IMF Mission Press Statement

This IMF mission has visited Tirana during July 19-30, 2004 to review macroeconomic developments, the execution of the 2004 budget, and implementation of structural reforms. The mission also discussed monetary and financial sector policies and initiated discussions on the main parameters of the 2005 budget. As on previous occasions, the mission has benefited from the authorities' warm hospitality and very constructive discussions, for which we would like to express our gratitude.

Macroeconomic developments and prospects. With continuing prudent monetary and fiscal policies, economic growth remains strong and inflation low. After a weaker-than-expected first quarter, economic activity has accelerated and seems in line with the 6 percent real growth rate projected for 2004. Activity will be supported in 2004 by the good performance of the energy, agriculture and manufactured export sectors, and, on the demand side, by strong migrant remittances and the supplementary budget spending. The12-month rate of inflation is expected to remain on the lower part of the BoA's target range owing to an abundant supply of foodstuffs and to the appreciation of the lek. Following a significant improvement in 2003, the current account deficit is projected to decline further in 2004 owing to strong remittances.

Fiscal policy. The execution of the 2004 budget is on track to meet the program targets. The slow start of capital spending during the first half of the year is expected to be compensated by an increase in project implementation during the rest of 2004, including the supplementary budget projects. The mission has also initiated the discussions on the 2005 budget and fiscal package. In our view, the 2005 budget should continue reducing domestic borrowing and domestic debt. This is necessary to ensure the medium-term sustainability of the public finances as well as to channel an increasing share of domestic savings to finance private sector investment. To this end, it will be necessary to improve the mobilization of budget resources, including by widening the tax base and enhancing the efficiency of spending. As the tax yield improves and non-compliance is reduced, there might be room for reducing tax rates in the future. Nevertheless, the introduction of significant tax cuts at this stage would compromise budget revenue objectives and the financing of key poverty alleviation and growth-enhancing public spending.

The implementation of reforms to improve the efficiency of fiscal institutions appears to have gained some momentum. In particular, we welcome the recent deployment of the ASYCUDA computer system at customs and encourage the authorities to further expand the use of information technology so as to increase effectiveness and reduce the room for discretion of pubic officials.

Monetary policy. Developments in Albania's financial system are encouraging. Bank deposits continue increasing by 14 percent on an annualized basis and the use of cash has been declining, indicating a sustained increase in confidence in the lek and the financial system. Together with the lower external current account deficit, these developments underpin the lek's appreciation. With the increase in confidence and low inflationary pressures, it has been possible for the Bank of Albania to gradually reduce the central bank policy rate from 6.5 percent at the end of 2003 to 5.5 percent. The mission welcomes these developments and supports the policy stance of the BoA.

At the same time credit to the private sector has continued to increase rapidly at an annualized rate of 30 percent since the beginning of the year. Although the level is still low, this increase should support investment and growth. It also points to the dynamism of the banking sector in the wake of the sale of the Savings Bank, which is otherwise illustrated by the increasing availability of services to customers, such as teller machines. In this context, the mission encourages the authorities to accelerate the payment of government salaries through the banking system. In view of the prospects for further expansion in the financial system, the authorities are strengthening, banking supervision; they have also decided to participate, during 2005, in a Financial Sector Assessment Program, which should help to chart the course of future financial sector reforms.

The independence of the BoA has played a key role in the consolidation of the monetary and financial framework and of public confidence in the banking system. The mission trusts that the upcoming appointments of the BoA's Board and Governor reinforces this independence and continue the central bank's commitment to price stability and skilful management of liquidity.

Structural reforms. The IMF mission is encouraged by the willingness of the authorities to move ahead with structural reforms. The action plan in the electricity sector has been implemented satisfactorily so far and, as a result, there has been a significant improvement in the supply of electricity and, in the financial performance of KESH. In addition, KESH has been able to mobilize the support of the international community to finance its investment program so as to ensure steady electricity supply in the future. Similar reforms are now needed in the water supply sector. This would also help to prevent the re-emergence of inter-enterprise arrears, which tend to be triggered by the weak financial position of the water sector. The authorities are moving ahead with the privatization of public enterprises. Their decision to proceed with the privatization of Albtelekom and ARMO to a strategic international investor is a welcome step which needs now to be implemented during the coming months. In this context, the mission welcomes assurances that Albtelekom's monopoly on international communications will be abolished at end-2004 and that progress is being made in settling arrears with private operators. The mission encourages the authorities to strengthen internal procedures in contracting commercially financed projects, including the prior realization of strict feasibility studies and open public tenders.

Foreign direct investment into Albania is still low. Economic growth and, as a result, socio-economic development could be further accelerated by addressing key obstacles to private sector activities. The mission therefore supports the implementation of the authorities' Action Plan to remove barriers to investment. It notes, however, that efforts are still needed in a number of areas, especially with respect to (i) strict rules-based application of tax and customs laws; (ii) improvements in tax-credit reimbursement and tax appeals practices; (iii) a streamlining of license procedures; and (iv) the continuation of Albania's open trade regime. The mission noted that accelerated development in the agriculture and tourism sectors require undisputed land property titles. In this context, the mission has expressed its hope that the legal framework currently discussed and its subsequent implementation will occur with the largest possible degree of agreement across political aisles.

We wish the authorities all the best, courage, and determination for a successful implementation of their program and, again, thank them for their cooperation throughout this mission.

Julio Escolano Jan-Peter Olters
Mission Chief Resident Representative