The IMF’s Gerwin Bell suggested freezing wage and pension increases or raising the social security contributions and the flat tax if the government hopes to lower the public debt to 50 percent of the GDP in the medium term
Tirana Times
TIRANA, June 22 – The high public debt levels and rising budget deficit remain key risks to the Albanian economy, the International Monetary Fund said after concluding a visit to Albania. These two factors have been the driving force behind the government’s decision to revise the budget and make cuts. Speaking on Wednesday at a joint press conference with Bank of Albania governor Ardian Fullani and Finance Minister Ridvan Bode, Gerwin Bell, who headed the IMF mission, reiterated the Fund’s calls on the Albanian government to be careful with the public debt levels, which are currently at 59 percent of the GDP.
“The important thing is that the public debt should not reach the maximum 60 percent level. For developing countries such as Albania this is a very high level which should drop,” said Bell.Bell also announced the IMF had lowered its 2011 GDP growth for Albania to 2.7 percent, down from 3.4 percent earlier this year.
The estimates are still almost twice as high as the 5 percent GDP growth expected by the government after cuts.
Speaking of the budget review, Bell recommended that the budget be planned in the beginning of the year without making cuts or other reviews mid-year. He suggested that the government should be more realistic when drafting the budget and take into consideration opinions by international financial institutions. The IMF chief said Albania could lower its public debt to 50 percent in the next five years only if it freezes wage and pension increases, increases social security contributions again, or raises the flat tax to 12 or 15 percent, up from 10 percent currently. He also suggested increasing budget cuts to 20 billion lek, up from 16 billion lek which the Finance Ministry had projected.
However, Finance Minister Ridvan Bode ruled out drastic measures and tax increases saying that the government’s key goal was to keep public debt under control and gradually lower it. According to him, the budget cuts expected to be approved next July are aimed at keeping the budget deficit at 3.5 percent of the GDP and providing a GDP growth of around 5 percent.Assuring of no other tax increases, Bode said big investments would be made through development banks at low interest rates.
Late last year when the government was drafting the budget, Bell had said that the IMF considered an immature 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 had a positive impact on public debt and achieve the Albanian fiscal policy’s goal of bringing it down to 54 percent by 2013.
IMF’s economic outlook for Albania
Economic growth in 2010 is estimated at 3ݠpercent, and projected to decrease further to 2.2/3 percent in 2011, due to lackluster domestic demand and moderating exports, said the IMF in its preliminary conclusion of its mission visit.
“Over the medium term, given catch-up potential remains and past investment in infrastructure is coming on line, growth could recover to some 4 percent, with some improvements in external sustainability. These levels, though respectable, are considerably below the previous decade’s average of 6 percent, and also subject to downside risks, including those stemming from the high level of public debt.”
Fiscal consolidation is the near- and medium-term policy priority for boosting economic performance and lowering risk, says the IMF. It would reduce the risks associated with the high level of public debt and advance external sustainability by helping to narrow the current account deficit. Moreover, lower deficits would boost sustainable private sector-led growth by raising the flow of credit to the economy and securing lower interest rates.
“The needed fiscal consolidation will require credible measures and sustained effort. Already interest, wage, and entitlement spending claim more than two thirds of every lek the government collects in taxes and fees. If capital spending is to be sustained at its current share in GDP, the wage and entitlement bill would have to be indexed to inflation only.”
In its latest World Economic Outlook report last May the IMF said the Albanian economy grew by 3.5 percent in 2010 and is expected to slow to 3.4 percent in 2011. IMF experts expect the Albanian economy to slightly increase to 3.6 percent in 2012 and return to normal growth only by 2016 when the GDP is expected to grow by 4.5 percent.
However, among the 14 central and Eastern European countries covered in the report, Albania has the third highest growth rate for 2010 after Turkey whose economy registered a record 8.2 growth and neighbouring Kosovo at 4 percent.
As far as consumer prices are concerned, IMF’s economic outlook report says Albania’s inflation rate is expected to climb to 4 percent this year, the maximum target band allowed by the central bank. IMF says inflation the rate in 2010 was at 3.4 percent and is expected to be at 2.9 percent in 2012, remaining within the central bank’s 3ѱ percent target band.
According to the IMF, growth in Albania averaged some 6ܠpercent during 2005-08, largely based on advancements in total factor productivity, while inflation was kept in check. Although current account deficits had crept up over time, they mainly reflected an ambitious public investment program and transition-driven productivity gains. Before the crisis, Albania enjoyed strong growth with comparatively benign external vulnerabilities. Sustained macroeconomic stability, a simplification of the tax system, and structural reformsةn the context of subsequent Fund-supported programs and generally good implementation of past Fund adviceبelped boost investment and productivity.
In the face of the global crisis effects, Albania’s GDP growth halved to 3.3 percent in 2009, down from 7.7 percent in 2008.
Budget to be cut by 16 bln lek
The Ministry of Finance says government spending for the second half of this year will be reduced by 16 billion lek (160 million U.S. dollars, 114 million Euros) following lower revenues and sharply increased spending during the first five months of this electoral year. The draft with the proposed changes to the 2011 budget has already been compiled and sent to the government for approval.
A rising budget deficit, and revenues at almost the same levels compared to the first five months of 2010 have reconfirmed the government’s need to make budget cuts even during this year. Latest Ministry of Finance data show the budget deficit in May 2011 rose to -20.4 billion lek (200 million U.S. dollars), up from -7.7 billion lek a year ago.
Total revenues were up by only 1 percent during the first five months of this year reaching 130.1 billion lek, at 36 percent of the initial 2011 budget plan of 362.2 billion lek. However, total expenditure in this electoral year rose by 14 billion lek (140 million U.S. dollars) to 150.5 billion lek.
The budget cuts account for 3.9 percent of the 2011 budget worth 409 billion lek (4.08 billion USD) and with revenues at 362.2 billion lek. The budget deficit at the end of 2011 is expected to be 46.8 billion lek, up from 38.1 billion lek in 2010נor 3.5 percent of the GDP. In mid-2010, lower tax and customs revenues also forced the government to make significant budget cuts, worth 39 billion lekנreducing spending by 25 percent and lowering its GDP growth for 2010 to 4.1 percent, down from an expected 5.5 percent at the beginning of 2010. Under current estimates, the government projects that the Albanian economy will grow by 5 percent in 2011, 0.5 percent below its initial estimate. The government had initially expected 2011 budget revenues to grow by 11 percent, 2 percent more than under the revised 2010 budget.
Public debt
Albania’s public debt dropped to 58.4 percent of the GDP at the end of 2010, remaining within the 60 percent target stipulated by law. Data published by the Bank of Albania in its financial stability report for the second half of 2010 show the public debt dropped to 58.4 percent at the end of 2010, down from a record 59.6 percent of the GDP at the end of 2009. The public debt continued to grow in 2008 when it reached 55.9 percent, up from 52.2 percent in 2007.The 2011-2013 mid-term budget, which the government has approved, foresees a lowering of high public debt levels to 54 percent by 2013.
However, IMF experts said in a 2010 report that Albania’s public debt will rise to 68 percent of the GDP in 2013. The IMF prediction for 2010 and 2011 was at 62.8 percent and 65.1 percent respectively, compared to government’s 59.5 percent and 58.2 percent.
