TIRANA, Oct. 22 – The much-rumored nationwide campaign against tax evasion with thousands of businesses previously operating informally registering with tax authorities is having a boomerang effect on government revenue. Official data published by the Finance Ministry shows public finances failed to meet the target even last September when more than 15,000 businesses registered after warnings of fines and seizure of goods. The tax and customs administrations failed to collect 4 billion lek (€28.7 mln) last September, with the revenue for this month only 0.6 percent higher compared to September 2014.
Budget revenue in the first nine months of this year reached 279 billion lek (€1.96 billion), up 4.6 percent compared to the same period last year, but down 6.85 billion lek (€48.2 million) or 6.85 percent compared to the target set for this period.
The value added tax, an indicator of domestic consumption, levied at a fixed 20 percent rate on almost all goods and services, continues underperforming affected by a slowdown in imports and consumption.
Excise revenue has also been affected by a sharp cut in tobacco imports following consecutive hikes in the excise rate making prices of imported cigarettes unaffordable for a considerable part of smokers who have shifted into cheaper domestically produced hand-rolled tobacco.
The sharp cut in international oil prices has also had a major impact on government revenue affecting the royalty tax collected from domestic oil production and base metals, the overwhelming majority of which is destined for exports. Royalty collected on fuel and base metals dropped by a sharp 43 percent to 3 billion lek (Euro 21.4 million) during the first nine months of this year when several oil production companies and mining and steel plants cut production and staff on lower international prices.
The underperforming revenue has also affected government spending and especially the much-needed public investments which although increasing by 10 percent compared to the first three quarters of 2014 were down by 5.4 billion lek (€38 million) compared to the target.
Meanwhile, spending on interest rates was down by 5.2 percent to 27.2 billion lek (Euro 191 million) fuelled by a sharp cut in rates on government’s internal borrowing despite the public debt standing at a record 70 percent of the GDP.
The situation is problematic and could lead to a new budget cut at the end of the year after a previous mid-year cut fuelled by lower international oil prices affecting royalty collected on oil production and spillover effects from the crisis in neighboring Greece..
Public finances failed to meet the target by 61 million euros in the first half of this year when Albania held local elections forcing mid-year budget cuts.
The poor performance in the first half of this electoral year forced the Albanian government to cut its 2015 spending by €114 mln while the International Monetary Fund postponed its new loan tranche as part of a three-year Euro 331 million loan.
The nationwide campaign against informality which has formalized more than 20,000 businesses since its launch last September, but closed down thousands of others, has been criticized by business representatives as being too aggressive and mainly targeting small businesses, which account for the overwhelming majority of 90 percent of total enterprises in Albania, but whose weight in the total budget revenue is relatively small. New legal changes increasing fines on tax evasion by several times and legal action to make tax evasion punishable by prison by amending the Criminal Code has also been criticized by the business community as not helping improve the business climate.
Experts have warned the campaign will further affect domestic consumption, the key driver of the Albanian economy, and spark a price hike in the short-run despite positive effects in the mid-and long-term.
The nationwide campaign comes after a similar campaign to curb electricity thefts and collect accumulated unpaid bills which have brought the Albanian government an extra $150 million in the first three quarters of this year. The central bank estimated the payment of accumulated unpaid bills continues having a negative impact on consumption.
In addition, some 30,000 people who have left Albania during this year to seek asylum mainly in Germany is also having an impact on the small Albanian economy of 2.8 million residents after the end of the tourist season.
The Albanian economy grew by 2.65 percent in the first half of this year and is on track to achieve its new revised target of 2.7 percent for 2015. However, final household expenditure, an indicator measuring consumer spending which accounts for around 90 percent of the country’s GDP, was down by 3.16 percent year-on-year in the second quarter of 2014, declining for the second quarter in a row.
The Albanian government and the IMF have recently revised Albania’s 2015 GDP growth forecast to 2.7 percent down from an initial 3 percent on lower international oil prices affecting exports and spillover impacts from the crisis in neighboring Greece.
