PRESS RELEASE
IMF Mission: Press Statement, April 27, 2004

We should like to take this opportunity to express our sincere gratitude for the authorities' constructive cooperation and warm hospitality throughout our stay in Albania.

The Macroeconomic Framework.

Economic growth remains dynamic, inflation low, and the lek strong. On the basis of available information, and supported by the policy measures agreed upon during this review of the program, we expect the commendable good performance of the economy to continue in 2004 and over the medium term. In 2004, we forecast output growth of about 6 percent, and inflation below the 4 percent ceiling of the Bank of Albania (BoA). Foreign exchange reserves are projected at comfortably high levels, covering more than 4 months of imports. Concomitantly, private investment and exports show signs of increasing as a share of GDP. Thus, we expect that the improvement in the current account deficit achieved in 2003 will be maintained in 2004, partly sustained by export growth.

Monetary Policy.

The BoA has managed liquidity skillfully. Underlying inflationary pressures remain muted and confidence in the lek has strengthened. In particular, the monetary policy easing of late-2003 was appropriate. There may still be room for further easing, but the BoA should consider carefully international conditions and the projected increase in public spending. The recent privatization of the Savings Bank will result in an increased dynamism of the banking sector that, while welcome, will pose new challenges. In this context, the current emphasis on improving financial prudential regulations and supervision is well placed. Recent reforms of the interbank payment system have significantly upgraded the efficiency of market infrastructure and should be continued. Under the lead of the Ministry of Finance and the BoA, the authorities have adopted a strategy to reduce the use of cash in the economy and deepen financial intermediation. This will enhance economic efficiency and private sector growth. But just as importantly, it will reduce the informal economy, opportunities for tax evasion, and corruption. As a crucial step in this strategy, the authorities plan to pay public sector wages through the banking system initially as a pilot that will subsequently be extended to all public employees.

Fiscal Policy.

The Government of Albania has continued the gradual consolidation of the public finances necessary to counter the decline in external concessional assistance over time. The overall fiscal deficit, at 4.4 percent of GDP in 2003, is now about 5 percentage points lower than it was in 1999. Setting the public finances on a solid footing is essential to protect priority spending in poverty-alleviating programs, infrastructure, health, and education. It is also crucial in order to preserve confidence and macroeconomic stability. In this regard, we welcome the revenue-enhancing measures and expenditure adjustment that the authorities intent to adopt in order to meet the 2004 budget objectives. We also support the decision to devote half of the privatization proceeds of the Savings Bank to priority investment with large socio-economic impact within the framework of the NSSED.

Structural Reforms.

Domestic revenue mobilization remains a critical policy challenge and will require significant improvements in the customs and tax administrations. We note that customs are undertaking all the necessary steps to ensure that the ASYCUDA computer administration system, after its installation in Tirana, will also be fully operational in the port of Durrës by mid-June a precondition for the discussion of Albania's economic program at the IMF's Board. We also found encouraging the progress by the tax administration in extending taxpayer identification numbers to all large businesses and by plans to accelerate the payment of VAT refunds to exporters. The application of the civil service law to the tax department will contribute to de-politicize decision-making and increase professionalism.

With an expected decline in foreign aid, the mission appreciates the steps taken by the Government to improve the management of non-concessional foreign-financed investment projects and their integration in the corresponding sectoral strategies outlined in the NSSED and the medium-term expenditure framework. The authorities are committed to subjecting all large-scale projects to international tender and undertaking them only if independent feasibility studies by international standards are prepared. This will lead to an increase in transparency and overall quality of public investments.

These initiatives complement Albania's overall reform program underlying its ambition both to advance negotiations with the European Union on a Stability and Association Agreement and to realize the policy objectives spelt out in the NSSED. We acknowledge that this is a difficult challenge that requires from all sides concerned courage and determination. Along this path, reforms aimed at improving governance, strengthening institutions, and formalizing economic activities remain critical elements for developing a fair, equitable, and rules-based business climate conducive to higher rates of private-sector investment. We wish the authorities well in their endeavor to create a modern and competitive economy that raises the standard of living of all Albanians.

Thank you very much!

Julio Escolano Jan-Peter Olters
Mission Chief Resident Representative