Goodbye IMF, Hello Crisis???
Recently, the International Monetary Fund concluded its mission to Albania, as was expected earlier this year. In a ceremonial meeting, Premier Berisha met with Ann-Margaret Westin, IMF Representative to Albania, for the final meeting.
“I am leaving Albania with the best of impressions and memories in all aspects of the country and the International Monetary Fund is open to further collaborations with the Albanian government,” said Westin in her goodbye speech.
In January 2009, a 3 year program based on two different agreements, the Poverty Reduction and Economic Growth Fund (PRGF) and the Expanded Financial Fund (EFF), ended under much political and business opposition. IMF justified the lack of renewal of the PRGF program as an expected event because Albania had moved up from the list of poor countries; something for which PRGF was created. Yet, Albania could have had the program renewed, but the authorities did not present a request, as per the required procedure.
Westin marked the past IMF-Albania relationship as a successful one and she indicated the results achieved by the Berisha government in fiscal reforms, macroeconomic and financial stability and the general positive economic performance in a time of global economic crisis.
Albania remains an IMF member which entitles it to different kinds of collaboration with the Fund. As Berisha assured Westin, collaboration between the tiny country and the international institution will continue according to Article 4 of the Fund. Under article 4, IMF is limited to the role of consultancy regarding fiscal policies and financial and macroeconomic stabilities, but it cannot intervene in the country’s structural reforms. In addition, Albania might or might not enjoy access to IMF financing funds.
The EU will replace the IMF in the supervisory role as a result of the integration process the country is undergoing. Albania is obligated to report on an annual basis all reports regarding middle-term fiscal and budgetary policies and reforms.
Albania ready to walk on her own?
Albania’s $13 billion economy will be the only one in Southeastern Europe to avoid recession, according to the World Bank.
Only a week ago, the National Institute of Statistics (INSTAT) released GDP data for Q1 indicating a growth rate of 6% on the year without providing a detailed breakdown in sectors. Premier Berisha, whose party narrowly won another 4-year mandate in parliament on June 28, made a comment that the country did not face an economic crisis. Others tend to differ.
Truth told, the Albanian economy is the only one in the region projected to post a growth this year, but that is as far as the optimism goes. The country will most definitely experience a slowdown in economic growth. The World Bank’s forecast has implied an economic growth of 1.5%, the IMF has been even less optimistic with only a 0.4% forecast, while the government has revised its earlier forecast from 6% to a 4% economic expansion this year. Ironically, the revision was made just a couple of days before the INSTAT data.
In accordance with the above Central Bank of Albania (BoA) has limited itself by reporting that the economy will not post a decline this year, while inflation will remain within the target of the central bank which has been fixed at 3% with a 1% fluctuation band.
If the country is to suffer the crisis impact, one way or another, then isn’t the reduced relationship with IMF a premature step?
Ardian Fullani, Bank of Albania Governor, expressed his disappointment Wednesday in an interview for Dow Jones Newswires that a potential precautionary standby arrangement (SBA) with the International Monetary Fund would have been a useful insurance policy for the country, although it isn’t experiencing liquidity constraints and doesn’t require emergency funding. While the country is not currently threatened with a balance of payments crisis and experiences no liquidity constraints, support from the IMF would lend confidence in official monetary and fiscal policies and would boost investor confidence in Albania’s economy.
“The timing and the amount of funds requested would then depend on the magnitude of the crises and its assessed impact on our economy,” Fullani said in the interview.
The IMF has intervened around emerging Europe, and already has loans negotiated with Serbia, Bosnia, Hungary and Romania. Montenegro, the Former Yugoslav Republic of Macedonia (FYROM), Croatia, Bulgaria and Kosovo are all considering the option.
Like many of his peers around the region the governor is worried about fiscal deficits, despite stressing that Albania’s financial system was sufficiently liquid to finance economic activity for the immediate future.
However, Fullani was quick to point out two major risks for the economy, associated with the fiscal targets and the external balance.
In the first case, the decline in revenues and the surge in expenditures pose a risk to meeting the government’s deficit target of 4.2% of GDP.
“While recent monetary and fiscal policy actions have been “appropriate,” greater efforts should be taken to ensure the budget deficit and public debt levels remain sustainable.
In the second case, although the current account deficit has taken on a downward path, it still remains at 15% of GDP. That’s not high for the region but still in vulnerable double-digit territory.
While the economy is not highly dependent on external private financing, some sources of financing such as remittances (estimated as high as 10% of GDP) will subside this year due to recession and labor market constraints in host European Union countries.
The Lek, the Albanian currency, and inflation might become problematic depending on how the situation develops
BoA, responding to rapidly cooling inflation, cut its policy interest rate to 5.75% earlier this January, and has injected ample amounts of liquidity into the banking system.
“There are still concerns about the large – albeit declining – trade deficit and its sustainability in the long run,” Fullani said, adding that the Lek was likely to face pressure to depreciate, which could push up import prices and hence local inflation.
Albania officially operates a flexible exchange rate regime, but lending in the economy is mostly in euros while most of the incomes are paid in Lek which makes lenders highly vulnerable to exchange rate fluctuations
Still, Fullani expressed confidence about longer-term growth prospects, emphasizing that Albania had a liquid, profitable and well-capitalized financial system, healthy household and corporate balance sheets, and was bound to have ever-closer integration into regional and European Union markets.
There are no signs Albania is struggling to draw in foreign funding, unlike many eastern European countries that have violently shifted into trade surpluses in recent months.
However, Fullani urged vigilance, noting that some sources of external financing, such as remittances, could be strained.
“Action should be taken to build solid bases for fostering a sustainable external balance in the medium term,” he said.
Here comes the crisis
Despite bold declarations by the Albanian Premier that the country remains unscathed from the global crisis, and Fullani’s optimism, signs of the crisis are slowly becoming facts.
Albanian business has many times claimed the need for the government to take anti-crisis measures. Several sectors, such as construction, textiles, and the mining industry have already rung the alarm bells on the verge of possible bankruptcy.
But the biggest sign came this Wednesday when a few decisions made by the government showed that the leaders are ready to finally listen, despite many earlier warning statements from other institutions, and cut down on expenses.
Being an electoral year, the government borrowed a hefty sum to finance the campaigns and to assure a stream of investments prior to elections which overshot public debt.
As the sums are piling up, it seems the Berisha government is trying to block investments, a decision that would have never crossed the Premier’s mind only a week ago.
Following the proposal of Ridvan Bode, Minister of Finance, the government decided to cancel all tenders for public investments after August 3.
With the exception of foreign investments, new projects that have not been through a tendering process will not be accepted.
Translated into money, the Albanian economy will miss another 214 million euro that were reserved for public investments in the second half of 2009
Worried by the latest indicators of economic performance and dropping revenues, accompanied with overspending in the first half of 2009, the decision seems a desperate move for the government to make ends meet and respect its 2009 budget.
Bode justified the decision by saying that “…the decision’s goal is to increase the efficiency of the current contracts regarding public projects. Our plan is that labor power should be concentrated on all projects prior to August 3.”
Still, the latest government’s decision isn’t that surprising. The signs of an economic slowdown have long been there and it was expected that once the election result was secured, the government would shift away from its pre-electoral optimism toward a more cautious approach on spending. After all, it’s not too late for being cautious. It’s important though that for once, the government relies on sound policies rather than simple charisma and good will.
