Tirana, Albania, May 22, 1999

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

1.  Despite the traumatic consequences for our country of the Kosovo crisis, the authorities of the Republic of Albania remain strongly committed to the policies that are being supported by a three-year arrangement under the IMF's Enhanced Structural Adjustment Facility (ESAF). Under the first-year economic program supported by the arrangement, the budget deficit was reduced as planned, inflation fell to a very low level, output rebounded, and our structural reform program was advanced. Since the review of the program was completed in January 1999, policies have remained on track and, according to preliminary data, all end-March 1999 indicative targets were met.

2.  The large number of refugees from Kosovo does, however, impose a considerable burden on our economy. Without help from the international community—and, in particular, the provision of external budgetary grants to defray the substantial cost of providing for the refugees—it will become increasingly difficult to maintain macroeconomic stability and pursue our development objectives. In this context, we are therefore requesting a second annual arrangement under the ESAF and an augmentation of access under the arrangement by SDR 9.7 million (20 percent of quota) to provide continuing support to our comprehensive macroeconomic and structural adjustment program. The attached Supplementary Memorandum on Economic and Financial Policies describes the policies we will implement during the course of this arrangement. In collaboration with IMF and World Bank staff, we have also updated the Policy Framework Paper describing our three-year program.

3.  The Government and the Bank of Albania believe that the policies outlined in the attached memorandum are adequate to achieve the targets of the program, but in consultation with the IMF, will take any further measures that may become necessary for this purpose during the program period. In addition, the authorities will provide the IMF with such information as the IMF may request in connection with the implementation of the policies and objectives of the program.

4.  It is our desire to contribute to greater transparency of our policy commitments. Accordingly we plan to make public the attached Memorandum of Economic and Financial Policies. We also wish to participate in the pilot project on the release of staff reports for Article IV Consultations. We would ask that both documents be placed on the IMF internet web site.

1.  Introduction

1.  Before the eruption of the crisis in Kosovo in March 1999, macroeconomic and structural policies were consistent with the program supported by the ESAF arrangement, and macroeconomic developments were on track. The economy was recovering from the effects of the domestic upheavals in 1997 and macroeconomic stability had been restored. Despite a brief episode of civil disorder in September 1998, real GDP growth for 1998 is estimated to have been 8 percent, close to the targeted 10 percent. Inflation declined sharply to under 9 percent in the year to December 1998, and fell further to around 2 percent in the first few months of 1999. The lek has been broadly stable during the past 18 months, and the external current account deficit declined from 12 percent of GDP in 1997 to about 6 percent in 1998. Foreign exchange reserve cover was a comfortable 4.7 months of imports of goods and services at end-1998.

2.  These positive economic developments reflected the government's steadfast adherence to macroeconomic stabilization policies. The domestically financed fiscal deficit was slightly below the target, and, at about 6½ percent of GDP, was over 4 percent of GDP below the 1997 outcome. Broad money was below the projected level for end-1998, and reserve money and net domestic assets of the Bank of Albania (BoA) actually fell during the year, reflecting an encouraging shift by the public from holding cash to bank deposits. Indicative targets for end-December 1998 and (according to preliminary data) end-March 1999 were met (Table 1).

3.  In addition, structural reform has continued. The pyramid scheme companies are close to being wound up. A strengthened customs code was approved by parliament in April 1999. A foreign strategic buyer has been selected for the National Commercial Bank (NCB). More than 250 small- and medium-sized enterprises (SMEs) have been privatized, leased, or liquidated since September 1998. One of the four remaining former Enterprise Restructuring Agency (ERA) enterprises has been leased to a foreign investor, and government decisions have been adopted to liquidate two others. End-1998 targets for agricultural land registrations and transactions in the land market were met. Employment in budgetary institutions was reduced from about 145,000 at end-1997 to 133,000 at end-March 1999.

