PRESS RELEASE
Speech by Governor Sejko on the draft budget for 2016 at the hearing session of the Parliamentary Committee on Economy and Finance

Honourable Chair,

Honourable Members of the Committee,

The drafting and approval of the budget and the accompanying fiscal package is a crucial moment for the configuration of economic policies in the next year. As a financial plan of public sector's activity, the budget details the main features of fiscal policy and envisages funding for development priorities and policies. In parallel, fiscal package and tax legislation affect the incentive structure in the private sector's development. For this reason, the careful examination, broad consultation and constructive debates about them will serve to finalising a rather qualitative and realistic document.

In response to your invitation, following I will present Bank of Albania's opinion on the main points of 2016 draft budget. In compliance with the legal mandate of the central bank, the following opinion will focus on the main fields of our activity and expertise: (i) economic framework and economic policies; (ii) fiscal projections and sustainability of public finances; and, (iii) expected impact of public borrowing on the domestic financial market. In conclusion, (iv) I would like to share some suggestions on the increase of effectiveness and sustainability of public finances, during 2016 and beyond.

1. Expected economic framework for 2016 and supporting policies

Budget indicators and economic activity performance have a mutual and causal correlation, in both forecasting and realisation stages. The accuracy of budget projections depends largely on the quality of macroeconomic forecasts, while the economy performance is a function of the projected economic policies and structural reforms to be implemented over the year. For this reason, formatting a reliable and consistent framework of the expected economic developments assumes primary importance.

Budget-related fiscal projections are based on the assumption for a real GDP growth at 3.4% during 2016, while inflation is expected to reach 2.3% and interest rates are estimated to stay at similar levels to 2015. These projections are based on expectations for the recovery of domestic demand and a more positive situation in our trading partners. Also, these projections factor in the continuation of fiscal consolidation in the next year, as shown from the reduction of the budget deficit, from 4.1% of GDP in 2015, to 2.2% of GDP in 2016.

The Bank of Albania deems that these projections provide an acceptable starting point for fiscal projections for the next year. We also deem that the economy will grow progressively during the next two years, while inflationary pressures will remain weak. In addition, interest rates will remain low, in response to our simulating monetary policy and the reduction of public borrowing in the domestic financial markets.

In line with Albania's needs for development and the commitments in the framework of the arrangement with the International Monetary Fund, the Bank of Albania has urged for and supported the implementation of a consolidated fiscal policy, aimed at lowering the deficit and the public debt. The consolidating trend of the fiscal policy is consistent with the simulating monetary policy stance of the Bank of Albania and is reflected in the high intensity of this monetary stimulus. Thus, the two main economic policies - monetary and fiscal - simultaneously support the economic growth and contribute to reducing public debt, which constitutes one of the largest structural weaknesses of the Albanian economy.

2. Fiscal projections and sustainability of public finances

From Bank of Albania's perspective, the budget should primarily observe two important and correlated objectives. First, it should be a realistic budget based on careful forecasts. Second, this budget should serve to the long-term sustainability of public finances.

According to draft budget projections:

- budget revenues are expected to amount to ALL 417.7 billion over 2016, or around 27.3% of GDP, increasing 4.9% in annual terms, compared to the level planned for 2015.

- public expenditures for 2016 will amount to around ALL 452.1 billion, or 29.5% of GDP. In annual terms, expenditures are expected to shrink by around 0.9% compared to the previous year;

- budget deficit for 2016 is estimated at ALL 34.4 billion, or around 41% lower than a year earlier. In terms of GDP, budget deficit is estimated at around 2.2% of GDP, down by 1.8 percentage points from the level of 2015. The reduction is due to the completion of the payment of arrears (whose impact is 1.3 percentage points) and the discretionary fiscal policy (whose impact is 0.5 percentage point).

- primary balance for 2016 is positive, around 0.3% of GDP, improving around 1.5 percentage points from the previous year. The current balance is estimated to have a surplus of around ALL 34 billion, or around 2.2% of GDP, slightly improving from the previous year.

In Bank of Albania's view, the budget revenue forecast is careful. Our estimations for tax revenues are close to the estimations of the draft budget. Also, the Bank of Albania deems that the draft budget introduces some structural improvements, in particular with regard to the improvement of the primary balance, which measures the impact of the budget on the public debt and the maintaining of the current positive balance, which approximates the efficiency of the use of public revenues. These improvements should be included and further detailed in the budget in the coming years. 

