The FINANCIAL -- On May 18, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the First Post-Program Monitoring review for Albania and considered and endorsed the Staff Appraisal on a lapse-of-time basis.
Albania’s capacity to repay the Fund is adequate reflecting a strong record of repaying the Fund, relative macroeconomic stability, and progress in reforms.
The Albanian economy has continued to strengthen, with real GDP growth at 3.8 percent (yoy) during 2017, reflecting strong domestic demand driven by a revival in construction, recovery in the labor market and household credit, and large energy-related FDI projects. While the public debt to GDP ratio declined, the pace of fiscal consolidation has slowed post-program, with arrears accumulating. The current account deficit narrowed to 6.9 percent of GDP, supported by tourism and other services exports, and the level of FX reserves remains comfortable. Inflation is low and although credit growth is weak, banks are liquid and stable, according to IMF.
Despite the favorable environment and positive short-term outlook, risks and vulnerabilities remain, emanating from high public debt, non-performing loans in the financial sector, and weaknesses in public institutions and the judicial system. A slowdown in reforms or spillovers from external shocks could undermine growth prospects and confidence, adversely affecting debt dynamics and creating financing pressures on the government. On the upside, the opening of EU accession negotiations can provide a window of opportunity to lift implementation of the reform agenda, leading to higher investment and GDP growth.
Executive Board Assessment
Albania is enjoying strong economic growth, but it may not last without a significant push for structural reforms. The country is yet to take full advantage of its low labor costs and proximity with the EU due to a difficult business environment that deters investment. It is therefore critical that the government uses the good times to push the reform agenda to lift potential growth and position the country to benefit from potential EU accession.
Key policy and implementation challenges remain. Public debt remains high. NPLs, while declining, continue to affect the overall credit growth, particularly in the corporate sector. The state-owned electricity sector needs to be put on a sustainable financial footing and growth-enhancing structural measures need to continue with more vigor. Efforts to address these challenges should be redoubled to enhance the country’s resilience to shocks and mitigate vulnerabilities.
Addressing fiscal risks posed by the high level of public debt and the related financing needs remains a high priority. This requires more fiscal adjustment, preferably in the near term. Public debt management should focus on lengthening the maturity of public debt and diversifying the investor base, while avoiding risks posed by excessive non-concessional FX borrowing. Debt management capacity needs to be strengthened.
Improving tax compliance and administration is crucial. The progress towards value-based property taxation is welcome, but its implementation needs careful preparation. The authorities should consider additional revenue measures, including broadening the tax base. They should refrain from lowering tax rates or granting any new tax exemptions or preferential tax treatments that could complicate the tax system and distort the resource allocation in the economy.
Strengthening fiscal institutions and assessment of fiscal risks is another priority. Stronger efforts are needed to enhance the credibility of the medium-term budgetary framework. Public investment prioritization, project appraisal and monitoring are key. The MoF should enhance the fiscal recording, and legal, financial and economic analysis of PPP projects and ensure proper implementation of the PPP framework. The impact of PPPs on the fiscal medium-term budget framework and debt sustainability should be carefully assessed.
Institutional improvements are needed to tackle arrears, including in VAT refunds and unbudgeted investment projects. The authorities should improve the VAT refund process and strengthen commitment controls, expand the Treasury’s IT system to local governments and register all unbudgeted commitments and record unpaid bills. Measures such as reverse VAT to limit refunds should be exercised with caution.
Reforms in governance and financial restructuring of the state-owned electricity sector need to continue. The endemic issues of arrears accumulation and intracompany debt should be addressed. These measures should be backed by acceleration of institutional and market design reforms.
The current monetary policy stance is appropriate. The policy rate is currently at historical low rate, consistent with low inflation and external conditions. Measures to reduce euroization and deepen domestic financial markets are welcome. The flexible exchange rate has been an important stabilizer for the economy and the Bank of Albania has been building a comfortable buffer of foreign reserves to address external shocks.
The push for legislative and institutional measures to resolve high NPL ratios needs to continue. While NPL ratios have declined, the authorities need to accelerate measures to deal with cumbersome and inefficient collateral execution and out-of-court restructuring frameworks, which continue to impede credit growth.
Further alignment of financial sector regulation with EU standards is needed. Gradual convergence with the Basel III framework is warranted, including by imposing capital requirements on a risk-based, bank-specific approach to tackle risks within certain banks. The recent efforts of the authorities to implement targeted regulations to address risks from related party transactions and cross-border flows are welcome. The crisis management framework for non-bank financial institutions needs to be finalized to enhance system’s resilience to shocks and mitigate financial stability risk.