IMF Country Report No. 16/5

ALBANIAFISCAL TRANSPARENCY EVALUATION
January 2016

This Fiscal Transparency Evaluation for Albania was prepared by a staff team of theInternational Monetary Fund based on the information available at the completion of theirvisit to Tirana on June 16, 2015.

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Fiscal Affairs Department

ALBANIAFISCAL TRANSPARENCY EVALUATIONTim Irwin, Suzanne Flynn, Tom Josephs,
Linda Spahia, and Rod O’Mahony

November 2015

ALBANIACONTENTS
Preface ___________________________________________________________________________________________ 4
EXECUTIVE SUMMARY __________________________________________________________________________ 5
I. FISCAL REPORTING __________________________________________________________________________ 10
A. Coverage of Fiscal Reports ____________________________________________________________________ 12
B. Frequency and Timeliness of Fiscal Reporting _________________________________________________ 17
C. Quality of Fiscal Reports ______________________________________________________________________ 18
D. Integrity of Fiscal Reports _____________________________________________________________________ 19
E. Conclusions and Recommendations __________________________________________________________ 20
II. FISCAL FORECASTING AND BUDGETING ___________________________________________________ 22
A. Comprehensiveness___________________________________________________________________________ 23
B. Orderliness ____________________________________________________________________________________ 29
C. Policy Orientation _____________________________________________________________________________ 30
D. Credibility _____________________________________________________________________________________ 31
E. Conclusions and Recommendations __________________________________________________________ 36
III. FISCAL RISKS ________________________________________________________________________________ 38
A. Disclosure and Analysis _______________________________________________________________________ 39
B. Risk Management _____________________________________________________________________________ 42
C. Coordination __________________________________________________________________________________ 47
D. Conclusions and Recommendations __________________________________________________________ 50
BOX
2.1. Example of Forecast Reconciliation _________________________________________________________________ 34

FIGURES
1.1. Public Sector Balance Sheet and Coverage in Fiscal Reports _______________________________________ 14
1.2. Liabilities of the Public Sector, Selected Countries _________________________________________________ 14
2.1. Social Security Contributions and Own-Source Revenues, Selected Countries ____________________ 24
2.2. Forecasts and Outturn for Real GDP Growth _______________________________________________________ 25
2.3. Average Forecast Errors for Real GDP Growth, Albania and EU Countries _________________________ 25
2.4. Revenue Forecast Errors ____________________________________________________________________________ 26
2.5. Difference Between Expenditure Projections and Outturns ________________________________________ 27
2.6. Gross Capital Expenditure of General Government, EU and Selected Countries ___________________ 28

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2.7. Difference Between Expenditure Plans and Outturn _______________________________________________ 28
2.8. Changes to the Submitted Budget _________________________________________________________________ 32
2.9. Difference Between Submitted Budget and Outturn in Selected Countries _______________________ 32
2.10. Difference Between Successive Forecasts and Final Outturns ____________________________________ 33
2.11. Comparison of Macro and Fiscal Forecast Errors (Percentage Points) ____________________________ 34
2.12. Decomposition of Errors in the Forecast of Gross Debt (Percent GDP) ___________________________ 35
3.1. Volatility of Real GDP and Government Revenue, European Countries ____________________________ 40
3.2. Projection of Pension Scheme’s Balance, 2014–78 _________________________________________________ 42
3.3. General Government Guarantees by Sector, March 2015 __________________________________________ 44
3.4. General Government Guarantees, Europe, 2014 ___________________________________________________ 44
3.5. Nonperforming Loans in Selected European Countries, 2014 _____________________________________ 46
3.6. Spending of Local Government in European Countries, 2014 ______________________________________ 48
3.7. Unconsolidated Liabilities of Largest Public Corporations, 2013 ___________________________________ 49
3.8. Liabilities of Public Corporations, European Countries, 2013 ______________________________________ 49

TABLES
0.1 Summary Assessment Against the Fiscal Transparency Code _______________________________________ 9
1.1. Published Fiscal Reports ____________________________________________________________________________ 11
1.2. Composition of the Public Sector ___________________________________________________________________ 12
1.3. Summary Accounts of the Public Sector, 2013 _____________________________________________________ 13
1.4. Balance Sheet of General Government, 2013 _______________________________________________________ 15
1.5. Cash-Flow Reconciliation for General Government, 2013 __________________________________________ 16
1.6. Value of Tax Expenditures __________________________________________________________________________ 17
1.7. Reconciliation of the Deficit With Changes in Debt, 2013__________________________________________ 18
1.8. Summary Evaluation of Albania’s Fiscal Reporting _________________________________________________ 21
2.1. Fiscal Forecasting and Budget Documents _________________________________________________________ 23
2.2. Dates of Budget Submission and Approval ________________________________________________________ 30
2.3. Composition of Forecast Errors (Million Lek) _______________________________________________________ 34
2.4. Decomposition of Errors in the Forecast of Interest Payments (Million Lek) _______________________ 35
2.5. Summary Evaluation of Fiscal Forecasting and Budgeting _________________________________________ 37
3.1. Albania: Selected Reports Discussing Fiscal Risks __________________________________________________ 39
3.2. Size of Selected Specific Fiscal Risks Not Quantified in Budget, Recent Estimates ________________ 41
3.3. Bank Liabilities, 2013 ________________________________________________________________________________ 46
3.4. Summary Evaluation: Fiscal Risks ___________________________________________________________________ 51

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PrefaceIn response to a request by the Government of Albania, a mission from the Fiscal Affairs Departmentof the IMF visited Tirana from June 4 to 16, 2015, to carry out a Fiscal Transparency Evaluation. The
mission included Tim Irwin, Suzanne Flynn, and Tom Josephs of the Fiscal Affairs Department, as well
as Linda Spahia of the IMF’s Resident Representative Office in Tirana and Rod O’Mahony, an expert
in government finance statistics.1
At the Ministry of Finance, the mission met Mr. Erjon Luçi, the Deputy Minister of Finance;
Ms. Gelardina Prodani, the General Secretary; Ms. Mimoza Dhëmbi, the General Director of the
Budget; Ms. Arjana Dyrmishi, the General Director of Fiscal Policy and Public Revenues; Mr. Endrit
Lami, the General Director of Macroeconomics; and Ms. Adela Xhemali, the General Director of
Financial Services. It also met, among other people, Ms. Mimoza Peço and Ms. Anxhela Kasapi of thetreasury; Mr. Genti Opre and Mr. Fran Brahimi of the budget department; and Mr. Dritan Fino, anadvisor to the Minister of Finance.
Outside the Ministry of Finance, the mission met Ms. Ilda Malile of the Ministry of the Economy,
Mr. Gjergji Mano and Mr. Enton Alika of the Institute of Statistics, Ms. Luljeta Nano and Ms. Manjola
Naço of the Supreme State Audit, Mr. Ali Emini and Mr. Astrit Hado of the Institute of Social
Insurance, Mr. Klodian Shehu of the Bank of Albania, several members of the Parliamentary budget
committee, Ms. Edina Halapi-Stansfield of the European Commission, Ms. Sigita Stafa of thedelegation of the Swiss government, and Ms. Aranita Brahaj of the Albanian Institute of Science.
The mission would like to thank all these people for their help. It would also like to thank Ms. Esi
Fezolli for arranging its meetings.

1

Advice and other assistance was provided by Miguel Alves, Ezequiel Cabezon, Kerstin Gerling, Sybi Hida, Nadeem
Ilahi, Duncan Last, Brian Olden, Kara Rideout, and Slavi Slavov.

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ALBANIAEXECUTIVE SUMMARY
This assessment of the information the Government of Albania publishes on its finances finds thatmany of the fundamental elements of fiscal transparency are now in place:The budget clearly shows the government’s forecasts of revenue and its plans for spending
and for financing the deficit. It is also detailed, showing spending on each of several
hundred government programs.

Reports on the implementation of the budget are frequent, timely, and comprehensive(though they do not consolidate public corporations). Basic data on revenue and spending
are published monthly, usually no more than 20 days after the end of the month. Quarterly
and annual reports give more detailed information. There are even daily reports listing eachgovernment payment.

The government’s direct and guaranteed debt is reported every three months. Every loan,treasury bill, bond, and guarantee is individually disclosed, and the composition of thegovernment’s debt is analyzed in ways that allow investors and others to understand theassociated risks.

The government also discloses many other sources of fiscal risk. It describes theconsequences for the deficit of lower-than-forecast economic growth, and it discusses therisks created by banks, some public investment projects, and the cost of compensating
previous owners for land expropriated during the communist era. The budget also limits thevalue of guarantees that can be issued during the year, and local governments’ borrowing isstrictly controlled by the Ministry of Finance.

As a result, Albania meets at least the standard of basic practice on 24 of the 36 dimensions of the
IMF’s Fiscal Transparency Code. On 10 dimensions, it meets the standard of good or advanced
practice. (See Tables 1.8, 2.4, and 3.4.) This achievement is all the more impressive given the
country’s relatively brief history of democracy.2
Yet there are problems with the quality and reliability of some fiscal information, or at least with themechanisms for assuring its quality:Over the past decade, the government’s budgets have on average overestimated revenue
by about 2 percent of GDP, which has encouraged unrealistic spending plans that the
government has had to cut back during the year. No independent fiscal council evaluates

2For earlier assessments of fiscal transparency in Albania, see IMF, Albania: Report on Observance of Standards andCodes—Fiscal Transparency, 2003, and International Budget Partnership, Open Budget Survey, 2012. The 2003 IMF
report on fiscal transparency is not directly comparable to this one because it assessed Albania’s practices against an
earlier version of the fiscal-transparency code. But it is clear there have been improvements since 2003. For example,
the 2003 report finds that only aggregate information on debt is available, while this report notes that detailed
breakdowns of debt are published. The 2003 report notes that fiscal data are published quarterly, while this one
notes that they are published monthly. It is also clear that much more information on fiscal risks is published. The
Open Budget Surveys for different years are directly comparable and according to the 2012 survey Albania had oneof the largest increases in transparency in the world between 2006 and 2012.

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the government’s forecasts, and the government does not explain why each new forecast
differs from the prior one. Nor does the government compare its forecasts with those ofother institutions or with actual outcomes. The problem of unrealistic forecasts undermines
what would otherwise be a transparent and effective system of budgeting and medium-term
fiscal planning.
The Supreme State Audit does not offer an opinion on whether the government’s financial
reports fairly represent public finances, and the Institute of Statistics has neither the
resources nor the safeguards of independence to produce fully credible fiscal statistics. (Atpresent, there is little or no difference in Albania between the financial reports produced byaccountants and the fiscal statistics produced by statisticians, but the international rules for
producing accounts and statistics differ in some respects.)The government’s fiscal reports contain few reconciliations of stocks and flows. For example,
no report explains how the change in the government’s debt can be reconciled with thebudget deficit. This increases the risks of errors and of hidden off-budget spending and,more generally, makes it hard for the public to see how everything adds up.

Finally, information is not always clearly presented and explained. Several departments of
the Ministry of Finance publish similar reports on aspects of public finances, which leads toduplication that in practice reduces transparency. While outturns are presented alongsidebudget plans, there is little explanation of the main reasons for major differences. There isalso no “citizens’ budget” that summarizes the main features of the budget in a simple
manner.

