While government revenue has stagnated, public investments have sharply increased leading to soaring budget deficit
TIRANA, May 27 – Ahead of the June 23 general elections, Albania’s budget deficit is soaring as government revenue stands at a standstill while public investments have considerably risen. Latest Finance Ministry data show that while government revenue increased by a mere 0.3 percent in the first four months of this year, government spending rose by around 10 percent compared to the first four months of 2012. Public investments which in the first quarter of the year were down by 10 percent, more than trebled to 11.5 billion lek (Euro 80 million) in April 2013, a historic high monthly level even compared to April 2009 on the eve of the previous general elections when the Durres-Kukes highway linking Albania to Kosovo was under construction. Two months ahead of next June’s general elections, public investments for the first four months of this year rose by 45 percent to around 26 billion lek year-on-year. The majority 65 percent of public investments were financed through domestic borrowing.
The budget deficit in the first four months of this year rose to 22.8 billion lek (Euro 159 million), up 96.5 percent compared to the same period last year.
Public investments have always registered sharp increases in general or local elections becoming a burden on Albania’s public finances. In 2009 when Albania held the last general elections, public investments reached a historic high of 97.6 billion lek while the budget deficit rose to a staggering 7 percent of the GDP. The record high public investments were also related to the completion of the Durres-Kukes highway linking Albania to Kosovo which cost the Albanian state budget around Euro 1 billion. Public investments in 2012 dropped to 61.6 billion lek down from 70.6 billion lek in 2011 and 67.5 billion lek in 2010, according to Finance Ministry data.
Public debt at an official 61.5 percent of the GDP, non-performing loans at 24 percent, sluggish domestic consumption and lending striving to remain at positive growth rates are some of the key symptoms of the economic difficulties in Albania, which has crisis-hit Italy and Greece as its top trade partners and sources of remittances from more than one million migrant workers.
The Albanian government expects the economy to grow by 3.1 percent in 2013 almost twice higher compared to 1.5 to 1.8 percent forecasts by top international financial institutions such as the World Bank, the IMF and the EBRD. Albania grew by an average of 6 percent annually until 2008 and remained one of the few global economies to register positive growth rates of 3 percent from 2009 to 2011. In 2012, growth slowed down to 1.6 percent, according to state Statistical Institute (INSTAT).
Jan-April performance
Sluggish government revenue in the first four months of the year unveils the ruling Democratic-Party-led coalition has for the fourth year in a row drafted on overoptimistic budget and the new government out of the June 23 general elections will be forced to cut the budget and revise the GDP forecast downward as crisis impacts escalate. Finance Ministry data show total government revenue in the first four months of 2013 reached 106.6 billion lek (Euro 745 million), up only 0.3 percent compared to the same period in 2012 but down 1.3 percent compared to the target for the first four months of the year. This is one of the lowest growth rates in the past 15 years, being better only compared to the first four months of 2011 when revenue shrank by 0.8 percent year-on-year.
Government revenue during the first four months of this year indicate the Albanian economy continues suffering and domestic consumption, the key driver of growth, remains sluggish as indirectly unveiled by the performance of value added tax, which continues registering negative growth rates.
The performance in April 2013 marked a turning point compared to the first quarter of the year when government revenue was down by 3.6 percent year-on-year.
The tax and customs administration managed to collect only 69.5 billion lek, down from 72 billion lek in the four months of 2012 mainly due to poor performance in the value added tax and the excise taxes which account for around half of total tax income.
VAT, which indirectly measures domestic consumption, dropped to around 33 billion lek, down 6 percent compared to the first four months of 2012, registering its poorest quarterly performance since the onset of the global financial crisis in 2009. The poor consumer consumption is reflected on businesses whose profit tax grew by a mere 1.6 percent compared to the first four months of 2012 but was far lower even compared to the first four months of 2006, when Albania was still applying progressive taxation. Excise collected on the so-called luxury products including fuel, alcoholic beverages and tobacco dropped by 5 percent.
With the public debt officially at around above the former 60 percent of the GDP ceiling, the Albanian government spent 12.7 billion lek in interest rates during the first four months of 2013, up 10.5 percent compared to the same period last year.
The deficit in the pension scheme rose to 12.5 billion lek (Euro 87 million), up from 10.4 billion lek a year ago, being a huge burden for the state budget.
Difficult targets to meet
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.
For the first time since 1997 when the notorious pyramid schemes collapsed and the economy suffered a sharp 11 percent shrink, government revenues suffered an annual drop, revealing the escalating woes of the Albanian economy since the onset of the global crisis in 2009. Finance Ministry data show total revenues shrank by 0.2 percent to 330 billion lek (Euro 2.3 billion) in 2012, registering the first annual shrink in the past 15 years. The performance proves the escalation of impacts from the global crisis and rising public debt now standing above the former 60 percent of the GDP ceiling.
The International Monetary Fund has suggested that it is better that the year starts with more realistic and mature projections in order to make its implementation easier.
“The repeated budget slippages underscore the need for more realistic macroeconomic framework. Weaker economic activity has pressured revenue, but the shortfall compared to the initial budget mainly reflects its overoptimistic forecasts,” says the IMF.
