Reform in energy sector crucial to speed up growth, says IMF

“The reform in the energy sector is crucial because subsidies on energy which is stolen and not paid are a huge burden to the state budget and this outflow of money which could help the potential of economic growth must be stopped,” says Jens Reinke, the new IMF resident representative in Tirana.
TIRANA, Sept. 25 – The International Monetary Fund considers the reform in the energy sector, which is estimated to cost the state budget around $200 million in annual losses, as crucial for Albania’s sustainable growth and key to bringing down the public debt, currently hovering at around 70 percent of the GDP.
Jens Reinke, the new IMF resident representative in Tirana, says the reform in the energy sector is essential considering that half of electricity in Albania is not paid.
“The reform in the energy sector is crucial because subsidies on energy which is stolen and not paid are a huge burden to the state budget and this outflow of money which could help the potential of economic growth must be stopped,” said Reinke in a televised interview.
INSTAT data shows grid losses, the overwhelming majority of which belong to distribution network losses, dropped by 7.3 percent to 1.546 GWh in 2013, accounting for 38.4 percent of total electricity available for consumption. The situation is a result of massive thefts and the dilapidated distribution grid.
“We are pleased that the pension reform was carried out quickly, but we are waiting for the energy reform where the impact would be not only in the financial aspect, but also in the sustainable electricity supply,” he added.
The IMF resident representative says they are examining the structure of electricity prices but have not made any recommendation on an increase in electricity prices. Government has announced energy prices are set to increase for business consumers starting next year.
Speaking about the 2015 draft budget, Reinke said IMF’s key concern was on reducing public debt and that it is up to the Albanian government to achieve it by combining improving tax administration, increasing taxes and controlling spending.
“What we agree on with government is the need to increase public investments because this helps infrastructure and develops the economy. However, it is a political decision by government, whether it decides to spend less and tax less or spend more and tax more,” he added.
Albania will need no new fiscal measures for 2014, but government authorities should tackle emerging fiscal risks such as the acceleration of arrears clearance, addressing non-performing loans and structural reforms to further improve the business climate, says the IMF in its latest country report on Albania.
The IMF which is assisting Albania get back to sustainable growth with a renewed three-year deal supported by a Euro 334 million loan to clear accumulated arrears, says fiscal consolidation is proceeding as planned and no additional revenue and expenditure measures are needed to achieve the 2014 targets of 2.1 percent growth and bring the public debt back to below 60 percent of the GDP by 2019.
While some of IMF’s tax and expenditure measures were adopted in the 2014 fiscal package, in its previous report last May, the IMF recommended new tax hikes to improve the sluggish performance of Albania’s budget revenue in the past few years.
The Albanian government has already adopted a higher corporate income tax, increased excise taxes on cigarettes and energy drinks, doubled property taxes, and raised the environmental tax on fuel in some measures to increase budget revenues. However, the IMF proposed new measures that would widen the VAT base by reducing exemptions on educational services and ship import and increasing the withholding tax on capital incomes from 10 to 12 percent. The Fund also proposed the introduction of tolls on the Durres-Kukes highway linking Albania to Kosovo which is scheduled to be awarded to a concessionaire and increasing taxes on cars.
Among expenditure measures, the IMF recommended reducing network losses in electricity distribution, freezing public administration wages and limiting pension increases to inflation rate.
In its new report, the IMF slays the Albanian economy is showing tentative signs of recovery in 2014, but growth will still remain below potential.
“Albania will need stronger sustained growth over the medium term, aided by structural reforms that increase the economy’s potential, to tackle rising unemployment, correct domestic imbalances and solidify financial stability,” says the Fund.
The IMF also urges urgent action to tackle fiscal risks from the electricity sector and property restitution claims.
“The electricity reform agenda is complex but needs to be addressed promptly to mitigate fiscal risks and support growth. Even then, it will take time to eliminate implicit and explicit budget support to the energy sector. Property restitution claims should be dealt with urgently, while safeguarding fiscal sustainability.”
The International Monetary Fund expects the Albanian economy to strongly recover and public debt to sharply reduce in the next five years. In its latest country report on Albania, the IMF which is assisting the Albanian government boost growth and achieving macroeconomic stability, expects the Albanian economy to recover from an estimated 0.4 percent growth in 2013 to 2.1 percent in 2014, 3.3 percent in 2015 and 4.2 to 4.7 percent from 2016 to 2019.
Public debt, which is estimated to have climbed to 70.5 percent of the GDP in 2013, posing a serious threat to the country’s macroeconomic stability, is expected to further climb to 71.7 percent of the GDP in 2014 before embarking on a downward trend that will take it to 57 percent of the GDP in 2019.
The IMF concluded its permanent mission to Albania in January 2009 when relations with the Fund were reduced to an advisory role. The renewed deal also came after the country’s economy sharply slowed down in the past couple of years, with GDP growth at an estimated 0.4 percent in 2013, the lowest in the past 15 years and the forecast for 2014 at 2 percent.