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

This paper discusses Albania’s Second and Third Reviews Under the Extended Arrangement and Request for Waiver for the Nonobservance of Performance Criterion, Waiver of Applicability of PCs, and Rephasing of Future Disbursements. The program is on track. All end-June, end-September, and available end-December quantitative PCs were met. However, the continuous PC on the accumulation of external arrears was not observed because of technical delay with one interest payment. The IMF staff supports the authorities’ request for the completion of the second and third reviews under the Extended Arrangement, waiver of applicability of PCs, and rephasing of future disbursements.

Abstract

This paper discusses Albania’s Second and Third Reviews Under the Extended Arrangement and Request for Waiver for the Nonobservance of Performance Criterion, Waiver of Applicability of PCs, and Rephasing of Future Disbursements. The program is on track. All end-June, end-September, and available end-December quantitative PCs were met. However, the continuous PC on the accumulation of external arrears was not observed because of technical delay with one interest payment. The IMF staff supports the authorities’ request for the completion of the second and third reviews under the Extended Arrangement, waiver of applicability of PCs, and rephasing of future disbursements.

Context and Developments

1. The economy is recovering. After a protracted slowdown, the economy is on track for a modest growth pickup. Macroeconomic imbalances are being tackled, but could take time to unwind. The opposition’s four-month boycott of parliament ended in late December, but efforts to appoint a new BoA governor have not yet succeeded. In June, Albania became an EU candidate; accession negotiations will start at a later date. The EU integration process could catalyze structural reforms and investment in the medium term.

2. Economic recovery appears broad based (Figure 1 and MEFP ¶2). Real GDP is expected to have grown by 2 percent (yoy) in 2014. Though growth remains below potential, confidence is improving, with indications of a modest recovery in construction. Unemployment is stubbornly high, at 17 percent (2014:Q3), but employment has increased in the past year.

Figure 1.
Figure 1.

Albania: Output and Growth Developments

Citation: IMF Staff Country Reports 2015, 048; 10.5089/9781498337212.002.A001

3. Inflation remained weak in 2014 despite monetary easing (Figure 2 and MEFP ¶4). Average inflation declined to 1.6 percent in 2014, largely due to a strong harvest and low imported inflation. Core inflation has been rising since 2013:Q2 but remains low and stable. The BoA decreased its policy rate by 25 basis points in May and November to a historic low of 2.25 percent. Lek lending rates and T-bill yields have been declining steadily, considerably easing budget financing costs.

Figure 2.
Figure 2.

Albania: Price Developments

Citation: IMF Staff Country Reports 2015, 048; 10.5089/9781498337212.002.A001

4. The external current account worsened in 2014 (Figure 3 and MEFP ¶3). While a boost in external demand has helped textile and agricultural exports, the trade deficit has widened because of a pickup in imports with the economic recovery and weather-related demand for imported electricity. A continued decline in remittances primarily from EU also contributed to the current account deterioration. The current account deficit was largely financed by FDI inflows. Reserve cover eased slightly, but the exchange rate remained stable.

Figure 3.
Figure 3.

Albania: External Developments

Citation: IMF Staff Country Reports 2015, 048; 10.5089/9781498337212.002.A001

5. Credit to the private sector is recovering, but asset quality remains weak (Figure 4). Credit is estimated to have grown modestly in 2014, supported by ample liquidity and monetary easing. NPLs are high, though the pace of deterioration eased in 2014. This has helped with bank profitability. NPLs net of provisions have fallen under 8 percent of total loans, helping mitigate financial stability risks. System-wide capitalization and liquidity exceed regulatory minima.

Figure 4.
Figure 4.

Albania: Financial Developments

Citation: IMF Staff Country Reports 2015, 048; 10.5089/9781498337212.002.A001

6. The BoA has been conducting monetary and financial policies in a normal fashion under the Acting Governor. The previous governor and the internal auditor were removed from office in September on charges of dereliction of duty relating to a vault theft in which a mid-level employee is alleged to have stolen, over a 4-year period, the lek equivalent of $6.5 million (about one thousandth of broad money and 0.05 percent of 2014 GDP). Criminal proceedings are currently in process. Discussions for the second review were subsequently delayed, but resumed once the authorities and parliamentary representatives publicly reaffirmed that the process of making high level appointments at the BoA and its oversight is consistent with its independence. The authorities also agreed to include the following as conditionality: discontinue the practice of advanced transfers of BoA profits; escalate the IT on BoA credit to government to a PC; hire an external advisor for the BoA Audit Committee; and commit to reforming the BoA law over the next year with a view to strengthening its governance and oversight. While governance gaps at the BoA remain, with the governor, one deputy governor and the internal auditor positions still lying vacant, there has been progress recently—four positions on the BoA supervisory board have been filled, and the President’s candidate for governor has received wide support.