4.  The crisis in Kosovo and massive influx of refugees into Albania has, however, considerably changed key assumptions underlying the program and created intricate policy challenges. Already, about 430,000 refugees (13 percent of the local population) have entered the country and many more could arrive in the period ahead. While the government has welcomed the refugees, their growing number is imposing considerable pressures on fiscal resources because direct foreign aid covers only part of the costs associated with the refugees. Without adequate additional external financing, the government's development and reform program would be compromised.

5.  Despite the enormous pressures caused by the crisis in Kosovo, the government remains firmly committed to the objectives of maintaining macroeconomic stability, advancing structural reform, and strengthening governance. Economic policies will continue to be conducted in the framework of a medium-term program for April 1998-March 2001, for which the IMF is providing financial support under the ESAF. The remainder of this memorandum details the macroeconomic and structural policies for the period ahead. The government believes that, with enhanced external assistance, the policies set out below will be sufficient to achieve the program objectives, but it will take additional measures and seek new understandings with the IMF should the program diverge from its specified targets.

II.  The Government's Macroeconomic and Structural Policies

A.  Objectives

6.  The crisis will not deflect the government from its task of helping to create the conditions for sustained rapid growth in a low-inflation environment. It will continue to implement far reaching structural reforms. Provided sufficient external assistance is made available to deal with the huge costs of the refugees, and provided the crisis is not exacerbated, annual growth should meet the 8 percent target for 1999. Inflation may rise temporarily from its current levels, owing to additional demand pressures on basic essentials, but the better-than-expected performance in recent months should ensure that it will remain below the program ceiling of 7 percent by end-year.

7.  Macroeconomic policies will be kept consistent with maintaining inflation on a downward path such that broad convergence with rates in industrial countries is achieved in 2001. In particular, the government will preserve fiscal stability by limiting the domestically financed fiscal deficit to 5.5 percent of GDP in 1999, and steadily reducing it to 3 percent of GDP in 2001. Fiscal consolidation and structural reform are projected to be consistent with sustaining growth of around 8 percent in the medium term, while helping to put the balance of payments on a sustainable footing. Although gross reserves may decline in 1999, reserve cover will be kept above 3½ months of imports of goods and services. Specific targets for 1999 and 2000 are tabulated below.

B.  Fiscal Policy

8.  The Kosovo crisis will not deflect the government from the pursuit of sound fiscal policies. The government is receiving assurance from the international community that additional budget expenditures for the provision of assistance to the refugees will be financed by external grants and highly concessional credits. This will enable the government to keep to its original budget objective of reducing the domestically financed budget deficit from 61/2 percent of GDP in 1998 to 51/2 percent of GDP in 1999 without having to make cutbacks in essential social and economic development spending and without having to incur sizable future debt service payments. Taking into account the higher external financing, however, the overall deficit, is projected to rise to 13.8 percent of GDP in 1999 from 10.4 percent of GDP in 1998. The government believes that the measures described below are sufficient to achieve the fiscal targets, but is prepared to take additional steps as needed. In particular, the government will intensify its tax collection efforts and, if necessary, raise taxes and cut current spending to prevent any slippage. As the economic impact of the Kosovo crisis is particularly difficult to predict, the government, in consultation with IMF staff, will keep the fiscal stance and fiscal developments under continuous review. A further reduction in the domestically financed deficit to about 4 percent of GDP will be embedded in the 2000 budget. Passage by parliament of a satisfactory 2000 budget will be a condition for completing the mid-year review of the program under the second annual ESAF arrangement.

9.  In line with the medium-term fiscal strategy, underlying fiscal consolidation in 1999 will rely on measures to raise tax revenue by the equivalent of about 11/2 percent of GDP. Part of the increase will result from measures taken to modernize the tax system through a new direct tax law and from the solidarity tax (a surcharge on profit and income taxes). Among other things, the direct tax law introduced a 10 percent withholding tax on interest income, raised personal income tax rates, included bonuses in the personal income tax base, and abolished some tax holidays. The government will not introduce new direct tax holidays, including for companies in any planned free zones, nor introduce exemptions from VAT or customs duty (structural benchmark). Other tax changes, including the unification of excise taxes on domestic and imported goods, will be at least revenue neutral, while improved import valuation methods will offset the cost of a reduction in tariff rates (see paragraph 32).

