Press Release No. 06/17

Press Release: IMF Executive Board Approves US$24.7 Million under the PRGF and EFF for Albania

January 27, 2006

The Executive Board of the international Monetary Fund (IMF) today approved concurrent three-year arrangements under the Poverty Reduction and Growth Facility (PRGF) and the Extended Fund Facility (EFF) amounting to the equivalent of SDR 17.045 million (about US$24.7 million) for Albania to support the government's program of economic reform and poverty reduction. Of this amount, the equivalent of SDR 8.5225 million (about US$12.3 million) will be available under each of the PRGF and EFF arrangements. The approval of the arrangements enables Albania to draw the equivalent of SDR 2.435 million (about US$3.5 million) immediately.

The last PRGF arrangement for Albania, amounting to SDR 28 million, was approved on June 21, 2002 and expired on November 20, 2005 (See Press Release No. 02/30).

Following the Executive Board's discussion of Albania's requests, Anne O. Krueger, First Deputy Managing Director and Acting Chair stated:

"Over the three-year span of the previous PRGF-supported program, Albania's macroeconomic performance was strong. Growth averaged close to 6 percent—the highest in the region—and monetary and fiscal policies successfully anchored inflationary expectations at low levels. As private sector confidence improved, the lek experienced a modest trend real appreciation, reserve holdings increased, and public debt relative to GDP was reduced. Progress in structural reform included strengthening customs administration, starting to use the banking system to pay public sector salaries, and the privatizing of the last state-controlled bank—the latter measure significantly raising the degree of competition and credit provision in the system.

"Near-term growth and external prospects worsened somewhat in late 2005 due to disruptions in the electricity supply, but the medium-term outlook remains relatively favorable. With full implementation of the policies contained in the new program—including the comprehensive Power Sector Action Plan for 2006-08—the economy is expected to return to its potential growth rate of 6 percent by 2007. Similarly, the current account deficit—after a projected deterioration in 2006 due to higher electricity imports—should also improve in subsequent years as domestic production returns to normal levels. The outlook is for inflation to remain at about 3 percent throughout the period, although downside risks have increased and policy makers will need to remain vigilant and react quickly to any second-round price pressures that may materialize.

"The new three-year arrangement has been designed to reduce economic vulnerabilities, enhance growth potential, strengthen government solvency, protect priority spending, improve governance, and further develop the financial system. Marking a change from previous financing arrangements, only half of this program will be supported through the concessional Poverty Reduction and Growth Facility, with the balance sourced from the Extended Fund Facility. Such a blend of concessional and nonconcessional financing reflects the strong progress made by Albania since the approval of the previous program—including in rapidly rising per capita income and overall institutional development.

"Reflecting the increased uncertainty surrounding near-term growth, the 2006 budget contains strengthened contingency mechanisms. Combined with realistic revenue projections, these provide considerable protection for planned priority expenditures on education, health care, and public investment. Over the medium term, the fiscal framework strikes an appropriate balance between spending in these areas and the need for continued fiscal consolidation. Net domestic borrowing—the key fiscal target—will decline gradually over the program period, but an increasing current fiscal surplus will ensure the concentration of expenditure on productive uses, while limiting borrowing to the financing of capital expenditure. In the event privatization revenues and gains from improvements in tax administration materialize, these will be either expended in priority areas or used for additional debt reduction.

"The program also envisages an acceleration of structural reform in key areas. Comprehensive tax administration measures, based on IMF technical assistance, will be pursued to enhance efficiency, with special emphasis on servicing large tax payers and improving tax compliance. Following an IMF evaluation mission, a detailed action plan to improve public debt management will be drawn up to guide reform over the program period. In the financial sector, the authorities intend to develop an action plan to implement the recommendations of the 2005 Financial Sector Stability Assessment report. Other structural measures will include civil service reform and improvements in the institutional framework for evaluating large projects; reform of the macro-critical electricity sector; and statistics," Ms. Kruger said.

ANNEX

Recent Economic Developments

Albania's macroeconomic performance has been strong in recent years and medium-term prospects remain relatively favorable. However, near-term growth and external prospects worsened in late 2005, as disruptions to the electricity supply contributed to a decline in growth to 5 ½ percent in 2005 from about 6 percent in 2004; and to a worsening of the current account deficit. Despite progress to date, macroeconomic challenges and an unfinished reform agenda remain to be addressed, particularly in the areas of revenue administration, public debt management, financial market development, civil service, and expenditure management.

Program Summary

After more than a decade of IMF-supported programs, this arrangement aims at preparing Albania for graduation from Fund-supported programs. The program focuses on maintaining sound financial policies, while promoting reforms aimed at enhancing growth potential, strengthening government solvency, reducing vulnerabilities, protecting priority expenditure, and improving governance and the business climate.

Under the program, real GDP is projected to return to its trend growth rate of 6 percent by 2007, while macroeconomic stability—with inflation remaining in the Bank of Albania's 3 percent +/- 1 percent range—will be maintained by additional fiscal consolidation and by a strengthening of the monetary policy framework. Reforms in tax administration and expenditure management will permit the quantity and quality of public investment to increase alongside a declining debt to GDP ratio; while domestic borrowing will be gradually reduced over the program period, and the current and primary fiscal balances will improve. Measures to reform public debt management and the electricity sector will be pursued to further reduce economic vulnerabilities.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4 ½-year grace period, and the interest rate, adjusted weekly, is currently about 4.30 a year.