Recent Economic Developments and Statistical Appendix

This paper reviews macroeconomic developments in Albania during 1997–99. Backed by a tightening of monetary policy, inflation subsided quickly in the second half of 1997, and the exchange rate recovered from its earlier sharp depreciation. In 1998, the authorities continued on the path toward macroeconomic stabilization, implementing a tight budget with savings in noninterest current spending and strong revenue measures. Inflation decreased rapidly from 42 percent at end-1997 to below 9 percent at end-1998 and continued on its downward path in 1999.


This paper reviews macroeconomic developments in Albania during 1997–99. Backed by a tightening of monetary policy, inflation subsided quickly in the second half of 1997, and the exchange rate recovered from its earlier sharp depreciation. In 1998, the authorities continued on the path toward macroeconomic stabilization, implementing a tight budget with savings in noninterest current spending and strong revenue measures. Inflation decreased rapidly from 42 percent at end-1997 to below 9 percent at end-1998 and continued on its downward path in 1999.

I. Introduction

1. Albania continues to experience wide swings in economic fortunes. Through determined adjustment efforts and substantial donor support Albania had managed to halt the economic collapse of the early transition years and to initiate a strong recovery that lasted until 1996. However, the good performance of the economy was not built on a solid foundation. In the absence of strong institutions and good governance, a gullible public invested a large portion of its savings in pyramid schemes. The subsequent collapse of the pyramid scheme bubbles precipitated severe civil disorder in 1997, putting economic growth sharply into reverse. A new government restored law and order and achieved considerable progress in macroeconomic stabilization. And while a brief flare-up of civil unrest in September 1998 was symptomatic of political fragility, it did not prevent growth from reaching an impressive 8 percent in 1998. The outbreak of the Kosovo crisis in March 1999 has added new uncertainties to the sustainability of the recovery. In particular, a tide of refugees into Albania—equivalent to nearly 15 percent of the local population at end-May—is placing considerable strain on the social and economic infrastructure. While it is too early to assess the full economic impact of this latest shock, the country will have to rely once again on its remarkable adaptability to continue on its path towards macroeconomic and social stability.

2. Strong adjustment policies were the key to Albania’s rapid recovery from the 1997 crisis. Immediately after the crisis the government implemented measures to contain the fiscal deficit, including through limiting spending and introducing a reformed VAT. Backed by a tightening of monetary policy, inflation subsided quickly in the second half of 1997 and the exchange rate recovered from its earlier sharp depreciation. Returning confidence in the local currency was also reflected in a rise of the share of domestic currency deposits in total deposits. In 1998, the authorities continued on the path toward macroeconomic stabilization, implementing a tight budget with savings in non-interest current spending and strong revenue measures. As a result, the domestically financed budget deficit decreased from 10½ percent of GDP in 1997 to 6½ percent in 1998. Inflation decreased rapidly from 42 percent at end-1997 to below 9 percent at end-1998 and continued on its downward path in 1999. Returning financial stability provided scope to lower interest rates cautiously, although real interest rates were still strongly positive in the first half of 1999. The exchange rate has remained broadly stable. The current account deficit narrowed substantially in 1998, and foreign exchange reserves rose to a relatively comfortable level (Figure 1).

Figure 1.
Figure 1.

Albania: Monthly Economic Indicators, 1995-99

Citation: IMF Staff Country Reports 1999, 069; 10.5089/9781451800685.002.A001

Source: Bank of Albania, Ministry of Finance, INSTAT, and Fund staff estimates.1/ Against the currencies of Albania’s major trading partners. A rise in the graph indicates appreciation.2/ The decline in September 1995 reflects payments associated with rescheduling of Albania’s commercial bank debt.3/ Three-month deposit rate; the real rate is the nominal rate minus annualized inflation, as depicted above.4/ Preliminary estimates based on Bank of Albania and Social Insurance Institute data.

3. In the structural area, the authorities have achieved considerable progress in transforming Albania into a modern market economy. The disarray left behind by the defunct pyramid schemes has been cleared up and the authorities have taken steps to strengthen the financial system. One major state-owned bank, the National Commercial Bank, is in the process of being sold, while another one, the Rural Commercial Bank, has been liquidated. More generally, to reduce the state’s demand on the economy, privatization has been extended: most small- and medium-sized public enterprises have been privatized or liquidated and nearly all of the enterprises under the control of the former Enterprise Restructuring Agency are now no longer government owned The authorities are preparing the strategic sectors for privatization. In the key agricultural sector, land has been distributed and the process of land registration is well underway. Rising turnover in the agricultural land market suggests the needed consolidation of landholdings is beginning. Public sector reform has focused on reducing overstaffing and increasing wage differentiation in the public administration. In parallel the government has started to conduct financial reviews of key ministries. To fight corruption, the government formally adopted an anti corruption strategy in September 1998 based on the results of a broad survey on corruption in Albania. Key measures from the strategy emphasizing public transparency and reform of the judiciary are being implemented. A new customs code, passed in April 1999, will also help to address problems of corruption in the customs administration and associated poor tax collection.

4. Nevertheless, Albania still faces tremendous development problems. The physical and financial infrastructure of the economy needs development. Roads are of poor quality, the public utilities require substantial improvements and better management to satisfy the demands of a growing economy, and the provision of financial services remains rudimentary with the dominating state-owned banks providing little effective intermediation in view of large stocks of bad debt. Fiscal revenues remain insufficient to finance essential expenditures. Despite reductions in its size, the public administration remains too large and inefficient and governance continues to pose a serious problem for further institutional development. Finally, the Kosovo crisis increases the risks to macroeconomic and social stability.

5. The remainder of this paper is divided into two parts. Section II presents more details on recent macroeconomic developments in 1997 and 1998, extending the discussion to 1999 where appropriate. Section III discusses major structural issues. The Albanian tax system is described in Appendix I, followed by the Statistical Tables.

II. Macroeconomic Developments

A. Developments in the Real Sector

Output developments

6. The reimposition of relative political, social, and financial stability in 1998 permitted output to fully recover losses of the 1997 disturbances. Output is estimated to have grown by 8 percent in 1998 after a decline of 7 percent in 1997 (Table 2), led by strong growth rates of about 20 percent in the construction and transport sectors. Other services, which had suffered most in 1997, also exhibited an above average growth rate. By contrast, growth in the agricultural sector was confined to 5 percent and industrial output to 4 percent.

7. Looked at over a longer period, output continues to be dominated by the agricultural sector. Despite below-average growth, the share of Agriculture in the economy remained around 54 percent in 1998, close to its average over the past six years. High growth rates of the early transition years were the result of reforms that produced quick results, in particular the privatization of agricultural production. With the potential for short-run productivity gains having been largely exploited, further growth in the agricultural sector will depend on the implementation of structural improvements. In particular, the average farm size of about 1.5 hectares severely limits the scope for further efficiency gains. To address this problem, the authorities have implemented a land registration scheme which is expected to finish in 2001 (discussed below) Once registered, land can be purchased and sold on a secure legal basis which facilitates the consolidation of farm sizes. While there has been a substantial increase in the number of land transactions in 1998, it is too early to judge its effect on average farm sizes. However, the growth in the number of private agricultural enterprises declined markedly to some 3 percent in 1998 from the high levels of the early transition years (Table 3). A further potential impediment to growth is the limited availability of agricultural credit.

