“Stagnating credit, troubled corporate balance sheets, and declining remittances are expected to limit growth to about 1.7 percent in 2013. Growth could increase modestly in 2014, provided the authorities initiate much needed policy and structural reforms,” says Nadeem Ilahi, the IMF Mission Chief for Albania
TIRANA, Oct. 1 – Handling public debt and unpaid government bills and arrears and initiating policy and structural reforms are crucial to restoring sustainable growth in Albania, an IMF mission has advised the new Albanian government after concluding a nine-day visit. Speaking in a joint press conference last weekend, Nadeem Ilahi, the IMF Mission Chief for Albania, warned that the Albanian economy is expected to remain sluggish in 2013 despite relatively strong exports. “Stagnating credit, troubled corporate balance sheets, and declining remittances are expected to limit growth to about 1.7 percent in 2013. Growth could increase modestly in 2014, provided the authorities initiate much needed policy and structural reforms,” Ilahi told a joint press conference with Finance Minister Shkelqim Cani and Bank of Albania governor Ardian Fullani.
The 2013 growth rate would be similar to last year’s 1.6 percent, which was the lowest since the collapse of the pyramid investment schemes and half of the average 3 percent from 2009 to 2011.
Fiscal slippages in the first half of 2013, together with rising unpaid bills and arrears of the central government, accumulated over the past two years or so, and estimated by the IMF mission to stand at about 4.1 percent of GDP, are expected to push public debt to 70 percent of GDP by end-2013, compared to 59 percent in 2010.
“To start lowering vulnerabilities and anchor expectations, the mission recommends that the authorities adopt a credible medium-term debt target for 2018, and aim for a reduction in the public debt-GDP ratio by 2015,” said Ilahi, adding that without the necessary policy and structural reforms, public debt would continue to increase and could adversely impact growth, says the IMF.
The IMF says the 2014 budget should initiate the process of sizable fiscal adjustment while being cognizant of the weak economy. A credible and ambitious structural adjustment based on specific and tangible measures, including comprehensive tax reform and improvements in tax administration, is essential. Relief measures for the poor should be delivered through targeted budget spending. Reforms of the social insurance and energy sectors and public financial management should be a priority over the medium term, along with substantial fiscal consolidation, suggests the IMF.
Clearance of the government’s arrears and unpaid bills would strengthen private sector balance sheets, facilitate the resumption of credit growth by helping lower nonperforming loans (NPLs), and support domestic demand. The IMF mission suggests systematically documenting the obligations (including thorough proper audits), retiring them promptly, and simultaneously implementing public financial management reforms to prevent a recurrence of the problem.
The IMF says the Bank of Albania monetary policy and liquidity management remains broadly adequate, in line with the cyclical weakness of the economy. “The BoA has been largely successful in anchoring inflation expectations. However, the transmission of easier monetary policy into faster credit growth remains hampered by increased risk aversion in the economy and higher NPLs in the banking system,” says the IMF.
Bad loans have more than quadrupled in the past four years hitting a record of around 25 percent, worth around 1 billion euros, plunging lending into negative growth rates for the first eight months of this year.
“The high NPLs are indicative of the state of disrepair of corporate balance sheetsزesulting in part from the accumulation of arrearsءnd are a major factor behind banks’ high risk aversion in lending. The mission welcomes recent efforts to prevent delays in court cases and facilitate collateral execution, but encourages additional measures, including loan restructurings from the banking system, removal of tax distortions, and facilitating out-of-court settlement.”
FinMin: Severe but not hopeless situation
Finance Minister Shkelqim Cani has described the situation of Albania’s public finances in the first eight months of this year as the severest since the collapse of the pyramid investment schemes in 1997. Speaking in a joint press conference with an IMF mission, Minister Cani said the situation inherited by the previous Democratic Party was difficult but not hopeless. “”The situation is really severe, but not hopeless. On the contrary, we are convinced that relatively soon we will see improvements from the bitter reality the previous government which was massively voted out has plunged us.”
He said the Albanian government expects growth to range between 1.7 to 1.9 percent in 2013 and public debt to increase to 67 percent of the GDP without including an estimated 55-60 billion lek (Euro 382 to 416 million) in unpaid government bills and arrears which would take public debt to 71 percent of the GDP at the end of 2013.
