PRESS RELEASE
The IMF Reached Understandings with the Authorities on Second Review Under the Program

Tirana, November 6, 2006

An IMF mission visited Tirana October 24-November 6, 2006, to conduct discussions for the second review under the current PRGF/EFF arrangement. Overall, the program is on track and progress in the implementation of agreed structural reform has been satisfactory. Macroeconomic developments are in line with previous projections and the fiscal performance is solid. The authorities have taken important steps to maintain financial system stability. Continued structural reforms, however, remain essential to the success of the government's economic program supported by the IMF. On Monday November 6, 2006, at 15.00 a joint press conference with the Minister of Finance and the Bank of Albania Governor will be held at the Ministry of Finance.

The mission held discussions with the authorities for the second review under the IMF program. It met with the President, the Prime Minister, the Minister of Finance and several other key Ministers, the Governor of the Bank of Albania, members of parliament, leaders of opposition parties, and representatives of the international community, local businesses, academia, NGOs, and media.

Overall, the program is on track and progress on agreed structural reform has been satisfactory. The mission reached understandings with the authorities regarding program targets and structural reform measures for the coming year. The IMF's Executive Board discussion on the review is scheduled for January 2007.

Macroeconomic developments are in line with previous projections. Real GDP growth is expected to be at least 5 percent this year and to return to its trend rate of 6 percent next year supported by strong growth in services, public investment, and mineral exports. The external current account balance is projected to narrow in 2006 reflecting strong exports but widen somewhat next year reflecting increased imports of capital goods. Inflation has remained within the Bank of Albania 3�1 percent target range so far in 2006 as increasing pressures on nontradable prices have been mitigated in part by the increase in the policy rate in July.

The fiscal performance is solid. Revenues are in line with increased projections of the supplementary budget thanks to continuous improvements in tax and customs administration. Net domestic credit to government, the key fiscal target in the program, is projected to stay within the agreed program target in 2006. The 2007 budget is based on realistic revenue projections and contain adequate contingencies to protect priority spending. As in the past, receipts from strategic privatization will be allocated in equal shares to investment and debt reduction, with the part allocated to investment financing the Durrës-Kukës-Morinë corridor. Discussions are ongoing with the authorities on the limit on non-concessional external borrowing for 2007 and the necessary measures to further strengthen budget contingencies in the medium term. Looking ahead, the medium-term fiscal strategy remains unchanged, with a focus on enhanced revenue mobilization and expenditure efficiency, including through the introduction of mid-year budget reviews.

The authorities have taken important steps to maintain financial system stability. The Bank of Albania has formulated the regulatory and supervisory measures necessary to maintain the stability of the banking system in face of rapid credit growth, and initiated a discussion with commercial banks on this matter. The establishment of a new integrated Financial Supervisory Agency will help improve the supervision of nonbank financial institutions. Looking forward, the establishment of a credit bureau in 2007 will help reduce credit risk in the banking system.

Continued structural reforms remain essential to the success of the government's economic program supported by the IMF. Revenue administration reforms will focus on further strengthening the Large Taxpayers Office and reviewing the role of the Tax Police. Privatization of large enterprises is expected to accelerate in 2007, particularly regarding Albtelecom, INSIG, and the distribution arm of KESH. Notwithstanding encouraging progress in many areas, stronger efforts are needed to improve public debt management and official statistics.

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The mission would like to thank the authorities for their close cooperation and warm hospitality.

István P. Székely K. Ann-Margret Westin
Mission Chief Resident Representative