IMF Departure from Albania Raises Political Storm

09 October 2008 An apparent decision to not renew the IMF’s tenure in Tirana has roused the opposition’s anger, while some experts argue the move comes at the wrong time.   

By Gjergj Erebara in Tirana

Published in Balkaninsight.com 9 Oct 2008

The Albanian government has caused a storm by signaling that it will not renew its contract with the IMF next January.

Opposition leaders have been quick to accuse the Prime Minister, Sali Berisha, and the Minister of Finance, Ridvan Bode, of arrogance and irresponsibility.

They charge that the decision not to renew the deal has political undertones, and that the government wants to spend freely in the coming year to boost its image before the country goes the polls in the summer of 2009.

IMF representatives have announced that they will remain if Tirana invites them to stay, and if the government decides it is time to part ways they advise Albania to set in place tight fiscal rules to guide its economic policies.

The end of the IMF mission will spell the end of its monitoring of the government’s macroeconomic and lending policies, after which Albanian institutions will regain full independence and be free to decide on monetary and fiscal policies without prior advice.

While the political blame-game continues, some experts are warning that an IMF departure next year would come at the wrong time, because Albania’s financial institutions are not yet fully capable of withstanding political pressures.

Parting of the ways:

The IMF has been monitoring Albanian economic policies since 1991, when the country’s Stalinist regime imploded. But after some 16 years of IMF programmes and further years of guided “transition”, Albania’s macroeconomic stability now seems firmly entrenched.

Growth rates have been stable and high, with per capita income more than doubling over the last decade to €5760, while inflation has been well contained, reflecting prudent fiscal and monetary policies.

“This is an achievement of the Albanian authorities, the current government as well as previous governments, and we are happy to have been partners of this successful transition,” the IMF representative in Tirana, Ann Margaret Westin, said. “If the Albanian authorities are interested, the IMF would be ready to discuss a new arrangement,” Westin added.

However, Albania’s centre-right government does not seem keen to remain under the fund’s supervision.

The opposition believes that the government’s coolness towards renewing the IMF’s monitoring contract is dictated by its selfish political agenda.

Socialist leader Edi Rama said the government “had decided to oust the IMF in an election year in order to deliberately spend public funds and gain support”.

Rama accused the government of charting a course that might lead to chaos, recalling an earlier departure of the fund in 1997 shortly before a series of pyramid schemes collapsed, plunging the country into financial anarchy.

The Socialist chief announced that if his government were elected in the parliamentary elections of 2009, it would accept the IMF’s renewed supervision.

Government officials have rebutted Rama’s allegations. Finance Minister Bode argued that even after the IMF’s departure, Albania’s finances would still be under external supervision, this time by the European Commission, since the country aims to become a full member of the European Union.

According to the Ministry of Finance, until then, the Office of Economic Policies in parliament will carry on supervising budget planning and fiscal policies, while the Bank of Albania, an independent institution by law, will act as adviser.

Countries opt to have an IMF arrangement for various reasons. These include access to finance and a desire to signal to the world that the country’s economic policies are on the right track.

“This signaling effect might be particularly important for international observers and investors when official statistics are still not up to international standards or in an election year,” Westin noted.

According to Bode, Albania has commissioned an independent evaluation of its foreign debt and is getting ready to raise its own funds in international financial markets.

But Westin remains cautious about Albania’s prospects. “With the expiry of the IMF arrangement, they will need some other type of fiscal rule to anchor their policies, such as an expenditure, deficit, or debt ceiling… This will be all the more important as Albania plans to access global financial markets,” she added.

Apart from opposition politicians, experts fear the government’s populist politics could undermine tight fiscal discipline. In its yearly report on Albania for this year, the IMF remarked on this danger, noting that “popular politics is the main risk to Albanian macroeconomic stability”.

According to Selim Belortaja, head of the Albanian Center for International Trade, politicians don’t yet show many signs of responsibility when it comes to public spending, while financial institutions are not yet prepared to act independently.

“Albania has only enjoyed financial stability because after any government decision there was an IMF official,” Belortaja said.

Zef Preci, a former economy minister and head of Albanian Center for Economic Research, agrees. “Despite an enormous number of achievements claimed by the government, the state budget is still under heavily political pressure,” he said.

“Many small interests in daily politics could have a big impact on stability,” he added. “Until now, IMF data were the most important source of financial transparency of the country. Next year there will be less transparency.”

As an example of the government’s profligacy, experts note that last December, the Prime Minister offered pensioners a New Year handout of 40 euros each, even though the finance ministry firmly counseled against such a move.

Adrian Civici, Dean of Economics at the European University of Tirana, defended the decision to dispense with IMF supervision.

“I don’t think a new agreement with IMF is necessary as Albania has the necessary know-how to go in the right decision,” he said.  “If some politician acts in an irresponsible way, this could happen whether there was an agreement or not.”

Tough love:

Since it set foot in the country in 1991, many have considered the IMF the real government of Albania in terms of handling macroeconomic policy.   “It was a little harsh but very effective although its decisions were imposed,” Selim Belortaja said.

“This was the most effective collaboration that Albania has experienced,” Civici agreed. “Every Albanian official was clear where to go”.

Former prime minister Aleksander Meksi, who headed the first post-communist government from 1992 to 1996, said the ground rules were basic: “If Albania obeyed IMF advice, the World Bank in turn offered low interest loans to rebuild the country.”

Overseeing a difficult and often tumultuous transition to democracy, Albania’s government had difficulty raising funds on international markets and as a result, IMF advice was strictly followed. “In 1994, we had to obey in order to receive money to pay salaries,” Meksi recalled.

The IMF’s stern oversight over the country’s fiscal policy frequently created public discontent. Business lobbies were often angered that they were unable to sway government officials or parliament when their interests collided with the IMF’s chosen policies.

Local producers of beer, flour and vegetable oil were outraged when the import duties for such goods were lifted on IMF advice in 2003, for example. “The IMF and World Bank want us to die in silence,” declared Koco Kokedhima, a well-known businessman and publisher, accusing the fund of driving local businesses towards bankruptcy.

When the right-wing US businessman Steve Forbes visited Albania at the time, the then head of Chamber of Commerce of Tirana, Luan Bregasi, presented him with a sword and jokily suggested that “maybe he will go and kill the IMF”.

In 2005, construction companies bitterly contested the introduction of VAT on new real estate developments. In fact, the strong construction lobby managed to have that decision halted.

However, by then the World Bank had already moved Albania from the list of developing countries that receive low-interest loans to the list of countries that can afford commercial loans. As a result, the IMF lost its main pressure mechanism. The IMF arbitration of economic policies would not translate anymore into access to cheap credit.

In the following years the right-wing government pursued its own tax policies and increase civil service salaries well beyond IMF guidelines.

Despite the growing schism, Westin described the relationship with the Albanian authorities as excellent overall, and one of open, productive dialogue.

“Although there can be differences of opinion, we have managed to agree on key policies and all reviews so far under the current programme have been concluded on time,” she said.

“Irrespective of whether Albania has a programme with the fund or not, prudent macroeconomic policies will need to be maintained to lay the foundation for continued poverty reduction and sustained high economic growth,” she warned.

Gjergj Erebara is a freelance journalist based in Tirana.. Balkan Insight is the online publication of the Balkan Investigative Reporting Network. This article was made possible through the support of the National Endowment for Democracy.