Increased fiscal risks require additional safeguards for the budget

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					Increased fiscal risks require additional safeguards for the budget
An IMF mission is scheduled to visit Tirana later this week to seek agreement with
authorities on further measures for the next six months. While we notice that overall
performance of under the progam so far remains good, additional budget safeguards may be
required to deal with increased fiscal risks.
Progress under the program, which continues to focus on macroeconomic stability and
structural reforms to improve tax administration and debt management, remains good and
preliminary information suggests that all end–March targets have been met. We also note and
appreciate the authorities’ continued strong ownership of the program.
Reflecting in part the two increases in the Bank of Albania’s policy interest rate last year,
inflation is close to the middle point of the BoA’s 3±1 percent target range, and inflationary
expectations are now firmly anchored at low levels. Still, the BoA will need to remain
vigilant, including for signs of renewed acceleration of credit growth, while also taking into
account an increasingly uncertain fiscal policy environment.
KESH’s continued difficult financial position has led to increased fiscal risks and might
require more contingencies in the budget. An action plan to significantly improve KESH’s
collection and loss performance is required to reduce the contingent liabilities for the state
budget and pave the way for a successful privatization of its distribution arm. We urge the
authorities to work closely with the World Bank, the lead development partner in this area,
for finalizing the action plan, which should also aim to ensure continuous electricity supply.
There has been good progress in tax administration and debt management reforms, although
much still remains to be done. A recent IMF technical assistance mission on tax
administration noted the progress achieved to date, while also pointing out the need for
further reforms—in particular regarding the Tax Police, the Large Taxpayers Office, and the
administration of social security contributions—in order to transform the General Department
of Taxation into a truly modern tax administration.
On debt management, we welcome the measures taken to extend the average maturity of
public debt, expand the range of instruments, and strengthen capacities at the Ministry of
Finance. Looking ahead, further steps are needed to strengthen capacity and broaden the
investor base. The forthcoming sovereign credit rating should help with the latter.
Lastly, the mission is looking forward to discussing with the authorities their proposals for
further reductions in key tax rates. While we stand ready to work with the government in a
constructive way in this important area, it will remain paramount that the already agreed
medium-term fiscal deficit and debt paths are not weakened, and that any tax reduction is
conditional on lasting and verifiable revenue improvements.

István P. Székely                                    K. Ann-Margret Westin
IMF Mission Chief for Albania                        IMF Resident Representative in Albania