## _cr03202 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr03202 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03202.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03202.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03202.pdf.json) --- ### Assessment scope and methodology - Provides an assessment of fiscal transparency practices in Albania against the IMF Code of Good Practices on Fiscal Transparency. - Assessment based on: discussions with the authorities and other organizations; authorities’ responses to the IMF fiscal transparency questionnaire; other sources of information. - Recommends consulting the IMF Manual on Fiscal Transparency for further explanation of terms and concepts. ### Key areas of progress - Clarity of responsibilities: - Roles among different branches of government are well established. - Distinction between government and most nonfinancial SOE activities is generally clear (with some sectoral exceptions). - Coordination and reporting: - Budget and extrabudgetary activities are coordinated. - Fiscal data are published in a timely way. - Final accounts are disclosed in a timely manner. - Accounting and audit: - Government accounting is relatively strong. - There is a well-established practice of external auditing of government activity. - Legal framework: - Legislative and regulatory framework for economic activity is reasonably well-developed. - Organic Budget Law has improved legal and administrative framework for fiscal management. ### Major shortcomings and risks - Tax law clarity, enforcement, and administration: - Major improvements required in transparency and enforcement of tax laws and instructions to reduce discretion and corruption. - Need to review tax laws and instructions to make them consistent and eliminate provisions that are not well defined. - Tax laws and instructions should be made more widely available to taxpayers in a user-friendly way. - Need to improve internal controls in tax and customs administration. - Specific nontransparent tax procedures identified, including: - Use of alternative customs valuation methods conflicting with prohibition on reference prices (Customs Code Articles 34.1.b and 36 f). - Inclusion of delivery expenses in the dutiable base for VAT on imports (Article 26 (4a)). - VAT treatment in construction sector where leasing is exempt (Article 20) but construction inputs are not; reliance on Instruction to the Value Added Tax Law Section 6.l introduces interpretative room. - Tax arrears by SOEs (example: Albpetrol) without usual recovery procedures. - High barriers to tax appeals: appellant required to pay 100 percent of tax liability prior to appeal; conflicting information on acceptance of “frozen” bank account deposits as payment before initiating an appeal. - Budget preparation and budget documents: - Substantial improvements necessary in budget preparation and the quality of budget documents. - Appropriation structure of the annual budget should be expanded to cover object/economic classifications. - Budget process should start earlier to allow more time for public and parliamentary debate, and to enable preparation with greater depth and breadth. - Drafting of the Medium-Term Expenditure Framework (MTEF) should be fully integrated into annual budget preparation. - Remaining shortcomings in the Organic Budget Law relate to the budget calendar, the appropriation structure, and insufficient coverage and lack of detail in annual budget documents. - State ownership and reporting: - Government equity holdings have declined but remain significant and are not well reported publicly. - Government currently holds equity in 131 enterprises, including 21 in which its share is below 50 percent. - Data on government equity holdings and SOE financial operations were published for 1996–98; a report for 1999–01 is being prepared for publication. - Extrabudgetary funds and donor-financed activities: - Two extrabudgetary funds represent jointly about 20 percent of general government expenditure; their deficits are covered by transfers from the government budget. - Until recently, foreign-financed government activities lacked a legal framework and spending agencies using foreign funds did not report regularly to the Ministry of Finance; Instruction No. 8, dated 17.02.03, seeks to remedy this by establishing guidelines for evidence, registering, spending and reporting of foreign financing. - Financial sector concentration: - Banking sector dominated by the Savings Bank, which is 100 percent state-owned, holds a large share of household deposits and Treasury bills, and can impair competition and impact interest rates. - In the insurance sector, the government plans to sell 40 percent of equity of INSIG to IFC and EBRD as part of pre-privatization. ### Institutional and legal arrangements - Definition and scope: - General government defined in line with GFS86 and GFS01, encompassing the central government, local governments, and extrabudgetary funds. - Annual budget documents comprise central government revenue and expenditure, including transfers to local governments and extrabudgetary funds; own revenue and associated expenditures of local governments and extrabudgetary funds are included as estimates. - Authorities intend to adopt GFS01 methodology for fiscal data compilation in the medium-term. - Privatization: - Privatization procedures generally well defined, but differ on a case-by-case