IMF praises Albania on economic growth but warns against mounting PPP fiscal risks

Tirana, Albania | 31 Jan 2019 (Tirana Echo) – The International Monetary Fund has praised Albania’s GDP growth and monetary policy performance but warns the small Balkan country against mounting fiscal risks stemming from public-private partnerships (PPPs).

In its 2018 Article IV Consultation with Albania, the IMF Executive Board concluded that Albania’s economic growth has trended upward in recent years as the country has benefitted from the implementation of reforms and from the economic expansion of its European trade partners. Growth is estimated at 4.2 percent for 2018 and is projected to stay close to this level over the medium term, supported by stronger exports, including tourism, and investments in infrastructure.

However, the IMF says Albania is strongly exposed to the increasing risks to growth in Europe, notably in its main trading partners.

“A downturn in these countries could spill over through lower exports, remittances, and foreign direct investment. Moreover, the expected tightening in global financial conditions would raise Albania’s cost of financing.” Says the IMF Executive board in its final report.

More crucially, the IMF Directors warn the small Balkan nation on containing fiscal risks stemming from its widespread PPP strategy, as increasing reliance on PPPs, often without transparent competitive bidding for national infrastructure projects has resulted in rising contingent liabilities.

“Directors highlighted the need to consolidate and strengthen the decision-making processes in public investment management and underscored the importance of ensuring value for money for PPP projects through competitive bidding. Directors also called for determined measures to halt the persistent build-up of government arrears, as these hurt private economic activity and undermine trust in the public sector.” – says the IMF.

The Albanian government has embarked upon an ambitious scheme of PPP projects to finance its national infrastructure, often prompting opposition criticism who accuse the government of careless economic policies and corrupt noncompetitive bidding practices.

While the global financial body welcomed planned amendments to the PPP legislation by the Albanian government in order to enhance the role of the Ministry of Finance and Economy as a gatekeeper in containing the potential fiscal cost of PPPs, they also noted that it will be critical to ensure value for money through a competitive bidding process for all projects, warning the socialist led government of PM Edi Rama to stay away from unsolicited PPP proposals.

While annual PPP-related government spending is projected to remain below the legal limit of 5 percent of tax revenues, this ceiling leaves little room left for additional government-funded PPPs, especially given the need to incorporate risks from contingent liabilities.

On the domestic side, the IMF has noted that Albania’s public debt remains high, while low domestic savings and the absence of large institutional investors amplify dependence on foreign sources of financing. The domestic risks also include the impact of drought on electricity generation, creating risks to the budget.

Despite robust GDP growth, projected at 4 percent in 2018, Albania’s inflation remains below its 3 percent target. The fiscal deficit has stabilized around 2 percent of GDP, implying a modest gradual reduction in public debt, which remains high at close to 70 percent of GDP.

The Albanian government relaxed its monetary policy in June 2018 following a rapid appreciation of the exchange rate against the Euro, probably due to the influx of tourists during the summer season as well as high levels of money laundering activities in the country.

The IMF says the economic outlook for Albania is mostly positive, with GDP growth projected to converge to 4 percent over the medium term and with inflation stabilizing around its target by 2021.

“Further fiscal consolidation and an accommodative monetary policy, combined with growth-promoting structural reforms represent the right policy mix,” – the IMF Board of Directors have said in their statement.