Albania has successfully avoided a serious economic slowdown since
2009, but with euro zone problems persisting, the economy slowed
considerably in the first half of 2012. Credit growth fell sharply
between January and August, as consumer and investor confidence
weakened. Inflation has been low and relatively stable, largely within
the central bank’s 2-4 percent target range. The current account deficit
has begun to adjust on account of weakening imports but still remains
high. Heavy exposure of exports and remittances to Greece and Italy
carries near-term risks.
Fiscal imbalances are rising. At nearly 60 percent, the debt-GDP
ratio has reached the statutory ceiling and is among the highest in the
region. Tax revenues have been trending downward, partly due to cyclical
conditions, while most expenditure cuts have been focused on capital.
Rollover needs are high as more than half of public debt is short term.
The banking system has been resilient so far, with banks having high
liquidity and capital ratios. Strong macroprudential actions have
mitigated risks. However, nonperforming loans have risen sharply over
the last two years and now exceed one fifth of all outstanding loans—the
highest ratio in the region. Greek bank subsidiaries, which account for
one-fifth of bank assets, have made considerable progress in
re-aligning lending with their domestic deposit base and increasing
capital.
Progress in reforming the business climate—critical for attracting
investment and achieving sustained growth over the medium term—has been
limited. Albania has dropped 8 places on the World Bank’s Doing Business
Index to a rank of 85.
Executive Board Assessment...
Executive Directors commended the authorities for prudent policies
that have supported growth in the midst of the global financial crisis.
However, Directors noted that the economy is slowing, policy buffers
have been depleted, and macroeconomic imbalances persist. Against this
backdrop, they recommended actions on a variety of fronts to preserve
fiscal sustainability, safeguard financial soundness, and improve the
investment climate.
Directors underscored the importance of a sustained fiscal adjustment
that would reduce the debt-to-GDP ratio over the medium term without
unduly dampening growth. Budgetary consolidation should center on both
tax and expenditure reforms. Taking note of proposed legislation to
remove the statutory debt limit, Directors agreed on the need for a
renewed commitment to a credible ceiling for public indebtedness to
anchor the authorities’ fiscal plans. Improvements in debt management
are also a priority, given rollover risks. In this regard, Directors
encouraged the authorities to utilize prospective privatization receipts
mainly for debt reduction and clearance of unpaid bills.
Directors observed that inflation targeting in the context of a
flexible exchange rate regime has been effective in keeping inflation
low and stable. However, they noted that the scope for easing monetary
policy further is limited by weakness in the economy as well as the risk
of an adverse impact on unhedged positions in banks’ balance sheets.
Directors took note of the staff’s assessment that the real effective
exchange rate is modestly overvalued, and urged the authorities to
accelerate fiscal and structural reforms to foster competitiveness and
external adjustment.
Directors commended the authorities for policies that have
safeguarded the soundness of the financial system. At the same time,
they recognized that financial risks remained elevated, and called for
continued supervisory vigilance. In particular, Directors encouraged the
authorities to take action against rising nonperforming loans at banks,
including by clearing unpaid government bills and improving collateral
execution. Directors welcomed the authorities’ request for an update
in 2013 under the Financial Sector Assessment Program.
Directors stressed the need to accelerate structural reforms in many
areas to boost potential growth. Priorities include strengthening
property rights and contract enforcement which would enhance the
investment climate. Impediments in the energy sector also need to be
addressed to make the sector self-sustaining and lower fiscal risks. Directors highlighted the importance of further improving
Albania’s economic statistics, particularly as regards the national and
external accounts, to help policy design and evaluation.