8. At the same time, a secular decline in industrial output has coincided with a rise in construction activity while the shares transport and other services have remained broadly unchanged. The trend of decline in industrial output reflects a sharp decline in the activity of state enterprises, while private sector output has increased (Table 4). However, a full assessment of the latter remains difficult, as regular data collection by the national statistical institute (INSTAT) has started only recently. Reflecting the dilapidated housing and infrastructure at the end of the communist era and continuing needs for new infrastructure in the market economy, the share of construction activity in the economy has been growing continuously since the early transition years. In 1998, it exceeded industrial output for the first time as the widespread destruction of housing and infrastructure during the riots in 1997 contributed to further demand. With public construction limited by tight fiscal constraints, the dominating part of construction activity is conducted in the private sector. Output in other services grew steadily between 1992 and 1996, reflecting mainly the development of the private retail and trade sector, although in the last year probably also in part the rise in the pyramid schemes. The service sector was hardest hit by the 1997 disturbances and even the recovery in 1998 left its output share below its 1992 level.

Price developments

9. Fiscal consolidation and tight monetary policy enabled the authorities to tame the inflationary surge resulting from the collapse of the pyramid schemes. After fiscal and monetary relaxation in 1996 had prepared the ground, inflation increased to 42 percent in 1997 when financial discipline and civil order broke down. The subsequent restoration of fiscal and monetary discipline helped stabilize the exchange rate and put a sharp break on inflation, which fell to 9 percent in the year to end-1998 and to 3 percent in March 1999. Disinflation continued in April 1999 when prices rose by only 0.4 percent over the year, showing no visible effect of the Kosovo crisis.

10. The development of the consumer price index in Albanian continues to be driven to a large extent by price changes for food items. Food contributes 75 percent to the overall index, and within this group fruit and vegetables as well as bread dominate with a share of 20 percent of all food items each. The composition of the CPI basket results in a relatively strong seasonal pattern of the index. Inflation tends to fall in summer when the domestic output of agricultural products reaches the markets and rises again in winter when supply decreases.

B. Fiscal Policy

Deficits and financing

11. Strong fiscal consolidation efforts in 1998 played a major role in reasserting financial discipline after the 1997 disturbances. A collapse in revenues during the civil unrest drove the domestically financed deficit up to around 10½ percent of GDP. Fiscal consolidation, in particular the introduction of a broad based VAT with a rate of 20 percent and tight expenditure control, helped slash the deficit to some 6½ percent of GDP in 1998. The decline in the overall deficit was more modest owing to the resumption of foreign financed investment that had stalled in 1997. The overall deficit declined from 12½ percent of GDP in 1997 to around 10½ percent in 1998. The 1999 budget calls for further fiscal consolidation with the domestically financed and overall deficits being reduced to 5½ percent and 9¾ percent of GDP, respectively. However, unanticipated spending to aid refugees from Kosovo is now projected to push the overall deficit to 13¾ percent of GDP The additional deficit is expected to be largely financed by foreign grants and concessional borrowing leaving the domestically financed deficit as originally budgeted.

12. Fiscal analysis focuses mainly on the domestically financed budget deficit which incorporates extrabudgetary social security funds, i.e., the budgets of the Social Insurance Institute (SII) and the Health Insurance Institute (HII), but excludes foreign project financing on which information is deemed unreliable. Although the SII and the smaller HII are legally separated from the central government, a large part of transfer payments continues to be channeled through these two institutes. Budgetary transfers to the SII, whose budget amounts to roughly 5 percent of GDP, include the regular contributions for public employees as well as for unemployed and for private farmers. In addition, 15 to 20 percent of the SII budget consists of special government welfare programs that are outside the SII’s core responsibility, including price subsidies for pensioners and war veterans allowances. Plans to improve coordination between the Ministry of Finance and the Ministry for Economic Cooperation and Trade (MECT), which manages foreign public investment projects, should pave the way for more reliable statistics for public investment and integrated fiscal planning and analysis in the future.

13. The budget deficit is financed domestically through treasury bills with maturities of three, six, or twelve months. The bills are sold in bi-weekly auctions organized by the Bank of Albania (BoA). The main buyer is the Savings Bank, and holdings of T-bills outside the banking sector are few. The Bank of Albania gives credit to the government through purchases of T-bills as well as through direct credits collateralized by T-bills. Foreign budget finance has been received mainly from the World Bank and the European Union (EU).


14. Albania’s tax revenues remain low compared to other countries of the same degree of development. In 1997, tax revenues amounted to less than 10 percent of GDP, in part owing to the temporary breakdown of public order and the ensuing inability to collect taxes. But even in the more stable environment of 1998, tax revenues did not exceed 12½ percent of GDP, still short of the level necessary for a sustainable fiscal position in the long run. Taxes are projected to rise to 13½ percent of GDP in the 1999 budget.

15. Indirect taxes are the main source of revenues. About half of total tax revenues stems from the VAT, which was introduced in 1996 and modernized in 1997. The VAT rate is now 20 percent and covers most goods and services with very few exemptions. The full-year effect of the reform became visible in 1998 when VAT collection rose to 6¼ percent of GDP from 4½ percent a year earlier. The next largest source of revenue is customs duties (about 1/5 of the total) while excises on selected goods, such as fuel, cigarettes, and alcohol, contribute about one percent of GDP to revenues. Direct taxes on income, i.e. profit tax, personal income tax, and small business tax, play only a minor role for revenue collection. Uncertain legal provisions and deficiencies in tax payer registration inhibit the full implementation of these revenue sources. Also, a large part of the population draws subsistence from agricultural activities which takes place outside the tax net.

16. The government has continued to make progress in modernizing the tax system, focusing on its simplification and the reduction of distortions. With regard to trade taxation, customs rates have been reduced with a new maximum rate of 20 percent and the government has committed itself to further reductions in the future, especially as high tariff rates encourage smuggling. However, revenues are expected to remain unchanged as a share of GDP in 1999 as enforcement of customs duties will increase. To reduce distortions excise rates for imported and domestically produced goods have been unified at rates that are expected to increase excise revenues from 1.1 percent of GDP to 1.3 percent in 1999. To strengthen collections from direct taxes, the government reformed the personal income tax law, including by introducing taxation of interest income, and modernized the profit tax law. These measures, in conjunction with a full-year impact of an income tax surcharge to pay for increased public security expenditures, (the solidarity tax), are expected to generate close to 1 percent of GDP in revenues in 1999.1

17. Nontax revenues consist mainly of social security contributions and the Bank of Albania profit transfer. The share of social security contributions has diminished during 1997 and 1998 owing in part to the transition of a large share of the labor force from the public to the private sector where the collection of social security contributions is more difficult to enforce. An increase of the profit transfer in 1998 relative to 1997 was mainly a result of the higher interest rates as well as the large amount of new government debt borrowed in 1997.


