At 48.2 billion lek (Euro 337 million) for the first half of this year, the budget deficit is 128 percent higher compared to the same period last year and at already 98 percent of the 48.9 billion lek target for the whole of 2013, according to Finance Ministry data
By Ervin Lisaku
TIRANA, July 23 – 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. Official data published by the Finance Ministry this week reconfirmed the critical situation with the budget deficit which has more than doubled in the first half of this year, posing a new threat to the country’s high public debt already at 62 percent of the GDP. Fuelled by rising budget deficit, public debt has climbed to 62.4 percent of the GDP in the first half of this year, being one of the highest in the region. In its 2013-2015 macroeconomic framework, the Albanian government expects public debt to climb to 63.8 percent of the GDP in 2013, up from 61.9 percent in 2012, when the 60 percent debt ceiling was lifted.
Data show the outgoing government has used up the overwhelming majority of 98.5 percent of its annual deficit target for the first six months of this year. The critical situation means the new government out of the June 23 general elections will have to make sharp budget cuts and revise downward the current overoptimistic targets.
At 48.2 billion lek (Euro 337 million) for the first half of this year, the budget deficit is 128 percent higher compared to the same period last year and at already 98 percent of the 48.9 billion lek target for the whole of 2013, according to Finance Ministry data. What’s more concerning is that government has also used up its internal borrowing target. In the first half of 2013, government’s internal borrowing climbed by 72 percent to 25.2 billion lek, standing already at 90 percent of the annual target. At 48 billion lek, the budget deficit is also 15 billion lek higher compared to the first half of 2009 when Albania also held general elections and the Durres-Kukes highway which cost Albania an estimated USD 1 billion was completed. This is also the first time government revenue has registered an annual decline for the first half of the year.
Privatization revenue during the first half of 2013 grew by a record 24 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.
The soaring budget deficit was a result of total government spending rising by 12.2 percent while revenue declining by 2.9 percent compared to the first half of 2012. Public investments for the first half of this year also rose by a considerable 42.5 percent to 41 billion lek.
Finance Ministry data show government revenue during the first half of this year reached around 157 billion, down 2.9 percent compared to the same period last year and 5.6 percent compared to the target set for this period. As a result, government failed to collect 9.3 billion lek (Euro 65 million) during the first six months of the year.
Key taxes such as VAT and excise taxes, also indirectly measuring domestic consumption which is the key driver of Albania’s growth, dropped by 7.4 percent and 2.7 percent respectively.
Government’s spending on interest rates in the first half of this year rose by 5.8 percent to 21 billion lek as public climbed to 62.4 percent of the GDP. The pension deficit for the first half of the year also rose to 21 billion lek, up from around 18 billion lek in the first half of 2012.
Government has recently approved a decision which disciplines spending starting from July 15 in an effort to keep public finances under control after soaring pre-electoral spending. The decision which bans procurements for investments and cuts allowances to the public administration comes after continuous appeals by the Socialist Party which won the June 23 general elections and is expected to take over next September. In repeated calls, the Socialist Party has warned outgoing Prime Minister Berisha to be careful with decisions affecting the already troubled finances especially after the PM announced a wage and pension increase in the past few days. The Socialist Party expected to lead the new government next September says it intends to reestablish cooperation with the IMF and hire an international company to audit the country’s troubled finances.
IMF’s warning
“Uncertainty about the government’s ability to finance its budget deficit could exacerbate
pressures in the domestic debt market, and affect banking system stability. Given the expected shortfall in financing, government security yields could rise, putting further pressure on the fiscal deficit and public debt. If left unaddressed, investor nervousness could ultimately lead to an adverse shift in perceptions. A disorderly fiscal adjustment could then trigger bondholder losses and banking system instability, says the IMF in its latest country report.
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.
Budget, GDP review expected
With post-electoral public finances facing a critical situation, the new budget cuts are expected to be made next September when a new Socialist Party-led government takes over. The Albanian government has already suspended public procurements after July 15 despite approving a new increase in wages in pensions opposed by the Socialist Party. Experts say the new government has two options, either further increasing public debt already at 62 percent of the GDP or making drastic cuts in expenditure.
Sluggish government revenue indicates the new Socialist-Party-led government out of the June 23 general elections, expected to take over next September will have to review downward overoptimistic targets set on GDP and government revenues. The Albanian government has regularly cut the budget and reviewed downward its overoptimistic GDP targets during the past three years.
At 3.1 percent, the Albanian government expects the country’s GDP to grow almost twice higher compared to international financial institutions and the country’s central bank which have forecast the Albanian economy will grow at around 1.8 percent citing spillover impacts from the Eurozone crisis and high public debt levels.
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.
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.
