Statement by the IMF Staff Representative

This paper discusses a Request from Albania for a Three-Year Arrangement under the Poverty Reduction and Growth Facility (PRGF). 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.

Abstract

This paper discusses a Request from Albania for a Three-Year Arrangement under the Poverty Reduction and Growth Facility (PRGF). 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.

1. This statement summarizes developments in Albania since the issuance of the staff report for the request for a three-year arrangement under the PRGF and for the use of Fund resources under an Extended Arrangement. The additional information does not change the thrust of the staff appraisal.

2. Recent developments have been broadly in line with previous projections. Year on year CPI inflation dropped to 2 percent in December, compared with a projected 3 percent, mainly due to lower-than-expected seasonal increases in the price of imported vegetables. Though data are still incomplete, the evolution of monetary aggregates up to end-December appears to have been broadly in line with projections. Demand for lek, however, was stronger than expected. This allowed the central bank to purchase more foreign currency, raising end-year holdings of gross international reserves to US$1,425 million, US$35 million higher than projected. On the fiscal front, preliminary data suggest that net government borrowing in 2005 was somewhat below the program target.

3.Developments in the energy sector have been relatively favorable, but major risks to electricity supply remain. Abundant rainfall in December raised the water level in the reservoir significantly, allowing the electricity company to temporarily eliminate power cuts in Tirana during the holidays. The situation, however, is less favorable in the countryside where economic activity has also been affected by floods. The government approved the 2006–2008 Power Sector Action Plan on January 13, 2006, including the targets for collection and loss rates which are performance criteria in the proposed program. Electricity imports have been secured for the first quarter of 2006. However, increasingly difficult energy market conditions in Southern European make the outlook for electricity imports in the rest of 2006 uncertain.

4. All prior actions have been implemented. The 2006 budget passed by parliament is in line with program targets. All firms meeting the set criteria have been incorporated into the Large Taxpayer Office (LTO) and the audit of social security contributions has been integrated into the LTO's audit function. Finally, an action plan to implement the recommendations of the IMF TA mission on tax administration, incorporating comments from IMF staff, has been developed.

Albania: Request for a Three–Year Arrangement Under the Poverty Reduction and Growth Facility, and Use of Fund Resources—Request for an Extended Arrangement
Author: International Monetary Fund