Albania: 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

This paper reviews Albania’s 2004 Article IV Consultation, Fifth Review Under the Poverty Reduction and Growth Facility (PRGF), Request for Extension of the Arrangement, and Financing Assurances Review. The macroeconomic performance of the Albanian economy has been remarkable by both regional and international standards. After a slowdown in 2002, economic growth recovered to about 6 percent in 2003–04; and inflation declined, generally remaining within the 2–4 percent target range of the Bank of Albania. Some structural reforms also gained momentum in 2004—notably privatization and sectoral restructuring.

Abstract

This paper reviews Albania’s 2004 Article IV Consultation, Fifth Review Under the Poverty Reduction and Growth Facility (PRGF), Request for Extension of the Arrangement, and Financing Assurances Review. The macroeconomic performance of the Albanian economy has been remarkable by both regional and international standards. After a slowdown in 2002, economic growth recovered to about 6 percent in 2003–04; and inflation declined, generally remaining within the 2–4 percent target range of the Bank of Albania. Some structural reforms also gained momentum in 2004—notably privatization and sectoral restructuring.

I. Introduction

1. The overall macroeconomic performance of the Albanian economy has been remarkable (Table 1). After a slowdown in 2002, growth has recovered to about 6 percent; inflation has declined, with the 12-month rate generally remaining within the 2–4 percent target of the Bank of Albania (BoA); the lek has shown an appreciating trend reflecting increased confidence; and the external current account and trade deficits, although still high, have improved. This performance has been supported by sound monetary and financial sector policies, fiscal consolidation, privatization, and structural reforms in selected areas. Public indebtedness has declined steeply, by 9½ percentage points of GDP since end-2002, to 55¼ percent of GDP at end-2004. More broadly, since 1998, output has increased at an average annual rate over 6½ percent and per capita income has doubled (Figure 1). This has resulted in reductions in absolute poverty (Table 2), although one fourth of the population is still below the poverty line and poverty alleviation remains a key challenge.

uA01fig01

Fiscal Deficit and Public Sector Debt, 1997–2004

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 089; 10.5089/9781451800807.002.A001

Source: Albanian authorities and IMF staff estimates.1/ IMF staff estimate.
uA01fig02

External Current Account and Balance of Goods and Services

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 089; 10.5089/9781451800807.002.A001

Source: Bank of Albania and IMF estimates
uA01fig03

Regional Comparison of Growth Performance, 1991–2003

(Index of Real GDP, 1991=100)

Citation: IMF Staff Country Reports 2005, 089; 10.5089/9781451800807.002.A001

Sources: WEO and IMF staff estimates.
uA01fig04

International Comparison of Growth Performance, 1991–2003

(Index of Real GDP, 1991=100)

Citation: IMF Staff Country Reports 2005, 089; 10.5089/9781451800807.002.A001

Sources: WEO and IMF staff estimates.
uA01fig05

Gross National Income per capita, 1990–2003

Citation: IMF Staff Country Reports 2005, 089; 10.5089/9781451800807.002.A001

Source: World Development Indicators database, World Bank 2004, and Bank and Fund staff estimates.
Table 1.

Albania: Basic Indicators and Macroeconomic Framework, 2000–09

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

The ratios to GDP have been adjusted from the ones in the IMF Country Report No. 04/206 to reflect the revisions in nominal GDP (see Box 1).

GDP data through 2002 are from the official national accounts. Real GDP growth is based on the observed economy only.

The statistical discrepancy contained in the national accounts (31 percent of GDP in 200 l), was allocated to private consumption and investment according to the ratio obersved in the national accounts excluding the discrepancy. Unexplained oscillations in this discrepancy introduced additional statistical uncertainty into the historical data.

Negative of current account including official transfers.

Revenue including grants less current expenditure and net lending.

Includes arrears, with the exception o of pre-1978 arrears to China.

Excludes IMF repurchase obligations.

In 2004, October 2004 to December 2003.

Figure 1.
Figure 1.

Albania: Economic Developments and Prospects, 1994–2004 1/

Citation: IMF Staff Country Reports 2005, 089; 10.5089/9781451800807.002.A001

Sources: Albanian authorities; and Fund staff estimates.1/ Data for 2004 are staff estimates.
Table 2.

Albania: Millennium Development Goals

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Source: World Bank and Fund staff estimates

Targets 12–15 and indicators 33–44 are excluded because they cannot be measured on a country-specific basis. These are related to official development assistance, market access, and the HIPC initiative.

