WASHINGTON, DC: International Monetary Fund (IMF) Executive Board Concludes Article IV Consultation[1]with Albania.

Albania was severely affected by the November 2019 earthquake and COVID-19 pandemic, but the economic contraction in 2020 has been weaker than initially expected. Real GDP is rebounding strongly, with a projection of 7.8% in 2021, stimulated by the continued support of monetary and fiscal policies, reconstruction, reduction of movement restrictions, high electricity production due to favorable weather conditions in during the first months and a relatively good tourist season. Headline inflation has increased on the back of higher food and energy prices, but core inflation has only risen modestly and broader inflationary pressures are under control. The budget deficit widened sharply to reach 6.8% of GDP in 2020 and is expected to remain at this level in 2021. Public debt increased to reach 77.2% of GDP at the end of 2020 and is expected to increase further in 2021. The financial system has remained stable, and cash and credit flows have continued to support the economy.

From 2022, economic activity is expected to remain strong as the impact of the pandemic abates and international tourism continues to recover, but growth will be tempered by the phasing out of budget support and reconstruction. and the maturing of the recovery cycle. In the medium term, growth should converge towards its potential of 3.4%, a level held back by unfavorable demographic factors. After temporary increases in inflation subside by mid-2022, inflation is expected to stabilize at the Bank of Albania’s 3% target over the medium term. Albanian public debt is expected to decline gradually, from a peak of around 81% of GDP in 2021 to 74% of GDP in 2026, absent further shocks. Uncertainty about the outlook remains high. The emergence of vaccine-resistant variants globally or localized epidemics in Albania along with potentially tighter global financial conditions and higher global energy prices pose significant downside risks to the outlook. Faster normalization from the pandemic poses an increasing risk.

Board assessment[2]

Directors praised the resilience of the Albanian economy following the 2019 earthquake and COVID-19 pandemic, backed by strong national policies and external support. They welcomed the strong rebound underway, while noting the uncertainty surrounding the outlook with downside risks, especially due to the pandemic trajectory, low vaccination rates and energy prices. Directors called for efforts to rebuild leeway, preserve financial stability and remove structural bottlenecks in order to unlock the country’s growth and development potential.

Directors stressed the need to embark on credible revenue-based fiscal consolidation, underpinned by a strong medium-term revenue strategy in line with IMF staff recommendations.. They stressed that low-efficiency spending should be reduced and that budget support should better target those who need it most. Directors further underscored the importance of enhancing the quality and transparency of public spending. It will be essential to close the gaps in the management of public investments, including public-private partnerships, and to strengthen the credibility of the budget and the fiscal framework. More concerted efforts are also needed to monitor and manage growing fiscal risks. Directors urged the authorities to quickly implement transparency and accountability measures for emergency spending and to subject reconstruction funds to adequate public financial management controls.

Directors supported maintaining monetary accommodation and stressed that any move towards tightening should be based on clear indications of widening 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 has yet to be fully observed, they called for continued vigilance in monitoring and supervision. Directors recommended close monitoring of the quality of banks’ loan portfolios, preservation of capital buffers, and strengthening of NPL resolution frameworks. Special attention to a potential build-up of vulnerabilities in the real estate sector and virtual assets is also needed.

Directors saw the need for constant efforts to remove structural barriers to growth. They called for the completion of judicial reforms and the continuation of efforts to strengthen Albania’s AML / CFT framework and to be removed from the FATF gray list. Directors commended the ongoing work to update the anti-corruption strategy and action plan.

Directors agreed that Albania’s ability to repay the Fund is adequate and that the risks remain contained and manageable.