Press Release No. 97/51

Press Release: IMF Approves Emergency Post Conflict Assistance for Albania

November 7, 1997

The International Monetary Fund (IMF) today approved a credit for Albania equivalent to SDR 8.825 million (about US$12 million), under the IMF’s emergency post conflict assistance, to support the government’s economic program for 1997-98.

Background

Having started its transition as Europe’s poorest and most isolated economy, Albania made exceptional progress in 1993-95. Annual GDP growth averaged 9 percent, inflation fell from triple digits to 6 percent, and external imbalances were reduced sharply because of a strong supply response from early privatization in the agricultural sector, retail trade, and small and medium-sized enterprises, as well as financial discipline at the budgetary and state enterprise level. The country’s transition stalled in 1996. Election-driven policies raised the budget deficit to 10 ½ percent of GDP, and annual inflation tripled. Despite warnings by the IMF and the World Bank, financial pyramid schemes were allowed to mushroom on an unprecedented scale, building up liabilities, which including accrued interest at unrealistically high rates, that were equivalent to nearly half of GDP. In March 1997, Albania descended into anarchy and near civil war. The economic fall out from the crisis was severe: massive supply disruptions reduced output in construction and industry, and the loss of wealth in the failed financial schemes depressed domestic demand.

The 1997-98 Program

The government’s primary macroeconomic goal, for 1997-98 are rapid disinflation and resumption of growth. The key macroeconomic objectives of the program are: (i) to limit the decline of real GDP to 8 percent in 1997 and achieve real growth of about 12 percent in 1998; (ii) contain the annual inflation rate to the range of 51-54 percent in 1997, and bring it down to 15- 20 percent in 1998; and (iii) keep gross international reserves above the equivalent of 3.5 months of imports through 1998. To achieve these objectives, fiscal policy will aim at limiting the domestically financed budget deficit to about 13 percent of GDP in 1997, and to below 10 percent of GDP in 1998. This will be done by first restoring and then improving tax collection; raising tax rates, including a significant increase in the VAT rate; and exercising expenditure restraint, including a rationalization of the civil service. The Bank of Albania will support the inflation reduction effort by maintaining an appropriately tight monetary stance.

Structural Reforms

Under the program the authorities are planning a broad range of structural reforms, including: (i) progress toward privatization or liquidation of two of the three state-owned commercial banks, (ii) winding up the companies that operated pyramid schemes; (iii) civil service reform; (iv) a resumption of enterprise privatization; and (v) creation of a functioning agricultural land market.

Addressing Social Needs

The crisis has resulted in an impoverishment of the Albanian population. In the medium term, the alleviation of poverty will be based on achieving high sustainable growth driven by private sector development. However, in the short term, temporary support targeted toward the poorest families will also be required. The government will therefore accelerate disbursements of social assistance, and will also introduce public works/community service schemes for social assistance beneficiaries who can work. Also, in the next few months, the government will address as a priority the severe shortages in pharmaceuticals, surgical goods and materials, and equipment for public health services.

The Challenge Ahead

The main risks to the program arise from the authorities’ still limited, albeit improving, capacity to formulate and implement macroeconomic and structural measures, and from the difficulty of projecting key economic variables in the uncertain circumstances. Strong commitment of the authorities to the implementation of policies, and substantial technical assistance in a broad range of areas, will be essential to achieve the program’s objectives. Also, Albania’s balance of payments position will remain difficult during the remainder of 1997 and 1998. Over the longer term, Albania will continue to require substantial external support, and its arrears to Russia and non-Paris Club official bilateral creditors will need to be reconciled and rescheduled.

Albania joined the IMF on October 15, 1991, and its quota¹ is SDR 35.3 million (about US$49 million). Its outstanding use of IMF financing currently totals SDR 32 million (about US$45 million).