20240111-IMF-Albania_2023_Article_IV_Consultation-Press_Release_and_Staff_Report_82页_1mb

Summary of the 2023 Article IV Consultation with Albania

Core Content

The 2023 Article IV Consultation with Albania, conducted by the IMF, highlighted the country's resilience in the face of multiple shocks, including the 2019 earthquake, the 2020 pandemic, and the 2022 Russia-Ukraine war. The economy rebounded strongly, with real GDP growth reaching 4.8 percent in 2022 and 3.6 percent in 2023. Inflation, which peaked at around 8 percent in 2022, declined to 3.8 percent in 2023 and is expected to return to the target of 3 percent by early 2025. The public debt ratio has returned to pre-pandemic levels, thanks to fiscal consolidation, higher incomes, and lek appreciation.

Main Views and Key Information

Economic Resilience and Growth

• Growth Momentum: The economy has shown strong resilience, with real GDP growth of 3.2 percent in Q2 2023, driven by robust private consumption, services, and construction activity.
• Tourism Recovery: Tourism has been a key growth driver, with tourist arrivals and electricity production in the first ten months of 2023 exceeding those of the previous year by over one-third.
• Fiscal Improvements: Fiscal revenues in 2023 surpassed budgeted levels, with the general government fiscal balance improving to -2.2 percent of GDP in 2023.
• Current Account: The current account deficit narrowed to 6 percent of GDP in 2022, and is projected to continue declining in 2024.

Inflation and Monetary Policy

• Inflation Trends: Inflation remains above the BoA's target of 3 percent, though it is gradually declining. Headline inflation is expected to reach the target by early 2025.
• Monetary Policy: The Bank of Albania (BoA) has resumed policy rate increases, raising the rate to 3.25 percent in November 2023. A gradual increase to a neutral stance of around 4.5 percent is recommended to bring inflation down to target.
• Euroization and Spillovers: High euroization means that monetary policy spillovers from the ECB may have contributed to tighter financial conditions, increasing inflationary pressures.

Financial Sector and Exchange Rate

• Exchange Rate: The lek has appreciated significantly since 2022, which may not be fully justified by economic fundamentals and poses a risk of sudden reversal.
• Exchange Rate Policy: A flexible exchange rate is recommended as the primary shock absorber, with interventions limited to disorderly market conditions.
• Financial Stability: The financial system is broadly resilient, but vulnerabilities exist, particularly in the real estate and FX lending sectors. Enhanced macroprudential policies and de-euroization efforts are suggested to improve stability.

Structural Challenges and Reforms

• Productivity and Living Standards: Structural issues such as informality, weak governance, gender gaps in labor force participation, and youth inactivity hinder productivity and growth.
• Fiscal Reforms: A credible revenue-based fiscal consolidation is needed to build fiscal space and reduce reliance on floating rate debt. Reforms should focus on efficiency gains, resource reallocation, and strengthening oversight of SOEs and PPPs.
• Structural Reforms: Priority areas include improving the rule of law, reducing corruption, enhancing female labor participation, and addressing infrastructure gaps.

EU Accession and Future Outlook

• EU Accession: The EU accession process presents an opportunity to address structural challenges and improve economic performance.
• Fiscal and Monetary Path: The 2024 budget is expected to achieve a small primary surplus, supported by higher tax revenues and controlled expenditures.
• Long-Term Growth: The economy is projected to converge towards its long-term potential growth of 3.5 percent, with continued support from tourism and FDI.

Key Recommendations

• Fiscal Policy: Implement a credible revenue-based consolidation starting in 2024, focusing on tax reforms, efficiency gains, and resource reallocation to infrastructure, education, and climate adaptation.
• Monetary Policy: Continue gradual rate hikes to a neutral stance of around 4.5 percent to bring inflation back to target by early 2025. Maintain a flexible and data-driven approach.
• Financial Sector: Strengthen supervision and prudential tools to address vulnerabilities in the real estate and FX lending sectors. Enhance macroprudential policies and de-euroization efforts.
• Structural Reforms: Address informality, governance, rule of law, and labor market issues. Increase female labor participation and reduce youth inactivity.
• Exchange Rate: Allow the lek to float and avoid intervention unless market conditions are disorderly. Enhance macroprudential measures to mitigate risks from exchange rate fluctuations.

Risks and Outlook

• Downside Risks: Geopolitical tensions, energy sector shocks, sudden exchange rate depreciation, and persistent inflation could undermine growth and stability.
• Upside Risks: Strong performance in tourism, construction, and the energy sector could boost growth.
• Monitoring: Continued monitoring of fiscal and financial stability, along with effective implementation of reforms, is crucial to sustain progress.

Next Steps

• The next Article IV consultation is expected to follow the standard 12-month cycle.
• The authorities are encouraged to maintain a consistent approach to reforms and fiscal consolidation.
• Enhanced coordination with the EU and continued efforts to address structural challenges are essential for long-term economic stability and growth.