basis for strategic enterprises and are not always widely disseminated. - Legal instruments include: Law no. 8834 (24.09.98); Decision no. 416 (30.09.98); Instruction for Implementation of Decision no. 416 (09.07.98); Act no. 192 on capital value assessment criteria; Law No. 8306 on privatization strategy of primary importance sectors. - For non-strategic enterprises, 5 percent of privatization proceeds is allocated to the National Agency for Privatization for its operations; 20 percent accrues to a development fund for SOE restructuring, managed by the Ministry of the Economy and included in the budget since 1999. For strategic enterprises the share varies on a case-by-case basis. - Central-local relations: - June 2000 Law on Organization and Functioning of Local Governments defines exclusive responsibilities and grants fiscal autonomy for those responsibilities. - 2003 budget coverage: central government includes Presidency, Parliament, Council of Ministers, State Supreme Audit Institution, Ombudsman, 16 ministries, and 30 other government agencies; local governments include 12 regional authorities, 65 urban municipalities, and 309 rural communes; extrabudgetary funds include Social Security Fund and Health Fund. - Stringent borrowing requirements for local governments under Law No. 8379 of July 29, 1998; local governments can only borrow from the central government. - Roles of branches: - Executive’s role in fiscal policy clearly defined in the Constitution and the Organic Budget Law; legislative branch has relatively little time to examine and approve the annual budget (Council of Ministers has up to November 20 to submit the budget for the following year). - Constitutional provisions on separation of powers exist; judicial independence limited by inclusion of one executive representative in the High Council of Justice (Article 147). - Legislative committee oversees fiscal policy but is constrained by institutional capacity. ### Public availability and coverage of fiscal information - Budget documents and coverage: - Budget documents cover all general government fiscal activities but with insufficient detail. - Budget approved on the basis of summary tables with spending agencies’ total recurrent and total investment expenditure. - Tables with functional, program, and broad object/economic classifications are provided to parliamentarians for information but are not approved by parliament and thus not legally binding. - Investment projects are not individually listed in the budget with detailed allocations for each spending agency. - Publication and accessibility: - The budget is published in the government gazette and on the MoF’s website (http://www.minfin.gov.al/). - During budget execution, detailed fiscal data (economic and program classifications) are not published but are available from the MoF’s Treasury and Debt Department. - Revenue data are generally presented only in aggregate form in budget documents. - Time coverage and forecasts: - Budget documents disclose the main fiscal aggregates for one year prior to the budget and forecasts of some variables for the two years following the budget year. - Draft budget generally finalized by the government in November; includes estimates for the previous fiscal year and main fiscal aggregates for the current year based on the nine-month outturn. - For some indicators, data expressed as a share of GDP are presented. - Final and audited outturn for earlier years is not provided. - Medium-Term Expenditure Framework (MTEF) forecasts for two years following the budget year are referenced but may not be relevant at time of annual budget finalization. - Contingent liabilities and tax expenditures: - Only limited information on contingent liabilities is included in the budget documents. - Annual budget documents include a maximum amount allowed for issuance of new guarantees for external borrowing by SOEs in the budget year. - MoF has not issued guarantees to SOEs on borrowing from domestic financial institutions in recent years; no formal procedures govern issuance of such guarantees. - Other contingent liabilities (future pension liabilities, privatizations) are not reflected in the budget documents. - None of the MTEF documents published in recent years has addressed contingent liabilities. - Information on future debt service obligations, including those related to guaranteed debt, is available from the MoF’s Treasury and Debt Department upon request. - Tax expenditures are generally not presented to parliament or published. - GDC has undertaken an analysis of revenue foregone from customs exemptions; full assessment of explicit and implicit tax exemptions/concessions is not available. - Quasi-fiscal activities and SOEs: - Quasi-fiscal activities in electricity and water sectors have declined in recent years but remain sizable. - SOEs continue to hold monopolies in electricity and water sectors and provide implicit and untargeted subsidies via tariffs below cost recovery and accumulation of payment arrears, which trigger tax arrears of energy companies. - Over the past 2–3 years these quasi-fiscal activities have been reduced primarily through increases in electricity and water tariffs. - For KESH, an action plan agreed with the World Bank aims at restructuring, privatization, and annual tariff increases to further reduce quasi-fiscal activities over the next few years. - Efforts underway to clear substantial