10.  Revenue increases will also result from measures to strengthen customs and tax administration. The Kosovo crisis will not loosen the government's resolve to implement these measures effectively. In the area of customs administration, the government will continue its cooperation with the EU Customs Assistance Mission to Albania in order to reduce smuggling, fraud, and corruption, and raise collections, including through better enforcement of taxation of imports carried by individuals. The passage in April 1999 of a substantially strengthened customs code provides a suitable legal framework to address governance problems in the customs area. As a prior action for the Board meeting for the second annual ESAF arrangement, the revised code will be implemented by: (i) activating the post-clearance unit in the Customs Directorate ; (ii) restructuring and inreasing the resources available to the internal audit unit in the Customs Directorate; and (iii) finalizing a plan for collecting customs debts and beginning its implementation. To reduce fraud and corruption the government will strictly implement the rules for transparency in the recruitment of customs officials and seek assistance from neighboring countries to continue providing pre-arrival information on exports to Albania. Along with the implementation of the new customs code, the government will also help to combat smuggling by employing 40 anti-smuggling officers hired from outside the Customs Directorate (prior action for the Board meeting). The government will hire a further 60 anti-smuggling officers by end-1999 (structural benchmark). Improving the valuation of imports for customs purposes is also a prior action for the Board meeting. To this end, the government will adjust reference prices for the valuation of imports in line with market prices, increasing in particular those prices which are currently underestimated. An exception will only be allowed in the case of diesel, for which current minimum reference prices for imports may continue to apply until end-October 1999. The government will also aim to make the customs reference valuation file fully operational in all major customs clearance houses by end-1999 (structural benchmark).

11.  As for tax administration, a new law on tax administration that will make tax procedures more transparent and strengthen enforcement will come into force at end-July 1999. Moreover, VAT documentation is being improved (through turning VAT receipts into secure paper, to be introduced by end-June 1999), 7 additional tax offices are being computerized with funds already approved under the Tax Administration and Modernization Project, and training for tax officials and taxpayer education has been increased. The government will also work with the World Bank to improve the operations of the large taxpayers' office.

12.  Delays in the passage of the customs code and in strengthening tax administration led to some shortfalls in revenue in the first quarter of 1999 relative to budget targets. The shortfall was compounded in April by a logjam of humanitarian and military imports at the main ports, which has delayed the import of taxable commercial goods. Assuming the logistical problems in the ports can be resolved quickly, and now that the measures to strengthen tax and customs administration are entering into force, the government is determined that there will be no further slippage in revenue collection in the remainder of the year. Effective July 1, increases in local property taxes (which have been unchanged since 1994 and the imposition of excise taxes on tires and cosmetics will also help to recover some of the earlier revenue losses such that revenues are projected to fall short of the full-year budget target by no more than lek 1.5 billion (US$10 million). Tax collection will be monitored under the program by way of quarterly indicative floors (Table 1). The authorities will review revenue developments with IMF staff on a monthly basis to identify any underlying weaknesses in tax collection and, if necessary, to agree on corrective measures to ensure that tax collection remains consistent with the quarterly floors.