18. The fiscal consolidation 1998 resulted partly from substantially lower non-interest current expenditures while capital expenditure grew by less than expected. Total current spending, however, remained broadly stable at around 25½ percent of GDP as interest payments increased with the higher interest rates required for financial stabilization.

19. The decrease in non-interest current expenditures from 20½ percent of GDP in 1997 to 17½ percent of GDP in 1998 was achieved mainly through reductions in expenditures for personnel, social security, and operations and maintenance. Personnel expenditures decreased as budgetary employment was reduced, by 10 percent to 135,000 at end-1998, and wage increases were kept below inflation. In particular, after a year of unchanged nominal wages in 1997, the government granted a 20 percent increase in public wages effective from February 1998. At the same time, the system of bonuses and allowances that resulted in effective wages far exceeding nominal scheduled wages was discontinued and the bonuses were included in the regular wage schedule—although a one-time compensation was granted to civil servants that were severely negatively affected by the reform, such as those with large families. Given the steep increase in the price level in 1997, real public sector wages thus declined by some 20 percent from 1996 to 1998. Declining real public sector wages also helped to contain pension outlays, which had grown rapidly during the first stages of transition owing to more generous rules of entitlement as well as the age structure of the population. To further limit pension outlays the government gradually narrowed the pension schedule with smaller increases for high pensions resulting in a fall in the difference between average and minimum pensions. Also, eligibility criteria have been enforced more strictly and the retirement age is being gradually increased. Spending on operations and maintenance has remained subdued over the past years. While in the short run saving on those expenditures has provided the government with some leeway to finance urgent expenditures in other areas, such as social assistance, the low level of expenditure has left shortcomings in the infrastructure unaddressed, in particular in the public utilities. As a result, the quality of infrastructure is low and will require substantial improvements to allow long-run economic growth.

20. While investment spending increased from 4 percent of GDP in 1997 to 5¼ percent of GDP in 1998, the increase was much less than budgeted. Although some of the shortfall in the implementation of the investment budget can be explained by political instability and the unsuitable investment environment, the underperformance (which had also been a problem in earlier years) reveals a number of policy deficiencies. First, as noted above, the investment planning process is largely separated from the overall budget preparation. As a result, part of the funds intended for the investment program are not included in the budget, including local counterpart funds for foreign financed investment projects, e.g., for the acquisition of land for infrastructure projects. Consequently, funds have in many cases been insufficient and projects had to be cancelled. Also, budgetary funds to reimburse VAT and customs duties paid on aid-related imports have been inadequate and importers of aid goods have frequently complained about outstanding claims on the government and cumbersome refund procedures. Second, complex and nontransparent approval procedures for foreign financed investment projects have caused delays in the implementation of the projects. In particular, for most of the larger investment projects multiple ministries—the affected line ministries in addition to the Ministry of Finance and the Ministry of Economic Cooperation and Trade—participate in the decision making process and coordination between ministries is often limited. Third, policy makers have turned first to lowering domestic investment outlays when the fiscal deficit target has come under threat.

21. Capital expenditure has been largely foreign financed. In 1997, more than half of the investment budget originated from foreign sources; in 1998 the balance moved further in favor of foreign financing. The most important multilateral sources of foreign financing are the World Bank and the European Commission’s PHARE program, whereas the USA, Germany, and Italy have been the largest bilateral contributors.

C. Monetary and Exchange Developments

22. Judicious monetary management has been instrumental in lowering inflation from over 40 percent, in the aftermath of the collapse of the pyramid schemes in 1996–97, to about 2 percent in the first few months of 1999. Appropriately tight control over monetary aggregates, supported by a significant reduction in the domestically financed budget deficit, enabled interest rates to fall from close to 40 percent in mid-1997 to under 15 percent in May 1999 and confidence in the currency to be restored, as demonstrated by the stability of the lek and a fall in currency-deposit ratio. The monetary program supported under the ESAF arrangement has been on track with the performance criteria for the net domestic assets (NDA) and net international reserves (NIR) of the Bank of Albania met with large margins.

23. Strengthening the framework for monetary management and improving the financial sector have also contributed to increased stability. There has been a gradual move toward adopting indirect instruments of monetary policy, although direct instruments still play a central role and obstacles to their complete removals have not yet disappeared. Financial policies have aimed at strengthening the formal banking sector through privatization, and improved supervision and regulations. Of the three state-owned banks, one has already been liquidated, one is currently being sold, and the third is scheduled to be privatized by end-1999. Despite significant progress, however, further strengthening of banking supervision and prudential regulations is required. In addition, the role of private banks in attracting deposits and extending credit remains limited.

24. The credibility gained in fighting inflation has helped to limit the impact of the Kosovo crisis on prices and the exchange rate. So far there has been no sign of upward pressure on prices, and an initial 2–3 percent depreciation of the lek and withdrawals of bank deposits proved temporary. The inflow of significant external financing in the coming months, however, could seriously test the monetary policy framework. The need to accommodate the inflows to finance increased imports, which would require lower interest rates to mitigate potential upward pressure on the exchange rate, will need to be balanced against the possible impact on inflation.

Conduct of monetary policy

25. The principal aim of monetary policy has been price stability.2 Policy is conducted through controlling growth in reserve money, as the intermediate target of monetary policy, taking into account current and prospective movements in prices and the exchange rate. The Bank has largely relied on direct instruments of monetary control, namely bank-by-bank credit ceilings and floors on interest rates on deposits with state-owned banks. In addition, monetary policy continues to be constrained by the rudimentary financial framework, the need to finance the fiscal deficit, the limited role of the private sector, and the thinness in the T-bill market. The Savings Bank is still frequently the sole bidder in the auction of primary T-bills.

26. The authorities’ goal has been to strengthen monetary management by developing market-based instruments. In reality, the bank-by-bank ceilings have not played a binding role since the beginning of 1998, following the introduction of a prudential regulation preventing all banks with a ratio of nonperforming loans to total loans (the credit ratio) in excess of 20 percent to lend. Formal removal of direct instruments of monetary control and full implementation of market-based instruments, however, require the completion of the bank restructuring process, improvements in supervision and regulation, further deepening of the market for treasury bills, and a better understanding of the determinants of money demand and inflation. The plan is to remove floors on interest rates and ceilings on credit by early 2000, once the Savings Bank has been privatized.

27. The conduct of monetary policy has also been strengthened by the transfer of the management of the primary auctions of T-bills from the Stock Exchange to the Monetary Operations Department of BoA in August 1998, thus unifying management of domestic and foreign currency operations. Further development of the treasury bill market will enhance independence for monetary policy by diminishing its role in financing fiscal deficits. There has also been some progress toward improving the coordination between monetary policy and public debt management. Following advice from an MAE technical mission, a joint committee of representatives from the BoA and Ministry of Finance has been established. However, progress in operationalizing this committee has been very slow.

