This paper evaluates Albania’s Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). Sound financial policies under the previous PRGF-supported program helped stabilize the economy and restore high growth, but poverty remains widespread. The authorities’ medium-term strategy aims to promote inclusive growth, as the country continues to be plagued by poverty. The proposed PRGF arrangement is justified by the authorities’ commendable performance under the previous PRGF arrangement and their strong measures for addressing the remaining policy challenges.

Abstract

This paper evaluates Albania’s Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). Sound financial policies under the previous PRGF-supported program helped stabilize the economy and restore high growth, but poverty remains widespread. The authorities’ medium-term strategy aims to promote inclusive growth, as the country continues to be plagued by poverty. The proposed PRGF arrangement is justified by the authorities’ commendable performance under the previous PRGF arrangement and their strong measures for addressing the remaining policy challenges.

On behalf of my Albanian Authorities, I would like to thank Staff for very fruitful discussions and consultations and for preparing a comprehensive and well-focused set of papers, which aims to support the medium-term priorities in achieving strong sustainable economic growth and reducing poverty.

Introduction

Since the introduction of market reforms Albania has shown an impressive track record of macroeconomic stability and program implementation. Sound macroeconomic policies have led to a stable economic environment while structural reforms have been implemented and the privatization of large sectors of the economy completed. As a result of that, real GDP growth averaged about 7 percent in the period from 1998 to 2001 with annual inflation well under control within the range of 2-4 percent. With fiscal performance broadly on track, domestic borrowing declined from 11 percent in 1996 to 3 percent of GDP in 2001. Monetary policy has proved highly effective in controlling price developments while the exchange rate has benefited from the sound macroeconomic environment remaining broadly stable. The trade regime has been largely liberalized and Albania became a WTO member last September.

Recent Macroeconomic Developments

Macroeconomic policies have been geared towards stability and growth-oriented policies. The recent surge in inflation to over 6 percent in the first quarter of this year was largely due to supply shocks, as the Staff Report clearly points out. Monetary policy acted promptly so as to avoid that inflationary pressures would become entrenched in agents’ expectations with the BoA increasing the intervention rate by 200 b.p. by the end of April. In March and April of this year, monetary policy was confronted with another shock stemming from a sudden withdrawal of about 10 percent of the total stock of banking deposits as a result of unfounded rumors on the health of the two largest banks. The BoA promptly injected liquidity to neutralize the impact of the withdrawals and was fully successful in avoiding that the loss of confidence would spread to the whole system.

The fiscal stance aims to support the economy’s development within the limits of a stable and sustainable financial path. The end-2001 deficit closed at 8.5 percent of GDP, one point below budget, reflecting lower spending. In 2002, authorities have amended their non-priority expenditures in the face of lower receipts stemming from the delayed privatization of Albtelekom, due to the current difficulties faced by the telecommunication industry worldwide. The government will continue its policy of fiscal consolidation in the years ahead. The overall deficit is targeted to decline to 5½ percent of GDP in 2005 from 8 percent in 2002, through increases in revenue, improved expenditure management, and reorientation of spending towards reducing poverty and improving access to health and education. As sensitivity analysis shows, even in the event of multiple shocks, Albania’s public debt will remain manageable.

Challenges Ahead

The past performance and the 2002–2005 program envisaged under the proposed PRGF arrangement indicate the strong commitment by the Albanian authorities to address in a comprehensive manner difficult long-term issues, such as poverty and growth, governance and institutional capacity, business environment and private-sector development. On the macroeconomic front, prudent fiscal and monetary policies and improved debt management will remain at the top of the agenda.

A strong economic growth of 7 percent per annum in the medium term is the way forward for achieving sustained improvements in the living conditions and poverty reduction in Albania. The Growth and Poverty Reduction Strategy represents a comprehensive medium- and long-term development program that sets clear priorities and goals for significantly improving education, healthcare, and infrastructure. The GPRS fully reflects the multidimensional aspects of poverty, high unemployment, and structural deficiencies. The outlined policies aim at reducing the number of poor from 47 percent in 1998 to 38 percent in 2005, reducing the infant mortality rate by 15 percent, further improving elementary and secondary education, and making considerable improvements in basic infrastructure services. The GPRS recognizes widely the need for stronger institutions, public accountability, and increased public participation. Therefore, considerable efforts are focused on strengthening the public sector’s capacity and improving monitoring and evaluation of reforms in the social sector.

The GPRS has been finalized under a comprehensive successful framework for dialogue with the civil society, the private sector, local government, and other groups involved in the areas of health, education, environment, labor, and social affairs. It is also a result of a fruitful cooperation and continuous consultation with the international community, the IMF and the World Bank, and for which the authorities are very grateful.

Structural Reforms

Sustained growth requires successful implementation of structural reforms in the Albanian economy. In addition, faster growth requires substantial improvements in the investment climate. Authorities are well aware of the weak performance in the energy sector and the significant threats it poses to growth and overall macroeconomic stability. Therefore, reforms are focused on diversifying the energy supply sources, curtailing excessive energy demand, and improving the financial position of the sector. While targets of the Power Sector Policy Statement have been met, considerable work remains to be done in implementation of the legal framework and improvement of collection rates. The review of the tariff system and the commitment to phasing out subsidies for electricity are also important steps in the right direction. In this context, the proposed Power Sector Rehabilitation and Restructuring Project and the planned Thermal Power Project are of significant support to Albanian’s efforts to resolve the crisis.

The successful privatization of the Savings Bank, the largest bank in the country, represents a major step in the development of the Albanian banking system. It should be noted that the IFC has played a crucial role in the process of restructuring and privatizing of state-owned banks, developing corporate governance, and enhancing market competition. In the telecommunication sector, while the mobile system has advanced very well, the authorities are taking a broad set of measures to avoid further delay in the privatization of Albtelekom, by solving its financial claims and improving the regulatory framework in support of fair competition. Efforts are also focused on creating a more conducive environment for private-sector development and foreign investments. A Bankruptcy Law was approved last March, while the Law on Deposit Insurance is under implementation. Albania is strongly committed to combat money laundering, fight organized crime and combat financing of terrorism. In this context, the appropriate legal and regulatory framework is in place and technical assistance is under way for efficient implementation.

Conclusion

The Albania authorities strongly endorse the underlying objectives of the proposed PRGF arrangement, which will be enormously helpful to efforts for reducing poverty and enhancing a broad-based economic development. Governance, business environment, and human development are at the heart of the government’s agenda. The authorities are committed to a timely and successful implementation of the program, as a way to yield sustainable growth and lead to Albania’s closer economic integration in the international community.