“We expect public debt to range between 72 to 73 percent of the GDP in 2014 and target a level of 60 percent of the GDP by 2018,” said Cani.
“Under this situation of negative tax collection, some 24 billion lek of extra debt is needed to close this year and the financing of
the deficit is expected to reach 6 percent of the GDP compared to 3.5 percent in 2012,” he added.
The Finance Ministry says it is cooperating with the IMF and the World Bank as well as other specialized international institutions with the target that the 2013 and 2014 budgets are as realistic as possible and examine space to fulfill commitments in the government programme.
The way out
“The normal way out has already been exhausted and we are already ahead of forced solutions. In order to restore confidence and optimism to the public and fulfill our obligations to the households and businesses which contribute with around 80 percent of the country’s economic development in the mid-term, our job will focus on three stages which involve first of all getting out of the emergency situation, stabilizing the situation and the shift to a stage of sustainable economic growth,” says minister Cani.
Some of the pillars of the reform will target increasing the efficiency on taxes, and the disciplined and responsible management of the public finances, the re-modeling of the pension scheme which currently remains a failed scheme and not stimulating at all, as well as the monitoring of tariffs and electricity losses. Other structural reforms in tax and customs administrations will be undertaken in the coming months for a rigorous, efficient administration.
“Of course this is a difficult start even for the 2014 draft budget we are preparing.
The optimistic picture is that with these measures we target sustainable growth of revenue and a decrease in public debt by 2016. This is the way which will give us space to implement the big projects of our political programme,” says Cani.
Gov’t measures
1) the review of the 2013 budget with a 40 billion lek (Euro 277 million) cut in the revenue target, a decrease in spending and the increase of the budget deficit with 24 billion lek (Euro 166 million).
2) the budget deficit at the end of 2013 is expected at 85 billion (Euro 590 million). The forecast on public debt is at 67 percent of the GDP compared to expectations of 64 percent
In the emergency situation the improvement in the tax policy and the increase in the efficiency of the administration will focus on:
1) the extension and the increase in the taxpayer base by fighting tax evasion
2) the introduction of a progressive tax on personal income
3) the removal of the tax on small businesses
4) the increase of profit tax (not for small businesses)
5) the payment of accumulated government bills and arrears to give a boost to the economy and businesses
6) supporting people in need with the removal of VAT on several basic food products and medicines and health services
Ex-FinMin slams government-IMF ‘silent’ deal
Former Finance Minister Ridvan Bode, who was in charge of Albania’s public finances for the past eight years, says the Albanian government and the IMF have been engaged in what he calls “a silent compromise to transmit the situation of an unrealistic crisis.”
“For the first time, the finance minister and the IMF chief are in unison because each of them is seeking to make a maximum profit out of this situation. The Fund is interested in a deal and unfortunately the finance minister has declared he is interested in increasing the public debt to 70 or 73 percent of the GDP,” said Bode. The former minister also described as untrue the Finance Ministry and IMF statement of an accumulated 55 billion lek (Euro 382 million) debt government owes to the private sector. “The Finance Minister publicly said that non-payment of obligations at staggering amounts central or local government units owe to CEZ distribution operator or KESH power corporation constitutes debt. I think this is not correct,” said Bode.
Bode said the only accumulated unpaid bills include public investments but the figure is much lower compared to what the finance ministry and the IMF claim.
“The accumulated unpaid bills are worth around 11 billion lek. (Euro 76 million). Even if this is calculated as hidden debt, this means an increase in public debt by another 0.7 percent from 62 percent to 63 but not at 73 percent of the GDP.”
Bode says he shares the same opinion with the IMF when it comes to the targets of the new government. “I can tell you that I see with realism the IMF statement regarding the fact that even this year the Albanian economy will perform in positive terrain, i.e we will have an economic growth rate of around 2 percent. I also share the same concern with the IMF that the new government must make clear its objectives, instruments and programme to contribute to the country’s economic stability,” added Bode.
Konfindustria urges careful fiscal policy
Albania’s business community represented by the Konfindustria association has called on the Albanian government to be careful with the fiscal policies it has initiated. Reacting after the joint Albanian government-IMF news conference, Konfindutria said support to specific groups should be envisaged in the budget and through fiscal policies. Konfindustria says it supports the clear government intention of paying off arrears and refunding VAT.
