The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF's Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC. An International Monetary Fund (IMF) mission, led by Anke Weber, and comprising David Bartolini, Fazurin Jamaludin, Jakree Koosakul and Hasan Toprak, conducted discussions for the 2024 Article IV Consultation with Albania during November 13-21. At the end of the visit, the mission issued the following statement:
- The Albanian economy has turned in a strong performance in recent years, underpinned by prudent macroeconomic policies. Output is now well above its pre-pandemic trend, thanks to booming tourism. Prudent fiscal policies contributed to a remarkable reduction in public debt while proactive monetary policy, falling global commodity prices, and a steady appreciation of the lek have facilitated disinflation. Growth prospects are expected to remain robust and risks to the outlook are balanced.
- Notwithstanding the upbeat macroeconomic picture, considerable structural challenges remain. GDP per capita stands at just around a quarter of the U.S. and EU-15 levels, amid rapid aging and emigration. Despite significant progress in rule of law reforms, governance shortfalls and institutional weaknesses represent headwinds to the business environment.
- Raising sustainable and inclusive growth will require overcoming structural shortcomings while safeguarding hard-won macroeconomic gains. Ambitious revenue reforms and strengthened debt management are crucial to preserving fiscal sustainability and meeting long-term spending pressures. A data-dependent approach to monetary policy remains key to price stability, complemented by a flexible exchange rate as a shock absorber. Maintaining financial stability will require further strengthening of supervision and regulation of banks and nonbanks, and further financial market deepening. Removing barriers to firm growth, transitioning to higher value-added production, and sustained governance reforms will be critical to maximizing the rewards of EU accession.
Performance and Outlook
The Albanian economy is on track to be one of Europe's fastest-growing economies in 2024. Following an expansion of 3.9 percent in 2023, IMF staff projects real GDP growth of 3.6 percent this year, driven by domestic consumption, tourism, and construction activity. Growth in 2025–2029 is expected to remain robust, at around 3½ percent, sustained by domestic demand and tourism, given the sector's price competitiveness and improved capacity. End-of-year inflation in 2024 is expected at around 2 percent, below the Bank of Albania's (BoA) 3 percent target. Although base effects from a significant month-on-month drop in early 2024 will temporarily push up inflation in the first half of 2025, a sustained return to target is not expected before 2026, given the high degree of inertia in the inflation process in Albania. The current account deficit is projected to reach 3.4 percent in 2024 and forecast to modestly widen over the medium-term due to higher imports fueled by large public investment projects.
Risks to the outlook are broadly balanced. Heightened geopolitical tensions and a global growth slowdown could dampen domestic growth, while renewed commodity price spikes or weather-related shocks could increase electricity prices and reignite inflation. Weaker demand for tourism following such global shocks could result in exchange rate depreciation and a real estate sector downturn, negatively affecting the financial and public sectors, given the still sizeable share of FX-denominated debt. On the upside, tourism activity could continue to outperform expectations. Broad-based structural reforms, in the context of the EU accession process—not yet part of the IMF staff baseline—would also significantly lift growth.
Shoring Up Fiscal Revenues, Credibility, and Transparency to Secure Inclusive Growth
The authorities are expected to outperform the 2024 budget target and are aiming for a looser fiscal stance in 2025. With revenues on track thanks to the favorable conjuncture and capital spending execution lagging, the primary surplus is expected at around 0.5 percent of GDP in 2024, marginally higher than the 0.3 percent of GDP budget target. The 2025 budget aims for a zero primary balance. The IMF projects limited fiscal consolidation thereafter with the primary balance expected to hover near zero in 2026-2029, as the authorities continue to uphold fiscal rules. The public debt ratio, expected at around 56 percent at end-2024, is projected to decline to around 50 percent in 2029 and is assessed to be sustainable over the medium-term.