Nor are the fundamental elements of transparency always sufficient to fully describe public finances.
In particular, the reporting of traditionally measured spending and debt can miss importantdevelopments in public finances that show up only in other more sophisticated kinds of data. For
example, cash-based measures of spending can miss costs that are revealed by “accrual” measuresthat record the economic effect of events even when no cash changes hands. These accrual
measures link the government’s revenue and spending to a balance sheet that includes not justdebt, but assets and other liabilities. Although the government’s accounting includes elements of
accrual measurement, the absence of a fully developed system, and of other disclosures, causes
various problems:

The government pays senior civil servants and members of the police and military partly bypromising them pensions when they retire. Yet the economic cost of these promises does
not show up now in the government’s reported deficit. The budget does include payments
to current retirees, but because the pension scheme for government employees is young,these payments may be much less than the increase in the government’s liability to future
retirees. The government’s pension liability is undisclosed and is estimated to be in theregion of 1.4 percent of GDP.



Although current and capital expenditure are distinguished in the budget, the absence of areliable balance sheet makes it hard to tell whether the government’s spending is building
and maintaining the country’s essential infrastructure.

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ALBANIAThe government is also financing some public investments by means of public-private
partnerships, in which it will either pay the cost of the investment in installments orguarantee the revenue of concessionaires that will collect tolls from road users. Modern
accounting standards would require the government to record the investment in at least
some of these projects as debt-financed government spending. The government’s
traditional accounting does not do this. There are also gaps in the information provided on
the costs of publicly financed investments that take longer to carry out than the three-year
horizon of the government’s budgeting. One outcome has been the build-up of significant
payment arrears in recent years.

The government promotes investment and other activities by giving tax exemptions tocertain kinds of businesses and by taxing some goods and services at lower rates thanothers. These so-called tax expenditures are like ordinary expenditures in that they must be
paid for by levying higher taxes on other businesses or activities. Yet the government does
not report on them.

The government has plans to tackle some of these problems.3 For example, it intends to develop
accrual accounting, and a recently enacted audit law allows the Supreme State Audit to give an
opinion on the government’s accounts. The Ministry of Finance and the Institute of Statistics are also
working to improve fiscal statistics, so that they include more of the information required by the IMF
and the European Union. Getting fully satisfactory fiscal information is difficult even in advanced
economies,4 and the government should not be expected to solve all the problems immediately.
Making progress is important, however, if the government is to maintain control over publicfinances, demonstrate its accountability to the public, and satisfy the requirements of the European
Union. One of the difficulties the government faces is to develop more sophisticated information
without creating unnecessary complexity and without losing the tight connection that currently
exists between the budget and retrospective fiscal reports.
The rest of this report assesses Albania’s practices against the standards set out in the IMF’s Fiscal
Transparency Code and makes recommendations designed to address the most pressing of the
problems. It has three parts. The first looks at fiscal reporting, including the monthly, quarterly, andannual publications on the implementation of the budget. The second considers the budget andfiscal forecasts. The third examines the disclosure and management of fiscal risks. In each section,
the report assesses not only whether Albania meets the standards of basic, good, and advanced
practice set out in the Code, but also how important any shortcomings are, given Albania’s particular
circumstances. On the basis of this analysis, it recommends that the government:Include a partial balance sheet in fiscal reports, along with tables that reconcile changes inthe debt with the deficit and changes in cash balances with cash flows;

3See, in particular, Ministry of Finance, Albania: Public Finance Management Strategy, 2014–20, December 2014.

4

Fiscal Transparency Evaluations for Finland, Ireland, and Portugal, among other countries, are available at
http://www.imf.org/external/np/fad/trans/.

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Simplify fiscal reports by producing a single set of monthly, quarterly, and annual reportsthat incorporate the information currently reported separately by the treasury, the debt
department, the budget department, and the macroeconomic department;

Publish an annual report on tax expenditures that estimates the revenue foregone by all
major tax exemptions and other tax privileges;Enhance the scrutiny of its macroeconomic and fiscal forecasts by publicly comparing themwith those of other institutions, by reconciling new forecast with prior forecasts and actual
outcomes, and by considering whether to establish an independent fiscal council;

Improve the transparency of public investment projects, including public-private
partnerships, by, among other things, routinely publishing cost-benefit analyses anddisclosing the total value of the government’s commitments, project by project; andProgressively increase the scope and depth of the report on fiscal risks in the budget
document, so that it also describes the fiscal implications of public-private partnerships, thefinances of public corporations, and the long-term risks created by pensions, healthcare, andother spending programs.



Put in place appropriate measures to ensure comprehensive oversight of all public
corporations.

The key findings of the evaluation are presented in Table 0.1 below and ranked according to theirrelative importance for fiscal management.

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Table 0.1 Albania: Summary Assessment Against the Fiscal Transparency CodeLEVEL OFIMPORTANCEHIGHLEVEL OF PRACTICE
I. FISCAL REPORTING

II. FISCAL FORECASTING
AND BUDGETING

III. FISCAL RISK ANALYSIS &MANAGEMENT

1.1.2 Coverage of Stocks

2.1.2 Macroeconomic
Forecasts

3.1.2 Specific Fiscal Risks

1.2.2 Timeliness of Annual
Financial Statements

2.1.3 Medium-Term Budget

3.2.2 Asset and Liability
Management

1.3.2 Internal Consistency

2.1.4 Investment Projects

3.2.5 Financial Sector
Exposure

1.4.2 External Audit

2.4.1 Independent Evaluation

3.3.2 Public Corporations

2.4.2 Supplementary Budget

3.3.1 Sub-National
Governments

2.4.3 Forecast Reconciliation

MEDIUM

LOW

1.1.1 Coverage ofInstitutions

2.3.1 Fiscal Policy Objectives

3.1.1 Macroeconomic Risks

1.1.3 Coverage of Flows

2.3.2 Performance
Information

3.1.3 Long-Term Fiscal
Sustainability Analysis

1.1.4 Tax Expenditures

2.3.3 Public Participation

3.2.1 Budgetary Contingencies

1.4.1 Statistical Integrity

3.2.3 Guarantees

1.4.3 Comparability of Fiscal
Data

3.2.4 Public Private
Partnerships

1.2.1 Frequency of In-Year
Reporting

2.1.1 Budget Unity

3.2.6 Natural Resources

1.3.1 Classification

2.2.1 Fiscal Legislation

3.2.7 Environmental Risks

1.3.3 Historical Consistency

2.2.2 Timeliness of Budget
Documents

Legend for Tables
Practice under Fiscal Transparency Code
Not Met

Basic

Good

Advanced

LEVEL OF PRACTICE

Importance to Fiscal Management
LEVEL OF PRACTICELEVEL OFHigh

MediumLow

IMPORTANCE

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I. FISCAL REPORTING
1.
This section assesses the quality of fiscal reports against the principles of the Code.
It assesses in particular whether fiscal statistics, financial statements, and in-year and end-of-year
budget-execution reports:

Cover all institutional units engaged in fiscal activity for the whole public sector;

Record all assets and liabilities and all revenue, expenditure, financing, and other economic
flows;

Are published in a frequent and timely manner;

Are classified according to international standards;



Are comparable with each other and reconcile different balances; and

Are prepared by an independent agency (in the case of statistics) or are scrutinized by anindependent auditor (in the case of accounts).

2.
Fiscal reports in Albania have many good features. They show revenue and expenditure,
financing, and the debt of the general government, including guaranteed debt (Table 1.1). They
consolidate general government in line with international standards and are prepared monthly,quarterly, and annually in a timely manner. They also reconcile the government’s deficit with its
borrowing and other sources of financing.
3.
Data on the government’s balance sheet are fragmented and incomplete. Detailed debt
data are published on the Ministry of Finance’s website. The government’s cash balance, however, ispublished only on the Bank of Albania’s website, while information on accounts payable isprovisional, unaudited, and unpublished. Debt and cash balances are not reconciled with fiscal flows.
4.
Some reports duplicate information, while others could be improved. For example, themonthly and quarterly reports produced by the treasury department show public debt, which is also
the subject of the reports produced by the debt department. The reports produced by the treasury
also overlap with those published by the macroeconomic department. While each report offers new
information, it would be better if the Ministry of Finance produced a single report that provided all
the relevant information. Quarterly and annual reports should also show opening and closing cash
and debt, reconciled to the flows during the period. The annual report on implementation of thebudget lacks summary data on final budget outturns by economic, functional, and program
classification. It also lacks a full set of financial statements, notably a cash-flow statement and abalance sheet.

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Table 1.1. Albania: Published Fiscal Reports
Title

AuthorMonthly Fiscal
Statistics

Macroeconomic
department

Monthly Fiscal
Indicators

Treasury
department

Frequency

Lag inMonthsMonthly1Monthly1Monthly2Monthly

1

Quarterly

1

Quarterly

2+

Quarterly

1

Daily

0

Annually

11

Annually

2

Annually

5

Annually

5

Quarterly Debt
ReportQuarterly Budget
Performance report

Budgetdepartment
Macroeconomic
department
Public debt
department
Budgetdepartment

Quarterly Fiscal
Statistics

Treasury
department

Daily Payments report

Treasury
department

Report on the Budget
Law

Ministry of
FinanceAnnual Fiscal
Statistics

Macroeconomic
department

Report on
Implementation of
the Budget

Budgetdepartment

Debt Report

Public-debt
department

Content
Outturn against budget, including
year-to-date and 10-year historic
data. Shows revenue, expenditure,and financing
Monthly and year-to-date revenue,
expenditure, deficit, and financing
against budget
Performance of the economy and key
fiscal statistics
Summary of key economic and fiscal
indicators
Stocks and flows of domestic andexternal debt and guarantees.
Expenditure and outturns compared
to budget, by ministry and program
Cumulative revenue, expenditure,
deficit, and financing, expenditure byfunction, debt, local-government
spending and revenue
All payments made from the Treasury
Single Account
Assessment of outturn data in the
year-to-date, discussion of budget
policy decisions and expenditure
allocations
Outturn against budget, including
monthly, year-to-date, and historic
data. Shows revenue, expenditure,and financing.
Detailed analysis of revenue,
expenditure, and deficit outturns,
and historical time series
Domestic and external debt andguarantees; stocks and flows

Macroeconomic
department

Summary of key macroeconomic andfiscal indicators

Annually

5

Ministry of
EconomySummary of budget and spending by
Ministry and project

Annually

1

Public-internalcontrol
department

Status of internal controls

Annually5

Economy and Budget
Economy in Focus

AnnualMacroeconomic
Indicators
Public Investment
Monitoring Report
Public Internal
Financial Control ofGeneral Government
Units

Source: Ministry of Finance website, except for reports on the implementation of investment projects, which are available on thewebsite of the Ministry of Economy. All reports cover the general government.

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A. Coverage of Fiscal Reports
1.1.1. Coverage of institutions (Basic)
5.
The public sector includes about 1,500 separate entities (Table 1.2). The precise number
is unknown, but efforts are underway to compile a full list. Most of the known entities are part of thecentral government. There also about 385 entities in the local-government sector, though thenumber is expected to fall to 61 after the implementation of a new law, after the July 2015 elections.
There are also two funds in the social-security sector, one for pensions and one for health insurance.
The public sector also includes the central bank and 255 unlisted public corporations that are owned
or controlled by entities in general government―58 owned by the local government sector, theremaining by central government. Almost all the public corporations are nonfinancial; the largest of
the financial corporations, other than the Bank of Albania, is an insurance company, Insig (seeSection 3.3.2).
Table 1.2. Albania: Composition of the Public Sector

Public Sector (I + II)
I. General Government (A + B + C)
A. Central Government
Budgetary central government
Extrabudgetary units
B. Local Government
C. Social Security
Health Insurance Fund
Social Security Fund
II. Public Corporations

Number of
Entities
1,469
1,213
826
799
27
385
2
1
1
256

Source: Ministry of Finance and Institute for Statistics.

