IMF: Business climate, fresh reforms are required

IMF: Business climate, fresh reforms are required

Albania needs to deliver a series of fresh reforms which will improve business climate in the country. This is the advice coming from the International Monetary Fund, which conducted a second monitoring mission in Albania.

The IMF joins the constant declarations made by Albanian and foreign businesses operating in Albania that business climate needs to be improved by the government.

“Maintaining the growth momentum over the medium term requires reforms to improve the business climate and reduce vulnerabilities. Key risks stem from high public debt, weaknesses in public finances and bottlenecks to financial intermediation. Policy priorities include further fiscal consolidation through well-designed tax policies, better public investment management, and prudent actions to support credit for private sector investment”, the IMF concluding statement reads.

An International Monetary Fund (IMF) mission, led by Mr. Jan Kees Martijn, visited Tirana during April 25-May 6, 2019, for the second Post-Program Monitoring (PPM) discussions. 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. At the end of the visit, the mission issued a statement, in which it points out that “Albania’s medium-term economic outlook is broadly favorable, even though growth is expected to moderate in 2019”. But, IMF notes that “maintaining the growth momentum over the medium term requires reforms to improve the business climate and reduce vulnerabilities”.

According to IMF, key risks stem from high public debt, weaknesses in public finances and bottlenecks to financial intermediation. Policy priorities include further fiscal consolidation through well-designed tax policies, better public investment management, and prudent actions to support credit for private sector investment.

The IMF has demanded the Albanian government “containing fiscal risks and creating fiscal buffers that require further fiscal consolidation via sustainable revenue efforts and stronger budgetary institutions”.

Thus, IMF urges the government “to use the favorable economic environment to improve the fiscal position”. IMF recommends the strengthening of the tax system by reversing measures that fragment and weaken the tax base and by levelling the playing field for businesses.

On the other hand,  there needs to be urgent action to curtail the persistent public sector arrears. “These arrears undermine the business climate and trust in the government. We urge the authorities to ensure the full and timely payment of all validated new VAT refund requests from now on, disconnecting them from corresponding revenue flows”, the IMF says.

“Growth is expected to moderate in 2019 but remain close to 4 percent over the medium-term”

Economic growth will persist, but it will shrink

In its report, IMF notes that economic outlook is broadly favourable. Growth is expected to moderate in 2019 but remain close to 4 percent over the medium-term. This year, growth is projected to slow to 3.5 percent, owing to the base effect of record electricity production in 2018 and the slowdown in partner countries. In the medium-term, activity is expected to be driven by a pickup in EU growth, increasing labor market participation, a gradual strengthening of exports including International Monetary Fund Washington, D.C. 20431 USA 2 tourism, and the investments needed to close Albania’s large infrastructure gap. However, sustained development also hinges on improvements in economic governance, including in the rule of law and the fight against corruption. As inflation remains well below its 3 percent target, the monetary policy stance should continue to be very accommodative.

Inflation is expected to converge slowly towards its target, as the output gap narrows and inflation in the euro area recovers. However, there are important downside risks. Albania is significantly exposed to the increasing risks to growth in the EU, notably in its main trading partners. On the domestic front the vulnerabilities are mainly in the public sector. While the fiscal deficit declined in 2018, it is projected to widen to 2.5 percent of GDP in 2019 (including guarantees for new loans to the energy sector of 0.4 percent of GDP). This widening is driven in part by the planned repayment of government arrears which, by itself, is welcome. However, the deficit is also augmented by recent tax measures that erode the already narrow tax base, and introduce preferential treatment of additional sectors, including through reduced VAT and corporate tax rates. Moreover, there are risks of further revenue shortfalls, and expected losses in the energy sector due to lower hydropower production.

Concerns over high levels of public debt

Despite a decline in recent years, public debt continues to be high at 69.9 percent of GDP (including arrears) at end2018, and it is projected to decline to 66.3 percent of GDP by the end of this year. At the current level of public debt and the deficit, fiscal policy has little room for absorbing or offsetting adverse shocks. Furthermore, there are fiscal risks from the increasing contingent liabilities, such as those related to public-private partnerships (PPPs).

However, according to IMF, risks to Albania’s capacity to repay seem limited. Although gross financing needs are fairly high due to the relatively short maturity of public debt, debt service, including to the IMF, is expected to remain well within Albania’s capacity to repay. IMF credit outstanding stood at 2.8 percent of GDP at end-2018. Albania’s strong payment record and macroeconomic stability also suggests that repayment risks are contained.