
Decisive implementation of policies to develop and retain human capital
would boost potential growth and raise living standards.
Key areasinclude (i) modernizing the education curriculum,
(ii) improving the labor market relevance and quality of vocational
education and training, (iii) investing in digital skills, and (iv)
fostering the R&D environment, thereby nurturing innovation. Measures to
encourage female labor force participation, including by expanding access
to childcare, will help reduce the gender gap, which is more prevalent for
women without tertiary education. Adequate budget resources and monitoring
mechanisms need to be put in place to ensure that the authorities’ efforts
in these areas translate into better outcomes.
The mission would like to thank the Albanian authorities and other
counterparts for their hospitality, engaging discussions, and
productive collaboration.
IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Camila Perez
Phone: +1 202 623-7100Email: [email protected]
