Albania: Staff Report for the 2016 Article IV Consultation, Seventh Review Under the Extended Arrangement, and Request for Waiver of Applicability and Modification of Performance Criteria—Informational Annex

Over the past few years, Albania has successfully maintained macroeconomic stability amidst a turbulent external environment. However, growth remains sluggish due to a weak Euro Area recovery and risk-averse banks. The current account deficit is expected to remain elevated as import-intensive FDI picks up. Headline inflation will likely remain subdued, due to imported disinflation and domestic slack. The medium-term outlook remains favorable, provided the reform momentum is maintained.

Abstract

Over the past few years, Albania has successfully maintained macroeconomic stability amidst a turbulent external environment. However, growth remains sluggish due to a weak Euro Area recovery and risk-averse banks. The current account deficit is expected to remain elevated as import-intensive FDI picks up. Headline inflation will likely remain subdued, due to imported disinflation and domestic slack. The medium-term outlook remains favorable, provided the reform momentum is maintained.

Fund Relations

(As of March 31, 2016)

Membership Status: Joined October 15, 1991; Article VIII.

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Latest Financial Arrangements:

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Projected Payments to Fund:

(SDR Million; based on existing use of resources and present holdings of SDRs)

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Safeguards Assessments. A safeguards assessment update of the Bank of Albania (BoA) was completed in June 2014. It noted that while the bank had strengthened its external and internal audit and financial reporting functions, the absence of an effective Audit Committee to oversee these functions and exercise control posed risks. Such risks were further exacerbated following the dismissal of the Governor and the Inspector General in the fall of 2014 for dereliction of duty in the wake of a vault theft scandal. Since then, the BoA has taken measures to implement safeguards recommendations, including establishing an Audit Committee governed by a charter aligned with international best practice, as well as engaging an external expert to assist it. In addition, the internal audit function resumed operations with the appointment of a new Inspector General, and the 2015 financial statements were prepared in accordance with International Financial Reporting Standards (IFRS). The authorities are also taking preliminary steps to align the BoA Law with modern central banking legislation.

Exchange Rate Arrangement: On July 1, 1992 the Albanian authorities adopted a floating exchange rate system. The de jure exchange rate system is classified as free floating, but the de facto exchange rate arrangement is floating, with the monetary authorities occasionally intervening in the foreign exchange market in order to accumulate reserves and avoid excessive disruptions in the functioning of the market. On February 21, 2015, the authorities removed two exchange restrictions and accepted the obligations of Article VIII, Sections 2(a), 3, and 4. Albania maintains an unapproved exchange restriction in the form of outstanding debit balances on inoperative bilateral payment agreements. These were in place before Albania became a Fund member in 1991, and relate primarily to debt in nonconvertible and formerly nonconvertible currencies. The exchange rate stood at lek 126.59 per U.S. dollar on February 29, 2016.

Article IV Consultation: The 2014 Article IV consultation was concluded on February 28, 2014 (IMF Country Report No. 14/78).

FSAP Participation and ROSCs: The most recent FSAP was carried out in November 2013 (with a Board date of February 28, 2014). A data module ROSC was published on the Fund’s website in June 2000. A fiscal ROSC was completed in June 2003. Albania participates in the General Data Dissemination System (GDDS), and a complete set of GDDS metadata for the external, financial, fiscal, and real sectors, as well as for the socio-demographic indicators is posted on the Fund’s Dissemination Standards Bulletin Board (http://dsbb.imf.org). A data module ROSC reassessment using the Data Quality Assessment Framework was conducted in March 2006. A ROSC for assessing the Financial Action Task Force (FATF) recommendations for Anti-Money Laundering (AML) and Special Recommendations on Combating the Financing of Terrorism (CFT) was conducted in November 2010 and the report was published in July 2011.

Technical Assistance: The Fund, other multilateral organizations, and donors have provided extensive technical assistance for institutional development in Albania. The Fund has sent multiple technical assistance missions to Albania every year since 1991. The extent and focus of Fund TA since FY 2011 is briefly summarized below.