6.
Fiscal reports consolidate most entities in general government, but not public
corporations. The coverage of general government is good, but not complete: there appear to beabout 27 entities (extrabudgetary units in Table 1.2) that are part of central government according
to statistical rules that are not consolidated in the reports of general government. They include thecivil-aviation authority, the deposit insurance corporation, and moribund companies that are in theprocess of being closed down. There is no published financial information for these entities. The
inclusion of these entities in fiscal reports would be relatively easy, and lead to an increase in therating. Figure 1.1 shows the coverage of the various sectors in the fiscal reports.
7.
Table 1.3 presents an estimate of public sector accounts for 2013, the most recent year
for which data are available. It incorporates the accounts of the Bank of Albania and the 12 largest
other public corporations by revenue. The estimates for the public sector in the right-hand column
are not the sum of the components in the other columns: some large transactions and claims that

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are internal to the public sector, such as the Bank of Albania’s liabilities to the general government,
have been eliminated in the consolidation.
Table 1.3. Summary Accounts of the Public Sector, 2013
(Percent of GDP)

Sources: For general government, the Ministry of Finance’s debt reports and its draft response to the questionnaire for the
IMF’s Government Finance Statistics Yearbook, 2014. For public corporations, Open Budget Data Albania. Eliminations are IMF
staff calculations.

8.
The accounts show that expanding the institutional coverage of fiscal reports toinclude public corporations would have increased the debt and deficit. The liabilities of the
public sector were about 119 percent of GDP, whereas those of the general government (debt andaccounts payable) were about 83 percent of GDP. At the same time, public corporations havevaluable assets, and the rough estimate in the table implies that the public sector had a small
positive net worth. In 2013, the Bank of Albania and other public corporations (including theelectricity companies) made a loss, and the estimated deficit of the public sector was 6.8 percent ofGDP, compared to 5.2 percent for the general government. Although the liabilities of public
corporations are substantial, they are not especially high by international standards (Figure 1.2).

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Figure 1.1 Albania: Public Sector Balance Sheet and Coverage in Fiscal Reports(Percent of GDP)

Figure 1.2. Liabilities of the Public Sector, Selected Countries(Percent of GDP)

Sources: IMF Staff estimates for Albania, Finland, Portugal, Ireland, Philippines, and Romania, National Financial Statements forother countries, excluding PPP liabilities.

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1.1.2. Coverage of Stocks (Basic)
9.
Some data on assets and liabilities are available, but the government does not publish
its balance sheet. Debt data are published on the Ministry of Finance’s website on a quarterly andannual basis. The data do not include accounts payable, however, which are also not reported
elsewhere. Data on the government’s cash balances are available on the Bank of Albania’s website,
but not in any government report. No other balance sheet data are routinely published, though
individual government entities produce, but do not publish financial statements including a balance
sheet. Assets and liabilities related to public-private partnerships are not reported (seeSection 3.2.4); nor are the government’s liabilities in relation to the supplementary pension schemes
for civil servants, the police, and the military. (International statistical and accounting standards
require a liability to be recognized on the government’s balance sheet in relation to defined-benefit
pension schemes for government employees.) Table 1.4 presents an estimate of the balance sheet ofgeneral government for 2013, using available data. Table 1.4 presents an estimate of the balance
sheet of general government for 2013, using available data. It includes an estimate for the accrued
liability of the civil service pension scheme, based on the present discounted value of all future
pension obligations assuming that beneficiaries will continue to increase to a steady state of around
1 percent of the population.
Table 1.4. Albania: Balance Sheet of General Government, 2013

Sources: Bank of Albania and Ministry of Finance’s debt reports and draft response to the questionnaire for the IMF’s
Government Finance Statistics Yearbook, 2014. Eliminations are IMF Staff calculations.

1.1.3 Coverage of flows (Basic)
10.
Fiscal flows are recorded on a modified cash basis. The financial statements of thegeneral government record the purchase of goods and services on an accrual basis, but revenues
and much expenditure, including interest are recorded on a cash basis and no depreciation ischarged. Other economic flows resulting from holding gains or changes in the volume of assets andliabilities are not included in fiscal reports.

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11.
There are also no reconciliations of fiscal flows with fiscal stocks. For example, thegovernment does not publish a reconciliation of its cash flows during the year with its opening andclosing balances. Table 1.5 provides an estimated reconciliation. A reconciliation of the deficit withchanges in debt is presented later in the report. Among other things, reconciliations such as thesehelp provide an assurance that flow data are complete.
Table 1.5. Albania: Cash-Flow Reconciliation for General Government, 2013

Source: Ministry of Finance, including draft responses to the questionnaire for the IMF’s Government
Finance Statistics Yearbook, 2014; IMF Staff calculations.

1.1.4 Coverage of tax expenditures (Not met)
12.
Albania does not publish an estimate of the revenue loss from tax expenditures.
Estimates are published of the fiscal impact of some new tax expenditures at the time ofpresentation of tax laws to Parliament, but there is no systematic reporting of the overall costs ofexisting and new tax expenditures in budget documents or fiscal reports.
13.
Estimates provided by the Ministry of Finance show exemptions for VAT, excise duty,
and some smaller taxes resulted in revenue loss of 1.2 percent of GDP in 2014 (Table 1.6).
This is not a comprehensive figure, as no data have been provided on expenditures for taxes suchas income tax and corporation tax. However, in both these cases the average tax rate in Albania isrelatively low, suggesting expenditures are unlikely to be a large source of revenue loss. Thissuggests that total tax expenditures may not be particularly high by international standards, but
further analysis would be needed to confirm this. An OECD report from 2010 found total tax
expenditures in several OECD countries were in the range of 5–10 percent of GDP.5 Nevertheless,providing full information on all tax expenditures in the budget documents would show whichgroups and sectors currently benefit from exemptions, and the extent of overall revenue loss, and so
improve the transparency of policy-making.

5OECD (Organization for Economic Cooperation and Development), Tax Expenditures in OECD Countries, 2010.

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Table 1.6. Value of Tax Expenditures(Billion Lek)

Source: Ministry of Finance; IMF staff calculations.

B. Frequency and Timeliness of Fiscal Reporting
1.2.1. Frequency of in-year reporting (Advanced)
14.
In-year fiscal reports are frequent and timely. The Ministry of Finance produces monthly
fiscal statistics for general government that cover revenues, expenditures, and financing and are
generally published on the Ministry’s website within 20 days of the end of the month. A quarterly
report provides more detailed revenue and expenditure information by budget institution andprogram. A detailed quarterly report on public debt is also published. The information published on
individual daily payments made by the treasury is commendable and adds transparency at a
detailed level.6

1.2.2 Timeliness of annual financial statements (Not met)
15.
Fiscal outturns are produced and published in a timely manner, but do not form a setof financial statements. Fiscal outturns are published on the website of the Ministry of Finance inFebruary each year. The law requires that the annual budget-implementation report is produced
within five months of the end of the fiscal year, but delays have occurred (the report for 2014 was
not published until June). The annual budget-implementation report includes neither a table of thegeneral government outturn against budget nor a table showing budget outturn by ministry andprogram. As discussed in Section 1.1.2, none of the annual reports include stock information or acash-flow statement, which would be minimum requirements of financial statements. The audit
report—published within 12 months—is in the nature of a compliance report, and the annual fiscal
data are not amended as a result of the audit. The government plans to address these weaknesses
through adoption of International Public Sector Accounting Standards and through aligning audit
approaches to international standards.

6See this website of the Ministry of Finance, which shows daily payments made through the treasury single account.

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C. Quality of Fiscal Reports
1.3.1 Classification (Advanced)
16.
Fiscal reports show detailed information on spending and revenue in line withinternational standards. Data are published by economic classification in line with the IMF’s
Government Finance Statistics Manual 2001, by program, and by function according to the United
Nations’ classification of the functions of government. Revenues are classified according to their
type (taxes, social contributions, grants, and other revenue, and with a further breakdown of these).
Spending is classified based on administrative, program, functional and economic classifications.
17.
Different classifications are, however, shown in different reports. Aggregate data byeconomic classification compared to budget are available in the reports of both the treasury and themacroeconomic department. The treasury reports also provide actual spending by economic andfunctional classification, but the latter has no comparison with budget. The quarterly budgetmonitoring report presents budget and outturn information by administrative, economic, andprogram classification, but not functional classification (see Table 1.1).

1.3.2. Internal consistency (Basic)
18.
Fiscal reports include one of the reconciliations required by the Fiscal Transparency
Code. The reconciliation between the fiscal balance and financing is shown in the monthly,quarterly, and annual reports on fiscal statistics and fiscal indicators. Discrepancies, shown below theline under the heading “other,” are significant, and include movements in cash balances in thetreasury single account and other accounts, accrual adjustments, onlending, and adjustments tocash for funds held in trust. While a reconciliation of debt issued and debt holdings and of financing
and the change in debt is produced, it is not published (Table 1.7). Publishing such a reconciliation
would help provide assurance that the government is not engaged in off-budget spending.
Table 1.7. Reconciliation of the Deficit With Changes in Debt, 2013
Billion Lek

Percent of GDP

Debt on December 31, 2012 (includes guarantees)

828.3

60.7

Deficit

70.4

5.2

Transactions that affect the deficit but not debt (e.g. bills received but not paid)

-5.6

-0.4

Changes in in debt caused by exchange-rate movements

-6.0

-0.4

Change in guaranteed debt (mostly electricity companies)

-2.1

-0.2

Change in local governments' debt

0.1

0.0

885.1

64.9

Debt on December 31, 2013

Source: Ministry of Finance, including draft responses to the questionnaire for the IMF’s Government Finance Statistics Yearbook,
2014; IMF Staff calculations.

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1.3.3. Historical revisions (Not met)
19.
Fiscal statistics are not revised. For submissions to the IMF’s Government Finance Statistics
Yearbook, for example, the government submits only the latest year in each submission; no revisions
are made.

D. Integrity of Fiscal Reports
1.4.1 Statistical integrity (Not met)
20.
Fiscal statistics are compiled and disseminated by the Institute of Statistics (INSTAT),
but do not fully meet international and European Union requirements. In addition to compilingsome government finance statistics according to national standards, INSTAT compiles debt
published on the IMF-World Bank online database, following the Public Sector Debt Statistics Guide
for Compilers and Users. However, many gaps in the data exist, and neither INSTAT nor the Ministryof Finance produces a full submission to Eurostat. INSTAT is a professional agency, and its
responsibilities for the collection, compilation, and dissemination of statistics are clearly defined by
Law 9180 of 2004. Nevertheless, INSTAT appears to lack sufficient legal safeguards and technicalcapacity to make it truly independent.7

1.4.2. External audit (Basic)
21.
The independent Supreme State Audit publishes an annual report on theimplementation of the budget, but does not issue an opinion. It audits the report on
implementation of the budget, the annual report on public debt, and the individual statements of
selected entities with over 50 percent state ownership. Audit coverage is limited: for 2013, only
124 out of 1,469 entities (8 percent, approximately 40 percent of budget spending) were audited,
including a risk-based sample of ministries, departments, agencies, local governments, projects, andpublic enterprises. However, there is currently no certification or audit opinion on the individual
financial statements of central or local budget institutions or on the consolidated fiscal statement. A
new law on the organization and functioning of the supreme audit institution (Law 154 of 2014) was
passed in February 2015, which gives authority for the institution to issue an opinion on the annual
financial statements of general government units and the annual report on implementation of thebudget. The Chairman of the Supreme State Audit is appointed by Parliament and can only beremoved on recommendation of the President under specified circumstances, the office has accessto all records and discretion to plan and execute audits. The Supreme State Audit is a member of theInternational Organization of Supreme Audit Institutions and is gradually moving toward operatingin accordance with international audit standards.

7

See European Commission, Albania: Progress Report, 2014, p. 35.

