The Size of Government
IS GOVERNMENT SPENDING TO HIGH?...
Deep political polarization in Albanian society, which was nurtured for couple of years by the ruling Socialist Party (SP) led by the PM Edi Rama and opposition Democratic Party (PD), reached another peak in the observed period. Situation started heating up in late 2018, with student demonstrations against high tuition fees, resulting in government reshuffle and abolition of the previously carried law that had regulated the issue. New government didn’t have even a month before facing a new crisis. Opposition parties returned to the parliament in January, announcing a series of rallies demanding new elections due to electoral fraud and high-level corruption. From February to May, many protests which turned violent were held. Because of that, elected president Ilir Meta decided
to postpone local elections previously scheduled for 30 June. However, the parliament revoked his decision and called for elections as planned. Main opposition parties boycotted local elections, hence ruling PS took power in almost all cities and municipalities without serious competition. According to international watchdogs, elections were well administered and peaceful, although voters lacked meaningful choice and were pressured by both sides. Electoral process in Albania is on a track of improvement, with last parliamentary elections having had been more competitive and fairer than the previous ones. Nonetheless, many problems with elections, such as voting irregularities and abuse of administrative resources, remained as an issue.
The biggest threat, undermining democratic institutions and decision-making in Albania, is coming from elected state officials. Those have effective power to govern the country however it is rather often abused for personal economic and political benefit by the ruling political elite and their business allies, or even by criminal groups. Also, deep political polarization reflects on institutions. Upon government formation after last parliamentary elections in 2017, the parliament was mostly boycotted by the opposition parties, thus making it difficult to uphold its oversight role. With a weak separation of powers in practice, with current strong domination of the SP over legislative and executive, and with SP`s capabilities to influence the judicial sector, their deeds can often
go by with impunity. Business or criminal leaders could influence decision making process as well.
Political atmosphere has shaped the media landscape in Albania to a high degree. Besides existing of a wide range of broadcast, print or online media outlets, their independent and objective reporting is subject to political and economic interests of their owners and extensive pressure coming from politicians. Therefore, many outlets provide a biased reporting, in favor or against the dominant political parties. Same goes for public broadcaster RTSH, which is controlled by the state and the ruling party. Lack of ceiling to media ownership share has led to huge concentration thereof, in the hands of few people. Another important issue is working conditions of journalists. Poor living standards lead to their dependence of financing from other sources, thus questioning their
integrity. Nonetheless, they are also faced with verbal and physical harassment, violence, threats, or legal charges. This includes labeling them as enemies, poison of the society, and “trash”, e.g. as it came from the PM Edi Rama. In such environment journalists often practice self-censorship. Defamation remained punishable by the law. Alas, attacks on journalists coming from state officials often go by with impunity.
In spite of constitutional guarantees of independent judiciary, the entire system of law enforcement in Albania is under heavy pressure from politics, special interest groups or outright corruption. That affects both impartiality and efficiency of courts. Cleansing of judiciary of incompetent or under-transparent officials, prosecutors or judges, i.e. the vetting process, that had begun in late-2017 under the auspices of the 2016 reform, was still incomplete by mid-2019, with many obstacles encountered meanwhile. Slow changes in the fields of fighting corruption and organized crime and of the reform of judiciary, have been main obstacles to Albania`s EU-accession process, besides recent inner-EU political considerations about enlargement process as such.
As Freedom House reports in 2019, „corruption and organized crime remain serious problems despite recent government efforts to address them.” In 2018, Albania fell on the Transparency International`s CPI list, to shared places 99-104 (of 180), with the score 36 (of 100), while in 2017 it was on the places 91-95/180 with the score 38/100. Bribery rates are high. Corruption among judiciary, police, customs, land administration, tax authorities and in public procurement is marked by the business portal GAN as either very highly or highly present. Recently, efforts were put to reduce the scope of immunity and impunity of high-ranking politicians if they are charged with corruption, embezzlements, smuggling or similar. Protection of whistle blowers improved. All those was not
enough to satisfy necessary conditions for the start of Albania`s EU-accession negotiations in 2019, wherefore insufficient struggle against corruption has been among major non-political and domestic obstacles.
Once (during communism) officially a militant-atheist country where religion was banned, Albania is nowadays a role model of a secular one, in which everyone`s worldview, religious or other, is respected. Likewise, identity rights of many ethnic minorities are respected, even though Roma might be a notable exception, being marginalized and vulnerable to various including political exploitation. LGBTs, in spite of notable improvements during the entire decade now, have still been under pressure and in fear, stuck in between conservative society and hypocrite politicians. Women are underrepresented in politics and management and still under-protected from domestic violence, harassment in public places, or human trafficking. Academic freedom is occasionally endangered by
corruption, notwithstanding lack of political interference. Police abuse is still a serious matter. Tribal tradition of revenge killings, persistent in some parts of the country despite government and civil society efforts to eradicate it, limits the freedom of movement and lifestyle to numerous innocent individuals and families.
