of GDP. This performance provides credibility to the fiscal surpluses planned under Albania's Nationa Progremme for execution of SAA, recently reviewed by the EU. At the same time, however, the budgetary challenge will intensify. With large net EU transfers expected to increase domestic development spending substantially, the government will have to reduce otherAlbania has come a long way since the dark days of the 1997 crisis. Back then, the future looked bleak, with Ponzi (pyramid) schemes, unemployment climbing, and output collapsing. But since adoption of the currency board arrangement a decade ago, along with consistent implementation of supporting fiscal policy and structural reforms, growth has been strong and stable, inflation has been kept low, and unemployment has fallen.

Albania's EU invitation of accession the past June is a landmark, holding the promise of sustained growth and rising living standards. EU-financed projects, if properly prioritized, can help boost economic performance through improved and additional infrastructure. Also, full integration into the common EU trading area should boost trade and competition. Finally, a reduction in Albania's perceived risk should further encourage private investment, helping to raise productivity growth. But accession alone is no panacea. Satisfactory economic performance will continue to depend on sound macroeconomic policies and sustained structural reforms. A key challenge will be to maintain a prudent fiscal policy.

The government remains committed to the currency board arrangement that has served the country well. But the absence of an independent monetary policy leaves fiscal policy as the only macroeconomic policy lever. Albania's strong fiscal stance has cut public debt almost in half of GDP since 2004, to 55 percent of GDP. This performance provides credibility to the fiscal surpluses planned under Albania's Nationa Progremme for execution of SAA, recently reviewed by the EU. At the same time, however, the budgetary challenge will intensify. With large net EU transfers expected to increase domestic development spending substantially, the government will have to reduce other

able, inflation has been kept low, and unemployment has fallen.

Albania's EU invitation of accession the past June is a landmark, holding the promise of sustained growth and rising living standards. EU-financed projects, if properly prioritized, can help boost economic performance through improved and additional infrastructure. Also, full integration into the common EU trading area should boost trade and competition. Finally, a reduction in Albania's perceived risk should further encourage private investment, helping to raise productivity growth. But accession alone is no panacea. Satisfactory economic performance will continue to depend on sound macroeconomic policies and sustained structural reforms. A key challenge will be to maintain a prudent fiscal policy.

The government remains committed to the currency board arrangement that has served the country well. But the absence of an independent monetary policy leaves fiscal policy as the only macroeconomic policy lever. Albania's strong fiscal stance has cut public debt almost in half of GDP since 2004, to 55 percent of GDP. This performance provides credibility to the fiscal surpluses planned under Albania's Nationa Progremme for execution of SAA, recently reviewed by the EU. At the same time, however, the budgetary challenge will intensify. With large net EU transfers expected to increase domestic development spending substantially, the government will have to reduce other

he common EU trading area should boost trade and competition. Finally, a reduction in Albania's perceived risk should further encourage private investment, helping to raise productivity growth. But accession alone is no panacea. Satisfactory economic performance will continue to depend on sound macroeconomic policies and sustained structural reforms. A key challenge will be to maintain a prudent fiscal policy.

The government remains committed to the currency board arrangement that has served the country well. But the absence of an independent monetary policy leaves fiscal policy as the only macroeconomic policy lever. Albania's strong fiscal stance has cut public debt almost in half of GDP since 2004, to 55 percent of GDP. This performance provides credibility to the fiscal surpluses planned under Albania's Nationa Progremme for execution of SAA, recently reviewed by the EU. At the same time, however, the budgetary challenge will intensify. With large net EU transfers expected to increase domestic development spending substantially, the government will have to reduce other

nge will be to maintain a prudent fiscal policy.

The government remains committed to the currency board arrangement that has served the country well. But the absence of an independent monetary policy leaves fiscal policy as the only macroeconomic policy lever. Albania's strong fiscal stance has cut public debt almost in half of GDP since 2004, to 55 percent of GDP. This performance provides credibility to the fiscal surpluses planned under Albania's Nationa Progremme for execution of SAA, recently reviewed by the EU. At the same time, however, the budgetary challenge will intensify. With large net EU transfers expected to increase domestic development spending substantially, the government will have to reduce other

of GDP. This performance provides credibility to the fiscal surpluses planned under Albania's Nationa Progremme for execution of SAA, recently reviewed by the EU. At the same time, however, the budgetary challenge will intensify. With large net EU transfers expected to increase domestic development spending substantially, the government will have to reduce other expenditures to keep overall spending under the government's chosen ceiling of 45 percent of GDP. Another formidable challenge is reducing the large current account deficit to a sustainable level.

At over 16 percent of GDP in 2006, the current account deficit has tripled in three years. Although this external imbalance continues to be largely financed by foreign direct investment, external private debt has also risen substantially. In light of the risks posed by such high debt, Albania should self-insure against unforeseeable shocks. The government should continue to build readily available reserves as insurance against a sudden disruption of capital flows to Albania. The country's defenses are at comforting levels in case of a moderate and temporary shock. But a deeper and more durable stoppage of inflows would be far more consequential for Albania. Latin America's financial crisis almost a decade ago should be a reminder that even countries in generally sound shape are not immune from the impact of crises elsewhere-and the sudden reversals of capital inflows that can result. Albania therefore needs to be prepared for such a contingency. Sustained fiscal surpluses will be required to strengthen the government's Fiscal Reserve Account while also saving for additional spending demands arising from an aging population.

With demand for imports of both investment and consumption goods expected to remain high, as well as outflows