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1.4.3. Comparability of fiscal data (Basic)
22.
Fiscal reports are comparable with the budget. The monthly fiscal statistics (budget
outturns) are prepared and published on the same basis as the budget, as is the annual fiscal table.
Published fiscal statistics do not differ from other fiscal data. Since there are no differences, there isno need for reconciliation. Producing fiscal statistics that follow all European (and IMF) standards
will, however, require several changes that will cause them to differ from budget outturns. For
example, the statistics will need to cover various entities that are outside the budget but are
deemed to be part of general government (see Section 1.1.1). These changes will create a need forreconciliations between the budget deficit and the deficit in fiscal statistics.

E. Conclusions and Recommendations
23.
Table 1.8 summarizes the assessment of Albania’s practices against the Code. It showsthat in some areas Albania meets the standard of advanced or good practice, particularly in the
coverage, frequency, and classification of data. It also shows that improvements are needed inseveral areas, particularly in the reporting of stocks—including accounts payable and liabilities
related to public-private partnerships and civil-service pensions—and of tax expenditures. The
integrity of reports could be further improved by publishing reconciliations between stocks andflows, requiring an audit opinion on annual financial statements, and making INSTAT fully
independent. The following recommendations are designed to address these issues.
24.
Recommendation 1.1: Balance sheet and stock-flow reconciliations. Gradually develop abalance sheet for the public sector that is integrated with reports on revenue and spending:Publish reconciliations of changes in cash balances with cash flows and changes in debt withthe deficit in advance of a move to full accrual accounting.



Publish a balance sheet for the general government, starting with financial assets andliabilities (initially, cash, advances, accounts payable, and debt).

Progressively expand the balance sheet to include all financial and nonfinancial assets andliabilities, including those related to pensions and public-private partnerships.

25.
Recommendation 1.2: Rationalization of reports. Reduce the duplication of informationin fiscal reports by publishing one definitive set of monthly, quarterly, and annual data, crossreferenced to supporting information.
26.
Recommendation 1.3: Tax expenditures. Publish every year an estimate of revenue
foregone from tax expenditures by type.

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Table 1.8. Summary Evaluation of Albania’s Fiscal Reporting
Principle

Assessment

1.1.1

Coverage ofInstitutions

Basic: Published fiscal reports
consolidate most of general
government, with some 27 entities
excluded, but not the public sector.

1.1.2

Coverage ofStocksBasic: Debt is reported by the Ministryof Finance and cash by the Bank ofAlbania; other financial assets andliabilities are not reported.

Coverage of Flows

Basic: Many fiscal reports show cash
revenues, near-cash expenditures, andfinancing; separate cash and accrual
data are not published.

1.1.3

1.1.4

1.2.1
1.2.2

Tax Expenditures
Frequency of Inyear Fiscal
Reports
Timeliness ofAnnual Financial
Statements

1.3.1

Classification

1.3.2

Internal
Consistency

1.3.3

Historical
Consistency

1.4.1

Statistical
Integrity

1.4.2

External audit

1.4.3

Comparability offiscal data

Not Met: Estimates are made of thecost of exemptions when laws are
passed, but there is no annual report on
total tax expenditure.
Advanced: Cash-based budgetexecution reports are publishedmonthly, with a lag of less than a month.
Not met. The report on implementationof the budget is published/within 6months of the end of the fiscal year, butdoes not include financial statements
Advanced: Fiscal reports include
administrative, functional, program, andeconomic classifications consistent withinternational standards.
Basic: Fiscal reports reconcile the deficit
with financing, but not with changes in
debt.
Not met: Fiscal statistics are not revised.
Not Met: Fiscal statistics are
disseminated but do not yet meetinternational standards.
Basic: An independent supreme audit
institution publishes a report on
implementation of the budget, based ona limited audit sample, but not an
opinion.
Basic: Budget-execution reports areprepared on the same basis as thebudget. (Fiscal statistics or financial
statements different from budgetexecution reports have not yet been
published).

Importance
Medium: Missing parts of general
government appear small; public
corporations including central bank
add non-equity liabilities of about 33
percent of GDP.
High: General government
unreported, civil service pensions, PPPs
and accounts payable for 2013 are
estimated at 9.6 percent GDP.
Medium: Fuller data on fiscal flows
will help in reconciling them withstocks and meeting international
statistical standards (GFSM
2014/ESA2010).
Medium: Revenue loss from tax
expenditures was at least 1.2 percent
of GDP in 2014.

Rec.

1.1

1.2

1.3

Low: Fiscal outturns are publishedwithin 20 days.
High: The Budget implementation
report should include the financial
statements. .
Low: Information is available but
scattered among different
publications.
High. Unexplained changes in debt
stock were -1 percent and 1.5 percent
GDP in 2013 and 2014.
Low: Revisions are valuable, but thepriority is to prepare comprehensive
and robust fiscal statistics.
Medium: Meeting EU standards will
require stronger safeguards of theintegrity of reporting.

1.1

High: Only 8 percent of entities were
subject to audit in 2013.

Medium: Reconciliations will become
important in the future, when there aredifferences between budget outturns
and fiscal statistics.

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II. FISCAL FORECASTING AND BUDGETING
27.
This section assesses the quality of fiscal forecasting and budgeting practices relative
to standards set by the IMF’s Fiscal Transparency Code. It focuses on four main areas:

The comprehensiveness of the budget and associated documentation;The orderliness and timeliness of the budget process;

The policy orientation of budget documentation; andThe credibility of the fiscal forecasts and budget proposals.

28.
Albania’s fiscal forecasting and budgeting practices meet advanced or good standards
in several areas. The annual budget is regulated by comprehensive fiscal legislation. The
government produces regular medium-term macroeconomic and fiscal forecasts and sets out
medium-term expenditure plans on a ministry and program basis. This information is provided toparliament and published in a full set of budget documents (Table 2.1). The annual budget process
is typically completed on a timely basis with approval by parliament before the start of the fiscal
year.
29.
However, there is scope for significantly improving the credibility of fiscal forecasting
and budgeting. Over recent years, budget-year and medium-term revenue projections have been
consistently optimistic. As a result, the medium-term expenditure projections have not provided areliable guide for planning, and the approved budget has often been reduced significantly during
the year, undermining the credibility of the budget process. The government’s forecasts are notcompared to those of external forecasters, subject to independent evaluation, or assessed for
accuracy. Furthermore, little explanation is provided of the factors causing changes compared toprevious forecasts and plans—in particular, the impact of new budget policy decisions on the publicfinances is not systematically quantified or explained. Limited information is provided on obligations
under multi-annual investment projects and there are weaknesses in project appraisal andimplementation.
30.
There are also shortcomings in the policy orientation of the budget. The government
does not clearly state and report on fiscal objectives to guide policy-making. Public participation in
the budget is limited, and no accessible summary of the implications of budget policy decisions is
produced. Detailed performance objectives and targets for ministries and policy programs are
specified and monitored, but have limited influence on policy-making.

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Table 2.1. Albania: Fiscal Forecasting and Budget Documents
Document
National Economic Reform Program(previously Economic and Fiscal
Program)Macroeconomic and Fiscal Framework

Medium-Term Budget Program

Budget Law and accompanying tables
Report on the Budget Law
Ministry of Finance Monitoring
Reports
Economy and Budget
Economy in Focus
Annual Macroeconomic Indicators

Content
Report to the EU providing detailed three-year
macroeconomic and fiscal analysis and forecasts andmedium-term economic strategy
Summary of government’s three-year medium-term
macroeconomic and fiscal forecasts
Summary of government’s three-year medium-term
macroeconomic and fiscal forecasts and expenditureand outcomes plan by program and ministry
Final aggregate budget revenue, expenditure, andfinancing tables
Assessment of outturn in the year-to-date,discussion of main new budget policies andexpenditure allocations
Quarterly and annual reports on expenditure andoutcomes compared to budget by ministry andprogramMonthly report on the performance of the economy
and key fiscal statistics
Monthly summary of key economic and fiscal
indicators
Annual summary of key economic and fiscal
indicators

TimingJanuary
JanuaryFirst draft in Spring.
Final draft publishedafter budget
approval
October/November
October/November
Quarterly andAnnualMonthlyMonthly
AnnualSource: All documents can be found in the reports section of the website of the Ministry of Finance.

A. Comprehensiveness2.1.1 Budget unity (Basic)
31.
Budget documentation excludes the revenues, expenditures, and financing of several
central government entities. The 2008 Law on the Management of the Budgetary System defines
the state budget to include all revenues, expenditures, and financing of the central government(Article 5). Article 7 of the law provides for the establishment of extrabudgetary or “special” funds ofcentral government, and requires that their budgets are presented and approved with the statebudget.8 The revenues, expenditure, and financing of local government are also presented in thestate budget. However, as discussed in Section 1.1.1, there are several entities that should be added
to central government according to statistical rules, and are not currently covered in the budget.
Further, the financing of loss-making public corporations is not fully covered. For example,
guarantees provided to electricity companies have not been included in the budget tables, despite
the gross exposure being included in the calculation of gross debt. Debt-financed investment in the
8Three special funds have been established and are included in the budget: a social-security (pensions) fund, ahealth-insurance fund, and an infrastructure-compensation fund. The financing and expenditure of a further fundestablished in law as a nonprofit organization, the Albania Development Fund, is also included.

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electricity sector is also not included, despite also being included in gross debt. These issues make it
difficult to reconcile changes in the debt stock with the flows shown in the budget tables (for wider
discussion of the reconciliation of debt stock with flows see Section 1.3.2).
32.
All revenues and expenditures are reported in the budget on a gross basis, as required
by Articles 5, 6, and 7 of the budgetary system law. Revenues collected directly by ministries andagencies amounted to around 17 percent of gross expenditures in 2015. As shown in Figure 2.1 thisis in line with levels seen in other countries surveyed. The bulk of these revenues are accounted forby contributions to the social security fund, which were expected to amount to around 12 percent ofgross expenditures in 2015.
Figure 2.1. Social Security Contributions and Own-Source Revenues, Selected Countries(2010–15, Percent of gross expenditure)

Sources: Albania: Medium-Term Budget Program 2014; Other countries: National documents; IMF staff calculations.

2.1.2. Macroeconomic forecasts (Advanced)
33.
Albania produces detailed medium-term macroeconomic forecasts that are intended
to underpin budget planning. Three-year forecasts are produced of the key macroeconomic
variables, their components, and the underlying economic assumptions. Summary forecast tables
are published in the Macroeconomic and Fiscal Framework in January each year at the start of themedium-term budget process. A detailed explanation of economic performance and theassumptions underlying the forecast is set out in the National Economic Reform Program, provided
to the EU in January each year. The forecast and a summary explanation are also set out in theMedium-Term Budget Program (MTBP), which is provided in draft to the Council of Ministers
alongside the draft budget law and is then updated and published after the final budget has been
approved.

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34.
Over the past decade, budget-year and medium-term GDP forecasts have been
consistently optimistic (Figure 2.2). In particular, since the downturn in 2009, successive forecasts
have predicted a recovery in growth rates that did not materialize. As shown in Figure 2.3, between
2002 and 2012, Albania’s GDP forecast errors were large in comparison to EU member states.
Budget-year forecast errors averaged −1.5 percentage points, which was the second largest among
the countries shown, while errors for one and two years out were also relatively large at −2.2
percentage points and −2.5 percentage points, respectively. This is despite the fact that, as shown in
Section 3.1.1, GDP volatility in Albania has been low compared to countries in the region. Further
discussion of the credibility of the macroeconomic forecasts is provided in Sections 2.4.1 and 2.4.3.
Figure 2.2. Forecasts and Outturn for Real GDP Growth(Percent)

Figure 2.3. Average Forecast Errors for Real GDP Growth, Albania and EU countries(2002–12, Percentage points)

Sources: IMF staff calculations; Eurostat; Medium-Term Budget Program.
Note: Countries are ordered by the size of budget-year errors. The EU includes a number of high-income countries whose
forecasting practices would meet “advanced” practice under the Code. However, it is an appropriate group for comparison given
Albania’s EU candidate-country status.