13.  Total expenditure, which was originally budgeted to remain around 31 percent of GDP, is now projected to rise to about 35 percent of GDP in 1999 as a result of the government's contribution to assisting the refugees. The projection assumes that the number of refugees in Albania will peak at about 500,000 in May and decline only moderately in the remainder of the year. The budgetary cost, equivalent to about US$144 million, includes sizable outlays for health, education, family assistance to the nearly 300,000 refugees being cared for in Albanian homes, provision of sanitation and other services in refugee centers, conversion of public buildings into refugee shelters, policing, and construction and maintenance of roads and other supporting infrastructure. These expenditures are in addition to those being borne by international relief agencies, which have been overwhelmed by the immense number and speed of arrival of the refugees. The estimated budgetary costs have been made conservatively in consultation with the staffs of the World Bank, IMF, and international development agencies. For example, they do not factor in the potentially much greater cost of caring for the refugees as winter approaches. There is also a significant likelihood that the number of refugees could be markedly higher. In view of the high degree of uncertainty in projecting refugee numbers and costs, the government, in consultation with IMF staff, will update its estimates of budgetary costs on a regular basis and keep the donor community informed of any revisions to external financing needs.

14.  In consultation with IMF and World Bank staff, the government will ensure flexible, transparent and accountable use of budgetary funds for humanitarian relief. Specifically, it will: (i) prepare an outline of the Budget Framework Memorandum for allocating budgetary resources on a bi-monthly basis, starting in May 1999; (ii) add separate expenditure categories temporarily to the budget classification; (iii) establish a monitoring mechanism for the use of budgetary funds allocated to the relief efforts and submit bi-weekly reports to the Ministry of Information, which will make them available to the public and the donor community; (iv) establish a budgetary account in the Savings Bank for all financial aid donated to the government to cover relief efforts (“The Kosovo Account”); and (v) implement guidelines and procedures requiring full budget and treasury procedures for the allocation, execution, accounting, and reporting of funds in the Kosovo Account.

15.  Excluding spending on the refugees, the original budget for 1999 allowed for a shift in the composition of expenditure from current to capital expenditure. Non-refugee-related current spending declines relative to GDP, largely because of lower interest payments on domestic debt, but also because of determined efforts to keep personnel expenditures in check and to improve the targeting and delivery of social assistance. To contain wage costs, the general wage increase was limited to 10 percent, and delayed until May 1, 1999, while budgetary employment will be reduced by 3½ percent, with the expenditure savings being used to cover the costs of further wage decompression (paragraph 26). To ensure better targeting of social assistance, only 35 percent of the 1999 budget allocation will be released by end-June 1999, by which time the Ministry of Labor and Social Affairs will have compiled a comprehensive database on recipient families. However, while improved monitoring of benefits and better economic conditions should generate savings on social assistance without weakening the economic position of those in need, the government will make available additional resources for social assistance from the reserve and contingency funds if the number of eligible families does not fall as expected. Expenditure on investment and operations and maintenance is budgeted to increase by 20 percent in 1999. Despite the increase, such expenditure remains too low in view of the great need to improve and extend the infrastructure. The government is committed to raising expenditures on investment and other priority items, including health and education, over the medium term. Without adequate external budgetary grants and concessional financing to pay for the costs of assisting the refugees, the government will be forced to scale back spending on investment and essential social services.

16.  The government will continue to improve budgetary procedures and public expenditure management. The 1999 budget was prepared according to the new organic budget law, with more transparent procedures. The government will seek technical assistance from the IMF, World Bank, and the EU to improve budget classification which will be used in the preparation, execution and reporting of the 2000 budget. The cash management system in the treasury department will be improved further in 1999. During 1999, the government will take steps to integrate the investment and recurrent budget planning processes.

C.  Monetary and Exchange Rate Policies

17.  Provided sufficient external assistance is made available to finance refugee-related government expenditures, the Kosovo crisis should have a limited impact on monetary conditions. The Bank of Albania (BoA) will continue to maintain an appropriately tight monetary stance to help reduce inflation, its main objective. The minimum deposit rates for state-owned banks will be kept at levels which are positive in real terms, with the timing and amount of nominal rate changes being based on an assessment of price developments, the demand for lek deposits, and conditions in the foreign exchange market. The BoA will continue to operate under a flexible exchange rate regime. Intervention will be limited to that necessary to smooth excessive fluctuations in the exchange rate. While maintaining adequate reserve cover, the BoA will also release foreign exchange derived from inflows of foreign assistance in order to provide resources for imports, timing its release to avoid excessive volatility in the exchange market.

