ALBANIAN PARLIAMENT APPROVES SUPPLEMENTARY BUDGET

UNCLAS TIRANA 000624 SIPDIS DEPT FOR EUR/SCE PLEASE PASS TO TREASURY FOR VIMAL ATUKORALA E.O. 12958:N/A TAGS: ECON EAID PGOV AL SUBJECT: ALBANIAN PARLIAMENT APPROVES SUPPLEMENTARY BUDGET Ref: A) TIRANA 424 B) TIRANA 241 Higher Revenues Despite Lower Tax Rates -------------- ¶1. For the third year in a row, tax and customs revenue collection exceeded forecasts for the first half of the year. Collections were seven percent (USD 81 million) above plan, allowing the Parliament to approve a supplementary budget on July 24. Although the GOA has reduced both business and personal taxes over the last three years, its strategy of bringing more taxpayers into the formal economy and fighting tax evasion and corruption seems to be working (ref A). Windfall Will Be Used For Infrastructure And Budget Deficit -------------- -------------- -- -------------- --- -------------- --- -------------- -------------- ¶2. Additional revenues/savings were the result of higher income from state-owned companies, reallocation of funds, and savings on interest payments from the original budget for a total of USD 270 million to re-allocate in the supplemental budget. The windfall will be used for road projects, to support local government, and to reduce the budget deficit. The Ministry of Transport and Telecommunications will receive about USD 103 million for the already over-budget Durres-Kukes road project (ref B). Another USD 32 million will be transferred to local governments for road projects and other infrastructure projects. The remaining USD 135 million, plus a USD 140 million capital spending reduction, will be used to reduce the budget deficit from 7.9 to 5.2 percent of GDP (as requested by the IMF). The supplemental budget will also allow the government to keep its promise to increase pensions and salaries nationwide. Opposition Critical -------------- ¶3. The opposition, which partially boycotted the final vote, said the supplementary budget confirms the government's inability to implement public projects according to plan. Former Minister of Finance Malaj criticized the new budget for ignoring the severe social problems caused by global price increases in commodities, fuel and food. He added that higher revenue collection was only due to higher VAT from price increases. Malaj also attacked the government for not including expected revenues from the privatization of ARMO and the distribution branch of KESH in the budget. However, IMF representative Ann-Margaret Westin applauded the supplementary budget, particularly the reduction of the budget deficit and the improved performance of the tax administration in increasing the tax base. Comment -------------- ¶4. Increasing the tax base by reducing the informal economy and reducing corruption through simpler and more transparent tax procedures are certainly signs of progress. However, the real challenge for the government is to properly plan and execute its spending programs in order to provide better infrastructure and services to its citizens. LANDAU