Statement by Pier Carlo Padoan, Executive Director for Albania and Alessandra Lanza, Advisor to Executive Director

The economy has thus far been fairly resilient to recent political uncertainties, although the reform process has been adversely affected. Continued growth will depend to a large extent on higher private investment, which will require further improvements in governance and the implementation of reform. The combination of a better investment climate and sound fiscal management is essential for ensuring external viability. Monetary policy has been successful, but rapid changes in the financial system call for continued vigilance. Program implementation has been uneven, but satisfactory.

Abstract

The economy has thus far been fairly resilient to recent political uncertainties, although the reform process has been adversely affected. Continued growth will depend to a large extent on higher private investment, which will require further improvements in governance and the implementation of reform. The combination of a better investment climate and sound fiscal management is essential for ensuring external viability. Monetary policy has been successful, but rapid changes in the financial system call for continued vigilance. Program implementation has been uneven, but satisfactory.

Despite undergoing a politically difficult year, marked by local elections, the majority party convention, and, lately, some government reshuffling, Albania has made remarkable progress both in terms of macroeconomic stability and in advancing in the structural reform process. From a macroeconomic standpoint, growth has been robust, inflation subdued, the external position strengthened, reserves have increased, interest rates have declined and deposits have been restored to their pre-crisis level. The successful sale of the Savings Bank and remarkable improvements in the power sector indicate that Albania is tackling major structural impediments to growth. All in all, authorities do not fully share the staff view that performance has remained uneven.

Macroeconomic performance

Growth has recovered to 6.0 percent, up from 4.7 in 2002, thanks in large part to the strength of domestic demand, which—coupled with the deposit increase—points to renewed confidence. Growth was also driven by a very favorable export performance that led the trade balance to improve by 1.5 percent of GDP in the first three quarters of 2003. The current account deficit, while still substantial (8.5 percent of GDP), has improved by half a percentage point compared to the previous year, while reserves now amount to about four and a half months of imports.

Inflation mitigated substantially during 2003, with retail price inflation averaging 2.3 percent. This allowed the Central Bank to lower its repo rate by 200 basis points between April and December 2003, thus creating a more favorable investment environment. The banking system has been strengthened considerably and deposits have returned to their 2002 levels. The overall panorama of the banking sector will also greatly benefit from the finalization of the privatization of the Savings Bank, which was sold to the Austrian Raiffeisen Bank for 126 million dollars on January 13.

Fiscal policy

The process of fiscal consolidation remained on track in 2003 and the targets for the deficit were met. Improvements in tax administration, including the new excise tax law, led to an increase in tax revenues by 1 percentage point in 2003. However, as staff notes tax revenues have fallen short of budget targets. This, however, is largely the result—as staff clearly points out in paragraph 16 on page 8—of past overoptimistic projections. As the recent IEO report on fiscal policy points out, overoptimistic projections have been common practice in Fund programs. However, projections for the 2004 budget lie on the cautious side and will thus add to the scope of fiscal consolidation. In addition, the authorities have set aside a contingency expenditure plan so as to protect priority spending should unforeseen risks arise. Also, some new developments may decrease pressure on the budget as they materialize: the proceeds of the privatization of the Saving Bank have not in fact been included in the budget, nor has a support disbursement by the EU amounting to 0.4 percent of GDP.

External relations

Given the improvement in the current account Albania will have no difficulty in meeting its future external debt service obligations, while payment to the Fund has consistently been made on schedule. This provides a sound basis for longer-term investment plans and should provide a starting point for improved relations with donors and stimulate renewed interest in foreign investors. Albanian authorities look forward to stimulating new investment for the development of much needed infrastructure. They intend to exploit the geographical location of Albania in an enlarging Europe as a strategic link between northern and southern regions of the Mediterranean basin. Given the need to secure a sustainable private sector growth and deepen structural reforms, the authorities are making further efforts to facilitate and intensify the donors’ involvement, enhance the coordination process, and improve the absorbing capacities. In this context, the Government feels the need to strengthen donor involvement through bilateral agreements and technical assistance in the areas of institutional reform, financial and capital markets, and infrastructure development.

Structural reforms and basic infrastructure

On the structural front, two of the main long-pending issues have seen important positive developments: the Savings Bank has been privatized and the power sector has shown remarkable improvements, hi particular, all the targets in terms of the reduction of technical and financial losses have been met, the reform agenda is on track and the KESH financial situation has significantly improved. Steps on the privatization of the distribution system are also under consideration. The privatization of the INSIG, the insurance company is also under way.

With regard to Tirana-Durres-Rinas railway project, where GE, ABN AmroBank, SACE, and US EXIM Bank could be involved, the Authorities share the concerns expressed by staff on the need for a more timely communication and on the need for an independent study. Following staff recommendations, a meeting was held last Sunday in Tirana, where the Authorities and the Bank agreed on the terms of reference and a time-frame for the study that would expedite the process and maintain the potential involvement of all parties. The Bank is also assisting in providing finance to the Government for such a feasibility study.

Governance

Governance, which was one of the key issues under discussion during the previous review, has been strengthened as all but one of the related measures under the program have been met. And the performance criterion for which a waiver is requested has been transformed into a prior action for this review. The authorities therefore do not share staffs view that the overall progress has been limited; they feel they have complied with all the measures foreseen under the program. Rather, as they believe good governance is critical to the development of Albania and to the strengthening of the private sector role in the economy, they look forward to identifying a better program framework in this respect so as to achieve more comprehensive results. This will obviously be a challenging task but the authorities are strongly committed to improve performance, in this as well as in other program areas, and they do believe they have showed a good faith effort in meeting the program targets for this review.