A stronger fiscal effort than currently projected would reduce gross financing needs and enhance resilience to fiscal risks. To this end, IMF staff recommends a modest primary surplus of around ¼ percent of GDP in 2025-29—resulting in a broadly neutral fiscal stance from 2026 onwards. This would require additional net fiscal measures of around 1 percent of GDP, comprising revenue administration and tax policy reforms and efforts to generate greater spending efficiency, including through further digitalization. Moreover, improvements in the public investment management framework will facilitate growth-enhancing spending on education, infrastructure, healthcare, and climate action. These policies will need to be accompanied by continued strengthening of public debt management to lengthen maturities.
A credible medium-term strategy is necessary for sustained revenue increases. The authorities are close to adopting their Medium-Term Revenue Strategy (MTRS). Realizing envisaged revenue increases (2½ percent of GDP) will require forceful implementation of administration measures and further tax policy reforms. A strengthened IT infrastructure, improved data utilization, and enhanced staffing and capacity would help close compliance gaps, including in tourism, construction and among high net-worth individuals. Rationalizing the tax structure and reducing exemptions, especially for VAT, would increase efficiency and expand the tax base. Efforts to streamline the tax regime for self-employed professionals should resume, coupled with a faster-than-planned removal of the zero-tax rate on small businesses. The groundwork for the introduction of a new property tax law, including the establishment of a fiscal cadaster and property valuation procedures, needs to be completed in a timely manner.
Rising long-term spending pressures will require even more ambitious reforms. IMF staff estimates an increase in public spending of around 10 percentage points of GDP in the next 25 years, mainly stemming from pension, healthcare, and climate adaptation. Labor market and pension reforms—including strengthening workers' coverage and participation in the pension system—will be needed to help mitigate those spending pressures. Ad hoc increases in pension bonuses should be approached with caution, given the risk of them becoming permanent. Support for vulnerable households is better channeled through well targeted social assistance schemes. More ambitious long-term revenue reforms—for instance, reducing the disparity in tax treatment of certain sectors of the economy, such as agriculture—could help Albania reach its full tax revenue potential.
Risks from contingent liabilities warrant a proactive response. Long-standing reciprocal arrears and liabilities among the largest SOEs remain. Public-private partnership (PPP) assets are highly concentrated, particularly in the energy sector. Significantly strengthening central oversight and governance of SOEs and PPPs, and integrating PPPs into regular budgetary processes are critical in improving fiscal risk management. The regular publication of a robust standalone fiscal risk statement will bolster monitoring and management of SOEs and PPPs. Gradual adjustment of electricity tariffs to fully reflect costs will also help contain fiscal risks. Boosting the Ministry of Finance's capacity to assess the risks and trade-offs of SOEs' and municipalities' borrowing, and a well-functioning capital market infrastructure, are prerequisites for their successful bond issuances over the medium-term.
Using Monetary Policy Tools Judiciously to Safeguard Price Stability
Uncertainty around the outlook calls for a continued data-dependent approach to monetary policy. With inflation below target, the 25 basis-point cut by the BoA in November was appropriate. Absent significant inflationary shocks, there may be scope for a further modest reduction in the policy rate in 2025 to reduce the risk of de-anchoring inflation expectations. This would also lessen exchange rate appreciation pressures, thereby supporting the BoA in achieving its primary objective of price stability given exchange rate pass-through to inflation.
The flexible exchange rate has served Albania well and should remain the main shock absorber. IMF staff analysis suggests that the sustained lek appreciation has been largely driven by fundamentals, such as tourism and productivity. Accordingly, consideration should be given to allowing the exchange rate to adjust more flexibly and maintaining the policy rate as the primary tool of monetary policy. Foreign exchange (FX) interventions could be warranted when currency appreciation is amplified by non-fundamental factors but should be limited in scale. Such interventions should take into consideration the costs and benefits of further reserve accumulation, including risks to the central bank balance sheet as well as implications for monetary policy transmission and financial market development.
