By Ervin Lisaku
TIRANA, Oct. 25 – With the general elections drawing closer every day, the ruling Socialist Party-led Albanian government has announced plans for a considerable wage and pension increase, a partial tax amnesty and easier tax procedures accompanied by a sharp cut in penalties, in measures expected to give the ruling coalition a huge advantage ahead of the upcoming mid-2017 elections.
While the easier tax procedures and the partial amnesty will benefit the current tense business climate with the high tax burden as the key concern, the wage increase which ranges from 10 percent for the public administration to 17 percent for police forces, one of the biggest pre-electoral hikes, is considered a controversial undertaking for the country’s ailing public finances and its macroeconomic stability at a time when GDP growth has only slightly recovered to 3 percent and public debt at about 72 percent of the GDP poses a huge threat for the current stage of Albania’s economic development due to high debt servicing being a barrier to much-needed public investment in key sectors such as infrastructure, education, health and agriculture.
The wage hike comes after the public administration faced a wage freeze in the past three years and is expected to cost the Albanian government $100 million.
The proposed increase in the minimum wage by a sharp 35 percent to 30,000 lek (€216), the biggest ever annual increase, could hurt some key industries relying on cheap labour costs such as the key garment and footwear industry, employing about 100,000 people and producing the country’s top exports, which is expected to partly finance the increase through higher social security and health insurance rates.
Garment and footwear producers, who have hailed government decisions to keep the minimum wage unchanged at 22,000 lek (€159) for the past three years, are expected to strongly oppose the hike fearing they could lose their competitiveness over other emerging markets.
“Albania could be facing headwinds from the growth slowdown in Europe and the decline in transport costs, which places it in competition with countries that have large textile sectors with lower labor costs such as Bangladesh, Cambodia, and Vietnam,” the IMF has warned this year.
The Albanian government says it plans to spend about $100 million on wage and pension increases next year, when police forces will benefit a 17 percent hike starting next January and the public administration is expected to get a 10 percent increase in monthly wages starting March 2017, only three months ahead of the upcoming general elections expected in June 2017.
The government’s shift to a more liberal approach is also expected to give an end to its relations with the International Monetary Fund after February 2017 when the Fund’s role will be reduced to advisory.
“There will no longer be a new binding or conditional deal. We would prefer to have an agreement based only on monitoring or advice,” Finance Minister Arben Ahmetaj has recently clarified.
Relations with the IMF during the past three years have been conditioned by a three-year €331 million soft loan, with IMF missions making almost quarterly visits to Albania to discuss tax policies with Albanian authorities before deciding on the next loan installment.
While the Fund has had a decision-making role on the government’s fiscal policies in the past three years, conditioning its financial support at only 3 percent of the country’s GDP with a tougher discipline on public finances, experts and business representatives have often criticized its continuous tax hike policy as not helping improve the business climate in crisis times.
Albania’s deal with the IMF in early 2014, the consolidation of public finances and the clearance of government arrears, led Standard & Poor’s, one of the big three credit rating agencies, to upgrade Albania’s long-term credit ratings to ‘B+’ from ‘B’ on improving fiscal performance with a stable outlook in early 2016.
Spending on wages and pensions as well as social protection accounted for a considerable 60 percent of the Albanian government’s total expenditure in 2015 compared to only about 14 percent used in much-needed public investment.
Back in late 2013, when the Socialist Party-led government came to power, it was forced to sign a deal with the IMF and increase taxes to clear government arrears of about €500 million.
Experts argue increasing borrowing to raise wages and pensions could give another blow to public finances and lead to a new increase in public debt.
$100 million
Prime Minister Edi Rama has announced his Socialist Party-led government will make available $100 million on wage and pension increase and raise the minimum wage by 35 percent to 30,000 lek (€216) in the first time such huge increase is made in Albania’s 25 years of transition in a single year.
“A hundred million dollars to reward the stamina, sacrifices and pain and the big support under the current conditions is a huge amount of money for this government, but is at the same time inalienable moral obligation,” Rama has said.
“It is high time we increased salaries for teachers, doctors, nurses, police and military forces and it is time that through this considerable increase we provide the clear message of my awareness and the awareness of this ruling majority that their role in taking the reform forward is inalienable,” he added.
“Albania will no longer be the last in the region for its minimum and average wage. Albania’s minimum wage will overtake Kosovo, Montenegro and Croatia and get closer to Macedonia,” noted the Prime Minister.
