FinMin justifies budget cut with euro’s free fall hitting revenue by €40 mln

Tirana Times
By Tirana Times September 6, 2018 17:01

FinMin justifies budget cut with euro’s free fall hitting revenue by €40 mln

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  • The negative effects are mainly related to euro’s free fall against the Albanian lek making imports much cheaper and reducing the amount of the key value added tax that the Albanian government collects from imports, the overwhelming majority of which comes from the Eurozone

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TIRANA, Sept. 6 – The ruling Socialist Party blamed the sharp strengthening of Albania’s national currency against Europe’s single currency and the US dollar with a negative impact on government revenue for the mid-year budget cut it approved this week in Parliament in a session boycotted by opposition parties.

Speaking this week at the parliamentary economy committee ahead of the bill’s final approval at Parliament, Finance Minister Arben Ahmetaj said a weaker euro and US dollar negatively affected public finances by 4 billion lek (€31.4 mln) for the first half of this year and about 5 billion lek (€39.3 mln) for the first eight months of this year, about 2 percent of total government revenue for the respective periods.

The negative effects are mainly related to euro’s free fall against the Albanian lek making imports much cheaper and reducing the amount of the key value added tax that the Albanian government collects from imports, the overwhelming majority of which comes from the Eurozone.

Europe’s single currency has been trading at a 10-year low of about 126 lek for the past three months in a situation, primarily hitting the country’s Eurozone exporters, but also savers in Europe’s single currency and remittance recipients.

Despite emergency intervention by Albania’s central bank, the euro continues to trade at about 6 percent below its late 2017 rate and is 10 percent below the mid-2015 level when its five-year reign of about 140 lek came to an end.

The U.S. dollar, whose weight on the Albanian economy is much lower compared to the euro, has also depreciated by about 9 percent during the past year and currently trades at a three-and-a-half year low of 108.8 lek, compared to a 12-year high of about 130 lek in early 2015.

The finance minister’s comments came at a hearing boycotted by the opposition which has conditioned its relations with Parliament following the summer break over allegations of the majority’s links to gangs and rising corruption.

The approval of the mid-year budget cut this week comes after the government initially cut the budget last July 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.

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.

The finance ministry says 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.

However, the main opposition Democratic Party says the budget cut reflects a growing number of business closures in the country, more than 9,000 during the first eight months of this year at a rate of 30 businesses a day, and comes amid lower consumption and a hike in the tax burden.

“The normative act is another slash to food and money for the marginal groups of the society. They save on the poor to give to those with government links,” says opposition Democratic Party MP Jorida Tabaku, referring to the controversial public private partnerships the government is providing for key services. According to her, the PPPs have created hidden debt which if included in the public debt stock take it to 83 percent of the GDP, compared to a current 70 percent of the GDP, a level considered too high for Albania’s current stage of development.

 

Revenue misses target by €65 mln

Government revenue rose by a mere 2.9 percent to a total of about 256 billion lek (€2 billion) in the first seven months of this year, but missed the target by a sizeable 3.1 percent equal to 8.26 billion lek (€65 mln) for the January-July period, according to finance ministry data.

The value added tax and excise duties, the two key taxes that account for about half of total government revenue and serve as indirect indicators for consumption, significantly underperformed over January-July 2018.

VAT, which is levied at a fixed 20 percent rate on almost all products and services failed to meet the target by 5.4 percent or 4.6 billion lek (€36.5 million) during the first seven months of this year.

The profit tax levied under a three-tier system that applies zero, 5 and 15 percent rates depending on businesses’ annual turnover, also missed the revenue target by about 1 billion lek (€8 million) in the first seven months of this year, apparently negatively affected by lower profits by exporting businesses hit by euro’s free fall against the Albanian lek during this year.

The underperforming revenues forced the Albanian government to pursue a tight spending policy that also affected public investment which although higher compared to the same period during the first seven months of the 2017 general election year, failed to meet targets by a huge 4.6 billion lek (€36 million).

The January-July budget performance ended in modest surplus amid a careful spending policy as the government tries to bring public debt down from its current 70 percent of the GDP, a high level for the Albanian developing economy and estimated to pose a key threat to the country’s public finances due to the high servicing cost and undermining investment in key priority sectors.

 

Tirana Times
By Tirana Times September 6, 2018 17:01