2. The continuation of high growth, however, cannot be taken for granted as a self-sustained, broad-based expansion of tradeable output has not yet taken root. Expansion of the market economy and an open trade regime have generated large increases in productivity through reallocation of resources since the start of the transition (the private sector now accounts for about ¾ of GDP). However, analyses by Fund and World Bank (WB) staff indicate that this source of total factor productivity (TFP) growth may be waning.1 In particular, nontradeable sectors have contributed most of the growth. In contrast, the contribution from industry has been modest. Although in 2002–04 the current account deficit narrowed from 10 to 7 percent of GDP reflecting trade gains, it remains high—as does the goods and services trade deficit, which was 23 percent of GDP in 2004 (Table 3). This trade deficit has largely been covered by migrant remittances and other private and official transfers from abroad, buttressing incomes and domestic demand. But remittances and transfers cannot be relied upon to sustain the current fast growth pace for much longer. Indeed, these sources can be expected to decline over time as a share of GDP.

Contributions to economic growth 2003–04

(in percent)

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Sources: Albanian authorities and IMF staff estimates.
Table 3.

Albania: Balance of Payments, 2001–09

(In millions of US dollars)

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

Consistent with IMF Country Report No. 04/206. For comparability purposes. indicators measured as percentage of the GDP have been adjusted to the new GDP.

Net of valuation changes.

In 2004–2006 assumes rescheduling of stock of outstanding arrears, both with official and private creditors.

Public and publicly guaranteed debt only.

Public and private. It includes arrears with the exception of China pre-1978 arrears.

Debt stock converted into Lek at the e-o-p exchange rate.

3. Therefore, looking towards the future, the challenge will be to foster significant increases in competitiveness and high quality investment. The recent prosperity of tourism-related activity and selected exports—textile, footwear, and vegetables—may harbinger a new export-based growth phase, but it is still in an early stage. Albania’s growth track record and the macroeconomic stability gained in recent years should provide an excellent starting point to attract the strategic domestic and foreign direct investment with the scale, technology and know-how needed to spark a new growth phase based on external competitiveness. But progress in this direction will require substantial improvements in infrastructure, as well as in governance and the institutional investment environment—including in areas beyond traditional economic policies, such as strengthening the rule of law, defining and enforcing property rights, and reforming the court system.

uA01fig06

Goods and Services Trade Volume, 2001–04

(Annual percentage change)

Citation: IMF Staff Country Reports 2005, 089; 10.5089/9781451800807.002.A001

Source: Albanian authorities and IMF estimates

SE Europe: Foreign Direct Investment Average 1997–2003

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4. This analysis and policy perspective has been at the core of earlier IMF Board discussions and has been incorporated in the authorities’ Poverty Reduction Strategy Papers (PRSPs).2 On occasion of the 2002 Article IV consultation, and more recently, at the conclusion of the fourth review, Directors praised the good macroeconomic performance of Albania, fiscal consolidation, adept monetary and prudential policies, and selected structural reforms. Nevertheless, Directors also pointed out that a broad-based export-driven expansion had not yet taken hold and stressed the need to accelerate structural reforms, improve physical and financial infrastructure, and strengthen governance and the rule of law.

II. Recent Developments

5. Since the fourth review, performance under the program has been good and all program conditionality has been observed. Quantitative and structural performance criteria for end-September 2004 and the structural performance criterion for end-2004 were all met, some with significant margins (Table 4). Tax collections have met program projections although foreign project-related disbursements and grants continued to underperform. In response, fiscal spending was contained to meet program targets on domestic borrowing—resulting in an overall deficit lower than programmed by 1¼ percentage point of GDP (Tables 5a, 5b, and 6). Monetary conditions have stayed tight and both BoA’s net domestic assets and international reserves also overperformed, resulting in a comfortable 4-month reserve import cover (Table 7).

Albania: 2004 Budget Outturn

(In percent of GDP)

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Sources: Ministry of Finance; and staff estimates.

Incorporates the Supplementary Budget

Table 4.

Albania: Performance Criteria and Structural Benchmarks under the PRGF Arrangement

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Data on VAT refunds were only available for the total since the beginning of the year and not with a monthly breakdown. The other required information was available.

Table 5a.

Albania: General Government Operations 1/

(In percent of GDP)

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

The presentation of the fiscal data has been revised since the January 2003 staff report, to include grants as revenue rather than financing. All budget and staff projection numbers are presented as a percent of revised GDP to facilitate comparison.

Information on grants prior to 2002 are estimates.

Includes statistical discrepancy.

Revenue excluding grants minus current expenditure.

Net borrowing in 2004 takes into account 0.9 percent of GDP Savings Bank privatization receipts used to redeem domestic debt.

Table 5b.

Albania: General Government Operations 1/

(In billions of Lek)

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

The presentation of the fiscal data has been revised since the January 2003 staff report, to include grants as revenue rather than financing. All budget and staff projection numbers are presented as a percent of revised GDP to facilitate comparison.

Information on grants prioir to 2002 are estimates.

Includes statistical discrepancy.