The IMF representative suggested that government should further lower the 2011 budget deficit to 2.5 percent of the GDP and provide prudent projections on economic growth and revenues
By Ervin Lisaku
TIRANA, Nov. 3 – The International Monetary Fund has raised its GDP projections for Albania to 3 percent in 2010 and 3.5 percent in 2011 following the country’s good performance in exports, the banking system and the agriculture sector, but warned of the major risks the country’s high public debt poses.
The IMF had earlier said the Albanian economy would grow by 2.6 percent in 2010 and 3.2 percent in 2011, almost twice less compared to government’s GDP projections.
Speaking at a press conference in Tirana on Wednesday after concluding a one-week visit to discuss the latest economic developments and the 2011 draft budget, Gerwin Bell who headed the IMF mission, described Albania’s current public debt levels, which have increased to 60 percent of the GDP, up from 54 percent three years ago, as very high compared to regional countries and developing economies in general.
Hailing government’s mid-year considerable budget cuts, which are expected to bring down budget deficit to 3,7 percent of the GDP this year, down from a record 7.4 percent in 2009, Bell said that further lowering public debt was a key priority to reduce risks of macroeconomic instability.
The IMF representative suggested that government should further lower the 2011 budget deficit to 2.5 percent of the GDP and provide prudent projections on economic growth and revenues.
IMF also hailed the issue of Albania’s first-ever Eurobond, worth 300 million euros last week and its 7.5 percent interest rate as a successful measure to improve public finances but called on officials to be careful preserving Albania’s positive perception in international markets through continuous budget reviews.
Asked by reporters if the 2011 draft budget was realistic, IMF’s Bell and Finance Minister Ridvan Bode shared different opinions. Bell said that IMF considered as immature any 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 a positive impact on public debt and achieve the Albanian fiscal policy’s goal of bringing it down to 54 percent by 2013.
Meanwhile, Finance Minister Ridvan Bode admitted differences with the IMF conclusions, which he said were first of all influenced by the Fund’s GDP growth estimates.
“Our economic growth project is more optimistic, but also more realistic as shown by experience to date. Albania possesses the financial resources to support a higher economic growth,” said Bode, supporting his thesis on the positive developments in the banking system, export boom and the recent Eurobond emission which have improved the country’s trade balance sheet.
“Of course I would feel much more comfortable as finance minister to programme a lower economic growth, lower debt, lower expenditure and less revenues,” added Bode, assuring that public investments in 2011 will increase by another 11 percent compared to 2010.
Pension reform
The Finance Ministry and IMF also stressed the need to implement an immediate pension reform considering the country’s high expenditure in pensions and social policies, which government says accounts for one third of the total budget, making it the highest social bill in the region.
Minister Bode said a reform in the pension system is necessary, but requires broad consensus by politicians and experts because of covering a 30-40 year period.
According to him, the budget on pensions doubled to 1.1 billion dollars in 2010 compared to five years ago following the aggressive increases government made each year.
“Of course this needs to be reviewed as half of this social bill is directly paid by taxes and not by social security contributions,” said the minister.
Meanwhile, IMF’s Bell warned Albania must implement the reform as soon as possible and make use of its young population age. According to him, the delay in its implementation would make the reform more difficult even politically because of the population getting older and the number of new beneficiaries increasing.
The International Monetary Fund (IMF) warned in its latest report published in July that past tax and contribution cuts should be reconsidered. IMF said that its staff saw little evidence that last year’s cut in social security contributions was delivering the expected improved compliance. On the contrary, it aggravated the pension deficit to 2.5 percent of GDP, which is high in view of Albania’s fairly young population.
Earlier this year, the World Bank also warned the Albanian pension system could put government in financial difficulty in the next few years because of the low rate of contributions. The current ratio is 1.4 contributions to 1 pensioner at a time when a stable pension scheme requires at least 3 contributions for one pension.
World Bank representatives have called for long-term sustainable reforms in the pension system.
