TIRANA, May 16 – A recent slowdown in public finances could spark a new budget cut and force the government to revise downward its slightly overoptimistic GDP forecast for 2016.
Latest finance ministry data shows the increase in government revenue slowed down to 7.9 percent in the first four months of this year following a double-digit hike of about 11 percent in the year’s first quarter. Yet, the revenue missed the target by 0.4 percent or €3.7 million in the first four months of this year.
The key value added tax, levied at a fixed 20 percent rate on almost all goods and services, registered a 10 percent hike in the first four months of this year. VAT, which is also an indirect indicator measuring consumption, seems to have been fuelled by the nationwide campaign formalizing thousands of previously informal businesses rather than a real increase in consumption which last year turned negative following modest growth rates in the previous five years.
The slowdown was affected by a slight contraction in the March-April revenues and if the trend continues, the annual 10.5 percent revenue increase target will be impossible to meet.
The tight spending policy the government is applying in a bid to bring down public debt to 70 percent of the GDP was reflected in a sharp cut in public investment which dropped by 26 percent to 10.5 billion lek (€75 mln) in the first four months of this year.
Last year, the Albanian government cut the budget three times to handle the sharp decline in international oil and mining prices and a slowdown in consumption. The GDP was also revised to 2.6 percent, down from initial expectations of 3 percent.
In its new macroeconomic framework revised last February, the Albanian government expects revenue to increase by 10.5 percent and the GDP to grow by 3.4 percent, slightly higher compared to the country’s central bank and several international financial institutions which expect growth to range between 3 to 3.2 percent.
The forecasts seem quite realistic considering several huge energy-related investments and the late 2015 nationwide campaign against informality which led thousands of businesses previously operating informally to register with tax authorities. However, the sharp cut in international oil and mineral prices affecting domestic production, employment and exports and sluggish domestic consumption and lending hint 2016 will be another difficult year for the country’s public finances.
Experts say that apart from external factors such as the slow recovery in top trading partners Italy and Greece affecting remittances, trade exchanges and investments, there are a number of other factors affecting consumption such as increased tax burden on businesses, the 2015 asylum exodus and the aggressive nationwide campaigns to collect accumulated unpaid power bills and reduce widespread informality.
Since 2014, the corporate income tax and the withholding tax on dividends, rents and capital gains have increased by 5 percent to 15 percent, making the tax burden in Albania one of the region’s highest.
The asylum exodus in 2015 when more than 65,000 people left the country to seek asylum in EU countries is one of the factors not frequently cited for the drop in consumption. For a small economy of 2.8 million residents such as Albania, 65,000 consumers less is a whole city disappearing, negatively affecting consumption of goods and services.
