| Summary: | KEY ISSUES Background: On February 28, 2014, the Executive Board approved a three-year Extended Arrangement with access equivalent to SDR 295.42 million (492.4 percent of quota). So far, two purchases equivalent to SDR 23.55 million (about €26.4 million) each have been made, and another totaling the equivalent of SDR 47.1 million will be made available upon completion of the second and third reviews. Recent Economic Developments: Economic recovery is underway, but growth is below potential. High nonperforming loans (NPLs) make banks risk-averse. Credit growth remains sluggish despite monetary easing. Program Performance and Risks: The program is on track. The second review was delayed because of the need to incorporate electricity reform in the program and to allow time for conditions surrounding the Bank of Albania (BoA) to normalize following the removal of BoA senior management. All end-June, end-September, and available end-December quantitative performance criteria were met. However, the continuous performance criterion on the accumulation of external arrears was not observed because of technical delay with one interest payment. An indicative target on new arrear accumulation was missed by a small margin. Inflation has been slightly below the inner band prescribed under the inflation consultation clause. Several structural benchmarks were not met; these are all expected to be completed in the first half of 2015. Program risks emanate from the complexity of energy reforms and the need for sustained political commitment. Staff proposes that the program move to three reviews a year, beginning with the fifth review, (rather than two as previously envisaged) to maintain a timely dialogue on prospective risks. Policy Recommendations: Reversing the upward trend in public debt in 2015, while incorporating energy sector subsidies, will require significant fiscal consolidation. The authorities have embarked on ambitious energy sector reform to lower the fiscal burden, but challenges will persist for 4-5 years. Addressing the NPL problem is critical for reviving credit. Steadfast structural reforms are needed for sustained medium-term growth.
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