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© 2006 International Monetary Fund
February 2006
IMF Country Report No. 06/54
Albania: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Use of Fund Resources—Request for an Extended Arrangement—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Albania
In the context of the request for a three-year arrangement under the Poverty Reduction and Growth Facility, and use of Fund resources—request for an extended arrangement, the following documents have been released and are included in this package:
the staff paper for the Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Use of Fund Resources—Request for an Extended Arrangement, prepared by a staff team of the IMF, following discussions that ended on November 21, 2005, 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 January 12, 2006. 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 staff statement of January 27, 2006 updating information on recent developments.
a Press Release summarizing the views of the Executive Board as expressed during its January 27, 2006 discussion of the staff report that completed the requests.
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*
Technical Memorandum of Understanding*
*May also be included in Staff Report
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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International Monetary Fund
Washington, D.C.
Front Matter Page
INTERNATIONAL MONETARY FUND
ALBANIA
Request for a Three–Year Arrangement Under the Poverty Reduction and Growth Facility, and Use of Fund Resources—Request for an Extended Arrangement
Prepared by the European Department
(In consultation with other departments)
Approved by Ajai Chopra and Scott Brown
January 12, 2006
Discussions on a new program took place in Tirana, November 8–21, 2005. The staff team comprised Messrs. Székely (head), Lazar, Oestreicher (all EUR), Ganelli (FAD), and Mansilla (PDR), and Ms. Westin (Resident Representative). The staff team met Prime Minister Berisha, Finance Minister Bode, Bank of Albania (BoA) Governor Fullani, Minister of Economy Ruli, Transportation Minister Basha, the public finance committee, senior BoA and government officials, opposition leader Rama, academics, and NGO and private sector representatives.
The authorities are requesting financial assistance under three-year PRGF and EFF arrangements in a total amount of SDR 17.045 million or 35 percent of quota (SDR 8.523 million under each arrangement). The previous PRGF arrangement with Albania, which ended in November 2005, was successful overall. The authorities have agreed to the publication of all program documents.
The annual report on the implementation of the poverty reduction strategy paper (PRSP) and a joint staff advisory note (JSAN) with the World Bank will be circulated to the Board before the meeting on the program request.
The World Bank's new Country Assistance Strategy (CAS), which envisages a gradual phasing out of IDA support, is expected to be approved in January 2006.
Contents
Executive Summary
I. Introduction
II. Background
III. Recent Developments
IV. Policy Discussions
A. Medium-Term Framework and Reform Strategy
B. Monetary and Exchange Rate Policy
C. Fiscal Policy
D. Financial System Stability and Development
E. Other Structural Policies
F. Other Issues
G. Program Issues
V. Staff Appraisal
Boxes
1. Growth Potential
2. Structural Conditionality
Figures
1. Economic Developments and Prospects, 1998–2005
2. Recent Monetary Developments, January-September, 2005
Tables
1. Schedule of Disbursements Under PRGF/EFF Arrangement
2. Projected Payments to the Fund
3. Basic Indicators and Macroeconomic Framework, 2001–09
4. Millennium Development Goals
5a. Balance of Payments, 2001–09 (in millions of Euros)
5b. Balance of Payments, 2001–09 (in percent of GDP)
6. Monetary Aggregates, 2002–09
7. IMF Core Indicators of Financial Soundness, December 2003–September 2005.
8. Structural Policy Intentions for the Second Half of 2005 under the Previous PRGF Arrangement
9. External Public and Publicly Guaranteed Debt Stock by Creditors, 2000–2005
10a. General Government Operations 2003–09 (in percent of GDP)
10b. General Government Operations 2003–09(in billions of leks)
11. Structural Reforms in Tax Administration
12. External Financing Requirement and Sources, 2002–09
13. Indicators of Fund Credit, 2000–2005
Appendices
I. Fund Relations
II. IMF–World Bank Relations
III. Statistical Issues
IV. External and Public Debt Sustainability Analysis (DSA)
V. Three-Year Arrangement Under the Poverty Reduction and Growth Facility
VI. Extended Arrangement
Attachment I: Letter of Intent and memorandum on Economic and Financial Policies (MEFP) for Albania
Attachment II Technical Memorandum of Understanding
Executive Summary
This arrangement aims to prepare Albania for graduation from IMF-supported programs. If properly implemented, the policies it embodies will reduce vulnerabilities, enhance growth potential, strengthen government solvency, and protect priority spending. These policies will also contribute to improved governance—a precondition for attracting the high-quality investment needed to address the structural imbalances in the external accounts and to ensure the continuation of strong growth. Remaining vulnerabilities in the financial system are also addressed.
Policy discussions focused on measures to maintain macroeconomic stability in the wake of the electricity disruptions and other potential external shocks; and on the structural measures needed to achieve the program’s objectives.
Despite a generally good macroeconomic performance in the past, near-term growth and external prospects have worsened due to disruptions to the electricity supply. Supply disruptions and rising costs contributed to a decline in growth from about 6 percent in 2004 to 5½ percent in 2005, and to a projected further decline to 5 percent in 2006, compared with the 6 percent for both years projected in mid-2005. Nonetheless, following the democratic and peaceful transfer of power, confidence appears relatively strong. The exchange rate is stable, and reserves, monetization, and private credit are all rising—the latter very rapidly, albeit from a low base. Despite the electricity shock and high oil prices, the outlook is for inflation to remain at 3 percent—the midpoint of the BoA target band. However, the authorities will need to be vigilant and react quickly to any second round effects. In the wake of significantly higher electricity imports, the current account deficit is projected to deteriorate to 8 percent of GDP in 2006, but to improve in subsequent years as domestic production returns to normal levels.
The fiscal framework is designed to reduce both domestic credit to government and public debt relative to GDP. The 2006 budget is based on realistic revenue and privatization projections, and utilizes large contingencies to further protect priority expenditure. The budget excludes possible gains from tax administration which, if they occur, will be allocated in a mid-2006 supplementary budget.
Comprehensive tax administration reforms, based on IMF technical assistance, will be pursued to enhance efficiency, with special emphasis on servicing large tax payers and improving their tax compliance. Following an early 2006 IMF evaluation mission, a detailed action plan to improve debt management will be drawn up to guide reform over the program period. In the Financial sector, the authorities will develop an action plan to implement the FSAP recommendations, with selected items set as conditionality at the first review. In the meantime, previously-initiated reforms will be completed. Other measures include civil service reform and improvements in the institutional framework for evaluating large projects; reform of the macro-critical electricity sector; and statistics.
The accompanying Letter of Intent and Memorandum of Economic and Financial Policies contain policy commitments appropriate to maintain macroeconomic stability and to accelerate the pace of the reform agenda; and staff supports the request for a program.
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January 27, 2006
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Press Release No. 06/17
FOR IMMEDIATE RELEASE
January 27, 2006
International Monetary Fund
Washington, D. C. 20431 USA
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January 27, 2006
