February 26, 2003
The Board meeting to discuss Albania had initially been scheduled for January 29, but had to be postponed because of a delay in completing one of two prior actions. This statement describes developments since the staff report was issued on January 10. The new information does not change the thrust of the staff appraisal.
1. Both prior actions have now been met:
- The 2003 budget was approved by parliament on December 19, 2002.
- The closure of duty-free shops at all land-crossing points in border areas, which had been a major source of smuggling, was approved by parliament on January 30, 2003.
The latter measure is part of the authorities’ efforts to reduce smuggling and improve customs administration. It was also strongly supported by the EU Customs Assistance Mission in Albania, which argued that duty free shops represented a high revenue risk, had often been used fraudulently, and had become a source of illicit activities. It was the third time the government had put the measure to parliament since May 2002.
2. On January 31, 2003 the EU officially opened negotiations with Albania on a Stabilization and Association Agreement, but only after: (i) EU Commissioner Patten, in a letter to the prime minister, directly linked the success of the SAA negotiations to a trend reversal in corruption and organized crime; and (ii) the EU troika and the U.S. Ambassador publicly reconfirmed this message.
3. In a recent letter to the Managing Director, Prime Minister Nano has confirmed his government’s commitment to fighting corruption and strengthening governance. As stressed in the staff report, stronger efforts are needed in this area, and staff—in consultations with the World Bank and the EU—will work with the authorities to strengthen their anti-corruption program.
4. Preliminary estimates suggest that the end-2002 indicative quantitative targets for domestic borrowing and the Bank of Albania’s NDA and NIR have been met. Tax and customs revenues in 2002, however, fell short of the budget targets by about 5 percent—in line with the projections in the staff report—necessitating delays in investment expenditures to maintain the fiscal consolidation path.
5. Activity indicators suggest a contraction in the construction and extraction industry sectors during the third quarter of 2002, but the estimated real growth rate of around 4¾ for the year as a whole still appears realistic, as other industrial sectors and services registered higher-than-envisaged increases in sales in the same period, and export growth picked up somewhat more than expected.
6. As anticipated in the staff report, 12-month inflation has continued to decline. At end-2002 it stood at 2.1 percent, at the lower end of the Bank of Albania’s 2–4 percent end-year target range, and somewhat below earlier projections. Inflation declined further in January 2003 to 0.3 percent.
7. The Albanian national statistical agency (INSTAT) published the first official National Accounts estimates for 1998–2000 on January 24, 2003, which represents an important step forward in improving data availability. The new data are consistent with staff’s estimate of a trend growth rate of 7–8 percent for 1998–2000. As noted in the staff report, however, further efforts are needed to improve over time the quality of these data.