Developments in the financial system

28. The financial system in Albania has advanced steadily since transition began, but fundamental weaknesses remain: although the importance of private banks is increasing rapidly, the formal financial sector is still dominated by state banks and the informal sector continues to play an important role. Faults in the system were amplified by the growth and collapse of the pyramid schemes in 1996 and 1997, which underscored the need to speed up structural reform and introduce new regulations. The crisis also provided further proof of the need to enhance the role of private banks within a well-functioning and well-regulated environment.

29. The financial impact of the pyramid schemes would have been much more severe if the authorities had been forced into implementing a costly bailout from the budget or had not frozen the assets in the banking system of the two companies with the most depositors.3 Administrators were hired from major international accounting firms in November 1997 to wind up five major companies, and in April 1998 the remaining 12 companies. The process of winding up is near completion. The crisis led to major legislative changes to help prevent the recurrence of similar phenomena: in particular the Banking System Law was revised, the Money Laundering Law was amended, and the enforcement of the Company Law and other commercial laws was improved.

30. While, starting from a very small base, the market share of private banks has increased substantially—in the year to March 1999 lek deposits in private banks doubled, domestic credit in leks rose seven-folds, and T-bills purchase 5-folds—their role in the domestic credit market is still minor. Private sector lending remains low and largely focused on trade-financing and fee-generating activities so far. In the first quarter of 1999, private banks held 35 percent of foreign currency deposits, but only 2.5 percent of deposits in leks. On the credit side, also their contribution was tiny: they provided 4.2 percent of domestic credits in leks and held 2.3 percent of treasury bills.

31. Further, and more substantial, progress in this area is clearly contingent upon a successful completion of the process of privatizing the state-owned banks. Of these, the operations of the smallest, the Rural Commercial Bank (RCB), were suspended in December 1997, and the majority of the deposits and a corresponding amount of liquid assets were transferred to the Savings Bank. The RCB was liquidated in March 1998 and the remaining assets and some liabilities were transferred to the Loan Collection Agency (LCA). The LCA’s mandate is to undertake asset resolution for state-owned banks. The second-largest, the National Commercial Bank, was at the end of 1998 put under the control of a foreign Chief Executive Officer, which was responsible for managing its day-to-day operations, enforcing limits on new lending, and planning and proceeding with divestiture of the bank. A strategic buyer was selected in May 1999. The largest, the Savings Bank, was put under a governance contract in May 1998. Bank of Ireland International Services agreed to carry out the role of foreign manager for the Savings Bank and plans to privatize it by end-1999 are under way. The Savings Bank is virtually the sole provider of credit to the government and its privatization would be a truly major step toward restructuring the banking system in Albania.

32. Steps have also been taken to improve banking supervision and prudential regulation. A Banking System Law was passed in July 1998, which together with the Law on the Bank of Albania passed in December 1997, provides an adequate legal framework for banks to operate effectively and for bank supervisors to perform their responsibilities. A set of prudential regulations broadly in line with the Basle Core Principles is also now in place. Nevertheless, significant weaknesses remain and further progress is required. In particular, the institutional capacity and skills available to the BoA are still insufficient for effective supervision and regulation, and the staff lack appropriate training and experience. Moreover, while most Core Principles appear to be met from a formal perspective, in practice the current framework does not fully comply with the principles.

Trends in monetary aggregates, interest rates, and the exchange rate

33. Movements in monetary aggregates and interest rates over the past three years have, to a large extent, been shaped by developments relating to the pyramid schemes. During 1996 and 1997, the growth of the schemes led to a significant rise in deposits in state banks, although, thanks to the strict limits imposed on lending by state banks, this did not lead to a further rise in money through the multiplier. Following their collapse, there was a massive fall in deposits, owing to a partial seizure of the assets by the government and withdrawals by owners. The effect on the currency-deposit ratio, however, was largely absorbed by BoA purchases and then sales of T-bills.

34. Tight monetary policy, supported by the implementation in 1998 of the monetary program under the ESAF arrangement, led to a moderation in monetary growth from around 40 percent in mid-1997 to 20 percent in December 1998. Confidence in the banking sector and the lek was restored, as manifested by the positive compositional changes in financial asset holding: there has been a shift from cash holding, and also demand deposits in leks and in foreign currency, to time deposits in leks. In the year to March 1999, lek deposits in the banking sector rose by 41 percent compared with 18 percent for foreign exchange deposits. The share of lek deposits has steadily risen from 63.7 percent at the end of 1992 to 75.3 percent in March 1999, indicating that currency substitution and “dollarization” are not a problem in Albania. There is no evidence so far that the Kosovo crisis has seriously impacted this trend.

35 The increase in private sector credit has, however, been disappointingly small, mostly because of the prudential limits imposed on lending by state-owned banks. Arrears also remain a problem. At the end of 1998 they constituted 57 percent of total claims on state enterprises and the private sector, which is lower than 61 percent in 1997, but still quite substantial.

36. Short-term interest rates were raised from 10.5 percent at the beginning of 1996 to a high of 37 percent by mid-1997 following the pyramid scheme crisis. They were maintained at high levels, and only reduced cautiously as inflation began to fall. The short-term rate stood at 14.0 percent at the end of May 1999, while 12-month and 6-month rates were only slightly higher at 14.5 percent. The significant fall in inflation in recent months, however, has raised real interest rates to levels higher than anytime since transition began in 1991.

37. More recently, as a result of the Kosovo crisis, there has been some reversal of the downward trend in currency-deposit ratio, reflecting the need of the refugees and humanitarian organizations, and increased government spending (financed by direct credit from the Bank): currency to broad money ratio is estimated to have risen from 26 percent in March to 28 percent by May. There have been no signs of panic, however, and some initial withdrawals of bank deposits proved temporary and the situation quickly normalized.

38. Albania’s flexible exchange rate system has shown remarkable resilience to external shocks. Following its recovery from the impact of the 1997 disturbances, the lek remained quite stable, before appreciating somewhat during the last quarter of 1998 and the first quarter of 1999 (5–6 percent against both the dollar and the DM/euro). The initial depreciation of the lek following the Kosovo crisis proved temporary, requiring little interventions by the BoA. The lek has returned to its pre-crisis dollar value and has appreciated by a further 4 percent against the euro, reflecting the latter’s weakness in recent months.

D. External Sector Developments

39. While developments remain generally volatile, the balance of payments has shown a significant underlying improvement in the 1990s. Until the late 1980s, Albania’s external sector was largely state controlled and based on bilateral payments arrangements in nonconvertible currencies. Since 1989, market-oriented reforms have transformed Albania’s trade and exchange systems to one virtually free of restrictions. The private sector has eroded the dominance of the state sector, a broad-based growth in exports of goods and services has taken hold, and emigre earnings have generated substantial inflows of private remittances. The current account deficit, while remaining large, has shrunk considerably since the early 1990s, and foreign exchange reserves have risen to a relatively comfortable level. At the same time, an active foreign exchange market, consisting largely of a thriving curb market and foreign exchange bureaus, has continued to support a substantial volume of foreign exchange transactions.

