As government makes drastic changes to public spending in an effort to lower the budget deficit, IMF and other experts see worrying trends.
TIRANA, July 12 – Albania’s government has been very active in its economic policies over the past few weeks, changing its budget and borrowing policies to keep the country’s deficit under control.
The government says it is on track to keep the country’s economy growing through the hard times. But critics also point out that the government is trying to correct previous overspending and find solutions for what it knows are unsustainable spending commitments for public investments and salaries.
The latest outlook came from a delegation of the International Monetary Fund, which expressed concern about the state of public finances at a meeting with Albanian lawmakers.
Meeting with members of the Commission of Economy, the IMF delegation said the Albanian debt was scheduled to grow beyond what the country can afford, posing a serious threat to the long-term outlook of the country’s economy. While the meeting was not public, details about it were revealed by members of the committee to the media.
The IMF sent a mission in Tirana this week, monitoring Albania’s economy closely when it comes to the government’s financial commitments.
IMF’s concern is not new. It has always insisted that public debt should be kept at 40 percent of GDP or below. That’s because the Albanian economy is small and can’t afford high debt levels.
However, Albania’s debt has increased steadily. By the end of 2009, it reached 60 percent of the GDP. Much of the overspending is tied to increased spending on the part of the government, particularly prior to the elections last year.
When many European economies are facing a hard time to cope with the recession and its effects, the IMF is concerned that the increased debt of Albania could lead to a crisis in public finances.
The government’s plan
Government economic officials say they are familiar with the risks and that’s the reason behind the cuts they announced in the budget.
These drastic cuts mean spending in the budget is being reduced by 25 percent.
“These cuts are dictated by the aim to reduce the budget deficit and to prevent the growth of debt,” Prime Minister Sali Berisha said.
Currently, the country’s budget deficit stands at 7 percent and debt at 60 percent of GDP, a level considered high for a country like Albania. That’s why the International Monetary Fund is asking that the deficit be brought down to 3 percent within this year, while debt should be lowered to 50 percent by 2013.
Berisha said the decision to cut the spending was not necessarily linked to the fact that the government is having a hard time borrowing in international markets. He said public debt is a hanging sword for the private sector more than anyone else.
“It would be very wrong if government gave the wrong message during a period when obtaining credit in this sector has a determining importance for the development of the country,” Berisha said.
Albania’s move when it comes to cutting spending mirrors those of other European governments and is dictated by the economic situation and the crisis that still prevails in Europe.
“These measures are the right, responsible attitude in a situation where the main currency of the continent is on thin ice and when the debts of some developing countries around Albania are larger in scale,” Berisha said.
Wage and pension increases
The problem is that the government’s cuts come at the same time as it decided to increase wages and pensions in the public sectors. And these two are the overwhelming part of civil administration spending.
The increases are hefty in the health sector. Doctors and nurses will see an 11 percent to 9 percent increase. And the lowest public salaries will be increased by 10 percent. Army and police salaries went up 4 to 5.2 percent. Teachers saw a 6 percent increase.
After opposition protests, the government dropped a proposed slight increase for high government officials.
Opposition not happy
The opposition Socialists say they have been closely watching the latest government moves and see signs that they are populist in character.
Former Finance Minister Arben Malaj, the top Socialist economy critic, says making cuts in public investment is the wrong move.
“This is the worst move that could have negative consequences for the economy for years to come,” Malaj said in an interview with private television station, Top-Channel.
Malaj added the mismanagement of public finances has plunged the economy into a vicious circle that could lead to a long economic crisis.
“While economic growth will not be at levels predicted by the government, government spending will not be efficient,” he said. “Increased debt, increased deficit and increased the cost of money in the economy, will make things harder.”
