IMF Executive Board Concludes 2020 First Post-Program Monitoring with Albania

The Executive Board of the International Monetary Fund (IMF) concluded the First Post-Program Monitoring review [1] with Albania on November 23. Albania has benefited from the IMF emergency financial assistance (around US$190.5 million) disbursed under the Rapid Financing Instrument in April 2020, which allowed Albania to meet urgent balance of payments needs stemming from the aftermath of the November 2019 earthquake and the outbreak of the COVID-19 pandemic. Albania’s capacity to repay the Fund is adequate, but risks have risen in light of the shocks.

Albania continues to be severely affected by the aftermath of the earthquake and the pandemic. The authorities responded promptly to the shocks, and macroeconomic and financial stability have so far been maintained. The economy is expected to contract by 7½ percent in 2020 and rebound gradually in 2021-22 as the shocks subside and reconstruction spending picks up. Inflation is expected to remain subdued before converging to the 3 percent target over the medium term. The current account deficit is projected to widen to more than 10 percent of GDP in 2020, but international reserves are likely to increase slightly, remaining at a comfortable level.

The outlook is subject to major uncertainty with risks to the downside. Downside risks are increasing as new infections have been rising considerably in Albania and many other European countries in the fall. A more severe pandemic would further dampen Albania’s economic outlook, through weaker tourism, remittances, external demand, and FDI, as well as tighter financial conditions. Large depreciation pressures could entail balance sheet risks given unhedged foreign currency loans, although the sizeable reserve coverage would be a mitigating factor. Albania’s elevated public debt, large rollover needs, growing fiscal risks, and a relatively high level of non-performing loans (NPLs) also present challenges.

Executive Board Assessment [2]

Executive Directors commended the Albanian authorities for maintaining macroeconomic and financial stability thus far, and welcomed their responses to support lives and livelihoods in response to the November 2019 earthquake and the COVID-19 pandemic. Albania’s capacity to repay the Fund is adequate, with a sizeable reserve cover and flexible exchange rate as important shock absorbers. However, risks have risen stemming from the pandemic, elevated fiscal deficits and public debt, weaknesses in management of public finances, and a relatively high level of non-performing loans (NPLs) and euroization. Moreover, considerable uncertainty and downside risks surround the projected recovery for 2021-22. In this context, Directors emphasized the importance of contingency planning and recommended that the authorities stand ready to take further measures to preserve macroeconomic and financial stability.

Directors stressed that support for the economy needs to continue in 2021, but should be temporary and targeted, subject to transparency and accountability. They urged the authorities to regularize as soon as possible extraordinary measures in public financial management (PFM) taken during the emergency and to subject reconstruction funds to adequate PFM controls. Directors recommended that the cyclical boost to revenues be used to achieve a larger deficit reduction in 2021 than is consistent with the budget and to build a buffer for contingencies. Directors welcomed recent amendment to the fiscal rules.

Addressing structural weaknesses in public finances can better support investment in human and physical capital. A sound medium-term revenue strategy should be adopted and implemented without further delay. Frequent, ad hoc changes to tax policy and tax amnesty schemes should be avoided. Directors also stressed the need to strengthen PFM, and manage increasing fiscal risks, including from public-private partnerships and recent government guarantees. They underlined the need to prevent new arrears and continued efforts to strengthen the AML/CFT framework.

Directors underscored the need to safeguard financial stability while supporting borrowers hit by the shocks. They recommended that supervisors closely monitor and carefully manage risks, including by guiding banks’ restructuring of credit portfolios. Directors supported retaining restrictions on dividend distributions to safeguard banks’ capital positions. They encouraged the authorities to further improve the NPL resolution framework and align the regulatory framework with international standards.