Albania's rapid growth in thedecade up to the 2008 global financial crisis propelled itto middle-income status and helped to reduce poverty. Theglobal financial crisis in 2008 slammed the brakes onAlbania's largely domestic-demand-driven growth. Thegovernment has accumulated sizable arrears in payments forpublic works and value-added tax (VAT) refunds. In abaseline scenario of no policy reforms, Albania'spublic debt-to-gross domestic product (GDP) ratio isprojected to reach 73.5 percent in 2015 and stay above 72percent over the medium term. Empirical evidence confirmsthat high public debt depresses economic activity andsignificantly increases the probability of default. Thisreport examines closely the opportunities for fiscalconsolidation on both the revenue and expenditure sides.Combined effect of structural reforms will reduceAlbania's public debt to GDP ratio significantly overthe medium term. It can in parallel rebalance its capitalspending, particularly in transport, toward maintenance tosupport growth. Albania needs to strengthen its institutionsto reinforce financial discipline and strengthen fiscalpolicy. Institutional reforms are particularly needed withregard to public financial management (PFM) and introducinga fiscal rule to anchor policy over the medium term.
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