Table 1.

Albania—Technical Assistance Since FY2011

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Resident Representative: Mr. Jens Reinke has filled the position since July 2014.

World Bank Group Relations

1. The Republic of Albania has been a member of the World Bank Group (WBG) since 1991. Since then, the WBG has provided strong support to Albania, including 87 IDA, IBRD, and GEF projects in different sectors totaling US$2.06 billion; IFC investments totaling US$406 million; and MIGA guarantees totaling US$8.6 million. The quality of the active portfolio has continued to improve, with an increasing focus on long-term capacity development and implementation through government structures.

2. The National Strategy for Development and Integration (NSDI) for 2007-2013 outlined the Government’s economic and social development program. The strategic goals of the NSDI were: (i) integration into the European Union (EU); (ii) strengthening democratic institutions and the rule of law; and (iii) achieving rapid and sustainable economic and social development. The authorities have made progress towards their NSDI goals. First, Albania gained EU candidate status in 2014. Second, Albania maintained GDP growth throughout the global financial crisis, while poverty continued to decline. However, the business climate still faces important challenges: Albania’s overall ranking in the World Bank’s 2016 Doing Business Indicators declined to the 97th position.

3. The authorities are in the process of finalizing the National Strategy for Development and Integration (NSDI) for 2014–2020. The current draft, which is undergoing a consultative process, has three main pillars: (i) to prepare Albania to become a full member of the EU; (ii) to foster strong and sustained economic growth; and (iii) to transform growth into improved well-being for all citizens in a fair and cohesive society. These broad goals are to be advanced through measures in four key areas: (i) governance, democracy, and the rule of law; (ii) fiscal discipline and increased competitiveness; (iii) sustainable growth through efficient use of resources; and (iv) investing in people and social cohesion.

4. The current WBG Country Partnership Framework (CPF) for 2015–19 supports the Government’s National Strategy for Development and Integration by focusing on three main areas: (i) restoring macroeconomic balance; (ii) creating conditions for accelerated private sector growth; and (iii) strengthening public sector management and service delivery. The CPF activities under each of the three focus areas will be underpinned by two cross cutting themes: gender equity and the EU accession process as a long-term policy anchor. The CPF focuses on accelerating the implementation of the ongoing program while selectively introducing new IBRD lending in strategic areas, increasing IFC financing for the private sector to US$150–250 million, strengthening partnerships with other IFIs and donors, and expanding its knowledge program through regional and national activities. IBRD indicative financing up to US$1.2 billion is proposed in support of the FY2015–FY2019 CPF program, with significant frontloading.

5. The current portfolio of US$544 million includes nine projects. It is a young portfolio, with six projects approved in the past two years. Implementation is affected by chronic public sector weaknesses, including procurement issues. This has led to a slowdown in project implementation, with a very low disbursement ratio of 9 percent in FY2015 and about 7 percent during FY2016. There have been high-level portfolio reviews during FY2016; the last one took place at the end of February 2016 and was chaired by the Prime Minister. An acceleration in project implementation is anticipated given recent progress in completing procurement actions for large projects.

Albania: Bank-Fund Joint Management Action Plan Matrix

(As of March 2016)

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Statistical Issues

Albania—Statistical Issues Appendix

(As of February 29, 2016)

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Table 1.

Albania: Statement of Operations—General Government, 2011–21

(Billions of leks)

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

Albania: Table of Common Indicators Required for Surveillance

As of February 29, 2016

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Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should include short-term liabilities linked to a foreign currency but settled by other means, as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially determined, including discount rates, money market rates, and rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. It also includes the explicit guarantees granted by the central government.

Includes currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annual (A), Irregular (I), Not Available (NA).

Reflects the assessment provided in the data ROSC published on October 31, 2006, and based on the findings of the mission that took place March 8-22, 2006, for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 8, except referring to international standards concerning source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

1

Formerly PRGF.