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International Monetary Fund. European Dept.
Albania continues to be severely affected by the aftermath of the November 2019 earthquake and the COVID-19 pandemic. The authorities responded promptly to the shocks, and macroeconomic and financial stability have so far been maintained. The economy is expected to contract sharply in 2020, followed by a gradual recovery in 2021-22. The outlook is subject to major uncertainty and rising downside risks as a second wave is gripping many countries in Europe. Albania’s capacity to repay the Fund is adequate, but risks have risen in light of the shocks. Aside from a more severe pandemic, key risks stem from elevated public deficits and debt, weaknesses in public finances, and a relatively high level of non-performing loans (NPLs) and euroization.
International Monetary Fund. European Dept.
This paper focuses on Albania’s Request for Purchase Under the Rapid Financing Instrument (RFI). The RFI provides rapid financial assistance to member countries facing an urgent balance of payments need, without the need for a full-fledged economic program or reviews. A sizeable increase in the fiscal deficit of 2020 is necessary to limit the impact of coronavirus disease 2019 (COVID-19). It will be critical to ensure adequate spending for healthcare and support for the people and firms that are hurt by the COVID-19 pandemic. The Albanian authorities remain committed to ensuring macroeconomic stability. Once the shocks have been overcome, it will be important to keep public debt on a clear downward path. The IMF staff supports the authorities’ request for financial assistance under the RFI to address the urgent balance of payments need due to exogenous shocks related to the 2019 earthquake and the COVID-19 pandemic. The balance of payments financing need is expected to be temporary.
Mr. Nadeem Ilahi, Mrs. Armine Khachatryan, William Lindquist, Ms. Nhu Nguyen, Ms. Faezeh Raei, and Jesmin Rahman
In the past 25 years, exports have contributed strongly to growth and economic convergence in many small open economies. However, the Western Balkan (WB) region, consisting of small emerging market economies, has not fully availed itself of this driver of growth and convergence. A lack of openness, reliance on low value products, and weak competitiveness largely explain the insignificant role of trade and exports in the region’s economic performance. This paper focuses on how the countries in the WB could lift exports through stronger integration with global value chains (GVCs) and broadening of services exports. The experience of countries that joined the European Union in or after 2004 shows that participation in GVCs can help small economies accelerate export and income growth. WB countries are not well integrated into Europe’s vibrant GVCs. Trade within the region is also limited—it tends to be bilateral and not cluster-like. Our analysis shows that by improving infrastructure and labor skills and adopting trade policies that ensure investor protection and harmonize regulations and legal provisions, the region can greatly enhance its engagement with GVCs. Services exports are an increasingly important part of global trade, and they offer an untapped source of growth. The magnitude of services exports from the WB region compares favorably with that of peers in Europe, particularly in travel services where several of these countries have a revealed comparative advantage. But there is significant room for growth in tourism exports and an untapped potential in business and information technology services exports that these countries can materialize through policy efforts that increase openness and enhance connectivity and labor skills. Serbia offers a good example of how decisive efforts, including education policies to ensure a sustained supply of skilled labor, can help information technology services exports to take off.
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper looks at revenue mobilization efforts in Honduras. The country has made considerable progress over the last years, helping to stabilize its fiscal position. Although tax revenue collection ratios in Honduras are high, the statutory rates are aligned with regional peers. A formal benchmarking exercise supports the evidence pointing to Honduras’s relatively good collection performance. The authorities’ future revenue mobilization strategy should prioritize reforms aiming at increasing efficiency and compliance. The cost-benefit assessment of existing tax exemptions in terms of their policy objectives may offer guiding principles to prioritize reforms going forward. Compared to peers, statutory tax rates are similar and tax collection ratios are generally higher—a benchmarking exercise suggests that the current revenue envelope is close to its frontier. Going forward, there is a need to sustain revenue mobilization efforts, which will be instrumental to maintaining a sound fiscal position, reducing the infrastructure gap, and increasing social spending. Rationalizing large tax expenditures could contribute to these efforts.
International Monetary Fund. European Dept.
Growth was strong in 2018, backed by high electricity production. Inflation remains subdued, notwithstanding very accommodative monetary conditions. The fiscal stance in 2018 was somewhat tighter than expected, supporting a further decline in public debt. The medium-term economic outlook is broadly favorable, with growth projected to converge to 4 percent and a further narrowing of the current account deficit. However, significant risks remain. Growth is vulnerable to a continued or sharper economic slowdown in the main trading partners. The main vulnerabilities remain in the fiscal sector, as public debt is still high, and contingent liabilities are increasing. Albania’s relatively large financing needs also pose risks that could materialize, in particular, in case of tightening external financing conditions.
International Monetary Fund. European Dept.
Despite robust GDP growth, projected at 4 percent in 2018, 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. Monetary policy was relaxed further in June 2018 following a rapid appreciation of the exchange rate. The current account deficit has moderated over recent years, to about 6.5 percent of GDP. The outlook is mostly positive, with GDP growth projected to converge to 4 percent over the medium term, 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.