Recent balance of payments developments

40. The balance of payments position improved during 1998 (Table 28). Although the economic recovery from the 1997 recession led to a sharp rebound in imports and a widening of the trade deficit, the current account deficit, contracted to 6 percent of GDP in 1998 from 12 percent of GDP in 1997 owing to a strong increase in private remittances. External sector statistics, however, remain inadequate and probably exaggerate the improvement in the current account. In particular, sizable positive errors and omissions in 1997 probably reflected unrecorded remittances and receipts from illegal trade. Errors and omissions remained large in 1998, but only half of the 1997 level. As before, the current account deficit was financed by a capital account surplus, generated by the continued inflow of official grants and loans, and by direct investment. Official reserves continued to increase, bringing reserve cover to over 4½ months of imports of goods and services at end-1998.

Merchandise trade

41. After fluctuating sharply during the pyramid crisis, exports returned to their underlying upward trend in 1998. The recovery in exports was not hindered by the strong appreciation of the real effective exchange rate, after mid-1997, (Figure 2), and exports continued to grow at a robust rate of about 15 percent in the first quarter of 1999. The shift away from the traditional reliance on mineral exports (chromium, copper and oil) to light manufacturing (textiles and shoes) continued, after a brief interruption in 1997 (Table 29). Export-oriented light manufacturing mainly comprises processing centers for imported raw materials, and is dominated by private foreign investors, mostly from neighboring Italy and Greece, attracted by low wages and an educated labor force. Other areas, such as food processing and small manufacturing, are still nascent. The shift away from traditional exports was exacerbated by a drop in world prices in 1998 which reduced profitability of both chromium and copper exports, as well as inherent inefficiencies in these state-owned mining enterprises and the lack of modernization. Similarly, obsolescence of the state-owned electricity sector hindered exports of hydropower resources to neighbouring countries, such as Greece and the former Yugoslav Republic of Macedonia (Table 31).

Figure 2.
Figure 2.

Albania: Competitiveness Indicators 1/


Citation: IMF Staff Country Reports 1999, 069; 10.5089/9781451800685.002.A001

Source: Fund staff estimates.1/ Shaded area represents a period of nominal exchange rate instability associated with the pyramid schemes.

42. With economic recovery under way, imports rose sharply, although in 1998 they remained somewhat below their 1996 peak. The composition of imports continued to shift toward food, beverages and tobacco (reaching 23.8 percent of total imports in 1998) and manufactured goods (22.3 percent). The share of machinery and transport equipment continued to decline and reached 16.5 percent in 1998, in part mirroring weaknesses in foreign direct investment. In the first quarter of 1999, imports fell in line with seasonal trends but were nonetheless about 4.0 percent above their level in the same quarter in 1998.

43. From the geographical perspective, European Union countries continued to dominate merchandise trade, with Italy, Greece and Germany being the principal trading partners. The importance of trade with the former CMEA countries has declined in recent years, while developing countries from the Mediterranean basin and the Far East are beginning to account for a larger share of total trade.


44. Albania’s net payments for current invisible transactions remained at a low level in 1998. Following the commercial debt restructuring in 1995 interest payments on foreign debt are relatively small (about US$7 million a year). At the same time higher receipts from tourism, transportation, insurance, and communications, broadly offset higher payments for transportation, communications, and substantial technical assistance provided by the international community. Stronger tourism receipts partly reflected improvements in domestic security as well as spending by refugees from Kosovo who arrived in Albania in 1998, prior to the full-scale eruption of the Kosovo crisis about a year later. The government has also been making efforts to foster the tourism industry through investment in infrastructure and encouraging foreign investors to enter this market through investments in hotels and other accommodations.

Private remittances

45. The turbulent economic and political climate in the aftermath of the demise of communism fuelled mass migration; an estimated 15–20 percent of the labor force left the country, mostly to neighbouring Greece and Italy. Remittances from these sources continue to be the largest single source of foreign exchange inflows (about 14.4 percent of GDP in 1998). Cash transfers, mostly in U.S. dollars, Deutsche marks, Italian liras and Greek drachmas, tend to peak during the second and third quarter of the year. During 1998, however, private remittances arrived relatively uniformly, possibly suggesting the improved economic status and an increasing shift toward non-seasonal occupations of Albanians working abroad. Data limitations, however, prevent definite conclusions on the nature and exact level of remittances, with the possibility that receipts from illegal exports and capital inflows are being classified as remittances.

Financial account and official reserves

46. While returning political stability provided some boost to the capital account in 1998, private and official inflows remained well below the levels of 1995–96. Official transfers and loans experienced a modest upturn, but foreign direct investment remained at only US$45 million (1.5 percent of GDP—a relatively low level for a transition economy). With the current account declining and the capital account improving, official reserves increased to US$384 million (4.7 months of imports of goods and services) at end-1998.

47. Albania continues to enjoy access to concessional official assistance, a large proportion of which takes the form of official grants, mainly project-related from the European Union. During 1997-98 the gradual substitution from food and humanitarian aid towards project-based lending, and within that an increasing importance of multilateral lending, continued. However, total loan disbursements increased only slightly to US$53 million in 1998, after the crisis of 1997 had significantly disrupted project implementation. Only a small portion of project-related financing was on non-concessional terms, mainly from the European Bank of Reconstruction and Development and the European Investment Bank.

48. Foreign direct investment in Albania has declined markedly reflecting weaker financial and political stability as a result of the 1997 crisis, despite relatively liberal regimes for trade, foreign exchange, and investment. The nature of foreign direct investment had been changing gradually from a focus on small-scale light industry to tourism-related activities and strategic sectors such as oil exploration, minerals (chromium) and gas production. This development in part reflected the shift in emphasis of the privatization strategy to the strategic sectors since 1995, and better infrastructure and communications facilities. In addition, following the enactment of the Petroleum Law in 1993, several production sharing agreements have been signed with foreign companies for off-shore and on-shore sites. Incentives created by liberalization of the external sector regime, however, could not fully compensate for the high country risk, and foreign direct investment rose only slightly to US$45 million in 1998, still significantly below the 1995 level of US$89 million.

49. Foreign exchange reserves of the BoA have increased steadily in recent years, reaching US$384 million at end-1998. The accumulation of reserves in the central bank reflected official aid inflows (including balance of payments support) and, more generally, the underlying improvement in the balance of payments. Reserves were not adversely affected in the first two months following the outbreak of the Kosovo crisis in March 1999.