Enhancing Financial Sector Resilience to Support Growth
Systemic vulnerabilities in the financial system appear broadly contained, but areas of vulnerabilities require continued supervisory vigilance. Overall, the banking sector remains well-capitalized and liquid with average prudential ratios well above regulatory requirements. However, there is scope for further strengthening the capital positions of some banks. In addition, banks' large-borrower and sovereign exposures represent sources of risk, as does the rapid expansion of banks' credit to the real estate sector, which has seen continued price increases and accounts for two-thirds of unhedged FX loans.
Enhancing supervision of both banks and non-banks is needed to bolster resilience and preserve integrity. Continued supervisory efforts should focus on ensuring strict compliance with capital requirements and, if needed, temporarily suspending dividends and preparing a capital conservation plan and restrictions. Further progress on moving towards regulatory equivalence with the European Banking Authority will help strengthen supervisory frameworks. Recent proposed changes by the BoA to non-bank regulations, including those related to consumer protection and microfinance lending, are vital for preserving integrity. Further efforts could be made on enhancing data collection and risk monitoring of the non-bank sector (insurance companies, investment and pension funds), including by leveraging the Financial Stability Advisory Group for effective interinstitutional cooperation.
There is scope for further enhancing the macroprudential toolkit. Building on the BoA's progress on real estate data collection, consideration should be given to introducing borrower-based measures, which could differentiate between domestic and FX activities, to help mitigate risks from the rapid expansion of real estate sector credit. The mission welcomes the increase in the countercyclical capital buffer and sees further benefits of moving to a positive neutral framework. Given concentration risks related to sovereign exposures, the mission encourages the finalization of a comprehensive methodology for the systemic risk buffer, alongside continued efforts to develop and deepen the bond and money markets to reduce banks' liquidity risks, including through changes in the legal framework underlying repurchase agreements.
Maximizing the Gains from the EU Accession Process Through Structural Reforms
Deeper reforms are needed to achieve inclusive growth and accelerate income convergence to the EU. As in many other European countries, demographic developments imply that medium-term growth becomes increasingly dependent on productivity gains. Yet, despite recent increases, labor and total factor productivity remain well below EU levels. Maximizing the gains of the EU accession process will thus hinge on successful implementation of an ambitious reform agenda to address productivity bottlenecks.
A multifaceted approach is required to lift productivity growth. Promoting SME access to bank lending through reduced information asymmetries would facilitate much needed capital investments and allow firms to step up the adoption of existing technology and R&D to foster integration into global value chains. The creation of innovation networks across firms and other research institutions would facilitate knowledge acquisition. Updating education and training programs, with an eye on labor market needs, including through enhanced vocational training, advancing on the digital agenda, and boosting labor force participation through expanding access to childcare facilities, would provide a lasting boost to Albania's growth prospects.
Overcoming infrastructure bottlenecks remains critical to improving connectivity and benefiting from domestic energy production. Although several projects have been initiated, including the construction of a new airport and touristic port, the transport network still lags EU economies. Albania's hydropower production represents a clean source of energy. However, it is susceptible to weather conditions (e.g., droughts). Continued efforts to diversify into other types of renewable energy with storage capacities will thus be essential for energy security. Adequate budget resources and monitoring mechanisms need to be put in place to ensure that the authorities' efforts in these areas translate into better outcomes.
Maintaining governance reform momentum is key to creating a sound business environment. The imminent completion of the vetting of judges and the significant progress on AML/CFT reforms, in line with FATF recommendations, are important milestones. Reforms should advance further, including reducing case backlogs, setting up an electronic integrated case management system, and filling critical court vacancies in a transparent and merit-based manner. The Intersectoral Anticorruption Strategy should be adopted this year as planned while ensuring that the Special Anticorruption Structure (SPAK) remains adequately resourced. The National Strategy for Money Laundering/Financing of Terrorism Prevention should be swiftly implemented, along with the mitigation of risks identified in the 2023 National Risk Assessment. AML measures should be leveraged to address tax non-compliance and crimes.
The mission would like to thank the Albanian authorities and other counterparts for their warm hospitality, close collaboration, and constructive exchange of views.
