IMF Ends 2023 Article IV Albania Consultation

Washington, DC:The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1with Albania and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.2

The Albanian economy has shown remarkable resilience in the face of consecutive shocks. Thanks to a strong rebound in tourism, growth in 2023 beat expectations at close to 5 percent, while the external position saw a notable improvement. A combination of fiscal consolidation, higher income, and lek appreciation brought the public debt ratio back to pre-pandemic levels. Monetary policy is rightly focused on reducing inflation, which has been gradually declining after peaking at around 8 percent, lower than in regional peers. The financial system appears broadly resilient, despite some global banking stresses and rising interest rates.

The favorable growth momentum continued this year. Real GDP grew by around 3¼ percent y/y in Q2 2023, following robust growth in the first quarter, supported by robust private consumption, services, and construction activity. Tourist arrivals and electricity production in the first ten months of 2023 are more than one-third above the levels recorded during the same period last year. 2023 fiscal revenues have already surpassed budgeted levels. Amid tight labor markets and rising domestic price pressures, the Bank of Albania recently resumed policy rate increases.

Against the backdrop of the EU accession process, the authorities are grappling with several mutually reinforcing impediments to productivity and higher living standards. These include widespread informality, weaknesses in governance and the rule of law, significant gender gaps in labor force participation, high youth inactivity, and infrastructure gaps. A high emigration rate of workers and population aging pose additional threats to growth.

Executive Board Assessment

In concluding the 2023 Article IV consultation with Albania, Executive Directors endorsed staff's appraisal, as follows:

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

Albania's economic prospects are expected to remain robust. Real GDP growth is projected at

3.6 percent in 2023 and 3.3 percent in 2024 led by resilient private consumption, with notable strength in tourism and construction activity. Inflation hovers around 4 percent amid tight labor markets and is expected to revert gradually to the 3 percent target by early 2025. Heightened geopolitical tensions represent a major potential headwind, even as the economy remains vulnerable to the risks of weather-related energy sector shocks, a sudden reversal of the exchange rate appreciation, and more persistent inflation.

A meaningful revenue-based fiscal consolidation starting in 2024 is critical to build fiscal space for future countercyclical policy. Additional frontloaded cumulative net fiscal measures of around 1½ percent of GDP would bring public debt on a clear downward path percent, and lower gross financing needs. Consolidation should be achieved through a sound revenue mobilization strategy, coupled with efficiency gains and reallocation of resources to infrastructure, education, and climate adaptation. The authorities should also continue to lengthen debt maturities and reduce the reliance on floating rate debt. Concrete advances on fiscal reforms that enhance governance and oversight of SOEs, including in the energy sector, and PPPs, are key to safeguarding fiscal sustainability.

Returning inflation to target will likely require some further increases in the policy rate. The BoA appropriately resumed monetary tightening in November 2023 as domestic inflationary pressures persist amid tight labor markets. A gradual increase of the policy rate to a broadly neutral stance—estimated at around 4½ percent—should help allow inflation return to target by early 2025. Uncertainty around the inflation path remains high and a flexible meeting-by- meeting approach to rate-setting is appropriate.

A flexible exchange rate should remain the first line of defense against external shocks. The external position of Albania in 2022 was moderately weaker than the level implied by fundamentals and desirable policies. A floating currency has served Albania well, but vigilance is needed given the potential of a sudden reversal, which could undermine financial stability. This calls for enhanced preemptive macroprudential policies, including differential LTV and DTI requirements for domestic and FX loans. Further de-euroization efforts, supported by government action to promote the use of local currency as the legal tender would raise the effectiveness of the inflation targeting regime.

The banking system overall appears more resilient, but some pockets of vulnerabilities exist. There is scope to strengthen the capital positions of some banks, in addition to prudent provisioning and focused asset quality reviews. Over the medium-term, a positive neutral countercyclical capital buffer rate could be considered to support financial stability. Further progress on aligning supervision and regulation with EU standards, operationalizing insolvency and resolution frameworks, strengthening governance and deepening capital markets would support durable credit growth.

Albania should seize the opportunities afforded by the growing momentum of EU enlargement to address long-standing structural challenges. Judicial reforms should be complemented by increased efficiency to address the backlog in cases. The authorities should build on their exit from FATF's list of countries under increased monitoring by ensuring sustained and robust commitment to AML/CFT reforms and best practices. Addressing gaps in youth and female labor force participation will help lift potential growth. Adequate budget resources and monitoring mechanisms are needed to ensure reform efforts translate into better outcomes.

It is proposed that the next Article IV consultation be held on the standard 12-month cycle.