The IMF, which is assisting Albania get back to sustainable growth with a renewed three-year deal supported by a Euro 334 million loan to clear accumulated arrears, says fiscal consolidation is proceeding as planned and no additional revenue and expenditure measures are needed to achieve the 2014 targets.
TIRANA, July 22 – Albania will need no new fiscal measures for 2014, but government authorities should tackle emerging fiscal risks such as the acceleration of arrears clearance, addressing non-performing loans and structural reforms to further improve the business climate, says the IMF in its latest country report on Albania.
The IMF which is assisting Albania get back to sustainable growth with a renewed three-year deal supported by a Euro 334 million loan to clear accumulated arrears, says fiscal consolidation is proceeding as planned and no additional revenue and expenditure measures are needed to achieve the 2014 targets of 2.1 percent growth and bring the public debt back to below 60 percent of the GDP by 2019.
While some of IMF’s tax and expenditure measures were adopted in the 2014 fiscal package, in its previous report last May, the IMF recommended new tax hikes to improve the sluggish performance of Albania’s budget revenue in the past few years.
The Albanian government has already adopted a higher corporate income tax, increased excise taxes on cigarettes and energy drinks, doubled property taxes, and raised the environmental tax on fuel in some measures to increase budget revenues. However, the IMF proposed 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 Fund also proposed 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 recommended reducing network losses in electricity distribution, freezing public administration wages and limiting pension increases to inflation rate.
The IMF also suggested 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, on track to be implemented starting next year. The new system government has proposed envisages that starting January 2015, the retirement age for women, currently at 60, will gradually increase by two months per year to reach 63 years old by 2032. The increase in retirement age for men, currently at 65, will continue only after 2032, to reach 67. The retirement age for both men and women is expected to increase to 67 years old by 2056.
Economy recovering
In its new report, the IMF slays the Albanian economy is showing tentative signs of recovery in 2014, but growth will still remain below potential.
“Albania will need stronger sustained growth over the medium term, aided by structural reforms that increase the economy’s potential, to tackle rising unemployment, correct domestic imbalances and solidify financial stability,” says the Fund.
The IMF also urges urgent action to tackle fiscal risks from the electricity sector and property restitution claims.
“The electricity reform agenda is complex but needs to be addressed promptly to mitigate fiscal risks and support growth. Even then, it will take time to eliminate implicit and explicit budget support to the energy sector. Property restitution claims should be dealt with urgently, while safeguarding fiscal sustainability.”
The IMF says Albania’s medium-term outlook is generally favorable. “Economic growth is expected to gradually rebound to 4.5 percent over the medium term on the back of critical structural reforms that improve the business climate and raise potential growth, a gradual recovery in European partners and large energy-related investments. EU accession-related reforms would also improve Albania’s prospects as an investment destination.”
The IMF warns insufficient fiscal consolidation could undermine fragile investor confidence, affect the domestic and external rollover of public debt and impact bank holdings of government paper. “Incomplete structural reforms could prevent a revival in investment. A weaker-than-expected outlook in the main trading partners, Italy and Greece, could affect the prospects for an export led recovery while potential regulatory and compliance risks at parent banks pose deleveraging spillover.”
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 is assisting the Albanian government boost growth and achieving macroeconomic stability, expects the Albanian economy to recover from an estimated 0.4 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 came after the country’s economy sharply slowed down in the past couple of years, with GDP growth at an estimated 0.4 percent in 2013, the lowest in the past 15 years and the forecast for 2014 at 2 percent.
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.
“In 2013, the economy was at its weakest in 15 years; growth dipped to 0.4 percent, while unemployment rose to 15.6 percent, public debt increased, nonperforming loans continued to rise, and credit began to shrink for the first time in a decade. Despite the negative developments at home and in Europe, the banking sector remained stable thanks to adequate capital and liquidity.”
