The IMF called on Albanian authorities to implement sustained fiscal consolidation in the medium term in order to minimize the vulnerabilities associated with the high public debt, the fund said in a concluding statement following its staff visit in Albania. The IMF underlined that the public debt in the country has reached record high level, in part because of the accumulation of unpaid government bills and arrears.

Loose fiscal policy has contributed for significant worsening of domestic imbalances in 2013, the IMF said. Unpaid government bills, coupled with poor tax revenue performance, would push the level of debt to 70% of GDP at end-2013, up from 59% at end-2010.

IMF believes that, without the necessary policy and structural reforms, public debt would continue on its upward trend and could adversely impact growth, particularly if interest rates start rising and begin to crowd out private investment over the medium term. This could also involve a deterioration in the domestic bond market’s perception of sovereign risk and its willingness to finance government debt.

The fund recommended to the Albanian government to commit to a 10-year debt target of 40% of GDP and an interim target that sees debt declining close to 60% of GDP within 5 years. Large fiscal adjustment of 1.5% of GDP would be required already in 2014 in order to signal the authorities’ seriousness in moving toward debt sustainability, the fund said.

IMF underlined the need for a tax reform and discussed with the Albanian authorities possible options such as the introduction of a progressive personal income tax, modifications to the profit tax as well as excise tax reform. In parallel, forceful action is needed to improve tax administration. Fiscal reforms should also involve the deficit-making state social insurance system and the energy sector as well.

The IMF expects Albania’s growth to remain low at 1.7% in 2013 as stagnating credit, troubled corporate balance sheets and declining remittances are weighing on domestic demand, while the rise in arrears has aggravated liquidity constraints in the private sector. Albania’s GDP growth could increase modestly in 2014, given that the authorities initiate much needed policy and structural reforms, the fund said.