Statement by the IMF Staff Representative March 27, 2008

The main challenges for this review were to further redress long-running problems in the energy sector and to balance fiscal policy requirements for development spending with macroeconomic stability. The financial position of the state-owned electricity company (KESH) deteriorated significantly more than anticipated. The authorities have adopted a two-pronged solution to the electricity crisis. The authorities are prioritizing the strengthening of regulation to assure financial stability in a rapidly maturing financial system. The proposed conditionality for the Fifth Review is consistent with program goals, and the program is fully financed.

Abstract

The main challenges for this review were to further redress long-running problems in the energy sector and to balance fiscal policy requirements for development spending with macroeconomic stability. The financial position of the state-owned electricity company (KESH) deteriorated significantly more than anticipated. The authorities have adopted a two-pronged solution to the electricity crisis. The authorities are prioritizing the strengthening of regulation to assure financial stability in a rapidly maturing financial system. The proposed conditionality for the Fifth Review is consistent with program goals, and the program is fully financed.

1. This statement updates on developments since the preparation of the staff report (www.imf.org). The additional information does not change the thrust of the staff appraisal.

2. The authorities have implemented the prior actions for the review:

  • A law transferring ownership of the requisite amount of gold from the Albanian Government to the Bank of Albania entered into force on February 27, 2008.

  • An increase in the average electricity tariff of about 15 percent became effective for the March 2008 billing period.

3. The recent explosion at an armament dismantling facility will lead to unanticipated fiscal expenditure, but does not threaten program targets. The accidental explosion outside Tirana on March 15, 2008 was devastating and led to significant loss of life and property damage in the surrounding area. The authorities want to expedite compensation for the victims and property damage. They intend to meet this unanticipated fiscal expenditure by utilizing part of the existing 1.6 percent of GDP of contingencies in the 2008 budget. The modalities and extent of potential compensation are not yet finalized, but estimates range between 0.1 to 0.4 percent of GDP. As payment arrangements are still being worked out, the authorities expect to meet any related expenditure within the limits of the end-March 31, 2007 performance criterion on net credit to government. To provide sufficient margin to deal with other risks, notably related to the electricity sector and potential infrastructure cost overruns, staff advises the authorities to replenish contingencies, in particular by limiting planned wage and social benefit increases.

4. The Albanian authorities intend to complete the remaining structural benchmark set at the time of the Third Review. This benchmark—the submission of legislation to parliament providing for the transfer of supervisory authority over the leasing industry to the Bank of Albania—was originally scheduled for end-October, 2007, and is now envisaged to be carried out by end-April 2008.

Albania: Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Review Under the Extended Arrangement, and Financing Assurances Review: Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Albania
Author: International Monetary Fund