Albania has made impressive progress over the past 15 years. When the country began its transition to a market economy, it had the lowest level of per capita income, trade openness, and market development in Europe. It is still among Europe’s poorest countries. But, notwithstanding some setbacks since 1991, the rapid growth engendered by a concerted series of structural reforms and by a strong commitment to macroeconomic stability has more than doubled Albania’s per capita income and steadily reduced the income gap with its neighbors.
A wide range of macroeconomic indicators signal progress. Public debt as a percent of GDP is declining, inflationary expectations are firmly grounded at low levels, financial intermediation is rising, confidence is steadily increasing, and in the virtual absence of capital controls, the freely floating exchange rate continues a trend appreciation. With its development strategy designed to contain the size of government and seek private sectorled solutions for all but essential core government functions, Albania’s fiscal management has found an effective anchor, and the privatization process for the remaining large government assets is reaching its final phase.
The government’s strong policies are chiefly responsible for this success, but the IMF has also played an integral role. The Fund has lent support through most of the transition process—first through its low-income country Poverty Reduction and Growth Facility (PRGF) and, more recently, in view of the rapid rise of incomes, through a blend of PRGF and Extended Fund Facility financing. Equally important, technical assistance—particularly in the monetary and fiscal areas—has been generous, in part reflecting the unusually high degree of implementation.
On to the next step
One measure of Albania’s success to date is that the authorities—supported by IMF staff and the Executive Board—now envisage graduating from program status in early 2009 with the expiration of its current financing arrangement with the IMF. The challenge ahead will be not simply to maintain high growth but also to ensure its quality and sustainability over the longer term. With early efficiency gains from transition largely exhausted, more per-manent sources of growth will be needed to ensure success and further reduce the income gap with its neighbors.
Expanding the export base and improving both infrastructure and regulatory frameworks are key, and here the issue of institutional quality becomes paramount. By most available measures of corruption, law and order, and bureaucratic quality, Albania lags behind the middle-income, high-growth countries it aspires to emulate. A reflection of these issues is that both foreign investment and exports remain very low as a percentage of GDP (see chart).
Foreign capital needed
Albania has had strong growth but must now improve its business climate to compete with its neighbors for foreign direct investment.
Note: 2005 data.
Data: IMF, World Economic Outlook database; and Vienna Institute for International Economic Studies.
Albania’s success after 2009 will depend to a significant degree on its ability to sustain implementation of strong policies, improve its investment climate, and reduce its still considerable vulnerabilities. Those areas that fall within the Fund’s core competencies therefore constitute important pillars of the current program. For example, comprehensive reforms—with key actions supported by the conditions that the IMF attaches to its lending—are currently being implemented to strengthen banking supervision, tax administration, and debt management. With strong technical assistance support from the IMF, significant advances have been achieved, and the country’s fiscal and other institutions are expected to be markedly stronger by 2009.
A substantial reform agenda will remain after graduation in 2009. Donors with appropriate expertise are expected to help Albania tackle medium-term priorities, such as infrastructure development, anticorruption measures, legal and regulatory reforms, and formalizing ownership relationships. Efforts in these areas will support and be supported by the recent approval of the Stabilization and Association Agreement with the European Union and prospective membership in the North Atlantic Treaty Organization.
IMF European Department