Affected by underperforming government revenue and soaring spending in the first half of 2013 ahead of the June general elections, the budget deficit rose by a record 43 percent to 65.4 billion lek (around Euro 457 million) reaching around 6 percent of the GDP, double compared to the average in previous years
By Ervin Lisaku
TIRANA, Feb. 17 – Positive performance in December 2013, when imports of fuel and tobacco boomed ahead of tax hikes, helped the country’s public finances considerably recover although they could not escape a slight negative growth for the second year in row, a situation unprecedented in the past 16 years. Finance Ministry data show total government revenue in 2013 declined by 0.5 percent year-on-year on sluggish consumption and private investments, indirectly unveiled through the performance of VAT and imports of machinery and equipment.
Affected by underperforming government revenue and soaring spending in the first half of 2013 ahead of the June general elections, the budget deficit rose by a record 43 percent to 65.4 billion lek (around Euro 457 million) reaching around 6 percent of the GDP, double compared to the average in previous years.
Government revenue dropped by 0.03 percent in 2012, registering the first decline since the collapse of the notorious pyramid investment schemes in 1997 after growth rates of 1.8 percent in 2011, 8.6 percent in 2010 and 2.7 percent in 2009.
VAT which is applied at a 20 percent rate on almost all products and services, dropped by 3.1 percent in 2013, unveiling the difficult situation the Albanian economy is facing as the expected growth rate for 2013 has been reduced to only 0.6 percent after a 2.3 percent shrink in the third quarter of the year.
The difficult situation businesses are facing is unveiled by profit tax dropping by 10.3 percent and imports of machinery and equipment dropping by 3.7 percent as an indicator measuring private investments.
Meanwhile, lending remains at negative growth of around 3 percent for both businesses and households as bad loans stand at a record 25 percent.
Public investments during 2013 rose by 6.1 percent to 65 billion lek, the same as the budget deficit while spending on interest rates rose by 4.4 to 43 billion lek (Euro 302 million) as public debt climbed to around 70 percent of the GDP. Spending on domestic debt rates also rose by 5.5 percent despite T-bill yields almost halving because due to consecutive cuts to the key interest rate, currently standing at a historic low of 3 percent.
Privatization revenue during 2013 grew by a record 20 times to around 16 billion lek (Euro 111 million) due to the sale of four small and medium-sized hydropower plants to Turkey’s Kurum for around 110 million euros. The Finance Ministry said Kurum had around 3.5 billion lek (Euro 24.3 million) deducted in VAT refunds for the steel plant operations in Elbasan.
The incumbent Socialist Party-led government, which took over last September, blames what it calls a critical financial situation on mismanagement by the former government ahead of the June 23 general elections and a chain of unpaid government bills and arrears estimated at around 55-60 billion lek (Euro 382 to 416 million).
The Albanian government expects the country’s economy to moderately grow over the next four years and public debt to slightly drop. In its new 2015-2017 macroeconomic and fiscal framework, the Socialist Party-led government expects the country’s growth to drop to 0.7 percent in 2013, down from 1.2 percent in late December 2013 when it approved the 2014 budget. The forecast which is lower even compared to what international financial institutions expect comes after Albania registered a 2.3 shrink in the third quarter of 2013, the sharpest quarterly shrink in the past five global crisis year.
Public debt, including government arrears at 5 percent of the GDP, is estimated to have climbed to 70.5 percent of the GDP in 2013, and is expected to further climb to 72 percent of the GDP before going on a downward trend starting 2015.
Pension deficit widens
The deficit in the pension scheme for 2013 rose to around 44.5 billion lek billion lek (Euro 311 million), up from around 40 billion lek in 2012, unveiling the need for an emergency reform in the pension system which suffers poor collection rates due to widespread informality, according to Finance Ministry data.
The Albanian government has initiated a reform in the pension system which targets curbing the escalating deficit in the scheme and preventing a possible social crisis considering that half of the working wage population does not pay social insurance contributions and could remain without a pension at retirement age.
Currently, an estimated 56 percent of people of working wage are out of the social insurance scheme, which has a deficit of 45 percent and is financed by other tax revenue.
Government says the new system will establish social pensions at a subsistence level for those who have not been able to pay social security contributions because of informality or joblessness. The social pensions will probably be awarded to people aged 70 and over.
Social Welfare Minister Erion Veliaj says the government is trying to find a new formula which will provide pensions for real contributors to the scheme, the poor and those who pay contributions in private schemes. “One pillar is that there should be a social pension that ensures subsistence level for everybody despite the amount of contributions paid, the second pillar foresees the lift of the ceiling for payment of social security contribution which will allow people who pay more to benefit more while the third pillar involves private pensions,” minister Veliaj told reporters.
The changes are based on recommendations by the World Bank but the official version has not been introduced yet.
While no official version has been made public yet, experts say the shift to social pensions could further increase informality in the scheme because of discoursing contributions to the scheme.
The current ratio is 1.4 contributions per pension at a time when a stable pension scheme requires at least 3 contributions for one pension. Albania has more than 500,000 pensioners.
