TIRANA, Sept. 28 – Albania’s public finances continued struggling even after a surprise mid-year budget cut that slightly revised downward government revenue and spending.
Finance ministry data shows the nationwide campaign against informality that formalized thousands of previously unregistered business and lifted dozens of hundreds of workers out of informality is having minimal effects on public finances, which although recovering by 7.2 percent during the first eight months of this year, failed to meet the target by about 1 percent or €16.4 million.
The performance in August, the peak of the tourist season, left much to be desired with government revenue registering only a mere 0.5 percent annual increase but failing to meet the target by 7.4 percent or €18.7 million.
Underperforming value added tax, the key tax levied at a 20 percent rate on almost all goods and services, and excise duties imposed on some key import products, were the main reason behind the poor August performance which apparently led to a reshuffle in the key tax and customs administration in the past few days.
The poor performance comes after a late July normative act cut spending by 0.7 percent to 450.2 billion lek (€3.24 billion), and revised downward expected government revenue by 1.1 percent to 414 billion lek (€2.99 billion) for 2016.
The tight spending policy the government is applying this year in order to slightly bring down public debt to 71 percent of the GDP is also affecting much-needed public investment which are forecast to register their lowest levels in the past seven years.
The Albanian government plans to spend about 60 billion lek (€432 million) or 3.9 percent of the GDP on public investment in 2016 compared to 4.3 to 5 percent of the GDP in the previous seven years.
Public finances received another blow in late August when an international auditor ruled the Albanian government will pay back Canada-based Bankers Petroleum $37 million after losing a tax dispute battle with the country’s biggest oil producer which is about to be taken over by a Chinese company, in a situation which could put Albania in new financial straits following a mid-year budget cut.
The amount the Albanian government will pay back to Bankers Petroleum is almost twice higher compared to the mid-year budget cut.
Last year, the Albanian government cut the budget three times to handle the sharp decline in international oil and mineral prices affecting exports and handle a slowdown in consumption. The GDP was also revised to 2.6 percent, down from initial expectations of 3 percent.
The Albanian government expects growth to accelerate to 3.4 percent in 2016 and 3.9 percent in 2017, forecasts which are 0.2 percent to 0.4 percent more optimistic compared to expectations by the European Commission and international financial institutions.
The 7 percent revenue hike in the first eight months of this year is mostly dedicated to the late 2015 aggressive nationwide campaign against informality which formalized thousands of businesses previously operating informally but failed to produce the expected boost in income due to sluggish consumption by households and business uncertainties. Some major energy-related projects including the Trans Adriatic Pipeline and a big hydropower power plant have also had positive effects on government income by reinvigorating the long-ailing construction industry. However, the slump in commodity prices continues having a negative impact on Albania’s key oil and mineral exports and government revenue due to a slowdown in production and employment.
The International Monetary Fund has warned Albanian authorities the reemergence of accumulated unpaid bills to the private sector poses a threat to public finances, already struggling to recover because of sluggish consumption and a slump in international oil and mineral prices affecting exports.
The government accumulated 2.3 billion lek (Euro 16.5 million) in arrears from court decisions and public works in the first four months of this year, according to finance ministry data.
The Albanian government cleared arrears €500 million to the private sector under a two-year program that ended in 2015 and is estimated to have strengthened private sector balance sheets, reduced nonperforming loans and supported domestic demand, although credit growth still remains at negative growth rates.
