Albania: Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility
Author: International Monetary Fund
Publication Date:
23 Jul 2003
eISBN:
9781451800777
ISBN:
9781451800777
Language:
English
Keywords:
ISCR; CR; revenue shortfall; maintenance expenditure; PRGF; IMF staff representative; preparation of contingency plans; current account; broad money; debt service; private sector; exchange rate; Debt service
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In the aftermath of adverse supply shocks, and with further measures to promote investment, growth of production and exports is expected to recover. Efforts to remove barriers to investment and ensure a reliable provision of electricity are critical to private-sector-led growth. External sustainability hinges on further improvements in the business climate to expand the production of tradables, and ongoing fiscal consolidation. Although the Albanian government remains committed to the program, serious risks to growth and the execution of the poverty reduction strategy remain.

Abstract

In the aftermath of adverse supply shocks, and with further measures to promote investment, growth of production and exports is expected to recover. Efforts to remove barriers to investment and ensure a reliable provision of electricity are critical to private-sector-led growth. External sustainability hinges on further improvements in the business climate to expand the production of tradables, and ongoing fiscal consolidation. Although the Albanian government remains committed to the program, serious risks to growth and the execution of the poverty reduction strategy remain.

I. Introduction

1. A staff team1 visited Tirana during April 14–29, 2003 to conduct discussions for the second review under the PRGF arrangement—approved on June 21, 2002, consistent with the authorities’ November 2001 National Strategy for Socio-Economic Development (NSSED)—and a financing assurances review. The first review under the arrangement and the 2002 Article IV Consultation were concluded on February 26, 2003. Executive Directors commended the authorities’ sound macroeconomic management, but noted mixed policy implementation under the PRGF. The first NSSED Progress Report (PR) was issued in May 2003, and a Joint Staff Assessment (JSA) is circulated separately. In the attached Letter of Intent and the supplementary Memorandum on Economic and Financial Policies (MEFP), the Albanian authorities request completion of the second program review and financing assurances review. The MEFP expands on the discussion included in the PR on policies regarding tax and customs administrations, and updates the macroeconomic framework included in the latter document, in particular to incorporate the new national accounts.

2. Albania’s economic program is also supported by the World Bank through several sectoral lending programs and a Poverty Reduction Support Credit (PRSC) approved in June 2002. In April 2003, FIAS presented a study of administrative barriers to investment.

3. Political stability remains weak and policy debate confrontational—a situation that is likely to continue, with local elections coming up in October and the ruling Socialist Party’s leadership convention in December. These factors have adversely affected the pace of reform, notwithstanding the authorities’ declared commitment to strengthen policy implementation and governance. Negotiations on a Stabilization and Association Agreement with the EU commenced in February 2003.

4. The coverage and quality of macroeconomic data remain weak, despite recent improvements. Albania participates in the GDDS. A ROSC on data dissemination was prepared in June 2000. A June 2002 safeguards assessment of the Bank of Albania (BoA) indicated that controls are broadly adequate, and the BoA has been addressing remaining minor weaknesses. A fiscal ROSC was finalized in June 2003, identifying weaknesses in the consistency and transparency of budgetary and tax regulations and procedures.

II. Background

5. Performance under the program has remained mixed. Macroeconomic stability has been maintained and, up to end-March 2003, all quantitative performance criteria were met, but the indicative targets for revenue collection were missed. Although structural reforms have continued, further delays in meeting several benchmarks have occurred (Table 1).

Table 1.

Albania: Performance Under the PRGF Arrangement

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6. Largely due to adverse supply shocks, economic growth is estimated to have decelerated in 2002, to less than 5 percent, from an average of around 7 percent in recent years (Table 2, and Figures 1 and 2). Discussions with businesses indicated that the slowdown stemmed mainly from the electricity crisis in the first part of the year and floods in the fall, against the background of political uncertainties and a weak investment climate. The limited activity data—including the BoA’s business survey—suggest a pickup in activity and exports since mid 2002. National accounts data for 1996–2000 were released in January, indicating that, while trend real growth was broadly in line with previous estimates, the current level of nominal GDP is somewhat higher (Box 1).

Table 2.

Albania: Basic Indicators and Macroeconomic Framework, 1998906

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

Data for 1998–2000 are based on first official publication of national accounts GDP includes an estimate of the unobserved economy. Data for 2001 and 2002 remain subject to revision, pending the compilation of official National Accounts.

Current account excluding official transfers.

Revenue minus current expenditure.

Grants are estimated. except for the 2002 outturn.

Including interest payments for bank restructuring.

Including bonds for bank restructuring (lek 24.6 bn for 2000)

Includes arrears with the exception of those transferable ruble arrears for which the value is subject to reconciliation and rescheduling agreements have yet to he reached with creditors.

For 1999 excluding imports of direct humanitarian aid related to the Kosovo crisis.

Figure 1.
Figure 1.

Albania: Monthly Economic Indicators, 1997–2003

Citation: IMF Staff Country Reports 2003, 218; 10.5089/9781451800777.002.A001

Sources: 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 real rate using annualized seasonally adjusted CPI inflation.
Figure 2.
Figure 2.

