IMF Executive Board Concludes 2018 Article IV Consultation with Albania
January 28, 2019
On January 23, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the 2018 Article IV Consultation with Albania. [1]
Albania’s economic growth has trended upward in recent years as the country has benefitted from the implementation of reforms and from the economic expansion of its European trade partners. Growth is estimated at 4.2 percent in 2018 and is projected to stay close to this level over the medium term, supported by stronger exports, including tourism, and investments in infrastructure. The exchange rate has appreciated sharply since March 2018, putting downward pressure on inflation, which is expected to rise gradually to reach its 3 percent target by 2021. The fiscal stance was broadly neutral in 2018, and in the absence of additional measures the fiscal deficit is expected to hover around 2 percent of GDP in the medium term. In October, the authorities successfully issued a €500 million Eurobond with a seven-year maturity, at a favorable rate of 3.50 percent. As large energy projects with import-intensive components are tapering off, the current account deficit is expected to narrow to around 6 percent of GDP over the medium term. Although the banking system is well-capitalized and liquid, the provision of credit to support business investments has remained weak. The non-performing loan (NPL) ratio has been lowered to about 13 percent, but pockets of vulnerability remain.
Over the medium-term, risks are tilted towards the downside. Albania is strongly exposed to the increasing risks to growth in Europe, notably in its main trading partners. A downturn in these countries could spill over through lower exports, remittances, and foreign direct investment. Moreover, the expected tightening in global financial conditions would raise Albania’s cost of financing. On the domestic side, public debt is high, while low domestic savings and the absence of large institutional investors amplify dependence on foreign sources of financing. The increasing reliance on PPPs for infrastructure projects has resulted in rising contingent liabilities. Domestic risks also include the impact of drought on electricity generation, creating risks to the budget.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They welcomed Albania’s continued economic growth. Directors encouraged the authorities to use the current favorable economic environment to further advance policies and structural reforms to entrench macroeconomic stability, build buffers, and foster sustainable and inclusive growth.
Directors encouraged additional fiscal consolidation to build stronger buffers. Accordingly, they recommended lowering the fiscal deficit further and accelerating the reduction in public debt, including through stronger revenue measures. Directors welcomed the authorities’ aim to achieve a simple, predictable tax system and encouraged them to focus on broadening the tax base and to avoid ad‑hoc tax measures that create distortions in the tax system.
Directors recommended containing fiscal risks, including those stemming from public‑private partnerships (PPPs). They highlighted the need to consolidate and strengthen the decision‑making processes in public investment management and underscored the importance of ensuring value for money for PPP projects through competitive bidding. Directors also called for determined measures to halt the persistent build‑up of government arrears, as these hurt private economic activity and undermine trust in the public sector.
Directors agreed that the accommodative monetary policy stance remains appropriate. They considered that the normalization of monetary policy should remain data dependent, aimed at reaching the inflation target over the medium term. Directors welcomed the authorities’ commitment to maintain exchange rate flexibility and agreed that interventions should be temporary and limited to preventing disorderly market conditions and a destabilization of inflation.
Directors called for strong measures to address the bottlenecks to credit growth and to improve the effectiveness of monetary transmission. They encouraged the authorities to expedite the implementation of de‑euroization measures, and to address structural weaknesses in the provision of credit, including continued high NPLs. Strengthening property rights and insolvency regimes will be helpful in this regard.
Directors emphasized that the authorities should continue to strengthen financial supervision to safeguard financial stability within the changing architecture of the banking sector. They also encouraged the authorities to continue to enhance the AML/CFT framework.
Directors called for resolute structural reforms to improve the business climate, with emphasis on strengthening the rule of law. Welcoming the progress thus far, they underscored that it is important to complete the ongoing judicial reform and strengthen anti‑corruption efforts. Directors emphasized the need to reduce the pervasive informality, by maintaining a simple and fair tax system, sustaining improvements in tax collection, and by increasing the quality of public services.
It is expected that the next Article IV Consultation with Albania will be held on the standard 12‑month cycle.
