By ervin lisaku
TIRANA, Feb. 1 – With budget revenues expected to grow by 11 percent, 2 percent more than under the revised 2010 budget, the Albanian economy will probably achieve a GDP growth rate of more than 5 percent only if no major cuts are made in mid-year as happened in 2010.
Latest Finance Ministry data show that despite significant budget cuts in July 2010, government fulfilled only 97.4 percent of its revenue targets which registered 324 billion lek (3.24 billion dollars) or 9 percent more compared to 2009. The customs administration which collected a record 13.4 percent more than in 2010 played a key role. However, with the tax administration revenues at the same levels of 2009, failing to meet the government target by 2.6 percent at the end of the first 11 months of last year, government will use some extra revenues from increased excise taxes and introduction of VAT on some new services.
Starting from January this year, the excise tax on cigarettes has increased to 70 lek per packet, up from 50 lek, in a measure aimed at discouraging the country’s high smoking rate which will bring government an extra 28 million dollars for 2011. The introduction of a 10 percent VAT on medicines and the 20 percent VAT for all legal, medicine and accounting services will also raise tax revenues.
Government is also planning to increase profit tax for mobile companies and banking services considering the relatively higher fees they charge even compared to regional countries.
The sale of the remaining important public assets such as oil producer Albpetrol, INSIG insurer and remaining state-owned shares in fixed-line Albtelecom and power distribution operator would bring another 100 to 150 million euros this year, according to government plans in mid-2010.
Assuring of no new tax increases during 2011, Finance Minister Ridvan Bode has said there will be small regulations which do not intend to increase the tax burden such as the customs duty on clothes because of increased purchases abroad following the visa liberalization last December.
The Finance Ministry’s main priorities in 2011 will be keeping the high public debt under control, currently at 59.5 percent and expected to drop to 59 percent of the GDP by the end of this year, keeping inflation rate within the central bank’s 3ѱ percent and further reducing current account deficit to preserve the country’s macroeconomic stability. Increased public investments in infrastructure, education, health and legal changes on public finances to bring them in line with the EU will also be on the top of the government agenda.
The 2011 budget, considered the biggest ever at 4 billion dollars will continue supporting wage and pension increases, and keep deficit in check. The 2011 budget, worth 409 billion lek (4.08 billion dollars) and with revenues at 362.2 billion lek, will take budget deficit to 46.8 billion lek, up from 38.1 billion lek in 2010 or 3.5 percent of the GDP.
Infrastructure expenditure, whose main focus will be the Tirane-Elbasan highway linking the two neigbouring cities through a tunnel, will be at 3.64 of the GDP, followed by education at 3.2 percent and health at 2.75 percent.
Unemployment rate is also expected to be brought down to 12.5 percent down from 13.6 percent in 2010.
However, IMF representatives have suggested that government should further lower the 2011 budget deficit to 2.5 percent of the GDP and provide prudent projections on economic growth and revenues.
Asked by reporters if the 2011 draft budget was realistic, IMF’s Gerwin Bell and Finance Minister Ridvan Bode shared different opinions few months ago when government was drafting the budget. Bell said that IMF considered as immature any draft budget with a revenue growth higher than 6 to 7 percent.
“It is better that the year starts with a more realistic and mature projection in order to make its implementation in 2011 easier,” said Bell. According to him, lowering budget deficits to 2.5 percent in 2011 would also have a positive impact on public debt and achieve the Albanian fiscal policy’s goal of bringing it down to 54 percent by 2013.
Last July, government lowered its 2010 GDP growth forecast to 4.1 percent, down from the previous 5.5, after deciding to cut spending by 25 percent, some 39 billion lek (390 million dollars). Minister Bode said the changes, which came immediately after a wage and pension hike by up to 12 percent, were aimed at keeping under control the country’s public debt and bring the budget deficit down to 3.1 percent by the end of 2010.
Under the revised 2010 plan, budget revenues decreased by 27.2 billion lek, lowering their annual growth rate to 11.4 percent, down from the expected 20 percent at the beginning of 2010. Public investments were also cut by 19 billion lek.
After moderate growth during the first half of 2010, the Albania economy returned to high growth rates in the third quarter somehow overcoming the global crisis effects present since the beginning of 2009. Latest INSTAT data show the country’s GDP in the third trimester of 2010 grew by 4.9 percent year-on-year and 1.6 percent compared to the second quarter.
Industry, transport, services, trade and agriculture were the drivers of the economic expansion while the construction and post-telecommunication continued suffering registering negative growth rates.
After shrinking by 0.8 percent in the last quarter of 2009, the economy managed to return to positive rates, registering year-on-year growth rates of 2 percent in the first quarter of 2010 and 3.3 percent in the second quarter.
The poor performance after the 3.3 percent GDP growth in 2009, when Albania became one of the few economies to register positive growth in the global crisis year, was first of all affected by the sharp shrink in the construction sector, 29 percent year-on-year in the second quarter, and the deterioration in the post-telecommunications market, whose activity fell by 2.6 percent during the same period.
Under the newly approved 2011 budget government hopes the economy will return to a 5.5 percent growth, which is still almost twice higher compared to what international financial institutions such as the World Bank, the IMF and the EBRD project for the Balkan country.
VAT collection drops
Despite total budget revenues increasing by 9.5 percent during the first 11 months of 2010, some important indicators such as the value added tax on sales within the country which measures consumption registered a sharp decrease. Finance Ministry data show VAT collection on domestic sales during the January-November 2010 dropped by 11.2 percent to 27 billion lek (around 270 million dollars), down from 30.4 billion lek during the same period in 2009. The situation reflects consumers’ hesitation and their saving trends at a time when unemployment is at 13.5 percent and prices have gone up on most consumer products.
Another indicator which registered a negative performance was the personal income tax which remained at 42.4 billion lek, exactly the same as the first 11 months of 2009 and the tax on small businesses which dropped 4 percent year-on-year.
The road circulation tax also dropped by 1.9 percent compared to 2009 while tax on sale of used cars fell by 7.2 percent.
The best performance was reported for excise goods with officials managing to collect 34.8 billion lek, 14 percent more than in 2009, from fuel, tobacco, alcohol, coffee etc also thanks to increased excise taxes on cigarettes and coffee since September 2009.
Finance Ministry data show total revenues at the end of November 2010 reached 293.4 billion lek while expenditure was at 316.5 billion lek significantly narrowing budget deficit also because of major budget cuts in July 2010.
No Eurobond
Government has withdrawn from the idea of issuing another Eurobond this year after the successful sale of the first ever 300 million Euro bonds last October. In a recent press conference, Finance Minister Ridvan Bode announced government had not planned to enter global financial markets again after last’s year bond to repay a costly syndicated loan taken to finance the Durres-Kukes road linking Albania to Kosovo. The Finance Minister said Albania would meet public investment needs under long-term loans at low interest rates by international financial institutions.
The decision is reported to have been affected by rising interest rates in international markets and the country’s ongoing political crisis after the 2009 general election which escalated in violent acts and deaths in a January 21 anti-government demonstration.
Albania’s debut sale of 300 million euros of five-year bonds at a yield of 7.5 percent at the end of last October lowered the country’s external debt cost by 20 percent one month later, the Finance Ministry says.
Xhentil Demiraj, the ministry’s public debt director, says the payment of the costly 200 million euro syndicate loan through the Eurobond has brought positive effects lowering the debt cost by 10 million dollars.
The external debt accounts for 40 percent of the country’s total debt.
Under the 2011 budget, government will spend 3.6 percent of the GDP on interest rates and 0.8 percent on principal payments, up from 3.4 percent and 0.5 percent respectively in 2010.
