1. This statement updates on developments in Albania since the preparation of the staff report (www.imf.org). The additional information does not change the thrust of the staff appraisal.
2. The authorities have continued to implement their reform agenda.
Parliament has passed a package of tax reforms in its first reading. The package is fully in line with the authorities’ intentions expressed in the Memorandum on Economic and Financial Policies. The package—to become effective in July 2007, will introduce a single personal income tax (PIT) rate of 10 percent combined with a zero bracket; as well as increase some indirect taxes. The PIT changes will be budget neutral, while the half year effect of the higher indirect taxes is estimated at about 0.3 percent of GDP.
To avoid tax arbitrage, the corporate income tax rate will be reduced from 20 to 10 percent in 2008, at an estimated budget cost of 1 percent of GDP. However, this loss will be offset in part by the full-year effect of the increase in indirect taxes. The remaining loss will be covered by additional tax measures which the authorities have committed to design in consultation with Fund staff and introduce in the 2008 budget.
An agreement has been reached with a Turkish consortium on the privatization of Albtelecom. The purchase price—€120 million for 76 percent of the company’s shares—remained as agreed in the original privatization tender. Albtelecom will pay the budget a dividend of 0.4 percent of GDP (accumulated from profits since 2005) before the privatization takes place.
3. To allocate the additional revenue and cover the cost of stabilizing the financial position of the state-owned electricity company (KESH), the government is preparing a supplementary budget for 2007. The overall deficit will remain broadly unchanged at 3.9 percent of GDP, as the additional revenue from the tax measures and Albtelecom dividend (some ¾ percent of GDP) will be offset by a ½ percent of GDP capital transfer to KESH and additional spending in priority areas (education, health, and roads) amounting to ¼ percent of GDP.
4. Recent results indicate that KESH’s new management has been successful in improving the company’s financial performance. In April-May 2007, KESH’s effective collection rates increased significantly, and the company met the targets set in the revised power sector action plan supported by the World Bank.
Albania: Effective Collection Rates of KESH, 2007
Source: Albanian authorities.
5. To anchor inflation expectations in the face of rapid credit growth, the Bank of Albania raised the policy rate by 25 basis points on June 27, 2007. The policy rate now stands at 5¾ percent.
6. Albania obtained its first ever credit ratings from Moody's. The rating for government debt obligations was B1, which is four steps below investment grade rating, reflecting the economy's continued transition.