TIRANA, Nov. 1 – The ongoing prolonged drought affecting the wholly hydro-dependent domestic electricity generation, a lower than expected increase in international oil prices, lower imports of tobacco triggered by a hike in excise rates and natural disasters such as flash floods regularly affecting the country in the past few years have been identified as the key threats facing Albania’s 2018 public finances.
In its 2018 draft budget, the Albanian government singles out the rainfall-dependent domestic electricity generation which this year suffered a major setback after one of the worst droughts in decades as the major threat for next year, with potential costly imports affecting scheduled investments in key sectors.
Albania’s state-run electricity operators have already spent some €120 million in costly electricity imports during the past six months and are due to spend dozens more unless heavy rainfall fills up the empty reservoirs of the country’s big hydropower plants.
Sporadic rainfall following one of the driest summers on record continues to negatively affect Albania’s wholly hydro-dependent domestic electricity generation, putting state-run electricity generation and distribution companies in dire financial straits and almost paralyzing much-needed investment in the distribution grid. The OSHEE distribution operator, which turned profitable in 2015 thanks to an aggressive nationwide campaign to curb electricity thefts and collect hundreds of millions of euros in accumulated unpaid bills, contracted electricity imports worth about €22 million for November 2017, in costly imports for the six month in a row.
“The vulnerability of the electricity sector to the meteorological situation in the country is the main risk factor. In case of considerable negative situation, the effective vulnerability has a domino effect on all sector operators, with a considerable impact on the financial condition of each of the companies, calling into question the progress of measures taken as part of the energy recovery reform,” says the Albanian government in its explanatory report on the 2018 budget.
Other risks for 2018 include natural disasters such as massive floods, fires and earthquakes on which the Albanian government has only allocated about 1.8 billion lek (€13 million) in civil emergency and contingency funds.
Albania has been regularly affected by floods in the past few years, reflecting climate change effects and poor measures to counter them, causing dozens of millions of euros in damage to businesses, households and the key agriculture sector.
The Albanian government says the 2018 budget is also endangered by final court decisions ordering compensation on unfair dismissals of public administration employees, often politically-motivated. Firing public administration employees especially when a new government takes over, has been a common issue in Albania’s transition to democracy which costs taxpayers dozens of millions of euros each year.
The finance ministry says the 2018 budget is also endangered by final rulings by Strasbourg-based European Court of Human Rights over Albanian ex-property owners expropriated under communism seeking compensation.
Last year, the Albanian government footed a record high bill of about €18 million in four cases appealed at the Strasbourg-based court, but the situation is expected to mark a turning point this year after the country’s constitutional partially upheld a government law that set a new formula for the compensation of former property owners, significantly below its market value. The new law, strongly opposed by former property owners, envisages a total of about €360 million, only about a tenth to what ex-owners claim, to complete the property compensation process in the next ten years.
Decisions against Albania in potential arbitration cases involving international companies is also seen as a threat considering several lawsuits pending decisions by arbitration courts in the U.S. and Europe.
The last time the Albanian government lost a significant amount in arbitration proceedings was in 2010 when it was fined $20 million for unilaterally cancelling contract with U.S. giant General Electric back in 2005. The €74 million project, known also as the electric train, was aimed at modernizing the Tirana-Durres railway segment which would have been linked with the Mother Theresa International Airport.
More than 13 years after the project was cancelled, the key railway segment linking the country’s two largest cities has almost been abandoned by passengers due to its degraded condition.
Albania has settled some key arbitration cases with Czech-owned CEZ operator and a customs scanning concessionaire amicably in the past few years, but still has some key cases pending including a tax dispute with Bankers Petroleum, the country’s biggest oil company and a dispute with Italian businessman Francesco Becchetti over cancelled waste management and renewable energy projects in Albania.
The Albanian government say the 2018 budget could miss its annual target by 1.26 billion lek (about €9.4 million) in case international oil prices don’t increase by 18 percent, tobacco imports don’t increase by 200 metric tons and domestic oil production and imports don’t increase by 7 percent each. The amount is quite negligible considering that the Albanian government plans to collect about 400 billion lek (€2.97 billion) in income for 2018, a 7.7 percent compared to this year.
International crude oil Brent prices have currently jumped to about $60 a barrel, up from an average of $50 a barrel during the year, but yet almost half of the peak level of more than $110 in mid-2014 just before the slump that took them to a 12-year low in early 2016, almost paralyzing new investments and significantly affecting Albania’s poorly diversified exports and underperforming government revenue.
The Albanian government expects the country’s growth to pick up to 4.2 percent in 2018 and public debt to drop to 68.6 percent of the GDP in forecasts which are much more optimistic compared to what international financial institutions forecast for the Albanian economy.
