Albania needs to be vigilant to face the upcoming financial storm – says the IMF

Tirana, Albania – | 12 Oct 2022 (Tirana Echo) – Albania needs to apply prudence and vigilance to stem rising risks from the economic slowdown in Europe in order to maintain the positive momentum in the economy, says the IMF.

In its latest Concluding Statement of the 2022 Article IV Mission, the International monetary Fund confirmed the Albanian economy has weathered multiple shocks since 2019 relatively well, but the small Balkan country faces short-term challenges stemming from soaring international food and energy prices. Higher interest rates and the changing landscape of the financial system call for enhanced vigilance to safeguard financial stability.

“The Albanian economy has weathered multiple shocks since 2019 relatively well. Although Albania’s direct exposures to Russia’s war in Ukraine are limited, with twin deficits and high government debt, Albania now faces challenges stemming from soaring international food and energy prices, tighter global financial conditions which are likely to persist, and the economic slowdown in Europe. Prudent policy and vigilance are required to stem rising risks and entrench the positive momentum in the economy”, – says the IMF its latest assessment.

According to the financial analysts, strengthening the efficiency and credibility of public finances remains crucial for preserving market confidence and mitigating higher borrowing costs while further monetary tightening is needed to tame inflation.

The IMF projects the Albanian economy will grow by 3.7% in 2022 on the back of robust activity in tourism, real estate, and services, while growth is projected to slow to around 2% in 2023, reflecting tighter financial conditions, the slowdown in Europe, and the necessary withdrawal of policy support.

Even as Albania grapples with pressing short-term challenges, the authorities need to step up their efforts on structural reforms to lift Albania’s potential for sustainable and inclusive growth. This is even more pressing given that inflation has risen sharply and has become increasingly broad-based.

Following a strong rebound in 2021, the Albanian economy seems to have maintained a positive momentum this year despite the shock to the global economy from Russia’s war in Ukraine.

Given the increase in international food and energy prices, the outlook is predicted to be subject to considerable uncertainty and risks are tilted to the downside.

“Higher and more persistent inflation could further weigh on real income and weaken growth prospects. Drastic tightening in global financial conditions could hamper Albania’s access to financing. The economy is also vulnerable to unfavorable weather conditions and reversal in the rise of real estate prices”, added the IMF.

Fiscal policy needs to rebuild buffers fast—based on raising tax revenue—and reduce demand pressure while providing targeted and temporary support to shield the vulnerable from the impact of the rising cost of living.

With last year’s economic rebound, the government has rightly embarked on fiscal consolidation. We support the July budget revision which provided additional targeted assistance to the vulnerable and reduced the deficit target. Public debt is projected to decline further to about 68 percent of GDP in 2022. Any higher-than-expected revenue should be saved for faster debt reduction.

Given Albania’s high public debt, large gross financing needs, and rising borrowing costs, the government needs to take advantage of the still positive momentum to rebuild fiscal policy buffers fast. Strengthening the efficiency and credibility of public finances remains crucial for preserving market confidence and mitigating higher borrowing costs, according to the international financial body.

As monetary conditions tighten and the financial landscape continues to change across Europe, enhanced vigilance is required to safeguard financial stability of the Balkan country.

While the banking system has been robust, Banks face multiple challenges.

“The banking system has weathered the consecutive shocks relatively well, supported by the BoA’s ongoing efforts to strengthen regulation and supervision. But the full impact of the shocks may only become visible on bank balance sheets over time, and banks are susceptible to credit, interest rate, and exchange rate risks”, said the report.

Click HERE for the full IMF Concluding Statement.