18.  The monetary program for 1999 is geared to ensuring that broad money expansion remains consistent with the inflation objective. On the assumption of a broadly constant velocity during 1999, and given projected nominal GDP growth, this would imply broad money growth of about 15 percent. This expansion should be sufficient to meet the needs of the budget, and also allow a significant increase in credit to the private sector. Quarterly indicative targets and performance criteria are contained in Table 1.

19.  The BoA intends to start to replace bank-by-bank credit ceilings with indirect instruments of monetary policy in the course of 1999. A necessary condition for the removal of the ceilings will be strong banking supervision to monitor and constrain, if needed, individual banks. The BoA intends to strengthen banking supervision during 1999, including by improving both on- and off-site supervision techniques (see paragraph 22). This should permit the phasing out of credit ceilings on banks that meet clearly stated prudential requirements. For banks not meeting such requirements, including having a proportion of overdue loans of more than 30 days in excess of 20 percent of their portfolio, no increase in net credit will be permitted, and lending proposals will be subject to strict review. The BoA will be discussing with a forthcoming IMF technical assistance mission the adequacy of banking supervision, means of developing the treasury bill market, reserve money management, the payments system, and the potential for developing an interbank credit market. The BoA will, by end-June 1999, organize a seminar for banks to discuss interbank lending. To facilitate the move towards indirect monetary policy instruments, the BoA and the Ministry of Finance have established a joint committee which coordinates the issuance of treasury bills and arrangements for profit transfers to the government. During 1999, the committee will meet each month. Furthermore, the BoA intends to set up a Credit Information Bureau by end-September 1999 to make transfer of information among banks easier and to facilitate lending to creditworthy customers.

D.  Structural Policies

20.  The process of winding up the pyramid scheme companies, whose collapse precipitated the crisis of March 1997, is progressing. Foreign accounting firms appointed to administer and audit the companies have offered all the seized assets for sale and one of the auditors' final reports of the companies was presented in May 1999. The government has already made an initial distribution of the proceeds of the asset sales, and aims to complete the sale and distribution of all remaining assets by end-1999.

21.  The government will make significant progress in privatizing the two remaining state-owned banks in 1999. A privatization advisor has been appointed for the National Commercial Bank (NCB), and, following the submission of two tenders, the government selected a buyer in April 1999. As prior actions for the Board meeting for the second annual ESAF arrangement, the government will prepare decisions on (i) recapitalization of the bank, (ii) transfer of the bank's loan portfolio to the Loan Collection Agency, and (iii) transfer of NCB's shareholdings in other banks to the Ministry of Finance. A sale contract is expected to be signed by end-June 1999, with final legal arrangements for the privatization of the bank, including the clean up of its balance sheet, to be completed by end-September 1999. The Savings Bank is now operating under a governance contract. Cooperation between the bank, its advisors, and the government has been good, and the advisors have prepared an action plan to streamline the bank's operations in preparation for privatization. For its part, the government will, by end-September 1999, agree on a plan for the privatization of the Savings Bank in consultation with the World Bank, and submit to parliament a draft law for its privatization (structural performance criterion). The government will also discuss with the Savings Bank the amount of compensation for agency services conducted on the government's behalf, and raise payments for agency services to commercial rates by end-September 1999. The government intends to initiate the privatization process in 1999 and select a buyer for the Savings Bank no later than end-March 2000 (structural benchmark).

