IMF: PPPs and VAT are a threat to Albania

IMF: PPPs and VAT are a threat to Albania

The Albanian economy is enjoying a momentum of growth, but this may not last for a long time. Downside risks continue to remain in the horizon and defenses should be built upagainst adverse shocks in the future. The International Monetary Fund mission which has visited Albania, seems to be very clear in its concluding statement over its findings about our economy. The mission does not deny the achievements that Albania has made, but it calls on the government to be prepared for what may follow. The International Monetary Fund has mentioned the concrete risks coming from the application of several wrong measures by the Albanian government. One of them relates to PPPs or Public-Private Partnerships, for which the International Monetary Fund has voiced its objection a while ago.

“With regard to PPPs, a key priority is to reduce the fragmented decision-making and strengthen risk assessment processes at the Ministry of Finance (MOF). These processes are critical given the large contingent liabilities frequently embedded in PPP contracts over a long-term horizon”, the statement of the IMF mission says, adding that the Albanian government should take into account the international experience as far as the risks that are associated with such incentives are concerned. “I advised the government two weeks ago to freeze the PPPs in order to set up the necessary framework, as this requires time”, said the representative of IMF in our country, Jens Reinke. According to him, IMF is offering technical assistance on this issue, but the Albanian government has said that it has a mechanism already in place for it. Under such circumstances, the representative of the IMF mission, Anita Tuludhar said: “We don’t have a program with Albania, we’re just offering advice. Therefore, the responsibility falls on the authorities on everything risky that is done. If the government goes ahead with the PPPs, we hope that the risks will be properly accounted for”. On the other hand, the International Monetary Fund has also mentioned the incentive to include small businesses with annual turnover of over 2 million lek in the Value Added Scheme, objecting this incentive once again. As far as this incentive is concerned, IMF advices that “the administration will lose its focus instead of focusing on large businesses and this may lead to a drop in revenues and this is why we didn’t agree from the outset”. “We don’t think this is a good measures which will boost revenues”, experts of IMF said regarding the application of such measure.

 What other threats does the economy face?

 “The tapering of large infrastructure investments in the energy sector is expected to drag down growth. With public debt levels very high by regional standards and contingent liabilities increasing, fiscal slippages could dampen confidence, increase borrowing risk premia and lower private investments”, says IMF as part of the reasons which according to this organization, will lead to a slowdown of economic growth in Albania. The IMF continues with the fact that the banking system is weighted down by large NPLs and difficulties in collateral execution. “More rapid deleveraging by EU-owned banks in Albania could lead to financial sector stress”, the mission further says. Meanwhile, adverse weather conditions are also mentioned. According to IMF, they can always threaten the production of energy, creating quasi-fiscal risks and headwinds to growth. “Insufficient progress in implementing structural reforms, in areas such as energy, public financial management and judicial reforms, can undermine investor confidence, significantly reducing donor and capital inflows, and lowering growth”, experts further asses, launching an appeal that now is the opportune time “to accelerate reforms to mitigate these risks and build up defenses against adverse shocks in the future.

Arrears remain high

Albanian institutions, central or local, continue to accumulate many arrears, although the government announced war to them. According to the International Monetary Fund, this issue should be addressed at once, as it causes many problems for the country’s economy. “It’s very important to prevent the accumulation of arrears”, IMF experts say, providing figures such as: accumulation of new arrears of around 0.9% of GDP in 2017 (of which, 0.7 percent of GDP in VAT refunds), which need to be resolved rapidly.

Enhanced supervision on banks, NPLs should not increase

According to the International Monetary Fund, one of the most important factors which should be shielded from the crisis is the banking system. According to IMF, there needs to be an enhanced supervision in order not to allow default on payments to pose a threat on banking capitals. “Nevertheless, important reforms to accelerate the collateral execution are pending, including success fees for bailiffs and the regulation of out-of-court agreements, making banks risk averse”, IMF points out among others, adding at the same time that the authorities should remain vigilant to potential risks related to large corporate exposures and growth in the construction sector. The International Monetary Fund also launches an appeal to the Bank of Albania, to supervise and regulate the banking sector properly in order to better manage risks of systemic banks and build up capital buffers.