Statement by Pier Carlo Padoan, Executive Director for Albania and Carlo Gola, Senior Advisor to Executive Director February 28, 2005

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.

At the outset, my authorities would like to express their appreciation for the valuable work and collaboration with staff during the duration of the program that is now coming to a conclusion.

1. Introduction

Albania has done well in the last years, progressively coming to what staff defines as a “commendable performance.” In fact, this is perhaps the first time we are not discussing a waiver. Albania has made remarkable progress since the 1997 crisis and the system has been able to absorb shocks like the huge influx of refugees during the Kosovo war or the other one in 2002, when 20 billion leks went out of the banking system in a matter of days.

2. A sound macroeconomic policy has generated strong results.

Few numbers represent well the results that authorities, with the collaboration of the Fund, have achieved over the course of the programs.

  • Since 1997 the economic growth has been strong, averaging 7.5 percent annually for the period from 1998 to 2004. In the same period per capita GDP increased almost three times. GDP growth in 2004 reached 6 percent.

  • Between 1997 and 2004 public debt declined from 84.6 to 55.7 percent of GDP; external debt has been reduced from 40.8 percent to 19.7 percent of GDP, over the same period. In 2004, the current balance, for the first time since the transition, has balanced, while the budget financing (including privatization receipts) has funded capital expenditures, which reached, at the end of 2004, 4.62 percent of GDP.

  • Following a skillful conduct of monetary policy, inflation, since 2001, has been within the limits set by the Bank of Albania, 2-4 percent. In 2004 average inflation was 2.9 percent, declining at the end of the year to 2.2 percent.

  • The Albanian economy continues to register strong growth rates supported by firm macroeconomic policies and implementation of structural reforms. The authorities have adopted a strong 2005 budget, committed to reducing public debt, domestic borrowing and current expenditure, despite mid-2005 elections pressures. This budget and the fiscal package accompanying it, are not only fully in line with staff recommendations and advice, but have also been transparently and widely discussed with all stakeholders.

  • Conscious of the need to ensure fiscal sustainability, the authorities have improved the performance of customs administration and are taking steps to further the reform in other fiscal institutions. As we speak ASYCUDA is operating in 5 customs houses and by the end of March, it will be installed in a sixth one, thus covering more than 80 percent of the entire customs transactions. The authorities are extending the Civil Service law to ensure a stable and supportive work environment to customs and tax administration officials. A tender to equip two sensitive customs houses with the latest-technology scanner system is under preparation, aimed at improving the quality of controls and facilitating trade. In addition, authorities have applied, and hope to be supported by the MCA program, for a Prime Advisor for the Tax administration.

3. Despite the success, the authorities are aware that many challenges remain.

Albanian authorities are aware of the numerous challenges to be faced. They are proud of the achievements, but also fully aware that a long way remains to reach the standards of other European countries. There is a need to improve the fiscal structure and discipline, and major efforts need to be channeled to reduce the sizeable informal economy. Further efforts are needed to enhance tax administration and expenditure management. The need for better infrastructure will of course take up significant financial resources before allowing Albania to fully exploit its geographical position as part of major regional networks. Further efforts are required by the authorities in enforcing the rule of law and improving governance before bringing the business climate indicators to regional levels. Authorities will have to cope with poverty by firmly addressing the needs of different social groups and the disparities between various areas in the country, and ensure that priorities set forth in the National Strategy for Socio-Economic Development are duly matched in the Medium-Term Budget Program.

We visited Albania a few days ago, and had extensive discussions there with the authorities. The speed of changes and the advancement of economic reforms in the country are impressive. Albania has established a very good track record of sustainable economic growth with low inflation, and has entered a path of sustainable fiscal consolidation. The banking system is increasing its contribution to economic growth and private sector development. While the active role of strategic investors has enhanced market competition in the financing sector, the authorities are, as we speak, closely working with an IMF and WB team to conduct a FSAP.

Let us assure you that the Albanian authorities are totally committed to continuing the implementation of important policies and structural reforms. Reforming the public administration, consolidating institutions and fighting corruption, enhancing accountability, and improving governance are all items that lie well at the top of the government’s policy agenda. In this regard, we find the program to have been an effective, and indeed quite powerful, mechanism to support the consolidation of critical economic reforms.

4. Future engagement with the Fund.

To conclude, let us convey that the Albanian authorities believe that Albania is still some distance away from graduating from Fund involvement. Despite improved macroeconomic conditions, the country has not yet fully developed its policy implementation capabilities. The authorities feel that Fund assistance and advice could play a key role in the design and implementation of macroeconomic policies and reforms focusing on the budget and treasury management and the banking sectors as well. This said, given the progress made in both macroeconomic and structural sectors, authorities also feel that Albania must elaborate an exit strategy that is sound, credible, and that demonstrates that policy decision and implementation capacities have been significantly strengthened over the recent past, also thanks to Fund support. Needless to say, enhancing ownership of the reform process is key for a timely and successful exit strategy. For these reasons, the authorities believe that Albania would benefit from another mid-term program with the Fund, the typology of which will be discussed in due course.