Public debt at 62 percent of the GDP, sluggish domestic consumption affected by lower remittances, bad loans at 25 percent and lending striving to maintain growth rates are some of the key worries of the Albanian economy. The new government will also have to pay off some Euro 200 million to private companies in outstanding debts for public works
TIRANA, Sept. 10 – With a new government having just taken over, the economy is on top of the agenda as Albania strives with the lowest GDP growth rates in the past fifteen years affected by the Eurozone crisis and problems at home with public debt at already 62 percent of the GDP. Public finances are at a critical situation following soaring pre-electoral spending and overoptimistic targets set by the former Democratic Party-led government require an immediate review.
Experts say the new government of Prime Minister Edi Rama will have to handle a series of challenges which are curbing the Albanian economy. Public debt at 62 percent of the GDP, sluggish domestic consumption affected by lower remittances from top trade partners Italy and Greece, bad loans at 25 percent and lending striving to maintain growth rates are some of the key worries of the Albanian economy. Unpaid bills to private companies contracted for public works estimated at around Euro 200 million is another bill the new government will have to handle at a time when both business and consumer confidence stand a low level affected by a decrease in purchasing power.
Former Prime Minister Sali Berisha who has led the Albanian government for the past eight years says Rama’s promises are completely unrealistic and not accompanied by a financial bill. He says the deceptive promises, which the Democrats could not make, were the key reason for their landslide loss in the June 23 general elections.
Economic growth agenda
The Socialist Party says it will identify new resources to drive economic growth or alternatives to some current resources which in the short and mid-term are expected to have a lower contribution.
“The end of the 22-year transition period and the economic and financial crisis has put the country in front of an undisputed fact. The current economic growth model in Albania, mainly supported on income from remittances, donations as a poor and developing country, soft loans and foreign assistance were an important driver which regularly supplied the Albanian economy. The massive privatizations which gave the Albanian budgets the luxury of being in equilibrium and at minimal deficits and self-employment mainly in agriculture, the 15-year boom in construction, and the reduction of unemployment through immigration seems to be heading to total or partial exhaustion,” says the SP-led left-wing coalition in its new programme for the 2013-2017 term.
“We are clear on the key development goals and the model of economic growth for the next 15 to 20 years. We will build the profile of the Albanian economy in the next two decades identified through several priority sectors such as manufacturing, energy, tourism, agriculture and agri-industry, education and services. We will draft more structured and well-addressed policies to promote maximum economic growth, increase domestic production and exports, and massively open new jobs,” says the winning left-wing coalition in its programme.
Tax changes
The transition of power will be accompanied by changes in taxes which were on top of the agenda by both major parties during the campaign of the June 23 general elections at a time when the Albanian economy is more and more suffering the consequences of global crisis impacts .The Socialists have announced they intend to apply progressive taxation when coming to power while the Democrats, now in opposition, insisted on the 10 percent flat tax introduced in 2008.
The new progressive taxation project and the transparency over privatization and concession contracts will be the first targets for the Socialist Party.
“We will act quickly to apply the new taxation project by shifting into fair taxation which will reduce taxes for 95 percent of Albanians and lift taxes for small businesses. We will act fast with a facilitating package on farmers to reduce their production costs, remove VAT on basic products and medicines, and reduce household electricity prices. We will also launch a transparency process on concessions and privatizations suspected of favours at the expense of Albanians,” Prime Minister Edi Rama has earlier said.
The Socialist Party has promised to create 300,000 jobs in the next four years focusing on the manufacturing, agriculture and tourism sectors.
At the start of the electoral campaign in late May 2013, Socialist Party leader Edi Rama clarified that the Socialist Party intends to apply progressive taxation only on personal income tax and dividends but not on company’s profits. Rama said only the 10 percent profit tax would be preserved from the current 10 percent flat tax on personal income and corporate taxes introduced in 2008 by the ruling Democratic Party.
“We are not in favour of progressive taxation when it comes to company’s profits,” said Rama adding that profit tax will be cut for small businesses and remain at 10 percent for big businesses.
The Socialist Party says 95 percent of Albanians will save money from progressive. The new system the Socialist Party has proposed foresees progressive taxation of up to 10 percent for monthly wages of up 140,000 (Euro 978) and 13 to 22 percent for wages from140,000 lek to more than 300,000 lek (Euro 2,095).
The Socialist Party also says it will lift the 20 percent value added tax on a series of basic products and reduce VAT on agricultural inputs. Ahead of the June 23 general elections, the ruling Democratic Party lifted the 10 percent personal income tax only for people receiving monthly wages of up to 30,000 lek (Euro 210) and said it will continue applying the 10 percent flat tax on personal income and corporate taxes as a successful reform increasing the country’s competitiveness.