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2.1.3. Medium-term budget framework (Good)
35.
Albania introduced a medium-term budget framework in 2000 based on three-year
fiscal projections and expenditure plans on a ministry and program basis. The plans are set out
in the MTBP, which provides three-year projections of revenues, expenditures, and financing by
economic category and by ministry and program, and two years of outturn data by economic
category. Annual data on outturns for individual ministries and programs are provided separately
in budget-monitoring reports, but no historical series is published. The MTBP is approved by aStrategic Planning Committee chaired by the Deputy Prime Minister before being submitted to theCouncil of Ministers. Subsequently the MTBP is submitted to Parliament alongside the main budget.
In 2014, the MTBP was for the first time approved by Parliament alongside the Budget Law. This isintended to strengthen the role of the outer-year ceilings in budget policy-making and planning.
Previously the outer-year ceilings were seen as purely indicative and were often adjusted
significantly between successive MTBPs.
36.
The credibility of the medium-term budget framework has been undermined byconsistently optimistic revenue forecasts. As shown in Figure 2.4, during the period 2002–12,
Albania’s average medium-term revenue forecast errors were among the highest among the EU
member and candidate countries. These errors are likely in large part to have been caused by the
optimism of the GDP forecasts, as discussed in Sections 2.1.1 and 2.3.3. As a result, the expenditure
projections set out in the MTBP have proved an unreliable basis for planning. Final outturn has beensignificantly lower on average than the projections made in the medium-term framework(Figure 2.5).
Figure 2.4. Revenue Forecast Errors(2002–12, Percentage points)
6
4

Underforecast20-2Overforecast-4Budget year

-6

Budget year + 1-8Budget year + 2

Sources: IMF staff calculations; Eurostat; Medium-Term Budget Program.
Note: Countries ordered by Budget year + 2.

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Finland

Hungary

IrelandDenmark

Austria

Belgium

Estonia

Germany

Netherlands

Luxembourg

Italy

FranceUnited Kingdom

CyprusSlovenia

SwedenCzech Republic

Slovak Republic

Spain

Lithuania

Malta

PolandRomania

Portugal

GreeceAlbania

LatviaBulgaria-10

ALBANIA

Figure 2.5. Difference Between Expenditure Projections and Outturns(2002–12, Percentage points)

Sources: IMF staff calculations; Eurostat; Medium-Term Budget Program.
Note: Countries ordered by Budget year + 2.

2.1.4. Investment projects (Not met)
37.
Limited information is provided on financial obligations under multi-annual
investment projects. The MTBP includes the objectives and expected outputs of each investment
project and the estimated expenditure in the current year and over the three-year planning horizon.
However, no estimate is provided of the full value of obligations for each project, despite this being
required by Article 29 of the budgetary system law, or of the overall total obligations for all projects.
As set out in Section 3.2.4, there is also very little reporting of investment projects financed as
public-private partnerships. The government acknowledges in its Public Finance Management
Strategy 2014–20 that multi-annual project controls are weak, with ministries entering into contracts
without accounting for the impact on future years’ budgets, and it is considering reforms to address
this issue. It has already introduced a new treasury approval process for multi-annual commitments.
38.
There are also weaknesses in project appraisal, selection, and implementation. Costbenefit analysis is undertaken for major projects, but the results are not published. The law on public
procurement requires that all major projects should be contracted via open and competitive tender,
but this has not been the case for two very large projects—part of the Durrës to Kukës road and the
new Arbëri road—which were implemented through specific pieces of legislation that overrode thestandard tender process.
39.
Government investment spending has been relatively high over the past decade,reflecting the country’s infrastructure and development needs (Figure 2.6). This is despite thefact that capital spending has been typically reduced significantly compared to the original medium-

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term and annual plans set out in the budget. As set out in Section 2.1.3, expenditure projections
have been consistently higher than final outturn in Albania. Figure 2.7 shows that capital spending
outturns have been on average 30 percent lower than plans set three years ahead, and 17 percent
lower than in the annual budget. This probably reflects the fact that capital spending is often easierto reduce than current spending in the face of shortfalls of revenue against forecast.
Figure 2.6. Gross Capital Expenditure of General Government, EU and Selected Countries(2002–13, Percent of GDP)

Figure 2.7. Albania: Difference Between Expenditure Plans and Outturn(2002–14, Percentage points)

Source: IMF staff calculations; Eurostat; Medium-Term Budget Program.

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B.

Orderliness2.2.1. Fiscal legislation (Advanced)
40.
Albania has a comprehensive legal framework covering budget preparation andapproval and the key contents of budget documentation. The 1998 Constitution sets out key
provisions for the public finances, such as a framework of state and local budgets and the broad
powers of the executive and the legislature. The Law on the Management of the Budgetary Systemestablishes, among other things, the system of budgeting, the roles and responsibilities of the mainstakeholders, the process for budget preparation, analysis, and approval (including the required
contents of budget documents), the budget implementation process, authority to borrow and issue
guarantees, and accounting and auditing practices. There are also laws on local government, debt
management, public procurement, audit, and tax administration. 9
41.
The Law on the Management of the Budgetary System does not place restrictions on
the legislature’s constitutional power to amend the budget, which is therefore without limit.
The constitution states that parliament must approve the budget and also that it may amend thebudget during the year (Articles 158 and 160). The budgetary system law sets out the timetable forparliament to approve the budget and procedures for the provision of an interim budget if approvalhas not been granted within this timetable (Articles 30, 35, and 36). It also sets out procedures formaking in-year amendments to the budget (discussed further in Section 2.4.2). However, there are
no procedures establishing the extent to which parliament may amend the budget, which, given the
broad power to amend provided under the constitution, is therefore without limit. As set out in
Section 2.4.2, in recent years the government has used wider legislative procedures to bypass thestandard approval process for in-year budget changes.

2.2.2. Timeliness of budget documents (Good)42.
The budgetary system law requires the draft budget to be submitted at least twomonths before the start of the fiscal year and approved by the start of the fiscal year. As
shown in Table 2.2, in general in recent years these deadlines have been adhered to, with the major
exception of the submission of the draft budget for 2014, which was delayed by a general election inJune 2013. The draft and final budget documents are made available to the public on the Ministry of
Finance website at the same time as they are submitted and approved.

9 A full list of related laws is provided in: Albania – Public Economic Financial Accountability Assessment 2011, January

2012, p. 22.

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Table 2.2. Albania: Dates of Budget Submission and Approval
Budget year

2011

2012

2013

2014

2015

Budget submitted

Oct. 29

Oct. 31

Oct. 30

Dec. 15*

Nov. 3

Budget approved

Nov. 26

Dec. 2

Dec. 17

Dec. 28

Nov. 27

Sources: National budget documents.
Note: * submitted late due to general election in June 2013. The new government was not sworn in until September 2013.

C. Policy Orientation
2.3.1. Fiscal policy objectives (Not met)
43.
Currently the government does not report on clear and measureable objectives for the
public finances. In 2012, the government abolished a debt ceiling of 60 percent of GDP, which had
served as its fiscal objective since 2008. An objective of reducing debt to 65.5 percent of GDP is
mentioned in the 2014 report on the Budget Law, but this does not appear in other budget
documents and there is no regular reporting on progress toward achieving it. For example, it does
not consistently appear in the MTBP or the Macroeconomic and Fiscal Framework, both of which areintended to set the fiscal framework within which budget policy decisions are taken.
44.
The government has stated that it intends to introduce a fiscal rule at the end of thecurrent IMF-supported program. By 2015 it intends to establish fiscal rules “that will guide fiscal
policy toward long-term sustainability of public debt, leaving reasonable room for counter-cyclicalpolicy.”10

2.3.2. Performance information (Advanced)
45.
The MTBP provides very detailed targets for the outcomes and outputs to be achieved
under each of around 100 policy programs. Objectives are set at three levels: ministry, program,and output. The MTBP sets out the overall policy objective of each ministry, outcome and output
targets, and the programs that will contribute to meeting those targets. Each program then has anumber of specific targets specified for each year. Each program is further divided into several
outputs, which each have specified objectives, output targets, and expenditure allocations for the
medium term. Implementation of budgeted expenditure and discussion of performance against
these targets is reported in quarterly monitoring reports published on the Ministry of Finance’s
website for each ministry, and on an annual basis in the Report on the Implementation of the Budget.
46.
While the performance information and framework meets the advanced requirementsof the Code, in practice it plays a limited role in policy making or improving public services.
The very large number of targets at the program and output level limits their value in providing
strategic direction for policy or in scrutinizing the performance of ministries. While monitoring
10

National Economic Reform Programme 2015–17, p. 46. See also Public Finance Management Strategy 2014–20.

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reports are produced, ministries have not been systematically held accountable for shortfalls against
performance targets. Moreover, as set out in Section 2.1.3, the medium-term plans have not beenrealistic in the past which undermines the credibility of the process.

2.3.3. Public participation (Not met)
47.
The government does not produce an accessible summary of the budget for citizens,and there are few opportunities for the public to participate in budget deliberations. The
government’s Public Finance Management Strategy 2014–20 states that it will prepare a simplified
citizens’ budget in 2015. The Open Budget Survey 2012 of Albania finds that opportunities for public
participation in the budget process are limited. It reports that there are no mechanisms for
consultation or feedback with the public by the executive, and only limited opportunities for the
public to participate in budget scrutiny and approval by the legislature.

D. Credibility
2.4.1. Independent evaluation (Not met)
48.
The government’s economic and fiscal forecasts are not subject to independent
evaluation or compared with those of independent forecasters. As set out in Sections 2.1.2 and2.1.3, consistently optimistic macroeconomic and revenue forecasts have undermined the credibilityof Albania’s medium-term budget framework. The government’s Public Finance Management
Strategy 2014–20 identifies options for addressing this issue, including setting up an independent
fiscal council to either produce or assess the forecasts, or obliging the government to use an
average of the forecasts produced by the central bank and international organizations.

2.4.2. Supplementary budget (Basic)
49.
The Law on the Management of the Budgetary System sets out procedures governingin-year changes to the budget, but changes have been made without prior approval by the
Parliament. The law allows two types of changes to be made without the prior approval of
Parliament. First, under Article 44 reallocations of funds can be made between programs, up to
10 percent of the total funds approved for the program, while reallocation of funds can be madewithin programs with no limit. Second, under Article 45 supplementary funds can be made available
for unforeseen expenditures from a reserve fund. The budget has also included a smaller
contingency reserve which can be released if revenue forecasts are realized (Section 3.2.1). Under
Article 46, additional changes require the Annual Budget Law to be amended, which requires theapproval of Parliament. However, in recent years, the government has used a procedure establishedin the constitution, known as a “Normative Act,” to make in-year changes to the budget that only
require ex post approval by Parliament within 45 days.
50.
Using one or more of these procedures there have been significant changes to theapproved budget in recent years, typically in response to shortfalls in revenue. Figure 2.8
shows that since 2002 the final expenditure outturn has often been significantly lower than the

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submitted budget. Typically only small amendments have been made to the submitted budget
before its approval by parliament. However, there have often been significant reductions to
expenditure allocations in the approved budget during the year through supplementary budgets.
There has also often been a significant expenditure shortfall between the supplementary budget
and final outturn. In the most recent two years, this has been due to the use of Normative Acts. In
other cases, it has been due to shortfalls in the execution of the budget during the year. As shownin Figure 2.9, the reduction in spending compared to the submitted budget is large by international
standards.
Figure 2.8. Albania: Changes to the Submitted Budget(Percent)

Figure 2.9. Difference Between Submitted Budget and Outturn in Selected Countries(2008–12, Percent)

Sources: IMF staff calculations; Albania: Medium-Term Budget Program; Other countries: National budget documents.

