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The author would like to thank for comments Julio Escolano, Mumtaz Hussein, Manmohan S. Kumar, and Joana Pereira.
It could be argued that as Albania enters international capital market, market discipline could be relied upon to prompt the authorities to pursue a sound fiscal policy. However, the experience with market discipline does not give strong assurances that it would be exercised in timely and sufficient manner: too often, market discipline comes“too much, too late” (Willett, 2000).
Recent strong revenue collection may also have benefitted from the significant absorption gap and import boom (VAT on imports is much easier to collect). To the extent that absorption declines or import substitution becomes more important, these ‘low-hanging fruits’ will largely disappear.
Interestingly, IMF (2003) also found that in advanced economies, the response of primary surplus increases with the debt-to-GDP ratio.
However, comparing overall and primary deficits in the EMCs database of the Strategy and Policy Review Department shows much lower interest expenditure, below 3 percent of GDP in 2008 (see Figure 7). The FAD EMC database shows—for a smaller sample of the EMCs—a projected mean interest payment at 3.7 percent of GDP in 2007.
The rule does not allow for α >1. That is, targeted nominal debt cannot increase more than projected nominal GDP.
The five-year 200 million euro syndicated loan contracted in 2009 came at the cost of Euribor plus 900 points
The sharp spike in the 2010 primary balance compared to the projected 2009 outcome is caused by the fact that the transition to the primary balance required to achieve the desired debt ratio path happens in one year. Primary balance in 2009 was particularly weak, resulting in a nominal public debt increase double the increase in nominal GDP.
Note the important assumption about the“underlying” size of capital spending, that is, excluding the road project. In 2006, before that project started, capital spending was 5.6 percent of GDP, almost 3 points less than in 2008.
With the most serious weaknesses in tax administration now addressed, the scope for further gains in revenue collection as a result of tax administration reforms inevitably diminishes.
Elasticity of tax revenue is e = dT/dY * Y/T. Given the assumed value of elasticity, e = ê, projected percentage increase in revenues is equal to is ê * dY/Y.
If the deviation of debt ratio would be moderate, and/or if it would be the result of cyclical weakening of growth, corrective measures would not be required.
Problems with poor contract design and costs overrun in some large investment projects suggest that such projects could pose fiscal risks, and further strengthens the case of inclusion of capital spending in the expenditure rule.
This assumes that higher non-interest spending permitted by a temporary decline in interest payments would be reversed once cyclical conditions tighten. More generally, if a volatile spending item is subject to symmetric shocks that cancel each other over time, it could be excluded from the expenditure ceiling. Total expenditure and deficit would increase (decrease) during cyclical expansion (contraction). This assumes no constraint on financing the temporary higher deficit. But if the spending item remains elevated for some time, and risks bringing the deficit to difficult-to-finance level, an offsetting reduction of other expenditure would be warranted. Targeting total expenditure would mean that government uses its control over discretionary spending to respond to shock to interest payments and other cyclically sensitive items, and to mandatory expenditure, to keep the overall expenditure on target.
However, following the recent reduction of corporate and personal income tax to a single 10 percent rate, this risk is probably low in Albania.