TIRANA, March 5 – Albania’s public finances registered positive growth rates for the fourth year in a row in 2017 but failed to meet the government’s overoptimistic forecast for an electoral year, in a situation which led to lower than projected public investment as the budget deficit was kept in check and public debt brought down.
A report published with a delay by the finance ministry shows government revenue grew by 5.7 percent to a record high of 430 billion lek (€3.2 billion) at the end of 2017, but failed to meet the annual target by a considerable 2.8 percent, equal to 12.5 billion lek (€94 million).
As a result, public investment failed to meet targets by 4.9 billion lek (€36.6 million), although it rose to a six-year high of 68.5 billion lek (€514 million), representing 4.4 percent of the GDP, up from a record low of 4 percent of the GDP in 2016 when public debt embarked on downward trend after soaring at 73 percent of the GDP in 2015.
The revenue performance is however considered one of the best in general election years during the past quarter of a century of transition to democracy and a market economy when incumbent governments traditionally sharply increased spending in an apparent bid to gain an electoral advantage, resulting in sharp budget cuts during the post-election period.
The positive 2017 performance is a result of a fiscal rule disciplining spending in electoral years and a mid-term target of bringing public debt to 60 percent of the GDP by 2021, down from a current 70 percent of the GDP, a level estimated too high for Albania’s current stage of development. The government’s long-term debt target has been set at 45 percent of the GDP, although international financial institutions and experts doubt such a target can be achieved given still below potential economic growth of 3 to 4 percent and a sharp rise in public private partnership contracts estimated to create future hidden debt.
The value added tax and excise duties, accounting for 43 percent of total government revenue were the key drivers of the revenue growth in 2017 with moderate 6.2 percent and 7.7 percent growth rates respectively.
Levied at a fixed 20 percent rate on almost all products and services, including basic products, VAT is the key tax in Albania accounting for a third of total government revenue.
Meanwhile, excise duties, most of which coming from oil, both imported and domestically produced, accounted for about 10 percent of total government revenue in 2017.
Local government income collected by 61 municipalities also registered a sharp 23.4 percent increase in 2017, mainly as a result of tax hikes and a better collection rate in the country’s largest municipality of Tirana.
Albania’s budget deficit was kept in check at about 31 billion lek (€233 million), accounting for 2 percent of the GDP in 2017 as public debt dropped to 70 percent of the GDP, down from 72.4 percent in 2016 when it embarked on a downward trend after growing for six consecutive years.
Albania paid about 32 billion lek (€240 million) in debt interest rates in 2017 when both domestic and foreign interest rates and security yields stood at a record low, taking spending on interest rates to a decade low of 2 percent of the GDP, according to another report by the finance ministry.
As the population grows elder due to ongoing migration and a sharp decline in birth rates, the tax administration managed to narrow the huge gap in the pension system only thanks to an ongoing nationwide campaign against informality and a 2015 reform gradually increasing retirement age for women.
Data shows the gap in the pension system measuring the difference between what the government collects in social security contributions and how much it spends on more than half a million pensioners narrowed to 45 billion lek (€338 million) in 2017, down 5 percent compared to 2016.
Under the new pension reform, starting January 2015, the retirement age for women, currently at 60, has been gradually increasing by two months per year to reach 63 years old by 2032. The increase in retirement age for men, currently at 65, will continue only after 2032, to reach 67. The retirement age for both men and women is expected to equalize to 67 years old by 2056.
A prolonged drought in the second half of 2017 cost Albania’s state-run hydro-dependent electricity sector a staggering €200 million in costly imports to meet domestic electricity needs, with the government revising the budget several times to support state-run electricity operators in handling imports.
The bankruptcy of ARMO oil refiner leaving more than 1,000 workers jobless in late 2017 and dozens of millions of euros in debts to the tax administration also negatively affected public finances at a time when domestic oil production registered a sharp increase.
Meanwhile, Turkish-owned Kurum steelmaker resumed production in 2017 after suspending its operations in 2016 due to initiating bankruptcy proceedings, with a positive impact on the country’s exports which grew by 12 percent last year.
2018 prospects
The Albanian government expects the country’s economy to grow by 4.2 percent in 2018, up from an expected 3.9 percent in 2017 in a scenario which is considerably more optimistic compared to what international financial institutions expect for the Albanian economy.
The World Bank and the IMF predict the Albanian economy will slow down to between 3.5 percent to 3.7 percent this year as two major energy-related projects, including the Trans Adriatic Pipeline complete their investment stage.
The government expects revenue to grow by an average of 6.6 percent in 2018 when public debt is projected to drop to 68.7 percent of the GDP.
With the electricity crisis over for now due to heavy rainfall since last December, a key threat to public finances has already been minimized. However, attracting foreign direct investment to replace the gap that TAP and the Devoll Hydropower project create by the end of this year remains a huge challenge.
The government targets filling the €200 million gap that the two major energy related investment leave with tax incentives on luxury investment in the emerging tourism industry and an ambitious €1 billion PPP which experts say could create new arrears and hamper efforts to reduce public debt.