government-enterprise and inter-enterprise payment arrears; a large share is associated with KESH and the water companies. - The government has undertaken an analysis of quasi-fiscal activities in the electricity sector, but this has not been documented in budget documents. ### Fiscal data publication, debt, and reporting frequency - Debt reporting and concerns: - Aggregate data on gross government debt is published; information on financial assets is not publicly available. - MoF’s Department of Treasury and Debt uses the UNCTAD debt management system and can provide detailed debt stock and financing flow data. - Only aggregate debt data are included in the government’s quarterly bulletin on fiscal statistics. - The debt stock was 64 percent of GDP at end-2002; more than half of this was domestic debt. - Debt service expenditure was 12 percent of total government spending in 2002. - A presentation of debt according to maturity is not available. - A draft law on the government’s strategy for resolving external debt arrears has been submitted to parliament but is not yet included in the parliament’s agenda. - Publication frequency and timeliness: - Quarterly fiscal data are published in a timely manner (5–8 weeks after the end of the quarter). - MoF publishes a quarterly bulletin on fiscal statistics with relatively detailed monthly data for the general government and an advance release calendar for the bulletin. - MoF intended to begin publishing the bulletin on its website by September 2003 and start reporting fiscal data to the public on a monthly basis. ### Budget process, transparency, and analytical shortcomings - Budget preparation and classification: - The budget process follows a regular timetable but starts late: the budget circular is generally issued only in July. - The budget calendar leaves parliament and the public one month to analyze and debate the draft budget. - The executive may transfer up to 10 percent of the approved budget of any spending agency to another with Council of Ministers’ approval, without consulting parliament. - Appropriation structure is unduly limited; GFS86-based functional classification at main category levels, broad object/economic classification, and program classification are presented but have no appropriation significance. - A more detailed object/economic classification is used for monitoring budget execution and accounting; final accounts follow the same aggregated pattern. - Following parliamentary approval, budget summary tables are gazetted but supporting documents and tables presented to parliament are not subsequently published. - Fiscal indicators and monitoring: - The overall balance of general government is the main fiscal indicator and is monitored monthly. - Other key indicators tracked monthly: primary balance, domestic balance, and public debt stock. - Subnational government activity was 6 percent of total spending in 2002 due to decentralization. - Detailed revenue and expenditure data for local governments are available to the MoF on a monthly basis and published in summary form in the MoF’s quarterly bulletin. - Forecasting and analysis weaknesses: - Progress in revenue forecasts noted in the 2003 budget, but disclosure of projections of macroeconomic indicators and revenue is limited. - Forecasts of selected macroeconomic indicators (rates of growth of GDP and inflation) are presented but not in sufficient detail and without adequate explanations. - Macroeconomic forecasts for budgetary purposes are mainly prepared by the Macroeconomic Department of the MoF and discussed by an ad-hoc committee involving MoF, Ministry of Economy, Institute of Statistics, and the central bank. - Prior to the 2003 budget, revenue projections were influenced by normative considerations (deficit and revenue targets), undermining credibility. - Revenue forecasts prepared by an ad-hoc committee comprising the Secretary General, Deputy Ministers, Directors, and Cabinet Advisers of the MoF. - MoF is in the process of establishing a tax revenue forecasting unit. - Revenue forecasts in the 2003 budget improved in quality and realism but require further strengthening and better explanation in budget documents. - A general statement on medium-term fiscal policy objectives is included in budget documents but not accompanied by indicative quantitative medium-term fiscal targets. - MTEF is discussed but not formally approved by parliament. - Budget documents contain neither a discussion nor estimates of fiscal sustainability. - Estimates of new policy initiatives and ongoing operations are not well distinguished in budget documents; costs of new recurrent activities are not well separated from ongoing operations. - Investment projects are not individually presented in the budget documents; investment details are presented to parliament but not provided in budget documents. - No formal guidelines explain how projects are prioritized in the investment budget or include assessment of recurrent cost implications of new investment projects. - Sensitivity analysis of budget estimates to changes in economic variables is limited and not published. - Main fiscal risks, including contingent liabilities, are not thoroughly discussed in budget documents. - Objectives of major policies are announced in budget explanatory sections, but actual progress is not reported against these objectives in final accounts. - Program classifications introduced for information