Ruling majority MPs also approved some additional funds to several ministries and independent state institutions among which a 500 million lek fund on the reconstruction of the Lushnje-Berat road following a request by the ally Socialist Movement for Integration
TIRANA, Dec. 17 – Ruling majority MPs approved this week amid debates with opposition Socialists a record high overoptimistic budget for the 2013 election year targeting a 4 percent growth rate, twice higher compared to what international financial institutions have forecast, also lifting the 60 percent of the GDP debt ceiling. The bill was approved by 72 votes to 60, receiving only the votes of the Democratic Party-led ruling coalition. Some amendments proposed by the opposition Socialist Party over the management of the public debt by the country’s central bank and the use of privatization revenue to reduce public debt, pay off accumulated bills to the private sector, and increasing investments in priority sectors were rejected by the majority which is expected to cash a record Euro 850 million from the sale of Albpetrol oil firm.
The 2013 budget expects government spending to increase to 409 billion lek (Euro 2.87 billion) and public debt to exceed the 60 percent of the GDP ceiling for the first time in the past decade with the argument of helping stimulate growth in times of crisis and securing 24/7 power as the country’s electricity system is on the verge of collapse with state-owned power corporation KESH continuously needing government funding to secure power imports and Czech-owned distribution operator CEZ Shperndarje on the verge of departure from Albania over rising losses. Another controversial amendment included the reallocation of unconditional grants to local government units based on the results of the 2011 housing and population census. Opposition MPs complained the changes affect opposition-Socialist Party municipalities whose mayors run most of the country’s municipalities apart from Tirana and Shkodra. Ruling majority MPs also approved some additional funds to several ministries and independent state institutions among which a 500 million lek fund on the reconstruction of the Lushnje-Berat road following a request by the ally Socialist Movement for Integration. Opposition MPs also opposed the Finance Ministry’s right to block funds to local government units if they don’t pay power bills for the water supply companies under their management. In late 2012, government cut 2.5 billion Lek (Euro 17.5 mln) in unconditional grants to local government units because of debts water supply companies under their administration owe to CEZ Shperndarje operator, putting many municipalities and communes in severe financial difficulty.
The approval of the 2013 budget comes one week after government cut the 2012 budget by 15.8 billion lek (Euro 111 million) after failing to meet its overoptimistic targets.
Public debt to climb 62.6%
The removal of the 60 percent ceiling in the budget law has been the most controversial issue in this year’s budget. Opposition Socialist Party MPs have described this as a dangerous precedent to the Albanian economy at a time when debt currently stands at the limit of 60 percent of the GDP. However, ruling majority MPs argue the removal of the debt ceiling and its increase by 2.6 percent will further stimulate the economy in these times of crisis.
For the first time in the past decade, Albania’s public debt will officially exceed its 60 percent of the GDP threshold, further endangering the country’s macroeconomic stability as GDP growth in the past few years has stuck into moderate growth rates mainly due to spillover impacts from the EU crisis and high public debt levels. For 2013, government has selected an overoptimistic budget which will increase public debt, already at its legal ceiling of 60 percent of the GDP by another 2.6 percent to 62.6 percent. The overoptimistic scenario of a 409 bln lek (Euro 2.87 billion) comes at a time when government revenue for the first three quarters of the year has frozen and public debt stands at the legal limit of 59.8 percent of the GDP. Public debt declined from 70 percent in 2000 to 54 percent in 2007 in the context of successive IMF-supported programs. This path was reversed with the fiscal stimulus in 2009 general elections. “Under current policies public debt would rise to 64 percent of GDP by 2016,” the IMF has warned. Albania’s public debt sharply rose to 59,3 percent in 2009, up from 54.7 percent in 2008 after loans taken to finance the Durres-Kukes highway linking Albania to Kosovo which cost around 1 billion euros and higher government spending in the general election year.
Both the IMF and World Bank have stressed Albania’s need to reduce public debt levels in order to achieve long-term sustainable growth.
The 2013 budget foresees total revenues to be at 360 billion, up 5.7 percent compared to the expected 2012 revenues and deficit at 3.4 percent of the GDP. The new budget expects the Albanian economy to grow by 4 percent in 2013, up from 3 percent in 2012, which is three times higher compared to what international financial institutions expect for the Albanian economy.
Introducing the 2013 budget at the parliamentary economy committee, Finance Minister Ridvan Bode said the Albanian economy currently faces three main challenges related to the global financial crisis, the electricity situation, and next year’s general elections.
