WASHINGTON, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Albania.
Albania was severely affected by the November 2019 earthquake and the COVID-19 pandemic, but the economic contraction in 2020 was smaller than originally expected. Real GDP is rebounding strongly by a projected 7.8 percent in 2021, spurred by continued monetary and fiscal policy support, reconstruction, reduction in movement restrictions, strong electricity production due to favorable weather conditions in the first few months, and a relatively good tourism season. Headline inflation has risen on account of higher food and energy prices, but core inflation has increased only modestly, and broader inflationary pressures are subdued. The fiscal deficit widened sharply to 6.8 percent of GDP in 2020 and is expected to remain at that level in 2021. Public debt increased to 77.2 percent of GDP at end-2020 and is expected to increase further in 2021. The financial system has been stable and liquid and credit flows have continued to support the economy.
From 2022 onwards, economic activity is expected to remain strong as the impact of the pandemic wanes and international tourism continues to recover, but growth will be tempered by the phasing out of fiscal support and reconstruction and the maturing of the recovery cycle. In the medium-term, growth is projected to converge to its potential of 3.4 percent, a level held back by adverse demographic factors. After the temporary increases in inflation recede by mid-2022, inflation is expected to settle at the Bank of Albania’s 3 percent target in the medium run. Albania’s general government debt is projected to decline gradually from a peak of about 81 percent of GDP in 2021 to 74 percent of GDP in 2026, absent new shocks. Uncertainty over the outlook remains high. The emergence of vaccine-resistant variants at the global level or localized outbreaks in Albania as well as potentially tighter global financial conditions and higher global energy prices pose important downside risks to the outlook. A faster normalization from the pandemic presents an upside risk.
Executive Board Assessment[2]
Executive Directors commended the resilience of the Albanian economy after the 2019 earthquake and COVID-19 pandemic, underpinned by strong domestic policies and external support. They welcomed the strong rebound underway, while noting the uncertainty around the outlook with risks tilted to the downside, including from the pandemic trajectory, low vaccination rates, and energy prices. Directors called for efforts to rebuild policy buffers, safeguard financial stability, and address structural bottlenecks to unlock the country’s growth and development potential.
Directors emphasized the need to embark on a credible revenue-based fiscal consolidation, underpinned by a sound Medium-Term Revenue Strategy in line with staff recommendations. They stressed that low efficiency spending should be reduced and fiscal support should better target those most in need. Directors further stressed the importance of strengthening the quality and transparency of public spending. It will be critical to address shortcomings in managing public investment, including public-private partnerships, and bolster the credibility of the budget and fiscal framework. More concerted efforts are also needed to monitor and manage rising fiscal risks. Directors urged the authorities to implement promptly transparency and accountability measures for emergency spending and subject reconstruction funds to adequate public financial management controls.
Directors supported maintaining monetary accommodation and stressed that any shift towards tightening should be based on clear indications of broadening and persistent inflationary pressures. They welcomed the authorities’ commitment to let the exchange rate act as a shock absorber.
Directors noted that the financial sector remains stable and liquid. However, as the full impact of the shock on banks’ balance sheets is yet to be fully observed, they called for continued vigilance in monitoring and supervision. Directors recommended close monitoring of banks’ loan portfolio quality, preserving capital buffers, and strengthening the NPL resolution frameworks. Close attention to a potential buildup of vulnerabilities from the real estate sector and virtual assets is also needed.
Directors saw the need for steadfast efforts to address structural impediments to growth. They called for completion of judicial reforms and continued efforts to strengthen Albania’s AML/CFT framework and exit from FATF’s grey list. Directors welcomed the work underway to update the anticorruption strategy and action plan.
Directors agreed that Albania’s capacity to repay the Fund is adequate and risks remain contained and manageable.
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[1]Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.