22.  The government and the BoA are continuing to take steps to clarify and strengthen the legal, regulatory, and supervisory framework under which the banks operate. The BoA is in the process of drafting a Law on Secured Transactions to facilitate collateralized lending, which will shortly be sent to the Council of Ministers, and to parliament by end-June 1999 (structural benchmark). The draft Money Laundering Law will incorporate IMF comments and be sent to the Council of Ministers by end-June 1999. Enforcement of the Companies Law and the Bankruptcy Law is being improved through additional training of the judiciary, with assistance from the World Bank and other donors. In the area of banking supervision, a legal framework and a set of core prudential regulations broadly in line with the Basle Core Principles has been adopted and licensing requirements for new banks and capital adequacy requirements for all banks are being strengthened. With IMF technical assistance, the BoA will, during 1999, hold a training program in banking supervision in order to develop its institutional capacity to implement the new regulations and, in particular, strengthen its ability to conduct off-site supervision. To improve the payments system, the BoA has introduced SWIFT communication with commercial banks and preparations are underway to adopt a large-value transfer system in the form of a real-time gross settlement system. Moreover, the Savings Bank has concluded agreements with Italian and Greek banks to allow low-cost transfer of remittances from Albanians in Italy and Greece, and an agreement with Moneygram to provide facilities for transfer from these and other countries.

23.  The government will take every step to accelerate enterprise privatization and restructuring. As prior actions for the Board meeting for the second annual ESAF arrangement, the remaining ERA enterprises and at least 300 of the 469 small- and medium-sized enterprises (SMEs) which remained at end-September 1998 will be privatized, leased, or liquidated. The remaining SMEs will be sold, leased, or liquidated by end-September 1999, with the exception of about 50 enterprises which are being retained in the public sector for national security or social reasons (structural performance criterion). At the same time, the government remains committed to the privatization of the strategic enterprises. The first candidate for sale is the mobile telephone company (AMC). A privatization advisor has been appointed and invitations for tenders will be sent to interested buyers with a view to selecting a buyer by end-1999 (structural benchmark). The government will initiate the privatization of the fixed telecommunications company (Telekomi Shqiptar) by end-1999. In the mining sector, the government will invite the World Bank to coordinate a financial assessment of the chromium and copper mines. The government will sell or liquidate all small copper and  small chromium mines by end-September 1999 (structural benchmark). In addition, a draft law for the privatization of Albchrom and Albbaker will be finalized in consultation with the World Bank and enacted by end-September 1999 (structural benchmark), with a view to initiating privatization in the fourth quarter of 1999 and completing privatization or liquidation of the companies by end-March 2000. In the petroleum sector, Albpetrol has been split into three companies, which are being prepared for privatization. To cut costs, the government will close unviable operations and reduce employment in the sector by 2,000 to 7,500 by March-2000. In consultation with the World Bank, the government will pass laws for the privatization of the service company and the refining and marketing company by end-September 1999. It is the government's aim to complete the privatization of the service company and initiate the privatization of the refining and marketing company by end-1999. The government will begin the privatization of the exploration and production company in 2000.

24.  By end-May 1999, the government, in coordination with the World Bank, will prepare a financial forecast which will clarify the financial position of the electricity utility, KESH, and propose measures to reduce losses and supply disruptions, and improve collection. The plan will include measures to strengthen the management of KESH, including through an incentive-based foreign governance contract. It will also include: (i) a clear financial plan for 1999 and later years; (ii) quarterly targets for reducing theft, improving collections, and disconnection of customers in arrears; and (iii) measures to facilitate payment of bills. The government will ensure the installation of at least 900 meter boxes per quarter, beginning end-March (structural benchmark). Government approval will be required for any borrowing or barter agreement entered into by KESH.

25.  The government has made considerable progress in creating a well-functioning agricultural land market, which is essential to improvements in productivity and consolidation of landholdings, and will take further steps to develop the land market in 1999. In particular, the government will provide adequate office space for land registries and set up and provide funding for special validation commissions which can provide tapis (land use certificates) in villages where these were not issued. Progress in land registration and the establishment of a land market will be monitored by quarterly benchmarks on the number of cadastral zones for which first registration should be completed and on the number of land sale transactions. These benchmarks are described in Table 2.

