Press Release No. 20/252

IMF Staff Concludes a Remote Staff Visit to Albania

July 1, 2020

• Due to the fallout of the earthquake and the COVID-19 pandemic, Albania’s economy is expected to contract sharply in 2020 and rebound in 2021. But uncertainty is high.
• Temporary, targeted, and transparent support for people and firms hurt by the shocks is warranted and needs to be embedded in a credible medium-term fiscal framework.
• Once the effects of the shocks subside, it will be critical to resume revenue-based fiscal consolidation and put public debt on a sustained downward path to rebuild room for fiscal policy maneuver.

Washington, DC – An International Monetary Fund (IMF) team, led by Ms. Yan Sun, conducted remotely a staff visit to Albania during June 25-July 1. At the end of this mission, Ms. Sun issued the following statement:

“The near-term outlook for the Albanian economy remains challenging, reflecting the significant impacts from the November 2019 earthquake and the COVID-19 pandemic. As in other parts of the world and reflecting Albania’s dependence on tourism and remittances, the economy is expected to contract sharply in 2020 and see a rebound in 2021. The outlook is subject to unusually high uncertainty, given the nature of the pandemic.

“Albania’s macroeconomic stability has been maintained so far thanks to skillful policy management and globally accommodative financial conditions. A considerable increase in the fiscal deficit in 2020 is necessary to deal with the fallout of the pandemic and earthquake, by supporting the economy and providing for health spending and reconstruction. Once the effects of the shocks subside, it will be critical to resume revenue-based fiscal consolidation and put public debt on a sustained downward path, so as to rebuild space for fiscal policy maneuver. In this regard, we strongly encourage the authorities to continue their preparation of a Medium-Term Revenue Strategy (MTRS), so as to build a fairer, simpler, more efficient, and more transparent tax system that will generate the resources needed to achieve Albania’s sustainable developmental goals and ensure debt sustainability. Efforts should also be stepped up to manage increasing fiscal risks, including from PPPs, and strengthen the quality of public investment management.

“We note with concern a recent proposal to remove until 2029 the profit tax for all businesses with annual turnovers up to 14 million Albanian lek (ALL) and VAT for all businesses with annual turnovers up to ALL 10 million. Support for people and firms hurt by the shocks is warranted, but needs to be temporary, targeted, and transparent, embedded in a credible and prudent medium-term fiscal framework. Thresholds for business profit tax and VAT should be unified at a carefully designed level, consistent with MTRS objectives. Setting the threshold too high for too long would erode the tax base and undermine tax compliance. Furthermore, we reiterate our advice against a possible tax amnesty, as it might undermine tax compliance. Effective systems must be created first to detect tax evasion and to prevent opportunities for money laundering and corruption.

“The Bank of Albania’s accommodative monetary policy remains appropriate. Continued flexibility in the exchange rate will help absorb the shocks and restore external balance. The banking system overall entered the pandemic liquid and well-capitalized. However, its resilience will be tested and pockets of vulnerabilities, including a likely rise of the still high stock of NPLs, will need to be closely monitored, assessed, and managed. Maintaining loan classification and provisioning rules is important for appraising banks’ potential losses as accurately as possible. We support prudent bank loan restructuring where necessary to sectors or firms heavily affected by the shocks.

“We would like to thank our counterparts for open and fruitful discussions and wish the government and people of Albania success in overcoming the shocks.”