EC Report Shows Government Fails to Present Implementable Economic Reforms

On Thursday, the European Commission (EC) published its annual assessment report on Albania’s Economic Reform Programmes (ERP) for the 2019–2021 period. The report seems to show that the government has made pledges instead of presenting policy programmes for the next three years. Governments of all EU candidate countries submit annual EPRs to the EC. The ERPs contain medium-term macroeconomic projections, budgetary plans for the next three years and a structural reform agenda in several areas.E The EC and the European Central Bank (ECB) both make annual assessments of the ERPs, and of each country's readiness and progress in the fulfilment of the economic criteria. In February, the Albanian government submitted its EPR 2019–2021 “with a view to enable sustainable growth, increased employment and reduced public debt,” as well as presenting “priority reforms measures […] for increasing domestic production, stimulating new investments and ensuring sustainable growth and increased competitiveness.” Albania’s EPR analyzed by the EC appears to have not been supported by reliable plans to achieve policy objectives. This seems to be the case for virtually every sector of the Albanian economy included in the report, as evidenced by the following examples. The report states that the government planned debt reduction “strongly depends on high economic growth” for 2019 – 2021. However, the EC’s quarterly report found that “Albania's real GDP growth continued to decelerate from 3.1 % year over year in the last three months of 2018 to 2.2% in the first quarter of 2019.” Whilst the government expects the budget deficit to fall to 1.2 per cent of GDP by 2021, it “does not provide details of a fiscal consolidation strategy.” The government plans to stabilize the low tax revenue, but “without major reforms outlined” in the EPR. It pledges to increase public investment to over 6% of GDP by 2021, but “achieving this increase could be difficult due to weaknesses in the planning and management of capital expenditure.” Below, Exit bring the main points of criticism raised by the EC report.

– The policy guidance set out in the conclusions of the Economic and Financial Dialogue of May 2018 has been partially implemented.

– The ERP of the Albanian government sets out reform plans that are partially in line with the priorities identified by the Commission.

– The programme’s macro-fiscal framework is slightly optimistic;

– The achieved debt-ratio and the reconfirmed commitment to lowering public debt are in line with the Commission's recommendation in previous years but the approach to achieving the fiscal targets could be more strategic;

– Public debt is still high, and large financing needs are weighing on debt sustainability;

– Tax collection is also below potential;

– The planned debt reduction strongly depends on high economic growth until the end of the programme period, however Albania's real GDP growth continued to decelerate in 2019.

– Advancing the fiscal consolidation can mitigate the risk of not achieving the debt reduction target in case of lower growth in coming years;

– Instead of raising tax rates, the government could increase tax revenues by lowering the high level of undeclared work and tax evasion;

– The credibility of government reported public debt is undermined by the unrecorded arrears and contingent liabilities;

– The ERP assumes rising investment, but does not address conditions necessary for increasing private investment or for improving the efficiency and growth impact of public investment;

– Private investment in Albania is hampered by the low quality of public services accessible to entrepreneurs, as well as shortages of skilled labour;

– Entrepreneurs lack productive and entrepreneurial know-how, financial literacy, and access to finance;

– Albania’s investment in education and health has been below the regional average, and the ERP plans to decrease even further the share of budget allocations to education and health;

– The EC underlines that while the Albanian government plans to increase public investment, it seems that increases will not cover education, health and research;

– Informal economy accounts for at least one third of GDP. This is causing tax revenue losses, a lack of labour protection and unfair competition among firms.

– The key obstacles to increased investments are weaknesses in the business environment, insecure property rights, an underdeveloped real estate market and increasingly shortages of skilled labour.

– The lack of infrastructure combined with improper maintenance leads to a very high number of road traffic accidents.

– Albania’s industrial sector is weak. The ERP does not provide any information or analysis of the industry in the country, nor does it propose any measures or policies.

– Inefficiencies in the energy sector, including insufficient security of supply, hamper Albania’s competitiveness;

– The dependence on hydropower for electricity generation (98%) makes the economy vulnerable;

– Despite vast water resources and advantageous weather conditions to diversify electricity generation (wind, thermal, solar power plants), Albania is a net importer of electricity;

– The tourism sector in Albania has a great potential, but it is underdeveloped. The government has delayed the adoption of a comprehensive tourism strategy which has been developed;

– High youth unemployment and inactivity, low female employment, high share of informal and vulnerable employment, insufficient social care services and low quality of education are key obstacles;

– Government policies on labour market need to better target vulnerable jobseekers, provide more upskilling and be more relevant to labour market needs;

– Poverty rates in Albania are presumably high and recent reliable data is crucially missing. The poverty rate estimate for 2018 is 35.2% (World Bank);

– Social assistance allowances are not sufficient to lift the poor above the extreme poverty line;

– Education and skills Albania continues to struggle with low quality of education. Public education expenditure is low at 3.1% of GDP (2017 and 2018), 1.5 pps lower than EU average (2017).

– Three new measures in the area of education are not sufficiently developed and seem to address structural issues only partially.

– Educational outcomes are weak at all levels and the VET reform is delayed;

– Early childhood education suffers from very low investments and low enrolment for children from vulnerable families. Participation in adult education is particularly low.

– The measure on pre-university curricular reform does not address the need for continuous support to teachers.

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