External debt

50. A sustained effort to regularize relations with external creditors since 1993 has led to a significant reduction in the external debt burden to tolerable levels (29 percent of GDP at end-1998), and a corresponding decline in debt service payments. Albania’s external indebtedness had reached as high as 108 percent of GDP at end-1992 mainly due to short-term borrowing by the former State Bank of Albania to support a highly speculative reserve management policy. By end-1993, more than three-quarters of Albania’s stock of external debt comprised arrears to commercial and bilateral creditors, including Paris Club creditors, and debts owed under inoperative bilateral clearing accounts (Table 33). As these external arrears threatened to jeopardize Albania’s external trade activities and soured relations with potential bilateral donors, Albania made major strides towards eliminating these arrears and regularizing relations with creditors. As a first step, short-term obligations (US$36.7 million) to Paris Club creditors were rescheduled in December, 1993. In addition, US$6.2 million in arrears on medium-term debts were paid in full at end-March 1994. A significant second step was a debt and debt service reduction agreement (DDSR) in 1995 with commercial bank creditors. The agreement settled claims worth US$371 million of principal and US$111 million in past due interest (after adjustments). The final cost of the settlement was US$96 million, translating into an overall buy-back equivalent price of about 26 cents per dollar of principal. The third notable step was a Paris Club agreement on the terms of reference for rescheduling Albania’s debt in arrears to Russia and Italy in July 1998, which provided a framework for reconciling and rescheduling of this debt.

51. As a result, Albania’s stock of external debt in arrears stood at US$359 million at end-1998. Of this, inoperative bilateral clearing (dollar) accounts were worth US$74 million and bilateral clearing (ruble) accounts US$172 million (valued at an official US$/ruble exchange rate of 1.6), the main creditors being Russia, China, Yugoslavia, the Czech Republic, the Slovak Republic, and Romania. Most of these debts remain to be reconciled and eventually rescheduled. In addition, Albania still holds about US$52 million of commercial debt (mostly unconfirmed letters of credit) in arrears, and arrears of about US$22 million to foreign telecommunication agencies. The growing importance of multilateral lending to Albania is reflected in the increase in the share of multilateral debt from just 6 percent of total debt in 1993 to about 35 percent in 1998. Monitoring of external debt flows improved in 1998 with the creation of an external debt database at the Ministry of Finance.

Exchange and trade system

52. Since 1992, Albania’s exchange and trade system has been largely free of restrictions. At the same time, there has been a steady progress towards creating an open, multilateral trading system. Exchange restrictions on current transactions have been largely eliminated, except for outstanding debit balances under inoperational bilateral payments agreements. Most export licensing requirements have been converted into export bans, which have been subsequently eliminated and exist only on scrap metal (because of fears about asset stripping of state-owned enterprises that have yet to be privatized). The only known exception is export licensing on wood and wood products, which is maintained for environmental reasons and operated as a near-ban. All quantitative import restrictions were removed in 1992. Automatic import licensing of fuel products was introduced in early 1999 to support the application of domestic technical standards. The import tariff system was rationalized and simplified to a three-tier structure with rates of 7, 25, and 40 percent in 1995. In January 1997, the top rate was reduced to 30 percent with four other rates of 0, 5, 10, and 20 percent, and in April 1999 the top rate was lowered further to 20 percent.

53. Albania’s request for accession to the World Trade Organization (WTO) is progressing. A memorandum on foreign trade regimes was submitted in early 1995 and the Working Party on Albania’s accession request is in the process of scrutinizing it to determine its consistency with the WTO, while market access negotiations are proceeding in parallel.

III. Structural Transformation

A. Agricultural Land Market

54. Despite much progress, there remains considerable potential for productivity increases in the agricultural sector. The privatization of agricultural land immediately after the end of the communist era induced sizeable productivity increases and agricultural output increased by more than 60 percent between 1991 and 1995. With the land distribution process largely finalized, the priority is to develop an agricultural land market in order to consolidate landholdings and raise average farm sizes.

55. To encourage the development of the land market, the government has embarked on a medium-term strategy aimed at facilitating agricultural land transactions through increased land registration and a modern legal environment. In particular, the government has established registration offices in all cadastral zones and established registration procedures. A package of laws approved in April 1998 clarified and simplified the legal framework for land transactions, removing the articles relating to priority claims in land sales, establishing a procedural framework for the leasing of agricultural land, and allowing undistributed state lands to be used to compensate former landowners in cases of conflicting claims on land holdings. These measures have yielded positive results with land registered amounting to one third of total agricultural land at end-1998 (Figure 3). Also, the number of land transactions has been rising continuously.

Figure 3.
Figure 3.

Albania: Indicators of Progress in Structural Reform, 1990-99

Citation: IMF Staff Country Reports 1999, 069; 10.5089/9781451800685.002.A001

1 Wage differentiation as indicated by the ratio of the difference between maximum and minimum wages in the public sector to the minimum wage. Budgetary employment in annual averages.2 The indices were developed in “Trade Liberalization in Fund-Supported Programs” (EBS/97/163). The maximum index values are 10 for overall trade restrictiveness, 5 for tariffs, and 3 for nontariff barriers. The minimum index value is one for all indices. For 1999, data is of end-May.

56. To ensure full compliance with legal requirements and allow the settlement of opposing land claims, land registration proceeds in several steps. The first step to registration is the issuing of an allotment certificate (tapi) indicating which properties belong to a specific family. These have usually been issued early on in the transition process. On the basis of the tapis all properties in a cadastral zone can then be mapped and ownership sheets (kartellas) be established. Once all ownership sheets for a cadastral zone have been established, a list of these sheets is put on public display for 90 days to allow voicing of potential conflicts. Experience shows that conflicts are usually raised shortly after the public display has started. After the end of the display period and the solution of possible conflicts the ownership sheets are officially registered and ownership certificates are issued.

B. Enterprise Privatization

57. A new, more flexible privatization strategy adopted in March 1998 has accelerated the previously stalled privatization process. Before 1998 privatization proceeded only slowly owing to political opposition and low investor interest. The new strategy allows for the sale of publicly owned businesses below book value—which in many cases does not reflect market values—enabling the government to divest the state share in joint ventures to private sector counterparts and private enterprises in strategic sectors. There are some differences in the privatization strategies relating to the type of enterprise, where small and medium-sized enterprises (SMEs) can be distinguished from those of the former Enterprise Restructuring Agency (ERA) as well as from strategic enterprises.

58. Nearly all SMEs that had remained in public ownership after the first wave of privatization early in the transition process were sold or liquidated in 1997 and 1998. Many of the enterprises comprised only a few assets with very low market values, such as old machines and warehouses, and were not economically viable. These were usually put into liquidation with the assets being transferred to local authorities. Sales of enterprises were usually organized in the form of auctions in line with the privatization laws. There was very little foreign interest in SMEs with only three enterprises going to foreign investors. A small number of SMEs, namely those involved in national security or the provision of public goods, will remain in public ownership.

