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Albania: Staff Report for the 2006 Article IV Consultation, First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Review Under Extended Arrangement, Request for Waiver of Nonobservance of Performance Criterion, and Financing Assurances Review Supplementary Information

Author(s):
International Monetary Fund
Published Date:
August 2006
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1. This statement reviews developments in Albania since the preparation of the staff report. The additional information does not change the thrust of the staff appraisal.

2. In accordance with the understandings described in the staff report, the authorities have prepared a supplementary budget for 2006. Because of the strong revenue performance in the first half of 2006, budgeted total revenue has been increased by 0.9 percent of GDP and—contingent on this target being met—domestic financing will be reduced by 0.3 percent of GDP. Additional expenditure is allocated almost entirely to infrastructure investment.

3. Despite a slowdown in headline inflation, underlying pressures have continued to build. Headline CPI inflation fell to 2.4 percent (year-on-year) in June mainly due to a base effect as the quarter-on-quarter rate of inflation picked up. Increases in food prices, however, were stronger than previously expected. The recent electricity tariff increases, while on average moderate, will result in a large hike in retail tariffs and a sizable decline in business tariffs due to the elimination of cross-subsidies. The increase in retail tariffs (by about 40 percent) will likely push headline inflation temporarily outside the BoA’s 3±1 percent target range in Q3 2006.

4. Owing to these underlying pressures and to prevent possible second-round effects from the electricity tariff hike, the BoA raised policy rates by 25 basis points on July 12, 2006. This increase, the first since April 2002, brings the policy rate to 5¼ percent. If the second-round effects are minimal, headline inflation is expected to return to the middle of the BoA’s 3±1 percent target range by late 2007.

5. The prior action for the completion of the First Review and the end-June structural benchmarks have been implemented (updated Table 4). The authorities have made the necessary arrangements with USAID and the World Bank to assist them with finalizing their new energy sector strategy and preparing for the privatization of electricity distribution. The remaining four end-June SBs, relating to public expenditure and debt management, were all met on schedule.

6. Proper accounting for the recapitalization of the BoA will lead to a small upward adjustment in measured public debt. As discussed in the Staff Report (footnote 8), the government issued securities to the BoA in 2005 to compensate for its foreign exchange valuation losses. These securities have so far been treated and reported as a guarantee in the official statistics on public debt. In addition to the implications for net credit to government discussed in the staff report, our preliminary estimate is that accounting for this item as public debt rather than as a guarantee will result in an increase in public debt from 55.3 to 56.7 percent of GDP in 2005. Projections for 2006–10 will change accordingly.

Albania: Public Debt Relative to GDP

(In percent)

7. The performance of the electricity company (KESH) has continued to improve, with the effective collection rate running above target in June 2006. However, as expected, collections remained somewhat below target for Q2 2006 as a whole.

Albania: Effective Collection Rates, October 2005- June 2006

(in percent)

8. A safeguards assessment for the Bank of Albania, completed on July 14, 2006, found weaknesses in the central bank’s safeguards framework. The main vulnerabilities identified by the assessment concern the quality of the external audit, poor oversight of the external and internal audit functions and the system of internal controls, and certain weaknesses in the controls over the Fund data reporting process. The assessment recommended measures to alleviate these weaknesses and staff will monitor their implementation.

Albania: Status of Performance Criteria and Structural Benchmarks under the PRGF and EFF Arrangements
Proposed Test DateStatus
I. Performance Criteria
1. Further extend the use of ASYCUDA systems in customs
(i) Deploy the ASYCUDA system in 10 customs houses.End-March 2006Met
(ii) Implement the risk assessment module of the ASYCUDA system in 10 customs houses to perform inspections.End-March 2006Met
2. KESH to meet the targets under the 2006-2008 Power Sector Action Plan for end-March 2006 with regards to collection rates and losses.End-March 2006Not Met
II. Structural Benchmarks
A. Improve public expenditure management
3. Complete a census of the wage bill for all budgetary sectorEnd-June 2006Met
4. Strengthen public investment programming:
(i) Establish and staff a public investment program department within the General Directorate of the Ministry of Finance.End-June 2006Met
(ii) Prepare and issue instructions for submitting public investment proposals consistent with the budget and the Medium-Term Budgetary Plan.End-June 2006Met
5. Safeguard the efficient use of nonconcessional foreign project loans:
(i) Conduct an independent feasibility study for any large project (as defined in the TMU) financed through non-concessional commercial borrowing.OngoingMet
(ii) Provide a semestrial listing and status report on all projects being considered for nonconcessional foreign financing.OngoingMet
B. Reduce fiscal vulnerabilities
Strengthen tax administration
6. Improve VAT administration by preparing and providing to the Fund quarterly reports on the aggregate amounts of the VAT refunds requested, refunds paid and refunds rejected (within one month of the end of each quarter).OngoingMet
7. Increase the share of tax revenue collected by the Large Taxpayer’s Office to 50 percent of all tax collected by end-June 2006.End-June 2006Met
8. Prepare and issue quarterly reports on progress made in the actual use of the risk assessment module of the ASYCUDA system to perform inspections in the customs.OngoingMet
Improve debt management capacity
9. Develop and discuss with IMF staff an Action Plan for implementing the recommendations of the IMF TA mission on debt management.End-June 2006Met
10. Prepare biannual reports (within one month of the end of each semester) on the stock of external arrears.OngoingMet
C. Strengthen the financial system and improve economic monitoring
11. Develop and discuss with IMF staff an Action Plan for implementing the recommendations of the Financial Sector Stability Assessment Report.End-March 2006Met
12. Strengthen statistical and economic monitoring capacity:
(i) Prepare advance GDP estimates for the first half of 2005.End-March 2006Met
(ii) Prepare and publish preliminary national accounts for 2004.End-March 2006Met

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