OREANDA-NEWS. June 09, 2016. Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV Consultation with Albania.1

Albania continues on a path of a gradual economic recovery despite difficult external conditions. GDP grew by 2.6 percent in 2015. Inflation remains low, reflecting the negative output gap and weak import prices. Large current account imbalances are financed mostly by foreign direct investment (FDI), while official foreign reserves have been rising.

Reforms are progressing well. In the past two years, Albania has made good progress with strengthening public finances and implementing structural reforms in the power sector. A sizable fiscal consolidation is underway and public debt is projected to start decreasing in 2016. However, other reforms critical for improving the business environment—including those related to property rights, resolution of nonperforming loans, the judiciary, and governance—are lagging.

The medium-term outlook remains favorable. GDP growth is projected to reach 3.4 percent in 2016, and around 4 percent over the medium term, reflecting a recovery in private sector credit, continued FDI, and structural reforms, as Albania advances through the European Union accession process. Headline inflation is likely to remain subdued. The current account deficit is expected to widen and remain elevated as import-intensive investment picks up.

Executive Board Assessment2

Executive Directors welcomed the increased strength of Albania’s economic recovery and emphasized that the medium-term outlook remains favorable, provided the reform momentum is maintained. Directors commended the authorities for their strong program ownership and for the implementation of an ambitious structural and fiscal reform agenda. Going forward, Directors encouraged the authorities to address fiscal vulnerabilities, strengthen efforts to reduce non-performing loans (NPLs) which will boost private sector credit, and press ahead with reforms to improve the business environment to strengthen competitiveness and support growth.

Directors welcomed the authorities’ commitment to fiscal consolidation and gradual debt reduction. They underscored that continued fiscal adjustment will be crucial to lower fiscal vulnerabilities and ensure debt sustainability. Directors encouraged the authorities to consider adopting a fiscal rule to anchor long-term expectations and strengthen credibility.

Directors supported the authorities’ plans to focus fiscal adjustment efforts on the revenue side, given the relatively low level of public spending. They emphasized that the consolidation strategy should aim to broaden the tax base, limit exemptions, and strengthen compliance and revenue administration. Directors encouraged the authorities to expedite steps to introduce a valuation-based property tax. They welcomed the authorities’ efforts to address tax evasion and informality by targeting high-risk, high-value segments and harnessing modern compliance risk management tools.

Directors emphasized the need for persistence in implementing structural fiscal reforms to reduce fiscal risks. In this regard, they urged the authorities to strengthen efforts toward improving public investment management, preventing new arrears, and conducting risk analysis of public-private partnership proposals in line with international norms.

Directors shared the view that the current accommodative monetary policy stance under the inflation targeting framework remains appropriate. They encouraged the authorities to consider measures to reduce euroization in the banking system in order to enhance the monetary transmission mechanism. Greater exchange rate flexibility would support the monetary policy framework, but it is also important to pay attention to financial stability risks emanating from unhedged exposures.

Directors noted that the Albanian banking system remains well capitalized and liquid. They welcomed the progress made in reducing NPLs but underscored the need to speed up implementation of the comprehensive NPL strategy, which will help revive credit growth. In particular, Directors supported simplifying the legal framework for insolvency and facilitating out-of-court restructuring. They also encouraged the authorities to continue strengthening financial supervision and regulation, and to boost the non-bank financial regulator’s supervisory capacity.

Directors emphasized that further structural reforms to improve the business environment are critical for strengthening Albania’s competitiveness. They noted the importance of implementing judicial reform, strengthening property rights, improving infrastructure, and diversifying the export base. Directors commended the authorities for their continued progress on power sector reforms, and urged steadfast implementation of the reform agenda in the sector.