Ambitious reforms, including in the areas of pensions, energy, local government, public administration and the business environment, are essential to support medium-term growth and debt sustainability, says the IMF
TIRANA, March 19 – The International Monetary Fund expects the Albanian economy to strongly recover and public debt to sharply reduce in the next five years. In its latest country report on Albania, the IMF which will assist the Albanian government in boosting growth and supporting macroeconomic stability, expects the Albanian economy to recover from an estimated 0.7 percent growth in 2013 to 2.1 percent in 2014, 3.3 percent in 2015 and 4.2 to 4.7 percent from 2016 to 2019.
Public debt, which is estimated to have climbed to 70.5 percent of the GDP in 2013, posing a serious threat to the country’s macroeconomic stability, is expected to further climb to 71.7 percent of the GDP in 2014 before embarking on a downward trend that will take it to 57 percent of the GDP in 2019.
“Albania successfully avoided recession in the aftermath of the global crisis and suffered a milder growth shock than neighboring countries. Recently, however, the economy has shown signs of protracted weakness and macroeconomic imbalances have widened,” says the IMF
with which government has signed a new deal supported a three-year Euro 331 million loan which will be used to pay off accumulated unpaid bills to the business community, estimated at around 5 percent of the GDP.
The IMF concluded its permanent mission to Albania in January 2009 when relations with the Fund were reduced to an advisory role. The renewed deal also comes after the country’s economy has sharply slowed down in the past couple of years, with GDP growth expected at only 0.7 percent in 2013, the lowest in the past 15 years and the forecast for 2014 is at 2 percent.
“Weak investor confidence, bank risk aversion, as well as incomplete investment climate reforms, have amplified the slowdown. Real GDP growth is expected to decline to 0.7 percent in 2013, the lowest in more than a decade,” says the Fund.
Public debt and financing needs, among the highest in the Central, Eastern and Southeastern European region, have risen because of fiscal loosening prior to the 2013 elections, the accumulation of significant unpaid bills and arrears, and the weak economy. Fiscal deficits have been driven up also by structural factors, with pensions exerting a heavy fiscal burden, adds the report.
Ambitious reforms, including in the areas of pensions, energy, local government, public administration and the business environment, are essential to support medium-term growth and debt sustainability, notes the IMF.
“Lack of reforms has affected the country’s growth potential. While macroeconomic imbalances and recent policy slippages have affected confidence in the economy, a sustained deceleration of structural reforms has coincided with declining potential growth in recent years. It has also prevented a broadening of the productive base, reduction in economic informality, and diversification of exports.”
The IMF describes structural problems in the hydro-dependent electricity sector as a source of fiscal and growth risks.
“Poor collection, electricity theft, and low quality grid affect the sector’s viability. As a result, the state producer has either run down the reservoir in dry years or imported electricity, either by issuing state guarantees, or direct budget support. The lack of payment discipline by consumers has also discouraged investment in new generation capacity,” says the IMF.
IMF’s proposed tax measures
While some of IMF’s tax and expenditure measures have already been adopted in the 2014 fiscal package, the IMF recommends new tax hikes to improve the sluggish performance of Albania’s budget revenue.
The Albanian government has already adopted a higher corporate income tax, increased excise taxes on cigarettes and energy drinks, doubled property taxes, and increased the environmental tax on fuel. The IMF proposes new measures that would widen the VAT base by reducing exemptions on educational services and ship import and increasing the withholding tax on capital incomes from 10 to 12 percent. The IMF proposes the introduction of tolls on the Durres-Kukes highway linking Albania to Kosovo which is scheduled to be awarded to a concessionaire and increasing taxes on cars.
Among expenditure measures, the IMF recommends reducing network loss in electricity distribution, freezing public administration wages and limiting pension increases to inflation rate.
The IMF proposes a reform in the pension system by increasing the retirement age for men to 67, up from 65 currently and to 65 for women, up from 60 currently.
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.
