SECOND AND THIRD REVIEWS UNDER THE EXTENDED ARRANGEMENT AND REQUEST FOR WAIVER FOR THE NONOBSERVANCE OF PERFORMANCE CRITERION, WAIVER OF APPLICABILITY OF PERFORMANCE CRITERIA, AND REPHASING OF FUTURE DISBURSEMENTS—STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR ALBANIA
In the context of the second and third reviews under the Extended Fund Facility and Request for Waiver for the Nonobservance of Performance Criterion, Waiver of Applicability of Performance Criteria, and Rephasing of Future Disbursements, the following documents have been released and are included in this package:
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on February 20, 2015, following discussions that ended on November 25, 2014, with the officials of Albania on economic developments and policies underpinning the IMF arrangement under the Extended Fund Facility. Based on information available at the time of these discussions, the staff report was completed on January 26, 2015.
A Staff Statement of February 20, 2015 updating information on recent developments.
A Press Release including a statement by the Chair of the Executive Board.
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*
*Also included in Staff Report
The publication policy for staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
SECOND AND THIRD REVIEWS UNDER THE EXTENDED ARRANGEMENT AND REQUEST FOR WAIVER FOR THE NONOBSERVANCE OF PERFORMANCE CRITERION, WAIVER OF APPLICABILITY OF PERFORMANCE CRITERIA, AND REPHASING OF FUTURE DISBURSEMENTS
January 26, 2015
Background: On February 28, 2014, the Executive Board approved a three-year Extended Arrangement with access equivalent to SDR 295.42 million (492.4 percent of quota). So far, two purchases equivalent to SDR 23.55 million (about €26.4 million) each have been made, and another totaling the equivalent of SDR 47.1 million will be made available upon completion of the second and third reviews.
Recent Economic Developments: Economic recovery is underway, but growth is below potential. High nonperforming loans (NPLs) make banks risk-averse. Credit growth remains sluggish despite monetary easing.
Program Performance and Risks: The program is on track. The second review was delayed because of the need to incorporate electricity reform in the program and to allow time for conditions surrounding the Bank of Albania (BoA) to normalize following the removal of BoA senior management. All end–June, end–September, and available end-December quantitative performance criteria were met. However, the continuous performance criterion on the accumulation of external arrears was not observed because of technical delay with one interest payment. An indicative target on new arrear accumulation was missed by a small margin. Inflation has been slightly below the inner band prescribed under the inflation consultation clause. Several structural benchmarks were not met; these are all expected to be completed in the first half of 2015. Program risks emanate from the complexity of energy reforms and the need for sustained political commitment. Staff proposes that the program move to three reviews a year, beginning with the fifth review, (rather than two as previously envisaged) to maintain a timely dialogue on prospective risks.
Policy Recommendations: Reversing the upward trend in public debt in 2015, while incorporating energy sector subsidies, will require significant fiscal consolidation. The authorities have embarked on ambitious energy sector reform to lower the fiscal burden, but challenges will persist for 4–5 years. Addressing the NPL problem is critical for reviving credit. Steadfast structural reforms are needed for sustained medium-term growth.
Masato Miyazaki and Aasim M. Husain
Discussions were held in Tirana on August 26–September 9, and November 17–25, 2014. Staff team: Mr. Ilahi (head), Mr. Gaertner, Mr. Ioannou, Mr. Slavov (all EUR), Ms. Gerling (FAD), and Ms. Unsal and Mr. Ismail (both SPR). Mr. Reinke (Resident Representative) and Ms. Spahia (local economist) assisted the mission. Mr. Senatore (OED) joined some of the meetings. The mission met with the Prime Minister, Ministers of Finance and Economy, Bank of Albania Governor, other senior officials and parliamentarians, and representatives of banks and the private sector. HQ support was provided by Dustin Smith and Patricia Mendoza (EUR).
CONTEXT AND DEVELOPMENTS
A. Outlook and Risks
B. Fiscal Consolidation: Reversing Unfavorable Debt Dynamics
C. High NPLs and Challenges for Monetary Policy and Financial Stability
D. Advancing Structural Reforms to Boost Growth Potential
PROGRAM MODALITIES AND RISKS
1. Fiscal Measures, 2015
1. Output and Growth Developments
2. Price Developments
3. External Developments
4. Financial Developments
1. Basic Indicators and Macroeconomic Framework, 2009–19
2a. General Government Operations, 2009–19 (Percent of GDP)
2b. General Government Operations, 2009–19 (Billions of leks)
3a. Balance of Payments, 2009–19 (Percent of GDP)
3b. Balance of Payments, 2009–19 (Millions of euros)
4a. Monetary Survey, 2009–15
4b. Summary of Accounts of the Central Bank, 2009–15
5. IMF Core Indicators of Financial Soundness, December 2007–September 2014
6a. Current Schedule of Reviews and Purchases
6b. Proposed Schedule of Reviews and Purchases
7. Indicators to Capacity to Repay to the Fund, 2012–19
I. Albania’s Energy Reform: Checkered History, but Promising Prospects
I. Letter of Intent
Attachment I. Memorandum of Economic and Financial Policies
Attachment II. Technical Memorandum of Understanding
Albania: Second and Third Reviews Under the Extended Arrangement and Request for Waiver for the Nonobservance of Performance Criterion, Waiver of Applicability of Performance Criteria, and Rephasing of Future Disbursements
Author:International Monetary Fund. European Dept.