Albania: 2004 Article IV Consultation, Fifth Review Under the Poverty Reduction and Growth Facility, Request for Extension of the Arrangement, and Financing Assurances Review—Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Albania
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of a combined discussion of the 2004 Article IV consultation with Albania, fifth review under the Poverty Reduction and Growth Facility, request for extension of the arrangement, and financing assurances review, the following documents have been released and are included in this package:
the staff report for the combined 2004 Article IV consultation, fifth review under the Poverty Reduction and Growth Facility, request for extension of the arrangement, and financing assurances review, prepared by a staff team of the IMF, following discussions that ended on December 16, 2004, with the officials of Albania on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on February 8, 2005. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a Public Notice Information and Press Release, summarizing the views of the Executive Board as expressed during its February 28, 2005, discussion of the staff report on issues related to the Article IV consultation and the IMF arrangement, respectively.
a statement by the Executive Director for Albania.
The documents listed below have been or will be separately released.
Letter of Intent sent to the IMF by the authorities of Albania*
Memorandum of Economic and Financial Policies by the authorities of Albania*
Selected Issues Paper and Statistical Appendix
Technical Memorandum of Understanding*
Ex Post Assessment of Longer-Term Program Engagement
*May also be included in Staff Report
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Staff Report for the 2004 Article IV Consultation, Fifth Review Under the Poverty Reduction and Growth Facility, Request for Extension of the Arrangement, and Financing Assurances Review
Prepared by the European Department (In consultation with other departments)
Approved by Ajai Chopra and Donal Donovan
February 8, 2005
Discussions for the 2004 Article IV consultation, fifth review under the PRGF and financing assurances review were held in Tirana during December 1–16, 2004. The Ex Post Assessment (EPA) report was also discussed with the authorities. The mission met with Prime Minister Nano; Ministers Malaj (Finance), Angjeli (Economy), Doda (Industry and Energy), and Poci (Transport and Communications); Bank of Albania (BoA) Governor Fullani; parliamentarians; senior officials; academics; and representatives from business sectors, civil society, and the international donor community. The staff team comprised Messrs. Escolano (head), Lazar, Oestreicher (EUR), Dalgic (FAD), Mansilla (PDR), Olters (resident representative), and Ms. Spahia (resident representative’s office). Mr. Gola (Executive Director’s office) assisted in the discussions.
The 2002 Article IV consultation was concluded on February 26, 2003. The current arrangement, in an amount equivalent to SDR 28 million (57 percent of quota), was approved on June 21, 2002 (IMF Country Report No. 02/135) and the fourth review was completed on July 14, 2004 (IMF Country Report No. 04/206). An FSAP is planned for early-2005. Albania participates in the GDDS, and a ROSC on data dissemination was prepared in June 2000. A safeguards assessment of the BoA was finalized in June 2002, and a fiscal ROSC in June 2003.
In the attached Letter of Intent and Supplementary Memorandum of Economic and Financial Policies (MEFP) the authorities request completion of the program and financing assurances reviews; and a five-month extension of the program to November 2005 to allow for the sixth review and associated disbursement to take place within the program period.
II. Recent Developments
III. Report on the Discussions
A. Macroeconomic Outlook
B. Monetary and Financial Sector Policies
C. Fiscal Policy
D. Poverty Alleviation and Other Structural Reforms
E. External Policies
F. Program Issues
IV. Staff Appraisal
1. National Accounts Revisions
2. Dollarization and the Financial System
3. 2005 Fiscal Package
4. Poverty Issues
5. Structural Conditionality
1. Economic Developments and Prospects, 1994–2004
2. Monthly Economic Indicators, 2000–04
3. Monetary Developments
1. Basic Indicators and Macroeconomic Framework, 2000–09
2. Millennium Development Goals
3. Balance of Payments, 2001–09
4. Performance Criteria and Structural Benchmarks under the PRGF Arrangement
5a. General Government Operations (In percent of GDP)
5b. General Government Operations (In billions of Lek)
6. Priority Expenditure
7. Monetary Aggregates, 2002–09
8. External Public and Publicly Guaranteed Debt Stock by Creditors, 1997–2004
9. External Financing Requirement and Sources, 2001–07
10. Indicators of External and Financial Vulnerability, 1997–2004
11. Projected Payments to the Fund as of December, 2004 (In millions of SDRs)
12. Indicators of Fund Credit, 1998–2004
13. Schedule of Disbursement Under PRGF Arrangement
I. Fund Relations
II. IMF-World Bank Relations
III. Statistical Issues
IV. Debt Sustainability Analysis
V. Letter of Intent and Supplementary Memorandum on Economic and Financial Policies Attachment I: Technical Memorandum of Understanding
After a slowdown in 2002, Albania’s macroeconomic performance has been commendable: growth has been 6 percent in 2003–04 with low inflation, and the lek has appreciated reflecting increasing confidence. The public debt-to-GDP ratio has fallen from nearly 67 percent at end-2001 to about 55 percent at end-2004, and external liabilities, at 17 percent of GDP, are limited. However, despite a narrowing of the external deficit, the trade deficit remains wide and the economy is dependent on transfers from abroad—as a broad-based export-driven expansion has not yet taken root. Thus, improving competitiveness and attracting investment are key priorities. Performance under the program since the fourth review has been good and program conditionality was observed, some with significant margins. The political environment is dominated by the upcoming mid-2005 elections.
Policy discussions focused on maintaining macroeconomic stability, strengthening the monetary, financial, and budget policy frameworks, and improving the investment climate. The accompanying Ex Post Assessment was also discussed with the authorities.
• The outlook is for growth to remain close to its 6 percent trend supported by domestic demand in the near term, and then increasingly by productivity and external trade gains in the medium term. However, maintaining this growth pace will require significant improvements in infrastructure and the business climate, including governance, property rights protection, and the rule of law.
• The newly appointed management of the Bank of Albania (BoA) reiterated the commitment to a strong monetary policy framework based on BoA independence, price and financial stability, and a flexible exchange rate. The monetary stance remains tight, but the current neutral bias is appropriate. In the wake of the large Savings Bank privatization, the financial sector is showing welcome dynamism and the BoA is stepping up prudential vigilance. The upcoming FSAP will contribute to these efforts. Financial intermediation is expanding, helped by the authorities’ initiatives to build market infrastructure and curtail the use of cash—including by paying public wages through the banking system. Dollarization hinders the monetary policy transmission mechanism, but does not pose an immediate financial stability threat.
• Staff supported the 2005 budget, which embodies further fiscal and public debt retrenchment. It envisages current spending restraint leading, for the first time, to a current surplus—thus, providing for increased public investment. The budget is premised on a realistic projection of revenue, which should help planning and implementation. Discussions covered policies to improve tax compliance, taxpayer rights, budget process, expenditure management and civil service reform. In this context, the authorities agreed to refrain from across-the-board wage increases in 2005 and will formally eliminate inflation indexation of wages before the 2006 budget.
• Other structural reforms have experienced increased momentum, notably privatization, electricity sector restructuring, and national accounts statistics. But further progress in infrastructure provision, economic statistics, and investment climate is needed. Indicators of absolute poverty have improved reflecting increasing incomes, but targeted social programs need strengthening.
The accompanying supplementary Memorandum of Economic and Financial policies constitutes a strong policy program and staff supports completion of the 2004 Article IV consultation, fifth review of the program, and financing assurances review.