IMF Executive Board Concludes 2019 Second Post-Program Monitoring for Albania | WPN World People News

On July 1, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Second Post-Program Monitoring review for Albania and considered and endorsed the Staff Appraisal on a lapse-of-time basis. 1 Albania’s capacity to repay the Fund is adequate reflecting a strong record of repaying the Fund, relative macroeconomic stability, and progress in reforms.

Albania’s medium-term economic outlook is broadly favorable. In 2019, growth is expected to slow down to 3.5 percent, due to the base effect of the 2018 peak in power generation and the economic slowdown in Albania’s main partner countries. Over the medium-term, GDP growth is projected to converge to its 4 percent potential rate, as activity is expected to be driven by a pickup in EU growth, increasing labor market participation, a gradual strengthening of exports including tourism, and the investments needed to close Albania's large infrastructure gap. Inflation is expected to converge slowly towards its 3 percent target by 2021, as the output gap narrows and imported inflation from the euro area recovers. The current account deficit is projected to narrow further over the medium term, supported by strong export growth and planned fiscal consolidation. The level of FX reserves remains comfortable.

Despite the favorable environment and positive short-term outlook, risks and vulnerabilities remain. Albania is exposed to the increasing risks to growth in the EU, notably in its main trading partners. On the domestic front, the vulnerabilities are primarily in the public sector, arising from high public debt, increasing contingent liabilities, and weaknesses in public institutions and economic governance in general. Domestic growth vulnerabilities include demographic prospects and heavy dependence of growth on weather conditions.

Executive Board Assessment

Following strong growth last year, the baseline projections foresee an ongoing economic expansion. Furthermore, inflation remains well under control, and the current account is expected to improve further. However, more ambitious improvements in governance and anti-corruption efforts, skills formation and other aspects of the business environment will be needed to raise potential growth, and take advantage of the country’s favorable location and low labor costs.

As a small open economy, with limited economic diversification, Albania remains considerably exposed to external and domestic risks. The country is especially vulnerable to drought, population aging combined with the ongoing emigration of skilled workers, and spillovers from lower growth in key trading partners. Furthermore, as a result of still high public debt, relatively large financing needs, and rising contingent liabilities, severe adverse shocks to growth or a deterioration in regional financial conditions could quickly undermine Albania’s public balance sheet and impair its access to affordable financing.

At the same time, Albania’s flexible exchange rate and ample reserves offer important tools for absorbing shocks. Furthermore, the recent fiscal consolidation and the lengthening of the maturity of public debt have also been helpful. As a result, risks to Albania’s capacity to repay appear contained. Nonetheless, more is needed to limit risks related to the public finances.

It is critical to implement further fiscal adjustment, combined with improvements in the quality of budgetary policies. Accelerating the reduction in public debt over the medium term, will create space to absorb and offset adverse shocks through countercyclical fiscal policies. Given the need to improve Albania’s infrastructure and human development, fiscal consolidation should be underpinned by improvements in tax policy and tax administration that lead to higher revenues. Such reforms should be supported by a careful analysis of the revenue system and a medium-term strategy to enlarge the tax base and level the playing field for businesses.

The authorities’ ambition to address the buildup of fiscal arrears is most welcome. These arrears have undercut the business climate as well as trust in the government. Going forward, all validated new VAT refund requests should be honored without delay, and the existing arrears should be cleared as soon as feasible—even if, in the short term, this may raise the deficit (measured on a cash basis).

It will be important to put in place a more consistent framework for public investment management, and to limit the risks from PPPs and other contingent liabilities. The Ministry of Finance and Economy should exploit its new role as gatekeeper for new PPP projects to help ensure both value for money and the containment of risks. Furthermore, the proposed establishment of the AIC should be revisited, to make sure that--if such institution is created--it will act on a strictly commercial basis and without direct government interference or reliance on future budget support.

Source: International Monetary Fund