On February 28, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the 2013 Article IV Consultation with Albania.1
Albania successfully avoided recession in the aftermath of the global crisis and suffered a milder growth shock than neighboring countries. Recently, however, the economy has shown signs of protracted weakness and macroeconomic imbalances have widened.
Weak investor confidence, bank risk aversion, as well as incomplete investment climate reforms, have amplified the slowdown. Real GDP growth is expected to decline to 0.7 percent in 2013, the lowest in more than a decade. Inflation has remained low, largely within the central bank’s 2–4 percent target range, reflecting the negative output gap. The external current account deficit has begun to adjust on account of oil exports and import compression, but weak external drivers are preventing a sustained reduction.
The fiscal position deteriorated significantly in 2013. Public debt and financing needs—among the highest in the Central, Eastern and Southeastern European region—have risen because of fiscal loosening prior to the 2013 elections, the accumulation of significant unpaid bills and arrears, and the weak economy. Fiscal deficits have been driven up also by structural factors, with pensions exerting a heavy fiscal burden.
The banking system has been resilient to eurozone stress so far, largely because it relies almost exclusively on domestic deposits. Banks’ strong solvency ratios and stringent provisioning rules have also contributed to banking system stability. Nevertheless, non-performing loans (NPLs) have increased considerably, further constraining credit growth and putting pressure on bank profitability.
The authorities have requested IMF’s financial assistance in support of their program to boost growth and support macroeconomic stability. The program seeks to: i) reverse the upward trend in public debt and lay the ground for its sustained reduction; ii) restore banks’ confidence in lending by bringing down NPLs and; iii) ease constraints on growth by undertaking ambitious structural reforms, including in the areas of pensions, energy, public administration, and the business environment. The program will be supported by an IMF arrangement under the Extended Fund Facility (see Press Release No. 14/81).
Executive Directors commended the authorities for their adoption of a package of measures to restore fiscal sustainability, safeguard financial stability, and improve the investment climate, which will be critical for reviving the economy and allowing sustained medium-term growth. Noting the significant risks from underlying imbalances, they looked forward to strong and lasting commitment to the program.
Directors stressed that given Albania’s high debt, fiscal consolidation should aim to lower the public debt ratio to below 60 percent of GDP in the medium term. Achieving this objective requires significant further tax and expenditure policy measures, supplementing the steps taken in late 2013 and in the 2014 budget, supported by extensive public financial management and tax administration reforms. Adopting a medium-term budget framework or fiscal rule would anchor the commitment to the debt target. Directors generally agreed that the burden of fiscal adjustment should fall primarily on revenues, given the country’s development needs and the low share of revenues in GDP. Pension and energy reforms should form a key part of medium–term adjustment. Reducing the outstanding stock of arrears and putting in place mechanisms to prevent their recurrence is critical for fiscal sustainability and restoring confidence. At the same time, Directors underscored the importance of proceeding cautiously with payments and employing an external auditor promptly to begin conducting ex post risk-based audits.
Directors commended the authorities for maintaining low inflation under the inflation-targeting framework. Most Directors saw scope for moderate monetary policy easing to support economic recovery, provided inflation expectations and financial stability remain well anchored. Nevertheless, they stressed the need for a cautious approach, given that further easing could increase the risks posed by high unhedged foreign currency exposure, while its effectiveness could be limited by sluggish credit demand and bank risk aversion. Directors also encouraged the removal of exchange restrictions as soon as possible.
Directors underscored the importance of continued vigilance to maintain financial stability. They encouraged prompt and comprehensive action to address rising non-performing loans to help boost bank profitability and credit growth, including through removing impediments to collateral execution and loan restructuring, and clearing arrears. Strengthening the regulation and supervision of the nonbank financial system, in line with recommendations from the recent Financial Sector Assessment Program, will help alleviate systemic risks.
Directors stressed that embarking on a path of sustained medium-term growth hinges on the implementation of ambitious structural reforms. Planned reforms include pensions, energy, local government, public administration, and measures to improve the business environment. If implemented properly, these reforms should strengthen Albania’s ability to attract investment, reduce fiscal risks, and strengthen debt sustainability.