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2.4.3. Forecast reconciliation (Not met)
51.
The budget documentation does not explain changes between successive forecasts.
In particular, there is no explanation of the differences between successive vintages of fiscal
forecasts broken down into the effects of individual policy changes, new macroeconomic forecast
determinants, and other factors such as classification changes. The Report on the Budget Law and theReport on the Implementation of the Budget provide some discussion and quantification of the fiscal
impact of selected policy changes, but there is no explanation or quantification of the overall impact
on the forecast. Similarly, the government does not publish an assessment of its past forecast
accuracy, including an analysis of why outturns have differed from forecasts, as discussed in
Section 2.3.1.
52.
Over the past decade there have been significant revisions between fiscal forecast
vintages, and, as set out in Section 2.1.3, relatively large errors. Figure 2.10 shows the change
between successive forecasts of revenue and expenditure for a specific year and the change
between the final forecast (t) and outturn. In several years, there have been changes between
forecast vintages of up to 15 percent of total revenues or expenditure.
Figure 2.10. Difference Between Successive Forecasts and Final Outturns(Percent)
Expenditure

Revenue

Sources: IMF staff calculations; Medium-Term Budget Program.

53.
Publishing regular forecast reconciliations could help improve the reliability andcredibility of Albania’s forecasts and budget plans. Box 2.1 provides an example of how aforecast reconciliation could be used to identify the major causes of change between forecasts andoutturn, and use this to improve understanding of the drivers of the fiscal position and the impact ofpolicy decisions, and to learn lessons for subsequent forecasts and budget plans. The same type ofanalysis can also be used to examine changes between successive forecast vintages.

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Box 2.1. Example of Forecast Reconciliation
This box provides an example of the type of forecast reconciliation that should be published on a moredetailed and systematic basis by the Ministry of Finance. Table 2.3 compares the government’s 2011
medium-term forecast for revenue and expenditure with the outturn, as reported in 2015. The largest
source of revenue error was VAT, which is the biggest revenue source. On expenditure there were large
errors in interest spending and in capital spending (an issue highlighted in Section 2.1.4).
Table 2.3. Composition of Forecast Errors (Million lek)
Revenue

2012

2013

2014

Expenditure

2012

2013

2014

2011 Forecast

353,759

375,833

400,732

2012 Forecast

394,922419,569

447,366

2015 Outturn330,384

327,178

367,9492015 Outturn376,241

394,118

456,404

Difference-23,375-48,655-32,783

Difference-18,681-25,451

9,038-12,042of which:of which:

VAT-10,766-24,458-20,571-9,952-12,716

Income tax-5,127-8,368-3,233Current, of which:Personnel-1,455-2,817-3,052

Excise-6,338-7,679-4,624

Interest-8,102-10,083-17,320

Personal income tax-1,765-2,254-5,826

Operating expenses

2,583

2,669

5,856

Other national taxes

6,079

3,860

7,303

Special funds-1,630-1,613-1,188

Local revenues-3,765-6,189-7,134

Local budget-2,451-3,307

62

Income from special funds-2,102-2,741-3,384

Other

1,103

2,435

3,600

-5,829-6,149-8,5860035,000-2,900-6,586-5,334

Non-tax revenue

3,352

5,073

9,082

CapitalOther-2,943-5,899-4,396

Arrears repayment
Other

Source: Medium-Term Fiscal Frameworks 2012–14 and 2016–18.

The next step would be to examine the causes of the largest errors. Figure 2.11 compares errors in theforecast of the growth of VAT to errors in the forecast of the growth of nominal private consumption,
which is the main macroeconomic driver of VAT receipts. The pattern is similar, which suggests optimism
in the macroeconomic forecast was an important cause of the error in the forecast of VAT receipts.
Figure 2.11. Comparison of Macro and Fiscal Forecast Errors (Percentage Points)
2012

2013

2014
5.1

1.9

-0.8
-3.6

Growth in VAT
Growth in nominal private
consumption

-10.7

-11.1

Source: IMF Staff Calculations, Economic and Fiscal Program 2012–14 and 2015–17.

Table 2.4 breaks down the forecast error for interest payments into components caused by the forecasts
for the effective interest rate and the nominal debt level. The main cause of the error was the forecast of
the effective interest rate. In 2011, the effective interest rate on government debt was expected to rise to
6.9 percent by 2014, but it actually fell to 4.2 percent. This was partially offset by the error on nominal
debt, which was forecast to fall to 54.3 percent of GDP by 2014, but in fact rose to 71.8 percent of GDP.

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Box 2.1. Example of Forecast Reconciliation (concluded)
A significant component of the overall error in 2013 is not explained by either nominal debt or interest
rates. More detailed analysis of large errors such as this could help improve future forecasts.
Table 2.4. Decomposition of Errors in the Forecast of Interest Payments (Million lek)
Interest payments

2012

2013

2014

2012 Forecast

49,60053,41857,4202015 Outturn41,49843,335

40,100Difference-8,102-10,083-17,320

Interest rates-11,361-14,552-24,054

Debt level

4,078

8,157

7,698

Other

-819

-3,689-964

Of which due to:

Source: IMF Staff Calculations, Economic and Fiscal Program 2012–14 and 2015–17.

Figure 2.12 provides an illustrative decomposition of errors in the government’s 2011 gross debt forecast.
In 2011, gross debt was forecast to fall slightly over the medium term, but in fact compared to the original
debt estimate for 2011 it had increased by 16 percent of GDP by 2014. A significant driver was the higherthan-expected primary deficit over this period, partially offset by lower-than-expected interest payments.
A large contribution also came from errors in the forecast of the stock-flow adjustment (i.e., the difference
between the deficit and the increase in debt). This was forecast to reduce gross debt over the forecast
period by 9.3 percent of GDP, but actually only caused a reduction of 1.5 percent of GDP, so causing an
overall positive forecast error of 8 percent of GDP. Again, further investigation of this type of error could
help improve future fiscal forecasts. It also underlines the value of debt-deficit reconciliations(Section 1.3.2)
Figure 2.12. Decomposition of Errors in the Forecast of Gross Debt (Percent GDP)
18
16
14
12
10
8
6
4
2

0
-2
Expecteddecrease
2011-2014

Revision to2011 debt

Primarybalance

Interest
expenditure

Stock-flow
adjustment

Unexplained

Actualincrease
2011-2014

Impact on change in debt of difference
between forecast and outturns

Sources: IMF staff calculations; Economic and Fiscal Program 2012–14 and 2015–2017.

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E. Conclusions and Recommendations
54.
Table 2.5 summarizes the assessment of Albania’s practices against the Code. It showsthat in many areas Albania meets the standard of advanced or good practice, particularly in theprinciples related to the timeliness and orderliness of fiscal forecasting and budgeting. There is also
room for improvement in several areas, particularly in the policy orientation and the credibility ofannual and medium-term planning. The government’s Public Finance Management Strategy 2014–20
sets out options for addressing some of these problems, such as introducing fiscal objectives andpublishing a citizens’ guide to the budget. It will also be important to address the optimism bias inannual and medium-term forecasts, which has led to the need to reduce expenditure compared tomedium-term plans and budget allocations, in some cases without prior approval from Parliament
through supplementary budgets. The management of multi-annual investment projects should also
be addressed, particularly given that investment spending is relatively high as a share of GDP. The
following recommendations are designed to address these issues.
55.
Recommendation 2.1: Forecasts. The government should enhance the scrutiny andanalysis applied to its annual and medium-term forecasts by:

Requiring the budget forecast documents to include a comparison with forecasts produced
by external institutions and an explanation of any significant differences;

Requiring the publication in budget forecast documents of a quantification and explanationof the factors, including new policy decisions, causing changes between successive fiscal
forecasts, and annually publishing a quantification and explanation of the source of forecast
errors and setting out lessons for future forecasts; andConsidering the case for establishing an independent fiscal council to provide an assessmentof the government’s forecast, if it can be given independence from political interference andprovided with sufficient technical capacity without significantly reducing the pool ofexpertise available to the Ministry of Finance.

56.
Recommendation 2.2: Public investment projects. The government should improve thetransparency and management of investment projects, including public-private partnerships andprojects managed by the Regional Development Fund, by:

Publishing in budget documents the total value of its obligations for each multi-annual
investment project, including: (i) expected total lifetime cost; (ii) spending appropriated in
the budget year; (iii) spending prior to the budget year; and (iv) total remaining costs over
the MTBP period and beyond the MTBP period;Consistently applying a set of general guidelines for project appraisal and cost-benefit
analysis for all major investment projects and publishing the final analysis; and

Ensuring all investment projects follow an open and competitive tender process.

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Table 2.5. Summary Evaluation of Fiscal Forecasting and Budgeting
Principle

Assessment

2.1.1

Budget Unity

Basic: The budget is presented on a grossbasis but excludes several institutions whichshould be classified to central government.

2.1.2

Macroeconomic
Forecast

2.1.3

Medium-Term
Budget2.1.4

Investment
Projects

2.2.1

FiscalLegislation

2.2.2

Timeliness of
BudgetDocuments

2.3.1

Fiscal Policy
Objectives

2.3.2

Performance
Information

Advanced: Targets are set for outcomes andoutputs to be achieved under each policy
program, and progress is monitored
quarterly.

Medium: Very large number of
performance targets, but use in thebudget process is limited.

2.3.3

PublicParticipation

Not met: There is no accessible citizens’
guide to the budget and public participationin the budget is limited.

Medium: Open Budget Survey finds
opportunities for public participation inbudgeting are limited.

2.4.1

Independent
Evaluation

Not met: Forecasts are not compared tothose of external institutions or subject toindependent evaluation.

High: Macroeconomic and fiscal
forecasts have been unrealizable, as set
out in Sections 2.1.2 and 2.1.3.

2.1

2.4.2

Supplementary
BudgetBasic: The budgetary system law sets out
procedures governing in-year changes to thebudget, but material changes are madewithout prior approval by Parliament.

High: Approved spending was reducedby 6 percent on average over 2002–14.

2.1

2.4.3

Forecast
Reconciliation

Not met: Budget documentation does not
explain changes from previous fiscal
forecasts.

High: Changes between forecast
vintages have reached 15 percent ofrevenues and expenditures.

2.1

Advanced: Budget projections are based on
macroeconomic forecasts with explanationsof key variables, their components, and theunderlying assumptions.
Good: Budget documentation includes
medium-term projections of revenues,
expenditures, and financing by economic
category, ministry, and program, but twoyear outturns only by economic category.
Not met: The total value of obligations
under multi-annual investment projects is
not disclosed, cost-benefit analysis is not
published, and competitive tenders are notused for all projects.
Advanced: The legal framework defines thetimetable for budget preparation andapproval, key contents of budget
documentation, and the powers of theexecutive and legislature.
Good: The budget is submitted to thelegislature and published at least twomonths before the start of the fiscal year,
and approved and published before the startof the fiscal year.
Not met: The government does notconsistently state or report its performanceagainst measurable objectives for the publicfinances.

ImportanceRec.

Low: Own-source revenue is around 3
percent of gross expenditures.
High: Average year-ahead real GDP
forecast errors of 1.5 percent points over
2002–13.

2.1

High: Average two-year-ahead revenue
and expenditure errors of 2 percent
points of GDP over 2002–13.

2.1

High: Government investment averaged
7 percent of GDP over 2002–13, one of
the highest in the region.

