The budget registered a surplus of 369 million lek (Euro 2.6 million) in July 2013 after government announced a freeze in spending and public tenders due to soaring deficit which poses a new threat to public debt already at 62 percent of the GDP
TIRANA, Sept. 3 – The soaring pre-electoral spending during the first half of this year came to an end in July 2013 when the outgoing government cut spending after the alarm raised over the troubled public finances. After a record deficit of 12.3 billion lek (Euro 86 million) in the June 2013 general elections, the budget registered a surplus of 369 million lek (Euro 2.6 million) in July 2013 after government announced a freeze in spending and public tenders due to soaring deficit, which posed a new threat to public debt already at 62 percent of the GDP.
However, Albania’s public finances remained in a critical situation after the first seven months of 2013, unveiling the new Socialist Party-led government expected to take over in the next few days 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. In its 2013-2015 macroeconomic framework, the Albanian government expects public debt to climb to 63.8 percent of the GDP in 2013, up from 61.9 percent in 2012, when the 60 percent debt ceiling was lifted.
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.
Privatization revenue during the first seven months of 2013 grew by a record 24 times to around 16 billion lek (Euro 111 million) due to the sale of four small and medium-sized hydropower plants to Turkey’s Kurum for around 110 million euros. The Finance Ministry said Kurum had around 3.5 billion lek (Euro 24.3 million) deducted in VAT refunds for the steel plant operations in Elbasan.
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. In repeated calls, the Socialist Party has warned outgoing Prime Minister Berisha to be careful with decisions affecting the already troubled finances especially after the PM announced a wage and pension increase. The Socialist Party says it intends to reestablish cooperation with the IMF and hire an international company to audit the country’s troubled finances.
Outgoing FinMin pleased with budget performance
Speaking in a press conference, outgoing Finance Minister Ridvan Bode said the government was handing to the Socialists a budget which has respected the limits set by law. “100 percent of what happened in the execution of the public finances is in full compliance to law. The fact that in the first seven months of this electoral year, there has been no kind of deviation means the capacity to administrate with fiscal discipline is at the right level,” said Bode.
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.
Speaking of the country’s macroeconomic situation, Bode said the country’s unemployment rate had dropped to 12.8 percent, and the trade deficit narrowed. “There has been no deviation and no fiscal incentive. The money from the sale of hydropower plants to Kurum have been declared as a special item on the state budget,” added the minister.
Ridvan Bode, who has been Albania’s Finance Minister for the past eight years will be replaced by Shkelqim Cani, a Socialist Party MP who has previously served as governor of the country’s central bank.
Skeptical of the country’s real financial situation, Prime Minister designate Edi Rama has warned he will hire an international company to audit the country’s troubled finances.
In a recent conference, Finance Minister-designate Shkelqim Cani has pledged to restructure the customs and tax administrations with a focus on fighting corruption, monopolies, money laundering and economic crime as well as improve the business climate.
Budget, GDP review expected
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.
Sluggish government revenue indicates the new Socialist-Party-led government out of the June 23 general elections, expected to take over next September will have to review downward overoptimistic targets set on GDP and government revenues. At 3.1 percent, the Albanian government expects the country’s GDP to grow almost twice higher compared to international financial institutions and the country’s central bank which have forecast the Albanian economy will grow at around 1.8 percent citing spillover impacts from the Eurozone crisis and high public debt levels.
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.
