In the government’s view, strong growth remains the main instrument for sustained improvements in the living conditions of the population and the elimination of poverty. The government is therefore determined to take all the necessary measures for preserving macroeconomic stability and to implement further structural reforms, with a view to keeping the economy expanding at its potential growth rate of about 8 percent a year. To allow for a gradual reduction in reliance on foreign resources, and to create scope for more rapid private sector credit growth, the government will continue its policy of fiscal consolidation and reduction in the current account deficit. However, this adjustment will be gradual, in light of the need to increase spending on poverty reduction measures, with the general government deficit declining from 9.4 percent of GDP in 2000 to 7.4 percent in 2003. To create scope for private sector credit growth, the domestically financed deficit, which is currently financed at high interest costs, will decline somewhat faster, from 4.3 percent of GDP to 2.1 percent of GDP in 2003. Such a program of fiscal consolidation will also allow the government to keep the public debt-to-GDP ratio on a gradually declining path and reduce interest expenditure from 5.9 percent of GDP in 2000 to 3.2 percent of GDP in 2003 (Table on Selected Economic Indicators is attached).

Strong efforts to boost revenue collection will provide resources for increasing public expenditure and simultaneously improving the fiscal balance. The government plans to raise non-interest public expenditure from 26.0 percent of GDP in 2000 to at least 27.5 percent of GDP in 2003, with a view to providing resources for additional programs for poverty alleviation and continuing with the public investment program. Combined with the targeted fiscal adjustment and the expected decline in interest rates (which will affect central bank profit transfers and, thus, government non-tax revenue) this will require the tax-to-GDP ratio to rise from around 15 percent of GDP in 2000, to 17 percent of GDP in 2003. This increase will be largely a result of better tax administration and a broadening of the tax base, to include, inter alia, agriculture. Moreover, possibilities will be explored for reducing tax rates to strengthen incentives for private sector activity. As foreign trade liberalization will continue, reliance on the taxation of imports will have to be reduced.

Monetary policy will be geared to keeping inflation in the 2-4 percent range. In response to reforms in the financial sector, private sector credit is assumed to grow from a very low base by an average annual rate exceeding 30 percent over the coming three years. Monetary policy will continue to be conducted in the context of the flexible exchange rate regime that has served the country well.

The current account deficit is projected to decline from 8.4 percent of GDP in 2000 to 6.4 percent of GDP by 2003. Financing of this deficit will require continued support from foreign donors, with foreign assistance for the budget in the form of grants, as well as concessional and close to concessional loans equivalent to about US$220 million per year in the period 2000–2003. The government is committed to cooperate with the donors in obtaining and effectively using these resources. With most of the financing provided on concessional terms and with longer maturities, the debt-service payments are expected to remain at a prudent level of less than 10 percent of annual exports, and foreign debt will remain broadly unchanged relative to GDP. To preserve the capability of the economy to react to adverse shocks, financial policies will be geared toward keeping the foreign reserves of the Bank of Albania at a level of at least 4.2 months of imports.

Forceful financial sector reforms, privatization of the remaining state-owned enterprises, and progress in creating an institutional and legislative environment conducive to foreign and domestic investment will be crucial for attaining the ambitious 8 percent target growth rate over the medium-term. The privatization of state-owned banks and legal reforms to strengthen financial markets will improve the effectiveness in channeling financial resources to the most productive uses. Enterprise privatization will focus on the strategic enterprises Albtelecom and KESH, as well as on the remaining medium-size enterprises. Regarding the legislative agenda, the government intends to approve a new bankruptcy law, and a new law on the office for execution of judicial orders in civil cases, which should enhance enforcement of private contracts. To create a better business climate, the government intends to establish a mediation center that will offer an alternative means of dispute resolution in commercial cases. To attract more investment, the government will explore in cooperation with donors the establishment of a one-stop investment shop, which would provide all the services associated with the promotion, approval, and facilitation of investment projects within the same agency. In addition, an industrial park will be created in Durres, with a view to providing foreign investors with a strategic location and adequate administrative and logistical support for their activities.