The business association advises that progressive profit tax should be implemented only on companies which operate under conditions of limited competitions because of exclusive licences and as a result of profits higher than the average.
Konfindustria estimates that the implementation of progressive taxation on personal income should also be applied only for individuals with high income otherwise government risks increasing tax evasion and hit the developing middle class. Since 2008, Albania has been applying a 10 percent flat tax on personal income and corporate taxes, one of the lowest in the region.
Public finances at a critical point
Driven by a sharp double-digit drop in VAT, the key tax also indirectly measuring consumption, Albania’s public finances continued underperforming even in August, a period when government revenue traditionally register high levels because of the peak tourist season and the arrival of migrants. Finance Ministry data show government revenue in August 2013, just before the transition to a new Socialist Party-led government, were down by 12.2 percent year-on-year hit by a 20 percent drop in the value added tax.
Government revenue in the first eight months of this year reached 210 billion lek (around Euro 1.46 billion), down 3.5 percent compared to the same period last year, but around 16 billion lek (Euro 113 million) less compared to the target set for this period.
The soaring pre-electoral spending has taken the budget deficit to 54 billion lek (Euro 378 million), more than double compared to January-August 2012 and at already 89.2 percent of the target set for 2013. The situation was a result of spending increasing by 9.2 percent to 265 billion lek in the first eight months of this year and revenues failing to meet targets by 7 percent.
Public investments in this electoral year also increased by 33 percent to 48 billion lek (Euro 333 million) compared to the first eight months of 2012. Key taxes such as VAT and excise taxes, also indirectly measuring domestic consumption which is the key driver of Albania’s growth, dropped by 8.2 percent and 4.6 percent respectively during the first eight months of the year.
Government’s spending on interest rates in the first eight months of this year rose by 5.6 percent to 28.4 billion lek as public climbed to 62 percent of the GDP. The pension deficit for the first eight months of the year also rose to 28.7 billion lek (euro 200 million), up from around 25.7 billion lek during the same period of 2012.
Former Finance Minister Ridvan Bode blamed the failure to keep deficit in check on local government units and the reduction of a series of taxes with a negative impact of 20 billion lek on the state budget.
International audit, deal with IMF
Skeptical of the country’s real financial situation, Prime Minister Edi Rama has warned he will hire an international company to audit the country’s troubled finances. He has also pledged to re-establish relations with the IMF which in early 2009 where reduced to an advisory role.
“We are committed to address a third party with undisputed international expertise. We are getting prepared to do this. We believe that today we are living with a half-truth because many of the data and many elements of the governing process are not part of the necessary transparency to handle the crisis next to us. That’s why we will undertake even another step which I believe will be complementary, by hiring an international audit company that will help us have the truth as soon as possible,” Rama has said.
The Prime Minister has also earlier announced the government intends to re-establish relations with the IMF.
The International Monetary Fund ended its mission to Albania in January 2009 after assisting Albania since the early 1990s. Former Prime Minister Sali Berisha said at that time that the exit of the IMF signals the end of the transition period for Albania and that Albania could economically stand on its own feet.
Meanwhile, new Finance Minister Shkelcim Cani has already started work on the review of the 2013 budget following the poor performance in the first eight months of this year. Cani, a former central bank governor, recently elected MP with the Socialist Party has replaced Ridvan Bode who was in charge of Albania’s public finances for the past eight years.
The finance ministry is also preparing to draft the 2014 budget where SP’s fiscal reform and tax changes are expected to be introduced.
The poor performance shows the previous government’s goal of an 8 percent growth in revenues and a 3 percent GDP growth rate for 2013 will be difficult targets to achieve after last year’s 1.6 percent GDP growth rate, the worst since the collapse of the notorious pyramid schemes in 1997 and almost half of the average growth in the 2009-2011 global crisis years. During the past three years, government has made mid-year budget cuts and revised GDP growth forecasts downward also using normative acts but has kept a constant policy on increasing wages and pensions by an average of 3 to 5 percent.
Albania enjoyed an average annual growth rate of 6 percent from 2003 to 2008 and was one of the few countries to register positive growth of 3.3 percent in 2009 in the outbreak of the global crisis.