Debt service
The debt service and the pension deficit will cost the Albanian government around 140 billion lek in 2013, which is around 40 percent of the total 360 billion lek in revenues government expects to collect next year, according to Finance Ministry data in the 2013 draft budget.
Public debt service at the end of September 2012 was estimated at 2.59 percent of the GDP, with internal debt interest rates accounting for 1.91 percent of the GDP, principal payments for 0.46 percent and external debt interest rates for 0.22 percent. For 2013, the Finance Ministry expects expenditure on public debt service to increase by 15 percent to 64.1 billion lek (Euro 450 million). Albania’s public debt service dropped to 3.71 percent of the GDP in 2011, down from a record 3.89 percent back in 2010. Estimated at over 900 billion Lek currently, the public debt costs the Albanian government 3.7 percent of the GDP in interest payment annually.
What puts the Albanian public debt more at risk is that it accounts for more than double the annual revenues, while interest expenditure has risen to 3.4 percent of the GDP, compared to an average of 1.3 percent in the SEE 6, the IMF has warned.
In its latest report on Albania, the International Monetary Fund (IMF) says that for 2013, the government’s immediate priority should be arresting the upward trend in public debt, by committing to a budget that maintains debt-GDP ratio at around the 2012 level. Discontinuing the practice of programming optimistic budget revenues and then having to face budget stress once revenue outturn is lower than expected would help avoid the accumulation of unpaid bills, says the IMF.
Loans to KESH
Apart from the controversial article on the public debt ceiling, the draft law on the 2013 budget also foresees that guarantees to state-owned power corporation KESH to borrow for electricity imports will no longer be calculated in the public debt stock. Socialist Party MP Mimi Kodheli, also the deputy head of the parliamentary economy committee, said the amendment would increase Albania’s public debt beyond the 62.6 percent level and risk the country’s macroeconomic stability.
With distribution operator CEZ on the verge of departure, the whole electricity imports will be made by KESH and this will also affect public debt and its legal limit of 60 percent of the GDP. KESH has already been recently awarded Euro 50 million to secure power imports. Government is also negotiating with the World Bank over a USD 100 million loan on KESH.
Infrastructure takes lion’s share
Infrastructure, education, health, defence and agriculture will be the priority sectors even in next year’s public investments. For 2013, which is an electoral year, capital expenditure is expected at 71 billion lek or 5 percent of the GDP compared to 63.6 billion lek or 4.7 percent for 2012. Some 1.7 percent of investments will be carried out with internal financing while the remaining 3.2 under external financing.
Infrastructure will continue taking the lion’ share with 3.9 percent of the GDP in investments, followed by education with 3.24 percent of the GDP, health with 2.54 percent and agriculture at 0.45 percent. The Public Works and Transport Ministry has been awarded 41.6 billion lek or around 60 percent of the total public investments. Some 44 km of new roads in the national network are expected to be built in 2013 and another 14 km rehabilitated. The Education Ministry has been awarded 39 billion lek to improve school infrastructure and support vocational training education. Investments in the health sector, perceived as one of the country’s most corrupt, continue remaining below the 3 percent of the GDP level. For 2013, government plans to invest 29 billion lek or 2.1 percent of the GDP in the health sector mainly in new reimbursed medicines, and reducing infant and maternal mortality rates.
The agriculture ministry continues receiving the smallest amount of funds among the other priority sectors although employing around 50 percent of the country’s population. For 2013, government has awarded only 6.5 billion lek or 0.45 percent of the GDP to support investments in the agriculture sector which accounts for around 20 percent of the country’s GDP.
Governor appeals for new fiscal rule
Speaking after introducing the monthly monetary report few weeks ago, Bank of Albania governor Ardian Fullani called for a new fiscal rule after the removal of the 60 percent of the GDP public debt ceiling, implying that the central bank does not approve of a situation where public debt limits are legally undetermined.
He called on the political class to approve a clear fiscal rule on public debt. “A necessary solution, which of course is not the magic key, is a new fiscal rule. I am making an open invitation to the Albanian political class to sit down and conclude with a fiscal rule which will be an important instrument for the long-term stability of the public debt and a window with all its flexibilities in cases when interventions in extraordinary situations are envisaged. At the same time, it will serve as a guarantee to domestic and foreign investors as far as its transparency is concerned,” said Fullani.