lack statements on program objectives; therefore, no performance reports can be prepared. ### Internal controls, treasury, and audit - Internal audit and controls: - Internal controls function is very weak across central government agencies. - February 2003 law on The Internal Audit of the Public Sector provides improved regulations governing internal audit units in all Ministries, seeking to strengthen internal audit (which currently focuses mainly on compliance). - New law specifies the Internal Audit Directorate in the MoF will undertake ex-post audits of agencies associated with the ministry and provide technical assistance and guidelines to internal audit units in other ministries. - Treasury and accounting systems: - Treasury accounting system (cash-based) produces complete and detailed monthly reports on general government activities via 36 district offices and central treasury office. - Reports are based on budget classifications and form the basis for the government final accounts submitted to parliament and the State Supreme Audit Institution (SSAI). - Transactions of extrabudgetary funds are reported to the MoF separately; they are not part of the treasury. - A substantially modified accrual accounting and reporting system exists in spending agencies aiming to prepare annual balance sheets of each spending agency; individual balance sheets are compiled by MoF to prepare the total government balance sheet. - Annual reports from spending agencies are not submitted to the MoF in a timely manner, preventing timely compilation of the government balance sheet. - The government intends to integrate the two parallel accounting and reporting systems but recognizes this could be a costly process. - Protection from political interference in tax and customs administrations: - Laws state tax and customs administrations shall exercise duties independently from other central and local government bodies and prohibit other government bodies from interfering. - The General Director of Taxation is appointed and discharged by the Prime Minister upon proposal from the Minister of Finance. - The Minister of Finance appoints four of the seven members of the Tax Appeals Commission, including one from the MoF. - The Tax Appeals Commission can review cases of improper conduct by tax officials and decide outcomes by open vote. - Despite formal protections, improperly defined tax provisions allow political interference into tax and customs operations. ### Mid-year review, audited final accounts, and assurances of integrity - Mid-year review and legislative access: - The government is not legally required to present a formal mid-year review to parliament; under the Organic Budget Law, the government is only required to present a formal mid-year review of budget execution to the Council of Ministers, but not to parliament. - Each year since 1999, the government has presented a revised budget to parliament in the middle of the year and provided the legislature in this context with a review of budget execution through mid-year. - The quarterly statistical bulletin provides detailed data on a regular basis to the public, allowing parliamentarians and others to monitor budget execution. - Timeliness and dissemination of audited final accounts: - The MoF prepares final accounts relatively soon after the end of the fiscal year and the SSAI starts analyzing these accounts early. - Audited final accounts become available timely, i.e., nine or ten months after the end of the fiscal year. - Example: the preparation of the 2001 final audited accounts was completed in September and published in October 2002. - The audited final accounts are disseminated widely through hard copy publication and the SSAI’s website. - Assurances of integrity: - Budget data are mostly reliable, but variance between budget and actual outturn of main fiscal aggregates is not well analyzed. - No distinction between foreign grants and loans in reporting; all foreign grants are included in foreign financing. - The overall balance target is not a meaningful and reliable variable because it is defined on a cash basis and can be affected by higher-than-expected foreign grants or accumulation of payment arrears. - Monthly reconciled reports are available within 20 days after the end of each month. - Final annual accounts are compiled four months after the end of the fiscal year. - External audit: Independent under the 1997 Law on the State Supreme Audit Institution; chairman reports directly to parliament for a term of seven years and audits central government agencies, extrabudgetary funds, and SOEs. - No independent external audit of local governments reporting to their legislature. - Audit reports are submitted to parliamentary committees, debated, and can prompt legal action or hearings of officials. ### IMF staff commentary: overall assessment and key shortcomings - Progress and strengths: - Albania has made much progress in improving fiscal transparency and meets the standards of the fiscal transparency code in several areas. - Responsibilities among branches of government are clearly defined. - Government operations are generally well distinguished from central bank activities and, in most cases, public financial institutions and SOEs. - Mechanisms for coordination of budget and extrabudgetary activities are well defined. - Budget accounting is relatively strong. - Final accounts are disclosed in a timely way; external