Finance Ministry data shows that at around 30 billion lek (Euro 210 million) for the first three quarters of 2014, public investments were down by 43 percent compared to the same period last year, hitting a record low since 2007
TIRANA, Oct. 29 – While public finances seem back on track with a double digit growth rate and no budget cut for the first time in the past five crisis years, the low level of public investments has been a barrier to Albania’s sluggish growth in the first half of this year. Data shows the Albanian government continues applying a tight fiscal policy on public investments which in the first three quarters of 2014 hit a record low for the past seven years.
Finance Ministry data shows that at around 30 billion lek (Euro 210 million) for the first three quarters of 2014, public investments were down by 43 percent compared to the same period last year, hitting a record low since 2007.
Data shows the general elections year in 2009 registered a historic high of 70.5 billion lek (497 million lek) in public investments for the first three quarters of a year followed by the 2013 general elections year at 52.5 billion lek (Euro 370 million).
Spending on public investments during the first three quarters of this year is almost the same to the amount government has spent on interest rates as public debt stands at a record 70 percent of the GDP posing a serious threat to the country’s growth.
Finance Ministry data shows government spent 28.7 billion lek (Euro 202 million) in domestic and external interest rate payments in the first three quarters of this year.
Public finances registered a 13.2 percent in the first nine months of this year, thanks to double digit growth rates in VAT and excise taxes and 40 percent hike in the corporate income tax which in January 2014 was raised by 5 percent to 15 percent.
The double digit increase in income, spending at around the same levels and the sharp cut in public investments compared to the first three quarters of this year, allowed government to cut the budget deficit by 48 percent to 30.5 billion lek (Euro 215 million).
The deficit in the pension system continued widening even in the first three quarters of this year when it climbed to 34 billion lek (Euro 240 million), up from 32.6 billion lek during the same period last year, posing a significant threat to the public finances.
The hydro-dependent electricity system is another threat to the country’s public finances with around $200 million in annual losses due to massive power thefts and losses in the dilapidated distribution grid. Both the pension and energy sectors are undergoing reform with the support of international financial institutions such as the World Bank and the IMF.
The slight shrink in the second quarter of the year means the Albanian economy has grown by only 0.56 percent in the first half of 2014, which is the worst performance in the past six crisis years, and that the road to recovery for the Albanian economy will be long and require key reforms.
Newly revised data also shows the Albanian economy grew 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.
Clearance of arrears suspended
The payment of government arrears, a process initiated in December 2013 has been suspended since the end of July when government reported it had paid off around 35 billion lek (Euro 247 million in accumulated unpaid bills, fulfilling its target set in the 2014 budget.
The Finance Ministry says it has paid off more than 40 percent of accumulated unpaid bills to private companies, estimated at $720 million or 5 percent of the GDP. In an update to the process of the clearance of arrears, a process which started last March after loan deals with the IMF and the World Bank, the Finance Ministry says it paid a total of around 30 billion lek (Euro 211 million) until late July 2014 in accumulated bills to private companies, of which Euro 67 million for public investments, Euro 45 million for supply of goods and services in current expenditure, Euro 74 million in VAT refunds and Euro 31 million in the energy sector. Around 5 billion lek was paid to clear arrears to people with disabilities and infrastructure works.
The Finance Ministry has prepared a draft strategy which foresees the payment of a total of 72.6 billion lek (Euro 500 million) in government arrears over the next three years. The arrears, estimated at 5.3 percent of the GDP include unpaid bills to the business community for finished public works and services, VAT and profit tax refunds as well as bills from court decisions against the Albanian government, expropriations and payment of social assistance to people with disabilities.
In its latest report on Albania, the IMF said “addressing the problem of unpaid bills and arrears would enhance the government’s credibility and boost liquidity and confidence. Clearance of these liabilities would strengthen private sector balance sheets, facilitate the resumption of credit growth by helping lower nonperforming loans (NPLs) and support domestic demand.”