Program Performance

7. The program is broadly on track (MEFP Tables 12).

  • Quantitative targets (MEFP ¶7–9, and Table 1). All end–June, end–September, and available end-December performance criteria (PCs) were met. The authorities are seeking a waiver of applicability for the end-December PCs on the general government overall cash deficit and expenditure, for which data are not available; staff have no evidence that these PCs will not be met. The continuous PC on accumulation of external arrears was missed in April (see below). All end–June, end–September, and end-December indicative targets (ITs) have been met, with the exception of the IT on domestic arrears accumulation which was missed by a small margin (0.03 percent of GDP).

  • Structural benchmarks (MEFP ¶10–11, and Table 2a). The Council of Ministers approved a pension reform strategy in July, six months ahead of schedule. The structural benchmark (SB) on the development of a capacity building strategy for the tax authority is delayed to allow for the completion of a new IT system (in line with IMF technical advice). Difficulties with procurement procedures have delayed the purchase of a new IT server for the treasury system. Funding constraints have delayed the hiring of an external auditor to conduct verification of arrears payments on tax refunds to early 2015, while legal changes to enforce the introduction of multi-year commitment limits have been delayed to 2015 to incorporate other changes under the PFM reform strategy. Finally, changes to the regulatory framework for investment funds on asset valuation and liquidity requirement have been delayed until June 2015 to incorporate further technical assistance. All other SBs were met with delay (see below).

Table 1.

Albania: Basic Indicators and Macroeconomic Framework, 2009–19

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Sources: Albanian authorities; and IMF staff estimates and projections.

In July 2014, INSTAT revised real GDP numbers for 2008–2012 and quarterly GVA numbers for 2013. The revisions reflect improvements in data sources and compilation methods, and closer alignment with ESA2010/SNA2008 standards. The revisions were conducted under the guidance of IMF statistical TA.

Table 2a.

Albania: General Government Operations, 2009–19

(Percent of GDP)

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Sources: Albanian authorities; and IMF staff estimates and projections.

It includes the property tax, the simplified profit tax for small businesses, and other local taxes.

Spending contingencies are reported according to their economic classification at outurn.

As reflected in official data and not accounting for arrears accumulated outside of the budget prior to 2014.

Following the approval of the program, Fund purchases are reported under foreign financing. Similarly, funding by the World Bank for 2014 has been been secured and is reported in foreign financing.

Table 2b.

Albania: General Government Operations, 2009–19

(Billions of leks)

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Sources: Albanian authorities; and IMF staff estimates and projections.

It includes the property tax, the simplified profit tax for small businesses, and other local taxes.

Spending contingencies are reported according to their economic classification at outurn.

As reflected in official data and not accounting for arrears accumulated outside of the budget prior to 2014.

Following the approval of the program, Fund purchases are reported under foreign financing. Similarly, funding by the World Bank for 2014 has been secured and is reported in foreign financing.

Table 3a.

Albania: Balance of Payments, 2009–19

(Percent of GDP)

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Sources: Ministry of Finance; Bank of Albania; donors; and IMF staff estimates and projections.

Historical data 2009–13 reflect old BPM5 estimates which include insourcing services as goods. 2014 onwards reflect BPM6 based data and projections.

Includes unidentified flows of private transfers, which are projected to decline gradually over the medium term with the decline in remittances as a share of GDP.

Net of valuation changes in 2009–13. In projections for 2014–19, valuation effects are assumed to be zero.

Following the approval of the program, Fund purchases are reported under available financing. Similarly, funding by the World Bank for 2014 -15 has been secured and is reported in available financing.

Table 3b.

Albania: Balance of Payments, 2009–19

(Millions of euros)

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Sources: Ministry of Finance; Bank of Albania; donors; and IMF staff estimates and projections.

Historical data 2009–13 reflect old BPM5 estimates which include insourcing services as goods. 2014 onwards reflect BPM6 based data and projections.

Includes unidentified flows of private transfers, which are projected to decline gradually over the medium term with the decline in remittances as a share of GDP.

Net of valuation changes in 2009–13. In projections for 2014–19, valuation effects are assumed to be zero.

Following the approval of the program, Fund purchases are reported under available financing. Similarly, funding by the World Bank for 2014–15 has been secured and is reported in available financing.

Public and publicly guaranteed debt only.

Public and private external debt, including arrears. Debt stock converted into Lek at the e-o-p exchange rate.

Fund Staff estimates and projections.