auditing of government activities is well-established. - The Organic Budget Law is commendable in many aspects. - The government publishes timely fiscal data on the general government in commendable detail in a quarterly statistical bulletin and intends to improve reporting through website disclosure and monthly statistical bulletins. - Shortcomings (summary): - Transparency of tax laws and instructions is weak in places; some provisions are ambiguous and inconsistent with other laws, allowing discretion and fostering corruption. - Taxpayers are not sufficiently informed about frequently changing tax laws and instructions (e.g., import regulations). - Budget preparation problems: inadequate level of detail in the budget appropriation structure; late and brief budget preparation process; limited coverage and depth of budget documents in macroeconomic context, fiscal sustainability analysis, and quasi-fiscal activities; MTEF not well integrated with the annual budget. ### Key statistics and factual points (preserved verbatim) - Government equity holdings: 131 enterprises; 21 enterprises in which government share is below 50 percent. - Two extrabudgetary funds represent jointly about 20 percent of general government expenditure. - Savings Bank: 100 percent state-owned. - Privatization plan: sell 40 percent of equity of INSIG to IFC and EBRD (insurance sector pre-privatization plan). - Civil service coverage: about 3,000 central government and 5,000 local government civil servants. - Quasi-fiscal activity reduction period: over the past 2–3 years. - Preparation timing: draft budget generally finalized in November; budget circular generally issued in July. - Executive reallocation authority: up to 10 percent of the approved budget of any spending agency. - Subnational government spending share: 6 percent of total spending in 2002. - Debt stock: 64 percent of GDP at end-2002; more than half was domestic debt. - Debt service expenditure: 12 percent of total government spending in 2002. - Treasury reporting: quarterly bulletins published 5–8 weeks after the end of the quarter; MoF intended website publication by September 2003. - Audited final accounts timeliness: nine or ten months after the end of the fiscal year. - Monthly reconciliation timeliness: within 20 days after the end of each month. - Final annual accounts compiled: four months after the end of the fiscal year. ### High-priority recommendations on tax transparency and procedures - Review tax laws and supporting instructions to ensure consistency between them and eliminate improperly defined provisions that are subject to interpretation and discretion. - Strengthen audit and control procedures in the General Taxation Department and the General Directory of Customs. - Prepare tax revenue forecasts on a tax-by-tax basis and by using statutory tax rates and realistic estimates of tax bases. - Include instructions on tax procedures in pamphlets distributed to taxpayers, and ensure their wide dissemination. - Publish all tax laws and instructions timely and widely, including on websites. - Strengthen tax appeals procedures and lower barriers of entry for appellants. - Improve taxpayers’ access to information by publishing, while preserving taxpayer anonymity, the decisions of the tax appeals commission and judicial rulings on tax matters. - Prepare and publish a tax expenditure analysis, demonstrating to parliament and the general public the costs of providing tax concessions. ### High-priority recommendations on budget preparation and quality - Expand the appropriation structure in the budget document as soon as possible to cover object/economic classifications of recurrent expenditure programs and investment projects. - Following the introduction of the expanded budget appropriation structure, require parliamentary approval for any transfer exceeding 10 percent from one expenditure item within a recurrent program or investment project and from one program to another, as well as from one investment project to another. - Reform the practice allowing transfers in the appropriation of one spending agency to another by up to 10 percent of the total with consent of the Council of Ministers but without approval of parliament; no such transfers should be allowed without parliamentary approval. - Separate foreign grants from foreign loans in the presentation of the budget and in fiscal reports, with foreign grants shown together with revenue above the line and foreign loans below the line. - Start the budget process significantly earlier in the year (e.g., April) to allow more time for administrative preparation. - Submit the draft budget to parliament earlier than mid-November to provide more opportunity for public scrutiny and parliamentary debate; consider discussing key budget parameters at an early stage with the parliamentary Economy, Finance, and Privatization Committee. - Better integrate the MTEF into the annual budget cycle and incorporate medium-term perspectives and projections into the annual budget. - Improve budget documents to provide more macroeconomic context, a fuller analysis of fiscal objectives and policies, a fiscal sustainability analysis, and more detailed estimates of contingent liabilities and quasi-fiscal activities in the electricity and water sectors. - Present to parliament a mid-year budget review, which should also be published, including on the MoF’s website. ### Other recommendations - Publish a summary report on government equity holdings and the financial operations of SOEs at least once per year. - Develop formal guidelines and procedures for evaluating and prioritizing projects included in the investment budget. - As local government activities expand, consider more detailed reporting on these activities in the government’s statistical bulletin on fiscal data. - External audit of local government operations should be undertaken by the Supreme Audit Institution and results should be reported to local government councils. *Source: IMF staff assessment, “EXECUTIVE SUMMARY” (_cr03202).