Albania: Economic Developments and Prospects, 1994–2003 1/

Citation: IMF Staff Country Reports 2003, 218; 10.5089/9781451800777.002.A001

Source: Albanian authorities and Fund staff estimates.1/ GDP numbers for 2001 and 2002 are estimates.

Albania: National Accounts, 1996–2000

The recently released official National Accounts have replaced staff and authorities’ GDP estimates. The new GDP figures take into account the large share of the non-observed activity in total output—estimated at about a third of total GDP. The GDP estimates are likely to be revised in light of planned technical assistance over the next two years, as improvements are made in the core data and the methodology. The main weaknesses affecting current analysis are:

  • There are no constant price estimates of the expenditure side items. The official GDP deflator diverges markedly from CPI inflation during the entire period, and the two are difficult to reconcile.

  • The poor quality of the core data underlying the expenditure side estimates of private sector activity and the deflator problems described above produce an excessively volatile series for private consumption and a large statistical discrepancy between the expenditure and production side estimates of real growth (over 3 percentage points in certain years).

Implications for Past Analysis

  • Trend growth of real GDP (about 6 percent per annum) is broadly in line with previous estimates, while nominal GDP in 2001 is now 3½ percent higher than previously estimated.

  • Because of the higher growth of nominal GDP, the tax revenue to GDP ratio during 1998–01 is now estimated to have increased by 2 percentage points, about half of previous estimates.

Albania: Tax Revenue as a Share of GDP (in percent), 1998–2001

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7. The supply shocks are also reflected in a continued large trade deficit, notwithstanding a fiscal contraction by 0.7 percent of GDP (Table 3). Net imports were accommodated, in large part, by continued strong worker remittances and official inflows, and, possibly, also through the use of liquid foreign assets.2 The 2002 current account deficit is now estimated at 9.1 percent of GDP, above earlier projections (see below). The lek has remained broadly stable in effective terms and against the euro since mid-2002—implying a sizable appreciation against the dollar. International reserves rose to US$911 million (about 4½ months of imports) at end-April 2003, in part as a result of valuation gains.

Table 3.

Albania: Balance of Payments, 2000–2012

(In millions of US dollars)

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Sources: Ministry of Finance; Bank of Albania; donors; and Fund staff estimates and projections.

Includes unidentified flows and valuation changes In 2002 it reflects $64 million of valuation effect on gross reserves. In 2003, the valuation effect amounted to $52 million during January-May.

In 2003 Q4, it assumes a hypothetical rescheduling of arrears to Hungary ($14.2 million at LIBOR 6 month, no grace period, 5 year maturity); Czech Republic ($11.7 million at 1 percent interest, no grace period, 8 year matu and Slovak Republic ($5.9 million at I percent interest, no grace period 8 year maturity) with first payment in 2004. In 2004–2006 it assumes rescheduling of outstanding arrears to official and private creditors.

Includes arrears, with the exception of those transferable ruble arrears for which the value is subject to reconciliation.

8. Encouraged by abating inflationary pressures, monetary policy was eased in April 2003. Year-on-year CPI inflation fell from 4½ percent in October 2002 (corrected for statistical bias) to 2 percent by end-2002 and to 2¾ percent in April 2003, mainly reflecting the receding impact of earlier supply shocks (Table 4). With lower inflation and the ongoing return of deposits to the banking system following the bank run in early 2002, the BoA lowered its repo rate by 50 basis points to 8 percent in April 2003, partly reversing the increases of early 2002. The spread between the T-bills rates and the repo and deposit rates has remained large and volatile.

Table 4.

Albania: Monetary Aggregates, 1999–2004 1/

(In billions of leks unless otherwise indicated; end-period)

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Sources: Bank of Albania; and Fund staff estimates.

Data exclude the balance sheet of the Bank Asset Resolution Trust (BART). In particular, private sector credit of lek 6.1 billion is excluded as of September 2001, when it was transferred to the BART from the Savings Bank.

The series includes a braek at end-2002, as a change in definitions lowered NFA by Lek 1.4 billion, raising other items net by the same amount.

Derived using end-December 2001 exchange rates.

Including credit transferred to the BART.

An end 2002 data revision, raising recorded reserves by US$22 million at that time, is not reflected in the Staff Report figures presented for comparison.

9. Notwithstanding considerable revenue shortfalls, the overall fiscal deficit (excluding grants) declined to less than 7 percent of GDP in 2002 (Tables 5 and 6). The shortfall relative to the—ambitious—budget target was 1.3 percent of GDP—significantly more than estimated at the time of the February Board meeting. This, combined with reduced privatization receipts (already incorporated in the interim budget revision) and lower foreign-financed investments, was mirrored in sharply reduced capital expenditures. Delays in the use of Italian support for subsidized electricity imports further reduced overall spending. The end-year indicative target for domestic government borrowing was marginally exceeded (by about 0.1 percent of GDP). Public debt declined to 62 percent of GDP owing to debt forgiveness.

Table 5.

Albania: Government Revenues and Expenditures, 1999–2003 1/

(In percent of GDP)

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The presentation of the fiscal data has been revised since the previous staff report, to include grants as revenue rather than financing.

Includes solidarity tax (discontinued in 2003) and non tax revenue collected by Customs Department.

Information on grants are estimates, except for the 2002 outturn.

In 2001 expenditure on work incentive programs (lek 400 million) has been reclassified under subsidies.