26.  The government will make further progress in the reform of public administration and the civil service in 1999. Budgetary sector employment will be reduced from 133,000 at end-March 1999 to 130,000 by end-1999 in order to free resources to increase wage differentiation (structural benchmark). During 1999, employment monitoring will be improved through enhancements to the database of budgetary employment in the Department of Public Administration and through better coordination between the Department of Public Administration and the Treasury Department. In late 1998, the Council of Ministers issued a decision to conduct functional reviews in four agencies (the central administration and the Ministries of Finance, Justice, and Local Government). With external assistance, the review of the central administration was completed in March 1999. Reviews of the other three ministries and the Ministry of Education will be completed by end-1999.

27.  The government is determined to continue the fight against corruption. In addition to the measures to strengthen the customs administration (paragraph 10) in September 1998 the government formally adopted an anti-corruption strategy, which it intends to implement fully. To improve transparency, the government will, by end-June 1999, modify procedures to increase the frequency of verification of the declaration of personal assets by ministers and senior officials. The government will also, by end-September 1999, display approved fees for government services publicly. To strengthen the judiciary, the government will, by end-December 1999, test all judges and remove those who fail the test, and will strengthen the functioning of the judicial inspection office in the High Council of Justice.

E.  External Sector Policies and Program Financing

28.  The external current account deficit is projected to rise sharply from 6 percent of GDP in 1998 to 12 percent of GDP in 1999 mainly as a result of higher import demand arising from the effects of the Kosovo crisis and from investment and reconstruction needs. Excluding humanitarian imports financed by direct aid, imports are projected to grow by 28 percent in 1999 while the rapid growth in exports expected before the crisis will be dampened somewhat by supply disruptions in the north of the country and some switching to local markets. A decline in the current account deficit to 8½ percent of GDP is projected for 2000 on the assumption (which may prove optimistic) that imports related to the Kosovo crisis will decline sharply and export growth will strengthen.

29.  On the basis of current commitments from bilateral and multilateral donors, and the expectation that inflows of direct investment will remain at a low level because of the uncertainty created by the Kosovo crisis, additional exceptional financing will be needed in 1999 to finance the current account deficit and maintain adequate reserve cover. Taking into account a new US$30 million public expenditure support credit from the World Bank and a one-year nonconcessional deferral of all debt service to Paris Club creditors, the residual financing gap for 1999 is estimated at US$119 million. The EU has pledged a budgetary grant of Euro 62 million (US$65 million). The government will request additional assistance from multilateral and bilateral donors at a donors conference scheduled for the second half of May. Assuming that the Kosovo crisis does not exert a continuing negative influence on the balance of payments, financing gaps in 2000 and beyond are more modest-on the order US$40-50 million a year. Additional support will be needed to close these gaps. The external financing of the program will be reassessed during the mid-year review.

30.  The government will take further steps to regularize relations with external creditors. The government will conclude bilateral agreements under the July 1998 Paris Club agreement for rescheduling Albania's debt in arrears to Russia and Italy as soon as possible and seek at least comparable treatment from non-Paris Club official bilateral and commercial creditors with outstanding claims on Albania. The government will continue efforts toward the removal of the remaining restrictions subject to IMF approval under Article VIII, Section 2(a), in the form of outstanding debit balances under inoperative bilateral payments agreements.

31.  The government intends to improve aid monitoring and absorption in the period ahead. An operational external debt database and a similar database for grants will be completed by end-June 1999 and the government will, with external technical assistance, formalize the procedural, institutional, and legal framework for monitoring and servicing external credits and grants by end-1999. The Ministry of Finance has appointed a foreign grants officer. The government will ensure timely and accurate reporting of external debt, including commitments by state-owned enterprises. To strengthen absorption capacity and remove obstacles to the disbursement of foreign aid, the government will continue to simplify procedures relating to the approval of foreign financed projects, and provide adequate funds for reimbursement of VAT and customs duty and for land acquisition.