* ### EXECUTIVE SUMMARY ### _cr03202 - EXECUTIVE SUMMARY ### Assessment scope and methodology - Provides an assessment of fiscal transparency practices in Albania against the IMF Code of Good Practices on Fiscal Transparency. - Assessment based on: discussions with the authorities and other organizations; authorities’ responses to the IMF fiscal transparency questionnaire; other sources of information. - Recommends consulting the IMF Manual on Fiscal Transparency for further explanation of terms and concepts. ### Key areas of progress - Clarity of responsibilities: - Roles among different branches of government are well established. - Distinction between government and most nonfinancial SOE activities is generally clear (with some sectoral exceptions). - Coordination and reporting: - Budget and extrabudgetary activities are coordinated. - Fiscal data are published in a timely way. - Final accounts are disclosed in a timely manner. - Accounting and audit: - Government accounting is relatively strong. - There is a well-established practice of external auditing of government activity. - Legal framework: - Legislative and regulatory framework for economic activity is reasonably well-developed. - Organic Budget Law has improved legal and administrative framework for fiscal management. ### Major shortcomings and risks - Tax law clarity, enforcement, and administration: - Major improvements required in transparency and enforcement of tax laws and instructions to reduce discretion and corruption. - Need to review tax laws and instructions to make them consistent and eliminate provisions that are not well defined. - Tax laws and instructions should be made more widely available to taxpayers in a user-friendly way. - Need to improve internal controls in tax and customs administration. - Specific nontransparent tax procedures identified (see Box 1 in source), including: - Use of alternative customs valuation methods conflicting with prohibition on reference prices (Customs Code Articles 34.1.b and 36 f). - Inclusion of delivery expenses in the dutiable base for VAT on imports (Article 26 (4a)). - VAT treatment in construction sector where leasing is exempt (Article 20) but construction inputs are not; reliance on Instruction to the Value Added Tax Law Section 6.l introduces interpretative room. - Tax arrears by SOEs (example: Albpetrol) without usual recovery procedures. - High barriers to tax appeals: appellant required to pay 100 percent of tax liability prior to appeal; conflicting information on acceptance of “frozen” bank account deposits as payment before initiating an appeal. - Budget preparation and budget documents: - Substantial improvements necessary in budget preparation and the quality of budget documents. - Appropriation structure of the annual budget should be expanded to cover object/economic classifications. - Budget process should start earlier to allow more time for public and parliamentary debate, and to enable preparation with greater depth and breadth. - Drafting of the Medium-Term Expenditure Framework (MTEF) should be fully integrated into annual budget preparation. - Remaining shortcomings in the Organic Budget Law relate to the budget calendar, the appropriation structure, and insufficient coverage and lack of detail in annual budget documents. - State ownership and reporting: - Government equity holdings have declined but remain significant and are not well reported publicly. - Government currently holds equity in 131 enterprises, including 21 in which its share is below 50 percent. - Data on government equity holdings and SOE financial operations were published for 1996–98; a report for 1999–01 is being prepared for publication. - Extrabudgetary funds and donor-financed activities: - Two extrabudgetary funds represent jointly about 20 percent of general government expenditure; their deficits are covered by transfers from the government budget. - Until recently, foreign-financed government activities lacked a legal framework and spending agencies using foreign funds did not report regularly to the Ministry of Finance; Instruction No. 8, dated 17.02.03, seeks to remedy this by establishing guidelines for evidence, registering, spending and reporting of foreign financing. - Financial sector concentration: - Banking sector dominated by the Savings Bank, which is 100 percent state-owned, holds a large share of household deposits and Treasury bills, and can impair competition and impact interest rates. - In the insurance sector, the government plans to sell 40 percent of equity of INSIG to IFC and EBRD as part of pre-privatization. ### Institutional and legal arrangements - Definition and scope: - General government defined in line with GFS86 and GFS01, encompassing the central government, local governments, and extrabudgetary funds. - Annual budget documents comprise