Meanwhile, some 500,000 Albanian pensioners had their pensions increased by a modest 1.6 percent this year, indexing them to inflation.
Average wages in the public sector, employing some 163,000 people or 20 percent of the workforce, rose to 54,000 lek (€390) in 2015.
Average gross wages in the private sector, where informality is still estimated high and wages are commonly underreported, is at an average of 37,000 lek (€267), making it hugely disadvantaged compared to the public sector. The private sector accounts for about 80 percent of Albania’s GDP and employs the overwhelming majority of four-fifths of the country’s population.
Meanwhile, Albania’s average monthly pension is at 15,000 lek (€108).
Central bank governor skeptical
Central bank governor Gent Sejko has hailed the pay rise as positive about stimulating current sluggish domestic consumption, but urged caution to continue fiscal consolidation in order to keep the budget deficit and public debt in check.
“The wage and pension increase is an exclusive right of the Albanian government. We have been preliminarily notified that the government will make a wage and pension hike. In the first impression, this hike would have a positive effect in boosting consumption,” Sejko has said.
“We have stressed that the easier monetary policy the central bank has been following to boost lending, consumption and investment is not enough unless structural reforms are undertaken. In this respect, we view the salary and pension hike as a stimulating factor to increase consumption. On the other hand, the central bank is interested in preserving macroeconomic balances, lowering the budget deficit and continuing the fiscal consolidation,” the governor notes.
“We haven’t seen the government’s plan on their expectations for the wages and pension increase, i.e. there is no final draft law on the budget yet. We need to examine this draft law in order to provide a more accurate opinion and it is only then that we can judge if the hike is acceptable, always considering these parameters and the central bank’s targets; i.e. the preservation of fiscal consolidation, the continuation of the downward trend in the budget deficit and debt reduction. As long as these parameters are preserved, of course the salaries and pensions increase is a right and exclusive attribute of the Albanian government,” he adds.
Tax amnesty
The ruling Socialist Party-led government has proposed a tax amnesty on businesses and property reassessment under modest rates, in two pre-electoral initiatives targeting to give a boost to sluggish business and consumer confidence ahead of the scheduled June 2017 elections.
The government has also announced a new fiscal package that significantly reduces penalties on businesses but keeps unchanged the current high tax burden, one of the major concerns for the business community, following tax hikes in the previous three years.
The new package which will become effective starting next year comes after concerns of deteriorating business climate by several key foreign and Albanian associations and after a law envisaging fines of up to €70,000 on tax evasion was turned down by the country’s Constitutional Court earlier this year over “disproportionate” penalties to income and offences committed.
Finance Minister Arben Ahmetaj recently withdrew from an initial proposal that was supposed to pardon 30 percent of debts in case of immediate one-time payments.
“From January 2011 until 2014 there will be easier procedures for those who pay the full obligation. Whoever pays the obligation, will benefit reduced interest rates and fines and there will be forceful collection with all instruments for those who don’t pay,” Ahmetaj has said.
The business community is estimated to owe the tax administration some $1.1 billion.
Struggling finances
Albania’s public finances continued struggling even after a surprise mid-year budget cut that slightly revised downward government revenue and spending.
Finance ministry data shows the nationwide campaign against informality that formalized thousands of previously unregistered business and lifted dozens of hundreds of workers out of informality is having minimal effects on public finances, which although recovering by 6.9 percent during the first three quarters of this year, failed to meet the target by about 1.5 percent or €32 million.
The Albanian government plans to spend about 60 billion lek (€432 million) or 3.9 percent of the GDP on public investment in 2016 compared to 4.3 to 5 percent of the GDP in the previous seven years.
Last year, the Albanian government cut the budget three times to handle the sharp decline in international oil and mineral prices affecting exports and handle a slowdown in consumption. The GDP was also revised to 2.6 percent, down from initial expectations of 3 percent.
The public debt, currently at a record high and a huge burden for the size of the Albanian economy, is set to slightly drop to slightly drop to 71 percent of the GDP this year before dropping to 60 percent of the GDP by 2019 which is slightly overoptimistic considering the sluggish performance of public finances even after an aggressive late 2015 nationwide campaign against widespread informality.
Since 2014, the corporate income tax and the withholding tax on dividends, rents and capital gains have increased by 5 percent to 15 percent, making the tax burden in Albania one of the region’s highest and a key concern for foreign and local investors.
The Albanian economy has grown between 1 to 3 percent in the past seven crisis years compared to a pre-crisis decade of 6 percent.