59. Of the 32 ERA enterprises, all but three had been sold, leased, or liquidated by March 1999. The ERA had been established in 1993 to deal with larger public enterprises or those where political considerations, for example regarding regional unemployment, were involved. While the ERA succeeded in downsizing the enterprises, few were privatized or liquidated, and the agency was closed in 1996 and the responsibility for the enterprises transferred to the Ministry of Privatization. Three alternatives were developed for dealing with the former ERA enterprises: sale, lease, or liquidation. Sales were again organized in auctions. Lease contracts involve a long-term commitment (e.g., for 20 years) to maintain and manage the facilities involved. As a special feature, the price of the lease may depend on the number of jobs kept or created with more jobs reducing the price as, for example, in the case of the recent transfer of the Elbasan steel plant. Liquidation comprises the breaking up of the respective company and transfer of ownership of the assets to interested parties, if possible by selling them at market prices. There was some foreign interest in the former ERA enterprises and some lease contracts involve foreign counterparts.

60. The privatization of strategic enterprises—telecommunications, mining companies, the oil company, and public utilities—has been lagging and will require further preparation. Except for one mining company, no strategic enterprises have been sold so far. Generally, a specific privatization strategy needs to be developed for every enterprise in cooperation with privatization advisors covering the necessary legal and management decisions on the way to privatization. In many cases, the enterprises need to be restructured to make them attractive investors, including by separating fringe activities that can be sold individually from the core businesses.

61. While privatization of the telecommunications sector may proceed relatively rapidly, natural resources and the public utilities are expected to require longer preparation periods. In the mining sector, the government has recently undertaken steps to relieve the core businesses from marginal activities which should make the former more attractive to investors. The state-owned oil company has been split into three units, dealing with upstream activities, refining, and selling and servicing, respectively. For both mining and petroleum sector, the authorities plan to complete the requisite privatization legislation by September 1999. The public utilities (electricity and water) are in poor financial shape and considerable efforts will be necessary to make them attractive to potential, probably foreign, buyers. In particular, the financial position of the two companies and their mutual financial obligations need to be established before further measures can be implemented. Concerning the electricity company, KESH, a financial plan-for 1999 and later years will be presented in the near future and its management will be strengthened through foreign involvement. Distribution losses of close to 50 percent (mid-1998), largely resulting from electricity theft, and shortfalls in bill collection for electricity from households of around 30 percent will be among the areas to be addressed immediately.

C. Public Administration Reform

62. To overcome the lapse in public administration reform in 1997 the government adopted a new strategy in 1998 focusing on establishing a modern legal environment for the civil service, modernizing personnel management, and increasing the flexibility of the wage structure. A new civil service law has already been drafted aimed at depoliticizing public employment and establishing a civil service based on merit. Also, a Supreme Audit Institute has been established, centralizing external audit functions in the civil service to improve governance. A civil service commission will start operating shortly to oversee the implementation of the new civil service law in particular with regard to personnel decisions. Finally, a review of the salary structure in the civil service will be completed within the next few months. This will provide the basis for a wide-ranged revision of the salary structure intended to attract and retain the most qualified staff in the civil service.

63. To take responsibility for civil service reform, the Department of Public Administration, which is attached to the Deputy Prime Minister’s Office, has been strengthened. The department remained inoperational for many months due to under staffing and the lack of a legal framework. These deficiencies have now been addressed through an increase in the department’s staff from 5 to 14 in 1998 and the drafting of the new civil service law. One of the department’s first activities will be the redesign of the salary scale. To improve planning capabilities, a database for public employment at the department of public administration is also being developed.

64. Despite the lack of detailed information on the structure of employment in the civil service, there is evidence of overstaffing and a compressed wage schedule in the Albanian civil service. Since end-1997, the number of budgetary employees has been reduced by more than 10 percent without visible losses in the quality of public services (Figure 3). Average wage increases have been modest in line with the need for fiscal consolidation, but substantial increases were directed at core groups of civil servants in early 1998: a 60 percent increase was directed at some 10,000 public order personnel and about 5,400 senior civil servants received a 40 to 100 percent increase. Also, allowances have been included in the base wage as of February 1998 resulting in a rationalization of the pay structure. Since late 1998, public order personnel have received a further bonus financed through the so-called solidarity tax.

65. With the aim of improving the organizational structure of policy execution, the government decided at end-1998 to conduct functional reviews in four ministries: the Council of Ministers, the Ministry of Finance, the Ministry of Local Government, and the Ministry of Justice. The functional reviews will provide a detailed analysis of the structure of the respective institutions and will, in a further step, be used to detect over staffing in the civil service. Building on the experience with the four ministries, other ministries, in particular those with many budgetary employees, will undergo the same exercise that should reveal significant scope for further rationalizaton. The review of the Council of Ministers was completed in April 1999,

D. Strengthening Fiscal Revenues

66. To strengthen its revenue base Albania has introduced a number of major tax policy and tax administration measures in recent years. Tax policy measures have consisted primarily in establishing a modern tax system through the adoption of new laws and regulations for direct and indirect taxes. However, in a country-with weak institutional capacity, at least as much effort is needed to implement the existing rules and to enforce the payment of taxes.

67. Efforts on the administration side have focused on the customs area, which generates some 60 percent of total tax revenues, in particular addressing smuggling, under valuation of imports, and corruption in the customs force. To combat smuggling, the government has worked closely with a technical assistance team financed by the EU to modernize customs procedures. In the aftermath of the 1997 crisis, a pre arrival information system (PAIS) was set up with the major trading partners through which Albanian customs offices were informed by their foreign counterparts about the details of all shipments leaving the participating countries for Albania. Using this system, customs officials could establish whether the information on volumes and prices provided by importers matched the information from the exporting countries. While the system was very successful in the beginning, over time collusion between Albanian importers and exporters in the neighboring countries increased, and prices stated by exporters and importers converged to the publicly known minimum prices. Nevertheless, the system continues to provide valuable information on the volume of shipments.

68. To address under valuation of imports in a systematic way, the customs authorities have developed a customs reference valuation file for use in all major customs houses. Under valuation reflects the lack of an information base at customs offices to apply true market values to imported goods. As a result, customs officials have referred regularly to minimum prices set out in customs regulations which, in many instances, substantially deviated from the true values. An electronic file containing market prices for all major traded goods was provided by Italy to the Albanian customs in early 1999. The file is also updated using information from past imports as recorded by the customs.

69. While smuggling and corruption depend to a large extent on economic conditions, such as price differentials, deficiencies in Albania’s legal framework also inhibited decisive counter measures. After a long period of drafting, the parliament passed a new customs code in April 1999, which corrects the major weaknesses of the preceding legislation. In particular, the code imposes significant fines for smuggling and related offences and provides the basis for establishing an anti-smuggling unit within the Customs Directorate. To fight corruption, the code also establishes the basis for increased internal auditing and-contains measures to apply when corruption of customs officials is detected.

70. With a view to enhancing tax collection by the Tax Directorate, a large taxpayer office was established in Tirana at end-1997. The large taxpayer office monitors and controls the 200 largest taxpayers in the country, providing them with an integrated service on all tax obligations. It is staffed with skilled and experienced auditors and tax officers who are able to provide efficient service to the taxpayers and enforce tax compliance. Computerization has proceeded gradually over the past years in line with organizational progress in the Tax Directorate. While the tax administration would welcome further rapid computerization, tax officials acknowledge the need to establish a modern organizational framework as a condition for reaping the benefits of further automation.