central government revenue and expenditure, including transfers to local governments and extrabudgetary funds; own revenue and associated expenditures of local governments and extrabudgetary funds are included as estimates. - Authorities intend to adopt GFS01 methodology for fiscal data compilation in the medium-term. - Privatization: - Privatization procedures generally well defined, but differ on a case-by-case basis for strategic enterprises and are not always widely disseminated. - Legal instruments include: Law no. 8834 (24.09.98); Decision no. 416 (30.09.98); Instruction for Implementation of Decision no. 416 (09.07.98); Act no. 192 on capital value assessment criteria; Law No. 8306 on privatization strategy of primary importance sectors. - For non-strategic enterprises, 5 percent of privatization proceeds is allocated to the National Agency for Privatization for its operations; 20 percent accrues to a development fund for SOE restructuring, managed by the Ministry of the Economy and included in the budget since 1999. For strategic enterprises the share varies on a case-by-case basis. - Central-local relations: - June 2000 Law on Organization and Functioning of Local Governments defines exclusive responsibilities and grants fiscal autonomy for those responsibilities. - 2003 budget coverage: central government includes Presidency, Parliament, Council of Ministers, State Supreme Audit Institution, Ombudsman, 16 ministries, and 30 other government agencies; local governments include 12 regional authorities, 65 urban municipalities, and 309 rural communes; extrabudgetary funds include Social Security Fund and Health Fund. - Stringent borrowing requirements for local governments under Law No. 8379 of July 29, 1998; local governments can only borrow from the central government. - Roles of branches: - Executive’s role in fiscal policy clearly defined in the Constitution and the Organic Budget Law; legislative branch has relatively little time to examine and approve the annual budget (Council of Ministers has up to November 20 to submit the budget for the following year). - Constitutional provisions on separation of powers exist; judicial independence limited by inclusion of one executive representative in the High Council of Justice (Article 147). - Legislative committee oversees fiscal policy but is constrained by institutional capacity. ### Recommended priorities for reform (as reflected in the assessment) - Tax administration and law: - Review tax laws and instructions to make them consistent and eliminate poorly defined provisions that allow discretion. - Make tax laws and instructions more widely available and user-friendly. - Improve internal controls in tax and customs administrations. - Reduce discretion and corruption risks in customs valuation and VAT treatment practices. - Budget processes and documentation: - Expand appropriation structure to include object/economic classifications. - Start the budget process earlier to allow more public and parliamentary debate and more comprehensive budget preparation. - Fully integrate the Medium-Term Expenditure Framework into annual budget preparation. - State-owned enterprise reporting and privatization transparency: - Improve public reporting on government equity holdings and SOE financial operations. - Disseminate privatization procedures and parameters more widely to the public. - Donor-financed operations: - Strengthen reporting and legal framework for foreign-financed government activities (build on Instruction No. 8, dated 17.02.03). - Institutional capacity and enforcement: - Strengthen enforcement of existing laws to reduce corruption and tax evasion. - Enhance institutional capacity to support legislative scrutiny of fiscal policy. *Source: IMF staff assessment, “EXECUTIVE SUMMARY” (_cr03202).* ### References: Law No. 9880, dated 12.12.02, on some changes in Law No. 8560, dated 22.12.02 “On Tax ### References: Law No. 9880, dated 12.12.02, on some changes in Law No. 8560, dated 22.12.02 “On Tax ### Legal and procedural framework for taxation and civil service - Tax laws and related instruments cited: - Law No. 9880, dated 12.12.02 (changes in Law No. 8560, dated 22.12.02 “On Tax Procedures in the Republic of Albania”). - Instruction No. 2, dated 13.04.00 for Tax Procedures. - Customs Code of the Republic of Albania. - Law No. 8979 dated 12.12.02 (additions and changes in Law No. 8438 dated 28.12.98 “on Income Tax”) with relevant amendments, instruction for income tax. - Law No. 7928, dated 27.04.95 “Value Added Tax”, Instruction on Value Added Tax. - Law No. 8714, 15.12.00 (supplements and amendments to the VAT law). - Decision No. 49, dated 26.01.01 (deferral scheme of VAT payment; definition of exporters that benefit the reimbursement of VAT within 30 days). - Law No. 8845, dated 11.12.01 (additions and amendments to the VAT law). - Law No. 8978 dated 12.12.02 (local small business tax). - Law No. 8982 (system of local taxes). - Instruction No. 2 dated 05.02.01 for small business tax. - Tax administration weaknesses and transparency: - Inadequate compliance with procedures in the General Directorate of Customs (GDC) and General Taxation Department (GTD) is facilitated by a lack of internal controls. - GTD has recently established an office of tax information to improve public access to tax laws and instructions; pamphlet on the VAT is ready and one on excise taxes is under preparation. - Tax laws and instructions