Private property in Albania is not adequately protected. The biggest problem is low judicial independence from powerful political and business interest groups connected to the executive. There were constitutional amendments and judicial reforms that were implemented in 2016 with the aim of improving the rule of law. The process includes the vetting of judges and prosecutors through a vetting commission, in the instances such as unexplained wealth, or ties to organized crime. This process remains to impact the overall judicial system in the country. Corruption within judiciary is perceived as high in public opinion polls. Contract enforcement is largely ineffective due to very long legal procedures – 1.4 years on average, and high fees involved. There is high number of
backlogged court cases whose resolution is pending, effectively flooding the courts. There are no specialized commercial courts, but adequate departments among district courts. Regarding court procedures, although court cases are randomly assigned to judges, other automated procedures are not well developed. Recent amendments to the code of civil procedure established a simplified procedure for small claims in order to lift the burden made by the less complicated cases. Bankruptcy procedures are also long, lasting 2 years on average, and lead to a moderate recovery rate of 44% through piecemeal sale of assets of the bankrupt company. Any significant improvements of the new bankruptcy law that was introduced in 2017 with the aim of addressing existing loopholes, reducing fraud and easing recover procedures, are yet to be acknowledged. The cadaster service still remains incomplete, with a significant proportion of land without a clear title, which increases uncertainties of real estate purchases. Property registration is slow, and involves very high fees, while there is also corruption within the cadaster service. To streamline the property management process, the government established the State Cadaster Agency in April 2019, which integrated several institutions responsible for property registration, compensation, and legalization, such as the Immovable Property Registration Office (IPRO) and the Office for the Legalization of Illegal Structures (ALUIZNI). Public notaries were recently given access to registries and can now confirm ownership of land and real estate. Private property expropriation is rare, restricted mostly to infrastructure projects, but the level of compensation offered is lower than the perceived fair market value. Another problem in the area of property rights regards the illegal buildings, whose number is estimated at 440 000. The wide demolition campaign that started in 2008 is still not finished, with the construction inspectorate that does not involve due legal process, ignores citizens` complaints and is partial in choosing its targets. Foreign nationals face restrictions in owning agricultural land, but they can lease it for a period of up to 99 years. Commercial property, on the other hand, can be purchased but only with a guarantee of a threefold investment against the value of the acquired land, but these restrictions can be avoided through registering a local company in Albania. There are few restrictions on foreign ownership in the country, the most notable ones regarding air transportation, electricity transmission and television broadcasting, in which foreign ownership is restricted to minority equity. The process of restitution, which started in 1993, is not yet fully implemented. Property restitution claimants are facing many challenges in practice, due to slow judicial procedures or corruption, leading to unclear property rights. The new property compensation legislation was recently introduced in order to provide a solution to the pending claims. This legislation envisages three methods of compensation (property restitution, compensation with a property of similar value and pecuniary compensation) and a 10 year long timeframe for resolving the restitution claims, but the compensation for land confiscated is difficult to obtain and inadequate. Political changes could have a significant impact on businesses and investments, due to attempts of the new government to revoke or renegotiate already settled concessions, licenses or contracts, thus significantly negatively influencing property rights. Political consideration can have an effective impact on property rights: although international arbitration is usually upheld, the previous government decided not to implement the arbitration ruling in a high level investment case in 2016, which significantly increased business uncertainties, but this decision was later changed. Furthermore, when a new government takes power, it often tries to renegotiate the existing licenses, contracts and concession agreements.
Size of government in Albania is modest as compared to many other European countries, with low levels of government expenditures, slightly below 30% of GDP in 2018. Public deficits were reined in recent years, still bearing in mind the expanding economy and the high level of public debt, reaching 70% of GDP in 2018. The deficit has been on a slow downward path, but its decrease is slow and its level remains quite elevated in the regional comparison. This could pose a significant fiscal risk in the case of another recession, but here problems are also arising from a slowdown in reforms and piling-up arrears, including VAT refunds and unbudgeted investment projects. Significant risks could also arise from contingent liabilities stemming from the private-public partnerships, which
saw a significant increase, coupled with low administrative capacities for their evaluation and political influence in decision making. Further problems will arise from the population aging and the high emigration rate, since it will increase expenditures on the pension and healthcare system, which will be borne by a decreasing working age population. After the privatization program during the transition, SOEs in Albania operate mostly in so called strategic industries, such as transports, energy generation and distribution, postal services and the hydrocarbon sector, as well as in the utility sector. The state also owns significant minority equity in big companies that operate freely in the market, such as the telecommunication company Albtelekom. SOEs in the energy sector, KESh and OShEE, pose a significant risk for public finances, due to their inefficient management and operational policies, piling up losses and payment arrears. Privatization of the state oil company Albpetrol, which has been postponed several times since 2012, is currently not under consideration and the company started a restructuring process. Low public spending makes room for low taxes: personal income tax is slightly progressive, with rates of 13% and 23%, coupled with a relatively high non-taxed threshold. Corporate tax is flat and set at 15%, but there are also 5% and 0% rate for small companies with turnovers below certain thresholds. The general VAT rate is set at 20%, while the preferential rate is 6%: the VAT threshold for small businesses was recently substantially increased from 8 to 14 million leks. Relatively low level of social security contributions leads to one of the lowest labour tax wedges in Europe - below 30%. A set of tax incentives was introduced in 2018, aimed at the tourism industry, cutting the accommodation VAT from 20% to 6%, which was also spread to agro-tourism ventures. In 2019, the dividend tax was almost halved, from 15% to 8%.
