With a new Socialist Party-led government having taken over, Albania’s public finances remain in critical situation fuelled by public debt at an official 62 percent of the GDP and around Euro 200 million in unpaid bills
TIRANA, Sept 24 – Driven by a sharp double-digit drop in VAT, the key tax also indirectly measuring consumption, Albania’s public finances continued underperforming even in August, a period when government revenue traditionally register high levels because of the peak tourist season and the arrival of migrants. Finance Ministry data show government revenue in August 2013, just before the transition to a new Socialist Party-led government, were down by 12.2 percent year-on-year hit by a 20 percent drop in the value added tax.
Government revenue in the first eight months of this year reached 210 billion lek (around Euro 1.46 billion), down 3.5 percent compared to the same period last year, but around 16 billion lek (Euro 113 million) less compared to the target set for this period.
The soaring pre-electoral spending has taken the budget deficit to 54 billion lek (Euro 378 million), more than double compared to January-August 2012 and at already 89.2 percent of the target set for 2013. The situation was a result of spending increasing by 9.2 percent to 265 billion lek in the first eight months of this year and revenues failing to meet targets by 7 percent.
Public investments in this electoral year also increased by 33 percent to 48 billion lek (Euro 333 million) compared to the first eight months of 2012.
With a new Socialist Party-led government having taken over, Albania’s public finances remain in critical situation fuelled by public debt at an official 62 percent of the GDP and around Euro 200 million in unpaid bills to private companies for finished public works and services. 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.
Government revenue for the eight months of this year were at 210 billion lek, lower compared to the same period in 2011 and 2012 and registering the first annual drop in the past decade.
At around 54 billion lek (Euro 337 million) for the first eight months of this year, the budget deficit is 129 percent higher compared to the same period last year and at already 89 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 exceeded its internal borrowing target. In the first eight months of 2013, government’s internal borrowing more than trebled to 43 billion lek, standing already exceeding the annual target by 6 percent. At 54 billion lek, the budget deficit is also around 7 billion lek higher compared to the first eight months of 2009 when Albania also held general elections and the Durres-Kukes highway which cost Albania an estimated USD 1 billion was completed.
Privatization revenue during the first seven months of 2013 grew by a record 20 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.
Key taxes such as VAT and excise taxes, also indirectly measuring domestic consumption which is the key driver of Albania’s growth, dropped by 8.2 percent and 4.6 percent respectively during the first eight months of the year.
Government’s spending on interest rates in the first eight months of this year rose by 5.6 percent to 28.4 billion lek as public climbed to 62 percent of the GDP. The pension deficit for the first eight months of the year also rose to 28.7 billion lek (euro 200 million), up from around 25.7 billion lek during the same period of 2012.
Former Finance Minister Ridvan 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.
New government’s plans
Skeptical of the country’s real financial situation, Prime Minister Edi Rama has warned he will hire an international company to audit the country’s troubled finances. He has also pledged to re-establish relations with the IMF which in early 2009 where reduced to an advisory role.
New Finance Minister Shkelcim 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.
The poor performance shows the previous 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 budget cuts and revised GDP growth forecasts 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.
