Underperforming revenue, stronger national currency trigger mid-year budget cut

Tirana Times
By Tirana Times July 27, 2018 14:22

Underperforming revenue, stronger national currency trigger mid-year budget cut

Story Highlights

  • In addition to revising downward central government spending and revenue targets, the mid-year changes to the 2018 budget also cut dozens of public administration jobs and cancel funds that were initially intended for salary hikes

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TIRANA, July 27 – Underperforming revenue in the first half of this year has forced the Albanian government to undertake a mid-year budget cut in what has become a common practice to handle overoptimistic expectations when drafting budgets over the past quarter of a century of transition to democracy and a market economy.

The budget cut is apparently triggered by sluggish consumption and a strong recovery of the Albanian national currency against Europe’s single currency with a series of negative effects for Albania’s exporters, local producers facing tougher competition from cheaper imports and sizeable Euro-denominated savings and migrant remittances.

In addition to revising downward central government spending and revenue targets, the mid-year changes to the 2018 budget also cut dozens of public administration jobs and cancel funds that were initially intended for salary hikes.

The changes envisage the central government spending and revenue targets will each be cut by about 4.5 billion lek (€35.5 mln; $41.5 mln) but the budget deficit left unchanged at 32.3 billion lek (€256 mln; $299 mln), at about 2 percent of the GDP as part of a public debt reduction agenda.

The central government administration staff will also be cut by 81 people to 81,672 and as part of smaller government the Socialists have promoted in their second consecutive term.

Last September, re-elected Prime Minister Edi Rama cut the number of ministries to 11, down from a previous 16, merging several ministries, while the number of government agencies is expected to be cut by a quarter to 104, from a current 141.

A 1 billion lek (€7.9 mln: $9.2 mln) fund initially intended for salary hikes has also been cancelled under the recent budget revision.

The finance ministry said the budget review is more of a reallocation of funds to support priority public investments and intended to provide year-end rewards to pensioners under a 3 billion lek (€23.7 mln; $27.7 mln) solidarity package.

The Albanian government has blamed the slowdown in tax revenue collected in the first half of the year on the free fall of Europe’s single currency against Albania’s national currency.

Earlier this month, Finance Minister Arben Ahmetaj says the considerable strengthening of the Albanian lek has negatively affected government revenue by an estimated 3.6 billion lek (€28.4 mln) over January-June 2018 when he unveils public finances are estimated to have recovered by an annual 3.3 percent or $60 million, but missed the year’s first half target by 2 percent.

The euro has been trading at an average of 126 lek since early June 2018 after Albania’s central bank decided to undertake emergency interventions to buy excess euros from the local currency exchange market, but is down 6 percent from the mid-January peak level of about 134 lek and 10 percent below mid-2015 level when euro’s five-year reign of about 140 lek came to an end.

 

‘Normative act’ intervention

The changes to the 2018 budget will be adopted under a fast-track procedure known as the ‘normative act’ intervention.

The normative act, which has the force of law for temporary measures and must be approved by Parliament within 45 days to turn into law, has been commonly used by Albanian governments to speed up procedures for emergency interventions to the state budget, especially mid-year cuts due to revenue underperformance.

Last year, the Albanian government also revised the budget downward several times through normative acts as the country faced one of its worst electricity crises triggered by a prolonged drought paralyzing Albania’s hydro-dependent domestic electricity generation forcing the country to make costly imports of about €200 million.

The changes to the 2018 budget come after the Albanian government approved lower corporate income tax and incentives on agribusinesses last June as part of a mid-year fiscal package that is not expected to become effective before next January ahead of the upcoming mid-2019 local elections.

 

Budget cut amid recovering growth?

The budget cut comes at a time when the Albanian economy registered strong growth of 4.45 percent in the first quarter of this year, but growth was largely fuelled by the energy sector thanks to heavy rainfall lifting the country’s hydro-dependent domestic electricity sector out of crisis and a sharp increase in oil exports following the late 2017 bankruptcy of a local refiner and a pickup in commodity prices.

The Albanian government expects growth to recover to 4.2 percent this year, but the World Bank and the International Monetary Fund predict Albania’s growth will slow down to 3.5 to 3.7 percent in the next couple of years as the Trans Adriatic Pipeline and the Devoll Hydropower projects, the two major energy-related projects that drove FDI and economic growth in the past four years complete their investment stage by the end of 2018, leaving a huge gap of about €300 million unless other major projects replace them starting next year.

A sharp strengthening of Albania’s national currency, lek, against Europe’s single currency is emerging as a new threat to the Albanian economy during this year, in addition to the already high public debt levels, sluggish credit and consumption as well as non-performing loans at declining but still high levels.

Public debt at about 70 percent of the GDP, a high level for Albania’s current stage of development, and a controversial €1 billion public private partnership program which the IMF says could create new hidden arrears and undermine the country’s debt reduction and fiscal consolidation efforts are considered key threats to the Albanian economy.

Economy experts estimate the Albanian economy has to grow by 6 percent annually, a growth rate it only enjoyed for about a decade ahead of the 2008-09 global financial crisis in order to produce tangible welfare for the country’s households and bridge the huge gap with EU member countries.

Tirana Times
By Tirana Times July 27, 2018 14:22