TIRANA, Nov. 17 – The Albanian government has drafted a rather realistic budget for 2017 when the economy is expected to recover by 0.4 percent to 3.8 percent but several international and local developments could put the targets at risk.
In its report accompanying the 2017 draft budget, the government has identified several risks related to fluctuation in international oil prices, tobacco imports, the performance of value added tax, natural disasters and unexpected decisions related to final court decisions mainly on property cases.
The key risk the Albanian authorities have identified is their forecast for a 20 percent hike in international oil prices.
“However, the October-November 2016 indicators and forecasts by international specialized agencies minimize the possibility of the hike not being at this level,” says the finance ministry.
The slump in commodity prices since mid-2014 has sharply affected the country’s key oil industry which has cut production and frozen new drilling waiting for prices to recover, in a situation which has also affected government revenue through lower collection of royalty tax. The mining industry has also been suffering a sharp cut in base metal prices.
The resumption of domestic oil refining by ARMO refiner could also affect VAT revenues by 10 percent because of lower tax base compared to imported oil, say government authorities.
Lower imports of electricity depending on weather conditions affecting the country’s hydro-dependent electricity generation could also affect VAT, the key tax levied at a fixed 20 percent rate on almost all good and services and accounting for a third of total government revenues.
Authorities have also identified as a risk the expected increase in tobacco imports by 200 metric tons with an impact of 1.4 billion lek (€10 million) to the 2016 budget.
Natural disasters are also identified as a risk factor with the Albanian government having allocated only 1.3 billion lek (€9.5 million) for 2017.
Massive floods that hit Albania in January 2017 and most recently last November claimed at least five lives and are estimated to have caused dozens of millions of euros in damage.
Final court decisions on property issues also remain a threat to public finances, especially in decisions from the European Court for Human Rights.
The Albanian government expects revenue to increase by 6.9 percent to 376 billion lek (€2.7 bln) in 2017 and the economy to accelerate to 3.8 percent fuelled by investment and private consumption. The budget deficit is targeted to drop to 2 percent allowing public debt to slightly drop to 69.1 percent, down from a record high of 71.8 percent of the GDP in 2016.
The forecasts are slightly more optimistic compared to what other international financial institutions and the European Commission predict for the Albanian economy.
The government says it plans to undertake reforms in the running water sector where two thirds of water still goes unbilled due to high losses in the dilapidated distribution system and lack of metering.
Reforms in the administrative and territorial division, the justice sector and the public administration are also expected to have a positive impact following previous reforms in the electricity sector, fighting tax evasion and improving the pension system.
Back in 2014, the number of local government units was cut to 61 municipalities from a previous 384 municipalities and communes but the accumulation of new arrears following their clearance in 2015 has emerged as a concern.
Albania is also expected to launch the implementation of a long-awaited justice reform which is being held back by a controversial vetting bill that will scan all judges and prosecutors over their past performance. The bill, initially appealed at the Constitutional Court, has now been taken to the Venice Commission, a Council of Europe advisory body, for an opinion over its compatibility with the country’s constitution.
The reform is expected to have a huge impact on the business climate in reforming one of the country’s most highly perceived corrupt sectors which holds back much-needed foreign investment for the country’s ailing economy.