71. In addition to improving tax administration, Albania has also conducted a major modernization of its tax laws. The process started in October 1997 with changes to the VAT which had been established in mid-1996, replacing an ineffective turnover tax. The initial tax rate of 12½ percent was increased to 20 percent and most exemptions, including on bread and kerosene for heating purposes, were abolished. Currently, standard VAT exemptions are granted for financial services, leasing of land and buildings, and non-profit activities, while specific exemptions exist for oil exploration and medical supplies.

72. The government has also implemented several measures to strengthen the personal income tax. Introduced in 1992, the personal income tax has never contributed more than 0.3 percent of GDP to tax revenues. This was a result of a low marginal tax rate, tax exemptions for various kinds of income, and low levels of enforcement owing to weak administrative capacity. With effect from the beginning of 1999, major shortcomings have been addressed. The tax base now includes not only wages but also cash benefits, such as bonuses. The marginal tax rate has been raised to 30 percent, in line with the profit tax rate. In addition, interest income will be taxed at a rate of 10 percent by means of a withholding tax. These measures are expected to more than double income tax revenues as a share of GDP in 1999. However, low enforcement levels remain a problem with the continuing reduction of the public sector workforce, where the income tax is relatively easy to collect, exacerbating the situation.

73. The profits tax has also been reformed. Introduced in 1992, it has never yielded significant revenues owing to the low and declining profits in the public sector, where tax collection is easier than in the private sector, and from the existence of various tax incentives which reduced tax obligations. The reform of the profit tax law, coming into effect in early 1999, aims at simplifying the tax rules so as to facilitate administration, increase equity, and set a modern tax framework capable of coping with new developments such as foreign direct investment. The new law contains a single tax rate of 30 percent. No new tax holidays will be granted and existing tax holidays are being phased out. Furthermore, the rules for depreciation allowances are considerably simplified with four broad asset categories and a general depreciation rate of 20 percent for most business assets. The law also provides rules for the treatment of transfer pricing with internationally operated businesses. Enforcement is strengthened through enhanced rights for the tax authorities to seize assets of non-compliant taxpayers.

74. Finally, after a brief eruption of civil unrest in September 1998, the government introduced an additional tax, the Solidarity Tax, to finance wage increases for public order personnel. The tax imposes a fixed nominal monthly levy on taxpaying individuals and businesses with the proceeds earmarked for the Ministry of Public Order and the Ministry of Defense. Although originally intended to be temporary, the Solidarity Tax may stay in effect for the longer term given the fragile domestic and external security situation.

E. Governance and Legal Reforms

75. Albania continues to suffer from poor governance, reflected in low institutional capacity of the government bureaucracy as well as widespread corruption. A survey conducted by the government in cooperation with the World Bank in 1998 revealed that the population has very little confidence in the state institutions’ ability to fulfill their tasks efficiently and that corruption is perceived as permeating essentially all areas of public activity, with the customs administration and the judicial sector being affected worst. In particular, deficiencies in the judicial area inhibit economic and social stabilization as they preclude the establishment of a clear framework in which individual activity can take place.

76. To develop a comprehensive anti-corruption strategy, the government held an “Anti-Corruption Workshop” in Tirana in June 1998, aimed at identifying means of addressing Albania’s serious problems. Following the conference, the government presented a detailed action plan for combating corruption, focusing on reforms in five areas; public administration reform, legal and judicial reform, economic policy reform, public expenditure management, and public awareness. The plan is being implemented under the responsibility of the Deputy Prime Minister, assisted by a technical-level monitoring group. In addition to the reforms in public administration discussed above, the measures relating to the customs administration include establishing transparent recruitment and promotion procedures in the customs administration, training of customs officials, and the establishment of an anti-smuggling unit in the customs directorate. Measures in other sectors comprise posting public information on the budget funding and the agreed service fees at schools, hospitals, and other public institutions, and the publication of procurement rules in newspapers.

77. The judicial sector in Albania suffers not only from corruption but also from lack of legal information, the low professional quality of judges owing to poor education and political influence in recruitment decisions, poor court management, lack of trained personnel, and inadequate physical infrastructure. The government has made a start in addressing some of the problems. It issued the regulation to create the Judicial Inspector’s Office, intended to carry out investigations of complaints against individual judges and to be involved in all major personnel decisions; however, the office has yet to start operating. Also, a re-accreditation test for active judges with less than ten years experience has been prepared and given to the majority of judges. Those failing the test will face expulsion from the profession. To increase public awareness of legal affairs, a state publication office has been established to ensure that all laws, regulations, and court decisions are publicized and accessible by all interested parties. The government is also drafting a plan to improve the standards at the Tirana law school, in the short term through reforms to the curriculum and changes in exam procedures, and in the longer term through a complete modernization of the university, including its physical facilities.

APPENDIX I Albania: Summary of Tax System at End-April 1999

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Table 1.

Albania: Basic Indicators, 1992-98

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Sources: Albanian authorities; and Fund staff estimates and projections.

Current account excluding net factor services and official transfers.

Revenue (excluding grants) minus current expenditure.

Commitment basis, excluding foreign financed investment.

Excluding official transfers.

Table 2.

Albania: GDP by Sector of Origin, 1992-98 1/

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Sources: Ministry of Finance; and Fund staff estimates.

Given the very limited production-side data, these estimates are based mostly on demand-side developments, and should be treated with caution. There are significant discrepancies between data in this table and some production-side data, e.g., for agriculture.

Table 3.

Albania: Registered Private Enterprises by Activity, 1992-98

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Source: Institute of Statistics.
Table 4.

Albania: Production of Selected Industrial Products in the State Sector, 1992-98

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Source: Institute of Statistics.
Table 5.

Albania: Construction Cost Index, 1993-98

(1993 Q1=100)

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Source: Instistute of Statistics.

No data collected.

Table 6.

Albania: Consumer Price Subsidies, 1992-99 1/

(In millions of leks)

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Sources: Ministry of Finance; and Fund staff estimates.

The total figures may not match the budget numbers as some subsidies were included under operations and maintenance.

Table 7.

Albania: Retail Prices for Energy, 1991-98

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Sources: Ministry of Finances; and Fund staff estimates.

Prices were raised between October and November 1992.

Prices were raised in the second half of 1993.

Prices were raised in April 1994; prices for firewood and coal were liberalized.

45-65.9 octane benzine.

66-89.9 octane benzine.

90 octane benzine and above.

Price for electricity usage less than 250 kwh per month per household: large cities, 150 kwh in small towns, and 70 kwh in rural areas.

The price for “lifeline block” was 0.8 lek/kwh, for the next 50 kwh 1 lek/kwh, and for greater usage 3 lek/kwh.

Price differentiation was abolished in April 1994.