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Albania: Selected Economic Indicators, 2014-2020 1/ |
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|
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
||
|
Proj. |
||||||||
|
Real sector |
(Growth rate in percent) |
|||||||
|
Real GDP |
1.8 |
2.2 |
3.3 |
3.8 |
4.2 |
3.7 |
3.9 |
|
|
Domestic demand contribution |
3.4 |
0.7 |
3.3 |
4.8 |
3.2 |
4.2 |
4.4 |
|
|
Consumption |
3.0 |
0.8 |
2.5 |
2.4 |
2.3 |
2.7 |
2.9 |
|
|
Investment (Incl. inventories and stat. disc) |
0.5 |
-1.0 |
-0.1 |
0.8 |
0.1 |
0.3 |
0.0 |
|
|
External demand contribution |
-1.7 |
1.5 |
0.0 |
-1.0 |
0.9 |
-0.5 |
-0.5 |
|
|
Consumer Price Index (avg.) |
1.6 |
1.9 |
1.3 |
2.0 |
2.0 |
2.0 |
2.4 |
|
|
Consumer Price Index (eop) |
0.7 |
2.0 |
2.2 |
1.8 |
1.8 |
2.2 |
2.6 |
|
|
GDP deflator |
1.5 |
0.6 |
-0.4 |
1.4 |
2.1 |
2.2 |
2.5 |
|
|
Saving-investment balance |
(Percent of GDP) |
|||||||
|
Foreign savings |
10.8 |
8.6 |
7.6 |
7.5 |
6.3 |
6.0 |
5.8 |
|
|
National savings |
15.9 |
15.8 |
17.0 |
17.4 |
17.9 |
17.9 |
18.1 |
|
|
Public |
0.6 |
0.7 |
1.2 |
2.4 |
2.6 |
1.9 |
2.0 |
|
|
Private |
15.4 |
15.0 |
15.8 |
15.1 |
15.3 |
16.0 |
16.1 |
|
|
Investment (incl. Inventories and stat. disc.) |
26.7 |
24.4 |
24.5 |
24.9 |
24.2 |
23.9 |
23.9 |
|
|
Public |
5.0 |
5.3 |
5.1 |
5.5 |
5.5 |
5.5 |
5.6 |
|
|
Private |
21.7 |
19.1 |
19.4 |
19.4 |
18.6 |
18.4 |
18.3 |
|
|
Fiscal sector |
||||||||
|
Total Revenues and grants |
26.3 |
26.4 |
27.4 |
27.7 |
27.2 |
27.4 |
27.2 |
|
|
Tax revenue |
24.1 |
23.8 |
24.8 |
25.7 |
25.4 |
25.2 |
25.1 |
|
|
Total Expenditure |
32.2 |
31.0 |
29.6 |
29.7 |
29.0 |
29.3 |
29.1 |
|
|
Primary |
29.3 |
28.3 |
27.2 |
27.7 |
26.8 |
27.1 |
27.0 |
|
|
Interest |
2.9 |
2.7 |
2.5 |
2.1 |
2.2 |
2.2 |
2.1 |
|
|
Overall balance |
-5.9 |
-4.6 |
-2.3 |
-2.0 |
-1.7 |
-2.0 |
-1.9 |
|
|
Primary balance |
-3.0 |
-1.9 |
0.2 |
0.1 |
0.5 |
0.2 |
0.3 |
|
|
Financing |
5.9 |
4.6 |
2.3 |
2.0 |
1.7 |
2.0 |
1.9 |
|
|
of which : Domestic |
3.4 |
-1.3 |
0.9 |
-0.8 |
-1.3 |
1.0 |
0.0 |
|
|
of which : Foreign |
2.5 |
5.0 |
1.3 |
1.9 |
3.1 |
1.0 |
1.9 |
|
|
General Government Debt 2/ |
72.0 |
73.9 |
73.3 |
71.9 |
68.6 |
65.1 |
63.3 |
|
|
Domestic |
42.4 |
39.6 |
39.0 |
39.0 |
36.7 |
33.7 |
32.1 |
|
|
External |
29.6 |
34.3 |
34.3 |
32.9 |
31.9 |
31.4 |
31.2 |
|
|
Monetary indicators |
(Growth rate in percent, unless otherwise indicated) |
|||||||
|
Broad money growth |
4.0 |
1.8 |
3.9 |
0.3 |
2.2 |
2.0 |
4.9 |
|
|
Private credit growth |
2.0 |
-2.8 |
0.4 |
0.2 |
0.8 |
2.6 |
3.6 |
|
|
Velocity (nominal GDP/broad money) |
1.2 |
1.2 |
1.2 |
1.2 |
1.3 |
1.3 |
1.3 |
|
|
External sector |
(Percent of GDP, unless otherwise indicated) |
|||||||
|
Trade balance (goods and services) |
-19.0 |
-17.3 |
-16.8 |
-15.1 |
-13.1 |
-12.5 |
-12.0 |
|
|
Current account balance |
-10.8 |
-8.6 |
-7.6 |
-7.5 |
-6.3 |
-6.0 |
-5.8 |
|
|
Gross international reserves (in billions of Euros) |
2.2 |
2.9 |
2.9 |
3.0 |
3.3 |
3.2 |
3.4 |
|
|
(In months of imports of goods and services) |
5.8 |
7.0 |
6.5 |
6.3 |
6.7 |
6.0 |
5.9 |
|
|
(Relative to external debt service) |
2.9 |
2.6 |
3.6 |
3.5 |
2.9 |
3.1 |
2.6 |
|
|
(In percent of broad money) |
25.7 |
32.5 |
31.5 |
31.4 |
32.3 |
30.3 |
30.4 |
|
|
Memorandum items |
||||||||
|
Nominal GDP (in billions of lek) |
1395 |
1431 |
1473 |
1551 |
1649 |
1748 |
1860 |
|
|
Output Gap (percent) |
-1.5 |
-1.8 |
-1.4 |
-0.7 |
-0.7 |
-0.5 |
-0.2 |
|
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Sources: Albanian authorities; and IMF staff estimates and projections. 1/ The numbers have been updated since the Staff Report was issued on January 2, 2019 in line with the Staff Statement issued to the Board on January 23, 2019. 2/ Starting with 2015, the stock of general government debt includes fully documented unpaid bills owed by local governments by the new municipalities after the June 2015 territorial reform. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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