The International Monetary Fund mission, Post-Program Monitoring has outlined necessary measures to assuage and revamp the economy of Albania and improve the standard of living, noting that the November 2019 earthquake and the COVID-19 pandemic have taken a big toll on the lives of Albanian people and the economy.
The fund disclosed the development following its first PPM discussions which was held virtually from September 17 to 28, 2020. PPM is a regular surveillance tool for countries with IMF credit outstanding above 200 percent of quota. PPM missions focus on vulnerabilities and risks to the repayment capacity to the IMF.
Led by Ms. Yan Sun, the group noted Albania’s capacity to repay the Fund is broadly adequate, but risks have risen in light of the shocks. “Aside from a more severe global pandemic, key risks stem from elevated public deficits and debt, weaknesses in public finances, and a relatively high level of non-performing loans (NPLs).
“Managing these risks amid large uncertainty will require continued support for the economy, gradually rebuilding room for policy maneuver as the recovery becomes entrenched, and close supervision of the financial sector”.
The group made the following recommendations:
- Support for people and firms hurt by the shocks is warranted, but should be temporary and well-targeted, subject to transparency and accountability. There is a need to make room for supporting essential activities and protecting the most vulnerable, including by containing non-priority spending and improving spending efficiency.
- As the effects of the shocks subside and to recreate room for fiscal policy maneuver, it will be critical to resume some modest fiscal consolidation from 2021 and build on it substantially over time, underpinned by a sound Medium-Term Revenue Strategy.
- The authorities should redouble their efforts to raise tax revenue by building a fairer, simpler, more efficient, and more transparent tax system that is growth conducive. Higher revenue is critical to sustain the higher spending needs of the people and the economy. At the same time, there is a need to contain and manage increasing fiscal risks and strengthen the management of public resources, notably of public investment, so as to obtain more value for money.
- Strong efforts are warranted to safeguard financial stability while supporting borrowers hit by the shocks.
- There is a need to prepare contingency measures in case of a more severe pandemic.
The PPM suggested that a sizeable increase of the 2020 fiscal deficit to cushion the impact of the shocks is warranted, stressing that support for the economy needs to continue in 2021 but with growth recovering, and that the budget should also strive to achieve a modest decline in the debt ratio.
It stated that fiscal support should be temporary and well-targeted, subject to transparency, accountability, and adequate public financial management (PFM) controls and stressed the need to complete, adopt, and start implementing a sound Medium-Term Revenue Strategy (MTRS) in 2021, following proper public consultation.
According to the group’s recommendations, there is an urgent need to strengthen public investment management and the quality of spending, cautioning that fiscal risks are increasing and need to be carefully monitored and managed.
It urged the authorities avoid creating new spending and VAT refunds arrears and stick to the plan to clear the existing stock. It pledged its support for the decision to restrict dividend distributions until end-2020 and recommend that it be retained until the full impact of the pandemic is known and banks’ capital position is assessed, under both the local regulations and IFRS-9 standards, to be sufficient to absorb the losses from the shocks.
While stating that the authorities should prepare for a likely surge in NPLs and continue to improve the resolution framework, the PPM said efforts should be stepped up to (i) swiftly and credibly operationalize and enforce the insolvency and resolution framework; (ii) implement the regulatory framework for out-of-court restructuring of loans; and (iii) make progress in bailiff reform. Improvements in the judicial process would also be important.