2.2

Low: Parliament’s power to revise thebudget is unlimited, but revisions to thesubmitted budget were only 0.3 percent
over 2002–14.

Low: Budgets have been routinely
approved by the start of the year.

Medium: The debt ratio has been risingsince 2008, reaching 72.6 percent GDP in
2014.

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III. FISCAL RISKS
57.
This section assesses the government’s analysis, reporting, and management of fiscal
risks compared to the practices set out in the Code. It looks at three dimensions of the issue:
General arrangements for disclosure and analysis of fiscal risks;

Reporting and management of risks emanating from specific sources, such as government
guarantees, public partnerships, and the financial sector; and

Coordination of fiscal decision-making between central government, local government, andpublic corporations.

58.
The analysis reveals that Albania performs well against the Code in several areas. The
government discloses several sources of risk and analyzes the sensitivity of revenue and the deficit
to economic growth (the main reports discussing fiscal risks are listed in Table 3.1). The budget
includes a contingency line and a reserve fund to cope with revenue shortfalls and emergencies.
Government borrowing is authorized by law, and risks surrounding debt are analyzed and reported.
Government guarantees are disclosed, controlled by law, and counted in the main measure of debt.
Local governments’ spending and revenue are reported monthly, and their borrowing is controlled
by law. The Department of Civil Emergencies monitors and analyzes environmental risks. Financialsector risks are discussed in several reports, including those of the Bank of Albania.
59.
But there are three areas where the standard of basic practice in the Code is not met.
There is no assessment of the long-term sustainability of public finances, no disclosure of the
lifetime fiscal costs of the public-private partnerships, and insufficient reporting of natural resources.
In some other areas, the standard of basic practice is met, but the government’s exposure to risks ishigh. For example, the budget shows transfers to public corporations and the accounts of eachmajor corporation are publicly available, but the government does not publish a report on theliabilities or financial performance of the sector, even though it has often had to subsidize many of
the companies, including those in the electricity and water-supply sectors.

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Table 3.1. Albania: Selected Reports Discussing Fiscal Risks
Title

Fiscal Risks Discussed

AuthorNational Economic Reform
Program 2015–2017

Macroeconomic risks, including sensitivity
analysis, specific fiscal risks, financial-sectorrisks

Ministry of Finance and Ministry of
EconomyBudget Report

Specific fiscal risks, including contingencies

Ministry of Finance and Ministry of
EconomyPension Policy Paper, 2014

Long-term risks of pension scheme

Ministry of Social Welfare and Youth

Medium Term Debt Strategy,
2015–2017

Debt risks related to refinancing, interest
rates, exchange rates, and operations.

Public-Debt Department, Ministry of
Finance

Debt Indicators

Debt and guarantees

Public-Debt Department, Ministry of
FinanceFinancial Stability Report

Financial-sector risks

Bank of Albania

Guaranteed bank deposits

Deposit Insurance Agency

Annual Report

Source: All documents can be found on the websites of the respective agencies.

A. Disclosure and Analysis
3.1.1 Macroeconomic risks (Basic)
60.
Macroeconomic risks are analyzed in the National Economic Reform Program. This isan annual document prepared and published by EU candidate countries that discusses policy andplanned reforms. The document shows alternative paths for growth and their implications forgovernment revenue and the deficit. However, this analysis remains a formal exercise: no sensitivity
analysis is included in the Macroeconomic and Fiscal Framework, which is the main document used
to prepare the annual budget and the medium-term budget program.
61.
Although macroeconomic risks are large, Albania’s economy has been more stable inrecent years than those of many other countries. Figure 3.1 shows the relationship between thevolatility of GDP and the volatility of revenue, measured as the standard deviation of real growthsince 2001. Among other things, it shows that neither GDP nor revenue has been unusually volatile.
This suggests that the large forecast errors of the past decade have been due to weaknesses in theforecast process, rather than to the volatility of the economy (see Section II).

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Figure 3.1. Volatility of Real GDP and Government Revenue, European Countries(Standard deviation of growth rates in percent)

Source: IMF, World Economic Outlook database, April 2015.
Note: Revenue is deflated at the consumer price index. Volatility is measured as the standard deviation of changes in the period
2001–14.

3.1.2. Specific fiscal risks (Basic)
62.
Many specific fiscal risks are discussed and quantified in budget documents. The 2015
budget report, which had more information on risks than previous editions, disclosed such risks as
possible revenue shortfalls, guarantees for the electricity sector that might have to be issued in thefiscal year, and property compensation expected to be awarded by the International Court of
Human Rights. The National Economic Reform Programme 2015–17 discussed but did not quantify
the risk from unfinanced commitments in investment projects that exceed medium-term budget
ceilings (of about 1.8 percent of GDP according to the Ministry of Finance). Other risks such as thoserelated to guaranteed bank deposits are described in other reports, but are not included in any
summary report on risks.
63.
Other significant risks are not quantified or discussed in budget documents. The
unguaranteed loans and other liabilities of the electricity sector are sizeable (1.9 percent of GDP)but not included in any report on risk. Nor has the government estimated the bill (paid in small
installments over many years) for compensating people whose property was expropriated during
the communist era. Rough estimates made by various sources, including the World Bank, put thebill in range of several billion euros.11 The remaining bill for compensating victims of politicalpersecution in the communist era (2.8 percent of GDP), also paid in installments, is similarly
undisclosed. Table 3.2 lists these and other specific fiscal risks, discussed below, to which the11World Bank, Governance in the Protection of Immovable Property Rights in Albania: A Continuing Challenge, April
2012, p. 11.

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government is exposed. It shows the government’s gross exposure (the most the government could
be required to spend in a worst-case scenario) and does not indicate likely expenditure. It excludes
guarantees already counted in the public debt.
Table 3.2. Size of Selected Specific Fiscal Risks Not Quantified in Budget, Recent Estimates
Risk
Unfunded commitments in investment projects
Compensation for expropriated property
Compensation for political persecution
Liabilities of public corporations except central bank not included in debt
Public-private partnerships
Liabilities of banks

Size
Percent of GDP
2
70
3
8
7
96

Sources: Ministry of Energy and Industry, Ministry of Finance; World Bank; Bank of Albania; IMF staff calculations.

3.1.3. Long-term sustainability of public finances (Not met)64.
No long-term fiscal projections are published. The only report of this kind has been a
one-off report on pensions, which did not project the government’s total debt or deficit.12
65.
Long-term risks are, however, important. Although Albania has a younger population
than that of many other European countries, its population is declining because of emigration and afalling birth rate, so the ratio of working-age to older people is falling. The government changed thepension scheme in 2014 to gradually close the gap in retirement ages for men and women and to
reduce the extent to which the scheme redistributed income. The scheme is projected to be selfsustaining only in 2042 and to return to deficit later (Figure 3.2). There is also the cost of
supplementary pension schemes for the military, police, and senior officials, which although small, is
growing and is paid mostly from the budget (see Section 1.1.2).

12Ministry of Social Welfare and Youth, The Pension Policy Paper, April 2014.

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Figure 3.2. Albania: Projection of Pension Scheme’s Balance, 2014–78(Percent of GDP)

Source: Ministry of Social Welfare and Youth, Pension Policy Paper, 2014.

B. Risk Management
3.2.1. Budgetary contingencies (Basic)
66.
The budget includes a contingency line and a reserve fund, but they are small and thecriteria for their use are not specified. The purpose of the contingency line (0.8 percent ofexpenditure in 2015) is to deal with shortfalls in revenue, whereas the reserve fund (0.3 percent ofexpenditure) is used at the discretion of the Council of Ministers, usually to cope with emergencies
or other unexpected expenditure needs. By law, the two can sum to 3 percent of total expenditure.
While their possible uses are spelled out in the annual budget law, the circumstances in which they
can be spent are not precisely specified. Nor are there regular in-year reports on their utilization,
though the Supreme State Audit reports their use in its annual audit report on the state budget. In
practice, the contingency line has been too small to cover the large shortfalls in revenue caused bybiased forecasts (Section 2). It has also been used to permanently increase wages and pensions.
Conservative estimates of interest spending may have served as a de facto contingency line.

3.2.2. Assets and liabilities (Basic)
67.
Government borrowing is authorized by law, and risks surrounding government debt
are reported regularly. The Medium-Term Macroeconomic Framework and the annual budget law
set ceilings on new borrowing and the guarantees that can be issued. The medium-term debt
strategy discusses rollover, interest-rate, exchange-rate, and operational risks for public debt, as well
as strategies to manage risks. The National Economic Reform Program reports the sensitivity of debt
to the exchange rate, interest rates, and growth. Quarterly debt reports provide detailed information
on debt and guarantees. The Arrears Clearance and Prevention Strategy, adopted in 2014, discussed
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as measures to prevent the reoccurrence of arrears. A quarterly survey of new arrears is now
published by the Ministry of Finance.13
68.
The risks surrounding debt, at 72.6 percent of GDP including arrears, are high.
Domestic debt (40 percent of GDP) has an average maturity of less than two years, and domestic
refinancing needs in 2014 were 24 percent of GDP. A large share of the domestic debt is held byforeign-owned banks, which makes the government vulnerable to the risk that they will reduce their
exposure to Albania, for example to comply with the regulations of their supervisors in their homecountries. To mitigate refinancing risks associated with domestic debt, the government intends toreplace part of it with longer term external debt. External debt has lower interest rates, but exposes
the government to exchange-rate risk. In 2014, the depreciation of the lek increased the stock ofdebt by 0.9 percent of GDP.
69.
Information on assets is scarce. As shown in Table 1.3, financial assets are estimated at
17.8 percent of GDP in 2013. The government does not have a published strategy for managing its
investments in public corporations and the dividends it receives are very small (0.08 percent of GDP
on average in the past decade). Information on nonfinancial assets exists, but is not comprehensive,audited, or published (Section 1).

3.2.3 Guarantees (Good)
70.
Guarantees are reported, controlled by law, and counted in public debt. The ceiling on
new guarantees that can be issued in the budget year is set in the budget law (Article 18 in the 2015
law). Information about guarantees, their beneficiaries, and the government’s gross exposure ispublished quarterly in the Summary of the Debt Register by the Ministry of Finance. However,published reports do not discuss the probability of guarantees’ being called or report on cases inwhich the Ministry of Finance has had to service a guarantee. All guarantees are, however, includedin the stock of the public debt, and when forecasting debt-service costs, the Ministry of Financetakes a conservative approach, assuming it will have to service all electricity-sector guarantees and alarge share of the others.
71.
Government guarantees have grown in recent years, but were only 3.9 percent of GDP
in 2014. The overwhelming majority of the guarantees (85 percent) have been given to electricity
companies and are likely to be called. Other guarantees have been issued to the water sector,
infrastructure, and agriculture (Figure 3.3). Although the level of guarantees is lower than in many
advanced economies, it is higher than in most other countries in Central and Eastern Europe(Figure 3.4). There are no guarantees given by local governments to water companies.

13Ministry of Finance, Information on New Arrears Created October–December 2014.

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Figure 3.3. General Government Guarantees by Sector, March 2015
(Millions of lek)

Source: Ministry of Finance, Debt Indicators, first quarter, 2015.

Figure 3.4. General Government Guarantees, Europe, 2014
(Percent of GDP)

Source: Eurostat, Ministry of Finance.