Although business regulation in Albania is not hostile to doing business in the country, there are significant challenges and shortcomings, stemming from widespread corruption and favoritism among public officials in their dealings with business entities. Actual impartial implementation of regulations is plagued with many problems, to do with the low administrative capacities of the civil service and political pressure. Legislation is often difficult to interpret, being ambiguous, inconsistent or outright contradictory, which could be used for manipulation and extortion, while regulatory changes are frequent and without proper consultation with the business community. Starting a business is relatively easy and quick, with low number of procedures and no paid-in minimum capital,
but it is tied to high administrative fees. In order to boost registering of new businesses, the government waived the taxes on new business ventures during their first year of operation, which has been a great boost to small and micro enterprises. The issuance of construction permits was stopped in 2013 through the enacted moratorium, in order to combat illegal construction, but the process of issuance commenced again and the number of issued permits has recently risen. However, this process is complicated by numerous procedures and long time limits, lasting more than 10 months on average. On the other hand, the process of getting an electricity connection is not burdened with numerous procedures, yet it is very expensive. Tax regulations are overly complicated, with high number of annual payments, although the introduction of an online system for filing and paying taxes has somewhat improved the situation. VAT arrears have become quite high in recent years, posing a significant burden on businesses. Labour market regulations are a mix of flexible and inflexible traits. There are no limits to the maximum length of fixed-term contracts, but those are prohibited for permanent tasks. The number of maximum working hours per week has recently been decreased. Notice periods and severance pay for redundancy workers rise significantly with the yeas in tenure, thus protecting more seasoned workers. The minimum wage is relatively high as compared to the average wage. It has been increased for additional 15% this year. Furthermore, there are two minimum wage types: the minimum wage for private and public sector (the latter being higher by a half). Collective bargaining is mostly concentrated in the public sector, while outside of it is prevalent in just several industries. A significant portion of the workforce is active in fully or partially undeclared economic activities. In March 2019, parliament approved a new law on employment promotion, which defined public policies on employment and support programs, aiming at increasing employment through active labour market policies.
Freedom of international trade in Albania is generally respected. Albania has been a member of the World Trade Organization (WTO) since 2000, which lifted many restrictions on trade. Tariffs are low, with the average MFN-applied rate of 3.6%, but more than double that for agriculture products. Albania ratified the Trade Facilitation Agreement (TFA) of the WTO in May 2016, which went into effect in February 2017 when 2/3 of the WTO members ratified it That is expected to have further liberalized foreign trade through cutting the red tape and modernizing import and export procedures. Albania is yet to become party to the Government Procurement Agreement (GPA) of the World Trade Organization (WTO), but it has obtained an observer status and is negotiating full accession. Major
impediments, however, to freedom of international trade are product standardization procedures which are costly and lengthy, followed by the low quality of transportation infrastructure, especially the railroad, which increases freight costs. Border and documentary custom procedures also pose difficulties, and mandatory scanning inspections for exports and imports increased both time and costs for border compliance. Corruption in the customs office and unequal treatment resulting from it also can pose difficulties. Main Albanian trade partners are EU member countries (most notably Germany and Italy), closely followed by China and Turkey. Therefore, majority of the Albanian trade is conducted under the Stabilization and Association Agreement (for the EU countries) and the CEFTA (for the countries of the SEE region), while Albania has also signed preferential trade agreements with EFTA and Turkey. The process of EU-integration, which was expected to provide a significant push for further implementation of the EU regulation in this field has recently been put to a halt since the European Council did not agree to opening of the accession talks with Albania. This might have negative reform impact in future. The control of short term capital flows, introduced by the National Bank, is still maintained, mainly due to the exchange rate policy and low foreign currency reserves. The process of issuance of work permits for foreign nationals is mostly streamlined, but the legislation stipulates that foreign workers cannot encompass more than 10% of the total workforce of a company.