PRESS RELEASE
IMF Mission Press Statement

An IMF mission has visited Tirana during May 4 - 17, 2005 to conduct discussions on the sixth and final review of the current program supported by the IMF's "Poverty-Reduction and Growth Facility" (PRGF). The mission has analyzed macroeconomic developments and discussed economic policies for the remainder of the program period and up until end-2005. We congratulate the authorities on the successful implementation of the three-year program thus far. As on previous occasions, the mission has benefited from the authorities' warm hospitality and very constructive discussions, for which we should like to express our sincere gratitude.

Macroeconomic developments and prospects. A sustained period of prudent fiscal and monetary policies has permitted the Bank of Albania to lower its interest rate by 350 basis points since early 2003 while maintaining low inflation and a comfortable level of foreign currency reserves. This reflects stronger economic fundamentals and increased confidence by market participants in the careful conduct of economic policies by the Albanian authorities. Partly as a result of lower borrowing costs, credit to the economy increased by almost 50 percent in the 12 months to March 2005, thereby supporting dynamic rates of non-inflationary growth and increasing the relative importance of the private sector as a generator of employment and income. Increased domestic production, particularly in agriculture and energy, has led to lower imports as a share of GDP, while export volumes continued to grow, thereby reducing the trade deficit expressed as a share of GDP. All of these factors combined still point to a growth rate of around 6 percent for 2005 as a whole.

Relationship with the IMF. The current program will expire in November 2005. The Albanian government (as well as the opposition) have viewed the cooperation as helpful and, as a result, have expressed interest in negotiating a successor arrangement with the IMF. We expect to begin - upon a request by the new government - formal negotiations on an agreement later on this year. It will aim at maintaining macroeconomic stability and accelerating structural reforms, especially those in the areas of fiscal administration and financial sector development.

Fiscal policy. Revenue performance, up until now, has remained consistent with budgetary projections in contrast to past years. For this, we commend the authorities. More broadly, fiscal policy is on track and within the limits defined by the 2005 budget. If budget discipline is continued throughout the year, it will deliver the first surplus on current operations since the beginning of transition. This implies that the government will borrow only to invest. Fiscal consolidation, together with the allocation of half the proceeds from large privatizations to redeem domestic debt, has resulted in the reduction of Albania's public debt burden to less than 56 percent of GDP at end-2004, as compared to 65 percent in 2002.

Structural reforms. To increase budget revenue as a share of GDP and improve the business environment for domestic and foreign investment, the modernization of fiscal institutions needs to continue and, in many areas, accelerate. Indeed, one the key challenges over the medium term is improving tax collection, including by widening the tax base, tightening administration in the tax and customs directorates, and formalizing economic activities. In this regard, we welcome the recent deployment of the ASYCUDA computer system at six customs houses and strongly support the scheduled introduction of the risk assessment module in the Tirana and Durrës customs houses by early-July as a means to increase effectiveness and reduce pubic officials' room for discretion. It remains clear that progress in increasing the level of foreign direct investment and in reducing the large informal economy can only be made with a modern system of tax administration. The mission has been encouraged by the progress made in paying public sector employees through the banking system. We are confident that reforms in these areas will continue during and after the electoral period.

Medium-term challenges. Despite improvements to the overall macroeconomic outlook, a self-sustained, export-driven expansion has not yet taken root and continues to be hindered by severe infrastructure deficiencies and institutional weaknesses. Against the background of a still large trade deficit and the likely decline over time of external transfers (including workers' remittances), the growth impulse needs to come from productivity increases in the private sector. Albania needs to attract the large-scale strategic direct investments required to further increase its market share in both domestic and foreign markets. Progress in this direction will require public investments on infrastructure, as well as tangible improvements in the integrity of public institutions and the overall business environment. In this regard, we would welcome a successful and early conclusion of the privatization of Albtelecom, which should lead to improved and more competitive supply of telecommunication services, and better governance. Other multilateral institutions, including the European Union, the World Bank, and the OSCE, actively support the Albanian authorities in strengthening the rule of law, registering and enforcing property rights, and reforming the court system and the judiciary�all of which are also essential to improve the business environment.

Policies in 2005. We are encouraged that, for the remainder of the year and until a successor program is in place, Albania remains committed to maintaining stability-oriented macroeconomic policies and ongoing structural reform initiatives. Specifically, this includes (i) fiscal policies in 2005 that are consistent with the current budget; (ii) structural reforms in fiscal administration, particularly in the tax and customs departments; and (iii) reforms to foster financial sector development and electricity sector modernization.

Again, we thank the authorities for their much appreciated hospitality and cooperation.

Julio Escolano Jan-Peter Olters
Mission Chief Resident Representative