3.2.4. Public-private partnerships (Not met)
72.
The government does not report on its obligations in public-private partnerships. The
law requires the Ministry of Finance to keep a register of public-private partnerships and to assess
their budgetary impact before they are signed, but the government does not publish a register anddoes not disclose projections of its expected or possible payments over the lives of the contracts. As
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noted in Section 1.1.2, it also does not recognize the investment in the projects as debt-financed
government spending.
73.
At least 55 public-private partnerships have been signed,14 creating commitments witha present value of about 7 percent of GDP. The government’s electricity-generation company,
KESH, has entered into contracts with hydropower producers (with payments worth 4 percent ofGDP). Tirana airport is operated under a 30-year concession that began in 2005, in which theconcessionaire benefits from a 9 million euro guarantee and a monopoly over the landing anddeparture of international flights. There are also contracts for a scanning service (2 percent of GDP),a national health-checkup service (1 percent of GDP), and a waste-management project at Elbasan.
Many new projects are being undertaken or planned, including for the Milot-Morinë and Arbëri
roads, the last project having an estimated cost of 2 percent of GDP.

3.2.5. Financial sector (Advanced)
74.
Deposit insurance is disclosed and an assessment of financial-sector stability isundertaken regularly. The Deposit Insurance Agency reports annually the amount of insured
deposits as well as information on its insurance fund. The Bank of Albania publishes twice a year the
Financial Stability Report, which assesses financial-sector risks and reports on various stress tests.
The Financial Stability Advisory Group, which monitors financial-sector risks and coordinates actions
between different actors, assesses but does not publish estimates of the possible fiscal costs of afinancial crisis.
75.
Albania’s banking system is larger than those of most emerging European countries.
Its assets were 95 percent of GDP at the end of 2013, whereas the average for emerging European
countries was only 65 percent. Analysis by the Bank of Albania and the IMF shows that risks remainhigh.15 Nonperforming loans were 23 percent of total loans at the end of 2014 (Figure 3.5), among
the highest in central and eastern Europe, though the loans are provisioned and banks are wellcapitalized. The capital-adequacy ratio at the end of 2014 was 16.8 percent, well above theregulatory minimum of 12.16 Proximity to Greece raises also concerns of contagion, although the
Greek-owned banks in Albania operate as subsidiaries. Table 3.3 shows that total deposits of thebanking system are 73 percent of GDP, most of which are insured. Deposits of individuals (but not
firms) up to 2.5 million lek per bank are insured.17 The Deposit Insurance Agency had a fund of
24 billion lek (1.7 percent of GDP) at the end of 2014 and has signed a credit line with the European
Bank of Reconstruction and Development for 100 million euro, guaranteed by the government. Bylaw, the government is responsible for the scheme’s obligations.

14See Open Data Albania, a project of the Albanian Institute of Science.
15

IMF Staff Report, March 2015, pp. 12–13, 17; Bank of Albania, Financial Stability Report, 2, 2014, p. 17.

16Bank of Albania, Financial Stability Report, 2, 2014, p. 65, Table 8.4. From 2016, loans-and-saving associations will be

included in the scheme for deposits up to 2 million lek.
17Law number 53 of 2014,”On deposit insurance.”

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Figure 3.5. Nonperforming Loans in Selected European Countries, 2014
(Percent of total)

Source: World Bank; World Development Indicators; and Bank of Albania.
Data for Bulgaria are for 2013.

Table 3.3. Albania: Bank Liabilities, 2013
Liability
Totalof which depositsof which insured

Amount(Percent of GDP)
95
73
62

Source: Bank of Albania and Deposit Insurance Agency.

3.2.6 Natural Resources (Not met)
76.
The budget shows receipts from royalties, but the government does not publish
annual estimates of the volume and value of major natural resources. Some data on the annual
volume of oil, coal, and other energy products, as well as timber production, are published by theInstitute of Statistics.
77.
Albania is rich in natural resources, but revenue from royalties is small. Proven reservesof oil are the 63th largest in the world, and the country also has gas and mineral deposits, including
chromium. Concessions for the exploitation of mineral resources are awarded by the National
Agency of Natural Resources. In 2014, royalties, mostly from oil, were 6.5 billion lek, or about
2 percent of total revenues.

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3.2.7. Environmental risks (Basic)
78.
Environmental risks are discussed, but not quantified in budget reports. The 2015
budget report also took into account the importance of rainfall for the subsidies or guarantees thegovernment would need to give to electricity sector, which are reliant on hydro-electricity.
79.
Albania is vulnerable to floods, earthquakes, and other environmental risks, but atleast recently the costs have been low. According to the Civil Protection Agency, Albania is one of
the countries with the highest economic risk in the world from multiple hazards, with 86 percent of
its territory prone to two or more disasters. Earthquakes are a high hazard according to theEuropean Seismic Hazard Map, though the last earthquake that caused serious damage was in 1979.
The most frequent disasters are major floods, which are especially common in the North East andSouth East of the country. The government pays some of the costs caused by floods, but the annual
costs were only 0.02 percent of GDP on average in the past five years. Other risks include forest fires,
droughts, and industrial accidents. Damages paid following the explosion of ammunition demolition
factory in Gërdec in 2008 amounted to 2.5 billion lek over two years (0.2 percent of GDP).

C. Coordination
3.3.1 Subnational governments (Good)
80.
Reporting on the revenue and spending of local governments is extensive, and theirdebt is constrained by law.18 Data on revenue and spending are published monthly on aconsolidated basis and quarterly on a unit level, including spending by function, in the Ministry of
Finance’s quarterly fiscal statistics. Data on the assets and non-debt liabilities of local
governments—including their arrears—are not published, though the government plans toundertake an inventory of these, as well as their contractual commitments. Government’s ability tounderstand the fiscal position of the local government sector is therefore limited. The Ministry of
Finance has a veto on any borrowing by local governments.
81.
Local governments’ spending is low, as is their debt. They have responsibilities for preuniversity education, local infrastructure, water provision, sewage and waste management, and otherservices. Their spending is about 8 percent of the spending of general government (2.4 percent ofGDP), which is low compared to other European countries (Figure 3.6). As noted in Section 1.1.1, a
recent reform will reduce the number significantly, eliminating the mostly inefficient and financiallydependent communes. At the end of March 2015, only six local governments had outstanding loans,and their total debt was less than 0.1 percent of GDP. Many more, however, could have arrears.

18Law number 9,869 of 2008, “On Local Government Borrowing.”

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Figure 3.6. Spending of Local Government in European Countries, 2014
(Percent of GDP)

Sources: Eurostat; Ministry of Finance.

3.3.2 Public corporations (Basic)
82.
There is no report on the finances of the public-corporations sector. The financial
statements of individual public corporations, like other joint-stock companies, are generally
published by the National Registration Centre. Ownership of 255 public corporations is distributed
among various ministries and local government. The Ministry of Economy is in charge ofadministering public property, but it does not prepare consolidated financial statements for thegovernment’s portfolio of companies or report quasi-fiscal activities. Transfers between thegovernment and public corporations are published in the budget.
83.
Public corporations create significant fiscal risks. As Figure 3.7 shows, the largest 12 (byrevenue) had aggregate liabilities of about 20 percent of GDP at the end of 2013. (Some of theseliabilities are owed to other public corporations.) Although the sector is smaller than those of many
advanced European countries (Figure 3.8), the governance and financial performance of thecompanies is weak. They operate under commercial law, but several, especially in the electricity andwater-supply sectors, run losses, receiving direct or indirect support from the budget. The electricity
sector is in deep trouble after the failed privatization and later reacquisition of the distribution
company, OSHEE. The sector is expected to need budget support until 2019. The water-supply
companies, which are owned by local governments, covered only 85 percent of their costs with theirown revenue in 2014. They rely frequently on budget transfers, mostly to cover their electricity bills.
The railway company also receives modest subsidies.

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Figure 3.7. Unconsolidated Liabilities of Largest Public Corporations, 2013
(Percent of GDP)

Sources: National Registration Centre. Open Data Albania.

Figure 3.8. Liabilities of Public Corporations, European Countries, 2013
(Percent of GDP)

Sources: Eurostat and Figure 3.7. Note: * Twelve largest corporations.

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D. Conclusions and Recommendations
84.
Table 3.4 summarizes the assessment of Albania’s practices against those of the Code.
It shows that Albania meets at least the standard of basic practice in 9 of the Code’s 12 dimensions.
The government could improve reporting on risks related to several issues, including long term
sustainability and public-private partnerships.
85.
Recommendation 3.1. Reporting on fiscal risks. The report on fiscal risks included inbudget documentation should progressively be increased in scope and depth. It should estimate thesensitivity of the government’s revenue, deficit, and debt to economic growth and other important
macroeconomic variables. It should also describe and where possible quantify a larger range of
specific fiscal risks including:Explicit and implicit guarantees of the liabilities of public corporations;

The government’s rights and obligations in public-private partnerships;



Unfunded commitments related to public investment projects;The possible cost of compensation programs; andLong-term risks created by pensions, healthcare, and other spending programs.

86.
Recommendation 3.2. Oversight of public corporations. The authorities should put inplace appropriate measures to ensure comprehensive oversight of all public corporations.

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Table 3.4. Summary Evaluation: Fiscal Risks
Principle
3.1.1

Macroeconomic
Risks

3.1.2

Specific Fiscal
Risks

3.1.3

Long-Term Fiscal
Sustainability

3.2.1

Budgetary
Contingencies

3.2.2

Asset-and-Liability
Management

3.2.3

Guarantees

3.2.4

Public-Private
Partnerships

3.2.5

Financial-Sector
Exposure

3.2.6

Natural Resources

3.2.7

Environmental
Risks

3.3.1

Subnational
Governments

3.3.2

PublicCorporations

Assessment
Basic: Some sensitivity analysis ispresented in the National Economic
Reform Program 2015–2017.
Basic: The 2015 budget reportdiscussed and quantified some fiscal
risks, but not all the major ones.
Not Met: The government does notproduce long-term projections of the
deficit or debt.
Basic: The budget includes
contingencies and a reserve fund, but
criteria for their use are not spelled
out in the budget law.
Basic: Government borrowing isauthorized by law and risks
surrounding debt (but not assets) areregularly reported.
Good: Guarantees is limited by law.
Information on guarantees and theirbeneficiaries is published quarterly.
Not Met: There is no regular report on
public-private partnerships including
projected receipts and payments overthe lifetime of the contracts.
Advanced: The Bank of Albania
discusses financial stability, and the
Deposit Insurance Agency reports
insured deposits.
Not Met: Royalties shown in thebudget, but the volume and value ofmajor natural resources and annual
sales are not regularly reported.
Basic: Environmental risks are
discussed in qualitative terms, but
their possible fiscal cost is notconsidered in budget documents.
Good: The finances of local
governments, individually and as asector, are reported at least quarterly
and their debt controlled by law.
Basic: The budget includes directtransfers to public corporations, but
quasi-fiscal activities are not discussed.

ImportanceRec

Medium: The volatility of GDP was
2.1 percent in 2001–14.

3.1

High: Exposure from unquantified risks
exceeds 76 percent of GDP.

3.1

Medium: Pension costs are large, but
a recent reform is expected togradually reduce the pension deficit.

3.1

Medium: Contingency and reserves
were 1.1 percent of spending in 2015,
too small to cushion risks.
High: Debt is high at 72.6 percent of
GDP and is either short term or inforeign currency.
Medium: Exposure from guarantees ismoderate (3.9 percent of GDP at end2014), but call probabilities are high.
High: Signed contracts create total
fiscal costs of at least 7 percent ofGDP, and more contracts are planned.

3.1

High: Insured deposits are 62 percent
of GDP, and the financial sector is
exposed to significant risks.
Low: Royalties, though they could
grow, are less than 2 percent ofgovernment revenues.
Medium: In recent years, the averageannual fiscal costs of natural disasters
have been only 0.02% of GDP, but alarge disaster would be very costly.
High: Local governments' spending is
2.4 percent of GDP and their debt isless than 0.1 percent of GDP, butarrears could be high.
High: The liabilities and losses of thelargest 13 companies were 20 percent
and 1 percent of GDP, respectively, in
2013.

3.1

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