The value added tax, which is levied at a 20 percent rate on almost all products and services and accounts for around a third of total government income, registered a sharp 20.7 percent growth in the first half of this year, hinting a recovery in domestic consumption.
TIRANA, July 23 – Albania’s public finances are back to double digit growth rates and seem on track to achieving this year’s target, putting an end to the scenario of mid-year or year-end budget cuts in the past five global crisis years.
Fuelled by a strong recovery in the value added tax and the shift to progressive taxation which has sharply increased revenue from corporate income tax, Albania’s budget revenues rose by 11.8 percent year-on-year in the first half of 2014, reaching a record high 175 billion lek (Euro 1.23 billion), registering the best performance since 2008 just before the onset of the global financial crisis when Albania’s decade of an annual 6 percent GDP growth rate came to an end.
“This is the first time after a 5-year period that we have not revised the budget because the revenue target has been achieved and we expect public investments to accelerate in the second half of the year,” said Finance Minister Shkelqim Cani in a televised interview.
The value added tax, which is levied at a 20 percent rate on almost all products and services and accounts for around a third of total government income, registered a sharp 20.7 percent growth in the first half of this year, hinting a recovery in domestic consumption which is the key driver of Albania’s economy.
The shift to progressive taxation which starting this year has raised corporate income tax for medium-sized and big enterprises by 5 percent to 15 percent has been positively reflected with income from this tax increasing by around 32 percent year-on-year. The opposite has happened with the personal income tax whose progressive application has cut income by 6.5 percent due to lower than the previous 10 percent flat tax applied for low and mid-wages.
Excise tax collection, the second most important tax, also overcame its negative growth rates, registering a 0.4 percent growth rate at the end of the first six months of this year after negative growth rates until last May fuelled by a boom in imports of tobacco, fuel and energy drinks in late 2013 ahead of tax hikes starting 2014.
With public debt standing at a record 70 percent of the GDP and a renewed deal with the IMF in place, the Albanian government continued following a tight fiscal policy despite public finances having significantly recovered compared to 2013 when at an estimated 0.4 percent Albania registered the lowest growth rate in more than a decade.
Finance Ministry data shows government managed to reduce the budget deficit in the first half of this year by around 54 percent compared to the same period in the run-up to soaring pre-electoral spending in 2013, thanks to a 12 percent increase in total revenue, a 3.8 percent drop in spending, including a sharp 52 percent cut in public investments. The budget deficit in the first six months of this year dropped to 22.2 billion (Euro 156 million), compared to a record 48.5 billion lek (Euro 341 million) during the same period last year.
Government spending on interest rates in the first half of this year dropped by 2.4 percent thanks to a sharp reduction on yields on government securities denominated in the national currency which have halved compared to the same period in 2013 as the key rate has been cut to a historic low of 2.5 percent.
Public investments in the first half of 2014 dropped by 52 percent to around 20 billion lek (Euro 139 million) compared to a record 41.4 billion lek (Euro 291 million) during the same period last year when Albania held general elections, historically accompanied by a sharp rise in public spending by incumbent governments.
The deficit in the pension system slightly grew to 21.4 billion lek (Euro 150.5 million) compared to around 20.9 billion lek (Euro 147 million) in the first half of 2013.
Privatization revenue during the first six months of this year is estimated at only 10 million lek (Euro 70,000), down from 15.8 billion lek (Euro 111 million) during the same period last year when four small and medium sized hydropower plants were sold to Turkey’s Kurum.
In its latest report on Albania, the IMF says “revenues exceeded program targets, in part because of better tax administration, but also lower refunds. “Capital spending has slowed since late 2013 because of reassessment of needs and reprioritization, and human resource capacity problems associated with the government transition.” The IMF says it has encouraged the authorities to accelerate the execution of budgeted capital spending to avoid a drag on growth.
Consumption, investments recovering
Domestic consumption and private investments, the two key drivers of the Albanian economy, have registered a significant recovery this year, when the Albanian economy is expected to grow by 2 percent.
Data published by the Finance Ministry and INSTAT shows the value added tax, which is levied at a 20 percent rate on almost all products and services and accounts for around a third of total government income, registered a sharp double-digit growth of 20 percent in the first five months of this year, hinting a significant a significant recovery in domestic consumption.
Meanwhile, imports of “machinery, equipment and spare parts,” an indicator also measuring private investments was up by 6.4 percent in the first five months of this year, signaling a recovery in the private sector which accounts for 80 percent of the GDP.
Sluggish domestic consumption, poor private investments, underperforming government revenue, public debt having climbed to around 70 percent of the GDP, non-performing loans at around 24 percent have been some of the key wounds of the Albanian economy in the past few years. Lending having plunged to moderate negative growth rates and deposits striving to maintain positive growth rates are some other indicators of the critical situation.
The Albanian economy grew by 1.65 percent year-on-year in the first quarter of 2014, signaling the country is on track to achieving its target of a 2 percent growth rate after an initial estimated growth of only 0.44 percent in 2013, which was the poorest in the past 16 years, according to INSTAT.
In its latest review, INSTAT revised the GDP for 2013 upward to 1.42 percent, up from an earlier 0.44, giving a wrong impression of 2013 as the worst year in Albania’s economy as the 2012 growth rate is estimated at only 1 percent. Revised data shows the Albanian economy grew by 3.7 percent in 2009, 3.75 percent in 2010, 2.17 percent in 2011 and only 1 percent in 2012.
Newly revised data also shows the Albanian economy has grown by an average of 2.6 percent annually during the 2009-2013 crisis years compared to a pre-crisis decade of an average 6 percent, being one of the best performers in the region, according to INSTAT.
