Press Release No. 23/222

IMF Staff Completes a Staff Visit to Albania

June 21, 2023

• Albania’s economy has shown resilience in the face of successive shocks. Growth is expected at around 3 percent this year, on the back of sustained consumer demand, tourism, and construction activity.
• We support the authorities’ commitment to fiscal consolidation and stress the importance for the forthcoming public sector wage increases to be accompanied by meaningful revenue measures and public sector efficiency gains.
• The Bank of Albania’s intention to continue with monetary policy normalization is appropriate. Should inflation prove more persistent than anticipated, amid tight labor markets and public sector wage increases, the pace of tightening will need to accelerate.

Washington, DC:An International Monetary Fund (IMF) team led by Ms. Anke Weber conducted a staff visit to Albania during June 13-19, 2023, to discuss recent macroeconomic developments, the economic outlook, and policy priorities.

At the end of the visit, Ms. Weber issued the following statement:

“The Albanian economy has outperformed expectations in 2022, growing by 4.8 percent, on the back of strong consumer demand, tourism inflows and construction activity. The current account and fiscal deficits narrowed considerably, in tandem with an appreciation of the lek. Growth is expected to moderate this year to around 3 percent, as a result of slow trading partner growth, withdrawal of policy support and tighter financial conditions. Sustained consumer confidence and tourism will support this year’s activity. Inflation has been gradually declining but remains above the central bank’s target.”

“The outlook is still subject to high uncertainty. Slower-than-expected growth of trading partners could affect exports and growth in Albania. Inflation could be more persistent, amid tight labor markets and sizable public sector wage increases spilling into private sector wages. An escalation of Russia’s war in Ukraine and unfavorable weather impacting electricity production could renew supply shocks. On the upside, the economy could again prove more resilient than expected, amid strong momentum in tourism.”

“We support the authorities’ commitment to achieving a non-negative primary balance in 2023, one year ahead of the deadline set by the Organic Budget Law. Aiming for a 1½ percent primary surplus in 2024 would help quickly rebuild buffers and ensure resilience to future shocks. Such an approach would also reduce inflation pressures. We stress that an increased public sector wage bill needs to be accompanied by meaningful revenue measures and public sector efficiency gains, and not jeopardize medium-term fiscal consolidation objectives.”

“A sound medium-term revenue strategy should anchor a credible fiscal consolidation and the tax reform agenda. We support the recently approved income tax law, which will broaden the tax base. Timely implementation of other planned revenue-enhancing tax policy measures is also important. More revenue administration reforms, including improved compliance among high-net-worth individuals, would complement tax policy efforts. Continued progress in fiscal structural reforms will strengthen management of finances, investment, and risk monitoring.”

“Further lowering inflation is critical, especially to protect vulnerable households. We support the Bank of Albania’s intent to continue with monetary policy normalization and note that the policy stance remains accommodative despite the March policy rate increase. Should inflation prove more persistent than anticipated, the pace of tightening will need to accelerate. We support a continued flexible and data-dependent approach to monetary policy decisions. Foreign exchange intervention should be limited to disorderly market conditions, preserving the role of the exchange rate as a shock absorber.”

“The banking system has proven resilient to successive shocks but tightening financial conditions could expose vulnerabilities. Overall, the banking system has robust capital and liquidity positions, but higher non-performing loans could erode capital. In this context, we welcome the Bank of Albania’s efforts to enhance regulation and supervision, including a gradual build-up of higher bank capital buffers. We encourage the continuous monitoring of bank credit, exchange rate and interest rate risks. Collecting more data on the real estate sector will be key to further developing the macroprudential framework.”

“The team is grateful to the authorities and other counterparts in Albania for the constructive discussions and warm hospitality. The next IMF mission to Albania for the 2023 Article IV consultation is expected to take place in October.”