Related to public debt level, the Bank of Albania estimates that the realisation of draft budget projections will mark a turning point in the trajectory of public debt level, estimated to fall from 72.6% of GDP in 2015, to around 71% of GDP in 2016. Nevertheless, the Bank of Albania draws the attention on the fact that this debt level remains high and continues to constitute an obstacle for the country's development. Its steady reduction will require, therefore, maintaining a consolidating fiscal policy for many years ahead. In the first place, it requires a bipartisan political will and consensus, a philosophy that I invite everyone to adopt.


3. Draft budget and the domestic financial market

The financial activity of the Government has an unquestionable impact on the domestic financial markets. This becomes more sensitive in countries like Albania, where the financial system is relatively undiversified and the public sector has a large impact on liquidity indicators and interest rates.

Draft budget 2016 envisages new public borrowing in the domestic financial markets amounting to around ALL 21 billion. In the light of the liquidity situation and interest rates' structure in these markets, the Bank of Albania estimates that this objective is feasible and has a low impact on the liquidity situation, as well as on the level and the slope of the interest rates curve. These developments provide more room in the banks' balance sheets to increase credit to the private sector.

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In the conclusion, I would like to provide some suggestions of the Bank of Albania for the budget of 2016 and for further structural improvements in the management of public finances.

4. Some suggestions of the Bank of Albania

4.1 Revenue forecast and budget risk management

To increase fiscal transparency and prevent large budget deviations, the Bank of Albania suggests complementing it with alternative fiscal plans, whose implementation would be conditioned by potential deviations of revenues from the planned level.

In line with our previous communications, the Bank of Albania deems that economic growth sources do not yet appear consolidated and the balance of risks continues to be on the down side. In other words, the probability for deviation on the down side from the projection of public income is higher than the probability for deviation on the up side. Fiscal authorities should continue to show due diligence, in order for the budget deficit and public debt to stay within the planned levels.

In the event the budget revenues are lower than the projections, the Bank of Albania suggests the preliminary identification and the ranking of expenditures by importance or profitability, for the fiscal adjustment, based on the reduction of expenditures, to be transparent and effective.

Likewise, in the event of revenues performing better than the projections, we suggest determining in advance whether to allocate the additional income to improve the fiscal position by lowering the deficit and the budget or to spend them maintaining the budget deficit and fiscal policy direction unchanged.

The Bank of Albania suggests that:

(i) in the event budget revenues are higher than planned, attributable to the economy growing faster than the forecast, the additional revenues should be used for reducing debt. This reaction increases the fiscal spaces to withstand possible shocks in the future, without impacting the economy negatively.

(ii) in the event budget revenues are higher than planned, attributable to the more positive effect of the fight against informality or the improved fiscal management, the additional revenues may be used for capital expenditures. This reaction does not affect the fiscal stimulus in the economy.

4.2 Attention should be given to the expenditure structure in the future

The ratio of current spending to capital spending has trended down for several years. Capital spending has a more considerable and longer-term impact on the indicators of economic activity. Furthermore, Albania is at a stage, when capital spending is important for improving infrastructure and unlocking growth factors. 

The Bank of Albania suggests intensifying the efforts in order for this trend to be corrected in the years ahead, within the limits imposed by the commitment for fiscal consolidation.

4.3 Structure of financing public deficit and debt

The Bank of Albania estimates that foreign currency borrowing increases the risks from possible exchange rate volatility. The domestic financial markets have the capacity to cover the level of domestic borrowing planned in the budget during the next year, without exerting pressures on liquidity and interest rate indicators.

In this context, the Bank of Albania suggests to consider foreign financing with commercial terms as a contingency plan, conditioned by the appearance of strong tensions in the domestic financial markets or their inability to cover the level of domestic borrowing.

Long-term sustainability of public finances

Lastly, the Bank of Albania continues to emphasise the need for introducing a fiscal rule, which will discipline the fiscal policy and will ensure the long-term sustainability of public finances. The explanatory report of the draft project foresees that this law will be introduced in the framework of the comprehensive review of the organic budget law.

The Bank of Albania suggests considering the adoption of a fiscal rule as a separate and priority initiative, detached from other objectives of the organic budget law review. In addition, this rule will introduce a reliable and transparent commitment of the Government on the reduction of public debt, and will stipulate maintaining the needed space for capital expenditures.

Thank you for your attention!