IMF Approves Second Annual ESAF Arrangement and Augmentation for Albania

The International Monetary Fund (IMF) today approved the second annual arrangement under the Enhanced Structural Adjustment Facility (ESAF),¹ and an augmentation of SDR 9.74 million (about US$13.10 million) in the amount of resources committed under the arrangement, to support Albania's economic and financial program. The augmentation takes into account Albania's increased balance of payments needs arising from the impact of the Kosovo crisis. The three-year ESAF arrangement was approved on May 13, 1998, in an original amount of SDR 35.30 million (about US$47.49 million), of which one-third has been disbursed. (See Press Release No.98/18.) Today's decision increases the total amount of the ESAF arrangement to SDR 45.04 million (about US$60.59 million) and triggers release of SDR 9.58 million (about US$12.89 million).

Background
Since 1991, when Albania began its transition to a market-based economy, the economy has been riding a roller coaster--it initially collapsed, then enjoyed a robust recovery, and tumbled again in 1997, as pyramid scheme bubbles burst, taking with them a large portion of personal savings and fomenting near civil war. Albania was putting this recent episode behind it when, in March 1999, the crisis in Kosovo erupted, precipitating a tide of refugees into Albania. By early-June 1999, when the peace accord was signed, there were about 460,000 largely destitute refugees in Albania, equivalent to about 14% of the population. The refugees are placing considerable strain on the social and economic infrastructure, the budget, and the balance of payments.

Prior to the Kosovo crisis, macroeconomic stability had been restored and economic trends were highly encouraging. During 1998, the government adhered to its tight fiscal target, reducing the domestically financed component of the deficit to 6.4% of GDP in 1998 from 10.8% of GDP in 1997; inflation declined to below 10%, compared to 42% during 1997, and fell further to just 2% in March 1999; the external current account deficit fell to 6% of GDP in 1998 from 12% of GDP in 1997; and the decline in output in 1997 was reversed, with 1998 growth estimated at 8%.

Medium-Term Strategy and the 1999/2000 Program
Albania's program seeks to achieve rapid economic growth, low inflation, greater employment opportunities, and reduced poverty. It requires ambitious and comprehensive structural reforms and a concerted attack on poor governance. After the Kosovo crisis broke out, Albania's authorities continued to focus on maintaining macroeconomic stability and the momentum of reforms. The impact of the crisis on growth and inflation is expected to be small, assuming that refugee-related expenditures are largely financed by the international community. Under the assumption that the refugees will have returned home by early 2000, foreign direct investment resumes, and fiscal consolidation and structural reforms continue as programmed, growth is expected to average 7-8% a year, while inflation stabilizes at industrial country levels.

The budget impact of the Kosovo crisis is estimated at US$154 million (4% of GDP for 1999). However, the authorities aim to ensure that this does not interfere with underlying fiscal consolidation. Albania plans to stick to the original budget goal of reducing the domestically financed deficit to 5.5% of GDP in 1999, and about 4% in 2000. However, if cuts in essential development and social expenditures are to be avoided, this can only realistically be achieved if the international community finances the large budgetary cost of helping the refugees. Monetary policy for 1999 is designed to meet the inflation and balance of payments objectives and is not expected to be deflected by the Kosovo crisis.

Structural Reforms
Albania is determined to keep up the momentum of structural reforms and step up the fight against corruption. Key priorities are to restructure the banking system, extend privatization to the economy's strategic sectors, and strengthen tax collection. The authorities recognize that the Kosovo crisis will put a strain on administrative capacity and create new opportunities for corruption which may make efforts to strengthen governance more difficult. With this in mind, they have prepared a plan to ensure transparent accounting for budgetary costs and external financial support connected with the Kosovo crisis. And with a significant part of fiscal adjustment relying on improved tax collection efforts, they are stepping up measures to reduce smuggling and customs fraud.

Albania aims to continue the significant progress already achieved in establishing a liberal and open trade system, through further reduction of tariffs in the next few years and lowering the maximum rate to 15% from 20%, and the average rate to 10-12%. Agriculture is central to the Albanian economy, accounting for more than 50% of GDP. Therefore, an important part of the program is to complete land registration and foster the land market in order to consolidate land holdings and increase productivity.

The Challenge Ahead
The challenges posed by the Kosovo crisis are indeed formidable. If sufficient support is forthcoming from abroad, and social pressures can continue to be contained, the crisis should not derail Albania's recovery or prove inflationary. However, the momentum of structural reforms and efforts to improve governance will need to be sustained if the medium-term goal of lasting rapid growth is to be achieved.

Albania joined the IMF on October 15, 1991, and its quota² is SDR 48.70 million (about US$65.52 million). Its outstanding use of IMF financing currently totals SDR 41.98 million (about US$56.47 million).