International audit of public finances
Prime Minister Edi Rama said one of the first things the Socialists will do is analyzing the real situation, the finances, the economy and the whole state structure. “For several years in a row there has been a criminal effort to manipulate statistics in order to cheat citizens through make-up of the real situation which in our opinion is much graver compared to what is made public by official data,” said Rama.
“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 also announced a reform in what he called the politically controlled INSTAT to turn it into an independent statistical institute. He has suggested its twinning and management by an EU statistical institute for a five-year period so that the currently-government controlled institute stays away from political pressure and influence.
Rama has also announced the establishment of a National Economic Council as an intermediate structure between government and the entrepreneurs. This National Economic Council will function as a joint roundtable to handle crisis factors which have aggravated the situation of the Albanian economy and public finances. The new Prime Minister has previously stressed the need to reestablish relations with the IMF which were reduced to an advisory role back in 2009 by the outgoing government.
Under the new government structure unveiled by Rama, the Ministry of Economy, Trade and Energy will be divided into the Ministry of Economic Development, Trade and Entrepreneurship and the Ministry of Energy and Industry. The current Ministry of Public Works and Transport will be turned into the Ministry of Transport and Infrastructure and the Ministry of Urban Development and Tourism. The Ministry of Agriculture will turn into the Ministry of Agriculture, Rural Development and Administration of Waters.
Public finances in critical situation
Albania’s public finances remained in a critical situation after the first seven months of 2013, unveiling the new Socialist Party-led government which has just taken over will face a tough challenge with the 2013 budget, rising public debt levels and its cost.
Fuelled by a sharp rise in pre-electoral spending, Albania’s public finances are facing their worst ever situation since the notorious 1997 turmoil triggered by the collapse of the so-called pyramid investment schemes. Official data published by the Finance Ministry reconfirmed the critical situation with the budget deficit which has more than doubled in the first seven months of this year. Fuelled by rising budget deficit, public debt climbed to 62 percent of the GDP in the first half of this year, being one of the highest in the region.
At around 48 billion lek (Euro 337 million) for the first seven months of this year, the budget deficit is 128 percent higher compared to the same period last year and at already 78 percent of the 61 billion lek target for the whole of 2013 budget, revised after privatization revenue from the sale of four hydropower plants, according to Finance Ministry data. What’s more concerning is that government has also used up almost all of its internal borrowing target.
With post-electoral public finances facing a critical situation, new budget cuts are expected to be made next September when a new Socialist Party-led government takes over. Experts say the new government has two options, either further increasing public debt already at 62 percent of the GDP or making drastic cuts in expenditure.
The critical situation means the new government out of the June 23 general elections will have to make sharp budget cuts and revise downward the current overoptimistic targets.
During the past three years, government has made mid-year budgets and revised GDP growth forecast downward also using normative acts but has kept a constant policy on increasing wages and pensions by an average of 3 to 5 percent. The former Albanian government expected the economy to grow by 3 percent in 2013, twice higher compared to what international financial institutions have forecast. The IMF, the World Bank and the EBRD expect the Albanian economy to grow between 1.8 percent to 3 percent in the next three years, citing high public debts and spillover impacts from Euro area.
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.
Foreign business communities
More than half of companies represented by the American Chamber of Commerce in Albania consider the current business climate in Albania as unfavorable and two-thirds of them expect it to deteriorate, according to results of the first AmCham Business Index.
Last April, a survey published by the German-Albanian Chamber of Commerce (DIHA) showed 64 percent of surveyed companies perceived the economic situation negatively for 2013, a sharp increase compared to last year. However, a majority 87 percent of companies which invested in Albania said they would invest again in the country. Albania received the lowest ranking among 20 countries in the survey regarding the attractiveness as business location – elected by 1,600 companies in Middle and Eastern Europe.
Albania lost three places in the Doing Business 2013 report although making it easier to start a business and pay taxes, according to a new report released this week by the World Bank and IFC. The report ranked Albania 85th among 185 economies, three places worse than in 2012, sandwiched between Croatia and Serbia but far worse compared to neighboring Macedonia and Montenegro which rank 23rd and 51st respectively.
Albania also lost six places in the 2013-2014 Global Competitiveness report published by the World Economic Forum, ranking 95th among 148 economies on deteriorating basic requirements, efficiency enhancers and innovation and sophistication factors. The report shows corruption remains the most problematic factor for doing business in Albania for 25.5 percent of respondents, followed by access to financing for 20.3 percent, inefficient government bureaucracy at 12.7 percent, tax regulations at 11.6 percent, and crime and theft at 9.8 percent.