are generally published in the official gazette. - Following internal appeals, taxpayers may ultimately appeal tax decisions to the courts; judicial decisions on tax appeals are not published. - Civil service framework: - The November 1999 Law on the Status of Civil Servant provides comprehensive provisions (professionalism, independence, integrity, political neutrality, duties and rights; transparent rules on hiring, promoting, suspending, dismissing). - The law applies only to about 3,000 central government and 5,000 local government civil servants. - No formal mechanism exists to ensure full implementation of the law by local governments. - Many central government and public agency staff (e.g., teachers and health staff) are not covered by this law as they have their own codes of conduct. ### Public availability and coverage of fiscal information - Budget documents and coverage: - Budget documents cover all general government fiscal activities but with insufficient detail. - Budget approved on the basis of summary tables with spending agencies’ total recurrent and total investment expenditure. - Tables with functional, program, and broad object/economic classifications are provided to parliamentarians for information but are not approved by parliament and thus not legally binding. - Investment projects are not individually listed in the budget with detailed allocations for each spending agency. - Publication and accessibility: - The budget is published in the government gazette and on the MoF’s website (http://www.minfin.gov.al/). - During budget execution, detailed fiscal data (economic and program classifications) are not published but are available from the MoF’s Treasury and Debt Department. - Revenue data are generally presented only in aggregate form in budget documents. - Time coverage and forecasts: - Budget documents disclose the main fiscal aggregates for one year prior to the budget and forecasts of some variables for the two years following the budget year. - Draft budget generally finalized by the government in November; includes estimates for the previous fiscal year and main fiscal aggregates for the current year based on the nine-month outturn. - For some indicators, data expressed as a share of GDP are presented. - Final and audited outturn for earlier years is not provided. - Medium-Term Expenditure Framework (MTEF) forecasts for two years following the budget year are referenced but may not be relevant at time of annual budget finalization. - Contingent liabilities and tax expenditures: - Only limited information on contingent liabilities is included in the budget documents. - Annual budget documents include a maximum amount allowed for issuance of new guarantees for external borrowing by SOEs in the budget year. - MoF has not issued guarantees to SOEs on borrowing from domestic financial institutions in recent years; no formal procedures govern issuance of such guarantees. - Other contingent liabilities (future pension liabilities, privatizations) are not reflected in the budget documents. - None of the MTEF documents published in recent years has addressed contingent liabilities. - Information on future debt service obligations, including those related to guaranteed debt, is available from the MoF’s Treasury and Debt Department upon request. - Tax expenditures are generally not presented to parliament or published. - GDC has undertaken an analysis of revenue foregone from customs exemptions; full assessment of explicit and implicit tax exemptions/concessions is not available. - Quasi-fiscal activities and SOEs: - Quasi-fiscal activities in electricity and water sectors have declined in recent years but remain sizable. - SOEs continue to hold monopolies in electricity and water sectors and provide implicit and untargeted subsidies via tariffs below cost recovery and accumulation of payment arrears, which trigger tax arrears of energy companies. - Over the past 2–3 years these quasi-fiscal activities have been reduced primarily through increases in electricity and water tariffs. - For KESH, an action plan agreed with the World Bank aims at restructuring, privatization, and annual tariff increases to further reduce quasi-fiscal activities over the next few years. - Efforts underway to clear substantial government-enterprise and inter-enterprise payment arrears; a large share is associated with KESH and the water companies. - The government has undertaken an analysis of quasi-fiscal activities in the electricity sector, but this has not been documented in budget documents. ### Fiscal data publication, debt, and reporting frequency - Debt reporting and concerns: - Aggregate data on gross government debt is published; information on financial assets is not publicly available. - MoF’s Department of Treasury and Debt uses the UNCTAD debt management system and can provide detailed debt stock and financing flow data. - Only aggregate debt data are included in the government’s quarterly bulletin on fiscal statistics. - The debt stock was 64 percent of GDP at end-2002; more than half of this was domestic debt. - Debt service expenditure was 12 percent of total government spending in 2002. - A presentation of debt according to maturity is not available. - A draft law on the government’s strategy for resolving external debt arrears has been submitted to parliament but is not yet included in the parliament’s agenda. - Publication frequency and timeliness: - