Government warned to be careful with budget deficit

TIRANA, August 31 – The central bank governor has called on government to be careful with the budget deficit management after budget cuts to lower the deficit to 3.1 percent of the GDP, down from a record 7 percent at the end of last year.
“The Bank of Albania must be careful in following expenditure every day so that the efficiency of the measure to lower budget deficit is achieved,” said governor Ardian Fullani at a press conference on Wednesday.
Budget deficit at the end of July registered 23.1 billion lek, 42 percent less than one year ago. Budget revenues increased by 3.7 percent while expenditure dropped by 5 percent.
The Bank of Albania says the respect of the budget deficit and public debt levels will help preserve economic stability. The careful administration of public debt is also expected to curb risk premiums and long term interest rates, further boosting credit to the private sector.
Government has recently cut spending by 39 billion lek (390 million dollars) for the rest of this year in an effort to keep public debt levels at 59.5 percent of the GDP and reduce budget deficit to 3.1 percent by the end of the year.
However, the International Monetary Fund, which has hailed government measures, expects the 2010 public debt to be at 63 percent and increase by another 0.8 percent in 2011.
Government has also lowered its GDP growth forecast to 4.1 percent, down from an expected 5.5 percent at the beginning of this year, which is still almost twice higher compared to what international institutions such as IMF and the EBRD expect in 2010.
According to the central bank surveys, the economic growth in the second quarter of this year is expected to be at the same levels of the first quarter when the GDP grew by 2 percent year-on-year after the 0.8 percent shrink registered in the last quarter of 2009.
The central banks says that despite the significant 86 percent increase in exports during the second quarter of this year the country’s long-tern foreign currency position stability will require more careful behaviour towards the trade deficit and promotion of capital inflows.
Governor Fullani said that the central bank’s recent measure of cutting the repo rate by 0.25 percentage points to 5 percent had already brought positive effects in the short-term by lowering interest rates in the interbanking sector and the primary government security market.
“In the coming months, the monetary policy move should be transmitted into lowering lending costs for the private sector,” said Fullani in the press conference.
The central bank says the mid-term inflation rate is expected to be within the bank’s 3 percent target, plus/minus 1 percent.
Last July inflation registered 3.4 percent mainly because of an increase in administered prices in international markets and the depreciation of the national currency lek.
Governor Fullani said the rise in wheat prices in international markets which have already caused bread price increases is expected to have minor effects in the overall inflation rate.