32.  The government remains committed to trade reform and to maintaining a liberal trade regime. A key objective in this regard is to lower the average tariff rate over the medium term through a combination of reductions in the level, number, and dispersion of rates. The medium-term aim will be to achieve a simple and transparent tariff structure with relatively low (fiscal considerations permitting, close to a 10-12 percent unweighted average tariff rate, compared with the present 15.9 percent) and more uniform tariff rates. As an initial step, the maximum tariff rate was reduced from 30 percent to 20 percent in April 1999. The government intends to lower the maximum tariff rate further to 18 percent in the 2000 budget. The government will also reverse the recent increase in the tariff on diesel back to 10 percent by end-October, 1999 and will not introduce any new protectionist measures for the domestic petroleum industry, including the differentiation of excise taxes by the quality of diesel. In addition, the government will remove the export bans on skins and hides, and on the remaining two scrap metals, by end-July 1999 (structural benchmarks). It is committed to not introducing any new quantitative restrictions on exports or imports.

F.  Economic Statistics

33.  The government and the BoA will continue efforts to improve the quality, coverage, and timeliness of economic and financial data. To address the key deficiencies, the authorities will implement a work program that was prepared in collaboration with a multitopic mission from the IMF Statistics Department in February 1999. By end-June 1999, the authorities will establish an inter-agency Statistics Council headed by the Institute of Statistics (INSTAT) and including representatives of the Ministry of Finance, the BoA, the Customs Directorate and other agencies, which will formulate statistical policies, coordinate the production of statistical data, and have the authority to request budgetary resources for statistical work (structural benchmark). One of the key objectives of the council will be to prepare the ground for Albania's participation in the General Data Dissemination System (GDDS), which is currently impeded only by a lack of adequate national accounts. Accordingly, the government has requested external assistance, including a short-term expert, and will also recruit additional staff for INSTAT's national accounts unit.

III.  Program Monitoring

34.  During the second annual ESAF arrangement, the program will be monitored based on quantitative performance criteria and indicative targets for end-September 1999 and end-March 2000, and indicative targets for end-June and end-December 1999, set on a cumulative basis from end-December 1998 (Table 1), and structural performance criteria and benchmarks (Table 2). The government will conduct with the IMF a mid-year review of the program no later than end-February 2000 that will, among other things, require for completion a satisfactory agreement with IMF staff on a 2000 budget, and an end-year review to be completed no later than end-May 2000. The quantitative targets include: (i) a floor on the net international reserves (NIR) of the BoA; (ii) a ceiling on the net domestic assets (NDA) of the BoA; (iii) a ceiling on the banking system's net credit to the general government (including extra-budgetary funds); (iv) a ceiling on the contracting or guaranteeing by the public sector of new nonconcessional medium- and long-term external debt in the maturity range 1-15 years, with a subceiling on the contracting or guaranteeing of new nonconcessional external debt in the maturity range 1-5 years; and (v) a ceiling on the stock of outstanding short-term external debt, with the exception of normal import-related credits. The NIR floor will be adjusted upward and the NDA and net credit to government (NCG) ceilings downward for any excess in balance of payments or external budget financing (including budgetary grants for humanitarian relief to refugees from Kosovo) above program projections and/or any shortfall of the Kosovo-related budget cost from program projections. The NIR floor will be adjusted downward and the NDA and NCG ceilings upward to the extent that there is any shortfall in balance of payments or budget financing from program projections and/or any excess of the Kosovo-related budget cost from program projections, with the proviso that the downward adjustment to the NIR floor shall not exceed US$50 million and the upward adjustment to the NDA and NCG ceilings shall not exceed the lek equivalent of US$50 million, converted at the program monitoring exchange rate. The ceilings on NCG will also be adjusted downward for any excess in privatization receipts over the program levels (Table 1). Collection of tax revenue will be monitored on the basis of quarterly indicative floors. During the program period, Albania will not impose or intensify exchange restrictions on current transactions or import restrictions for balance of payments reasons, and will not accumulate new external payments arrears, except for obligations for which a rescheduling is expected.