Prime Minister Edi Rama says the Albanian government owes the business community USD 400 million including VAT refunds, pointing out “we cannot pretend as if it does not exist and leave it as a burden to the private sector”
TIRANA, Sept. 17 – The new Albanian government headed by Prime Minister Edi Rama has invited an IMF mission to assist the new government with country’s public finances, including soaring budget deficit and public debt at 62 percent of the GDP. An IMF mission has arrived in Albania at the invitation of the new government out of the June 23 general elections to discuss expected measures that would accelerate Albania’s growth. The visit by the IMF mission is not related to the financial sector assessment programme the IMF has undertaken after last July’s visit at a request of central bank governor Ardian Fullani and former Finance Minister Ridvan Bode. After eight years, the IMF is expected to assess Albania’s banking system which despite handling the financial crisis successfully has been suffering a sharp rise in non-performing loans, currently standing at 25 percent.
Prime Minister Edi Rama has said the new government will hire an international company to audit the country’s troubled finances and re-establish relations with the IMF which were reduced to an advisory role in 2009.
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 can economically stand on its own feet now.
Speaking on Thursday in a regional seminar organized by the Bank of Albania, Prime Minster Edi Rama underlined the need for a new economic model.
In its 2013-2017 programme, the Socialist Party-led government has identified manufacturing, energy, tourism, agriculture and agri-industry, education and services, considering the current model based on remittances, donations, and the construction sector as already exhausted.
Rama said the Albanian government owed the business community USD 400 million in debts including VAT refunds. “We are preparing to pay off this debt as soon as possible. We cannot pretend as if it does not exist and leave it as a burden to the private sector,” said Rama.
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.
2013 budget under review
New Finance Minister Shkelqim Cani has already started work on the review of the 2013 budget following the poor performance in the first eight months of this week. 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.
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.
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.
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. In the first seven months of 2013, government’s internal borrowing trebled to 37 billion lek, standing already at 91.4 percent of the annual target. At 48 billion lek, the budget deficit is also 15 billion lek higher compared to the first half of 2009 when Albania also held general elections and the Durres-Kukes highway which cost Albania an estimated USD 1 billion was completed. This is also the first time government revenue has registered an annual decline for the first seven months of the year in a decade.
The soaring budget deficit was a result of total government spending rising by 10 percent while revenue declining by 2.6 percent compared to the first seven months of 2012. Public investments for the first seven months of this year also rose by a considerable 38 percent to 44 billion lek.
Finance Ministry data show government revenue during the first seven months of this year reached around 185 billion lek, down 2.6 percent compared to the same period last year and 5.9 percent less compared to the target set for this period. As a result, government failed to collect 11.5 billion lek (Euro million) during the first seven months of the year.
Key taxes such as VAT and excise taxes, also indirectly measuring domestic consumption which is the key driver of Albania’s growth, dropped by 6 percent and 4.9 percent respectively.
Government’s spending on interest rates in the first seven months of this year rose by 4.6 percent to 24 billion lek as public climbed to 62 percent of the GDP. The pension deficit for the first seven months of the year also rose to 23.7 billion lek, up from around 21 billion lek during the same period of 2012.
Government has recently approved a decision which disciplines spending starting from July 15 in an effort to keep public finances under control after soaring pre-electoral spending. The decision which bans procurements for investments and cuts allowances to the public administration came after continuous appeals by the Socialist Party.
The poor performance shows 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 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.
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.
Albania’s central bank expects the country’s economic growth to be only slightly higher compared to 2012. The forecast made by Albania’s central bank is in line with international financial institutions which expect the Albanian economy to grow between 1.5 to 1.8 percent compared to government’s projection of a 3.1 percent growth for 2013.
