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.

At the outset I would like, on behalf of my Albanian authorities, to express our appreciation and to thank Staff for the very fruitful consultations and for preparing a comprehensive set of documents, which provide a candid assessment of the program and the challenges ahead in the implementation of economic and structural reforms.

The Authorities broadly concur with the key findings of the reports and would like to reiterate their firm commitment to maintaining macroeconomic stability and to making further progress in speeding up structural reforms. While authorities fully recognize the importance of a stable political environment for the success of the program they feel that concerns about the consequences of the upcoming electoral period are overstated. The policy framework offered by the agreement with the Fund is widely recognized as necessary for Albania to progress in macroeconomic stabilization, to sustain growth and to reduce poverty.

The macroeconomic outlook

The macroeconomic outlook remains favorable in spite of growth deceleration, which is mainly due to an unfavorable external environment. The Authorities are aware, however, that sustained growth cannot be achieved without a significant strengthening of the business climate and the elimination of major supply constraints, especially in the energy sector.

Prudent monetary policy implementation has kept inflation under control and is making room for careful monetary easing against the background of renewed stability of the banking sector. Progress is also being achieved in monetary management, with increased reliance on market practices. Authorities are benefiting from advice by MFD and LEG.

The external position remains manageable, also given the still-satisfactory expected FDI inflows, and external debt remains sustainable. Of course, sustained FDI inflows will require continuing progress in strengthening the business environment and full implementation of the reform program.

Fiscal policy

Fiscal balances have broadly remained within the program targets. However the Authorities are fully aware that this is the result of both a weak revenue performance and of expenditure cuts, and they are taking necessary measures to strengthen tax administration and improve expenditure prioritization. Authorities are implementing the measures agreed under the program to strengthen revenue collection (which are themselves a source of additional expenditure). The expected positive outcomes, however, will take some time to materialize. This notwithstanding, revenue collection remains exposed to downside risks.

Authorities agree with staff that, given such downside risks, respecting fiscal targets will require expenditure cuts that will have to be carefully prioritized so as to protect critical items such as health care and education. A contingency plan laying out measures for the remainder of the year has been prepared as a prior action for this review. The plan includes savings in administrative expenditures, reduction in subsidies for electricity imports, and reductions in the public wage bill.

The budget implementation process will also be improved in the context of the 2004 budget.

Strengthening governance and improving the business environment

The Board discussion in occasion of the completion of the first review had put a strong emphasis on strengthening governance and fighting corruption. These remain among the Government’s top priorities. Since the time of the first review under the PRGF, considerable progress has been made in improving the regulatory framework and enhancing the transparency and accountability of public institutions as well as the transparency and communication between the administration and the business community. Actions have been taken to correct hiring procedures of public officials, which had raised concerns.

The business climate is visibly improving. Agencies dedicated to the support of small business and to the attraction of FDI inflows are being created. These will be operated according to principles of efficiency in service production and their size will be kept at a minimum.

Structural reforms and the energy sector

The Authorities are committed to speeding up structural reforms, which are at the core of the Government’s agenda. They are aggressively implementing measures to improve business environment, strengthen the reform in the energy sector, and finalize the privatization of Albtelecom and of the Savings Bank for which authorities will again contact potential buyers

A lasting solution to the problem of energy shortages will require the gradual elimination of dependency from foreign sources of supply. Authorities are concerned that, in the transition to full independence in energy production and distribution, meeting targets related to power supply will require that power availability to households and industry be often severely reduced. This produces negative effects both on the level of activity and on the degree of business confidence, both harmful to growth. Authorities are confident that, with the financial support of a soft loan from the Italian government, the restructuring of KESH will proceed as scheduled.

Reducing Poverty

Reducing poverty and inequity of opportunities remain a great challenge for the country. My Authorities fully agree with the JSA Progress Report and are committed to sustain the intensive efforts in order to enhance the efficient implementation of the National Strategy for Socio-Economic Development.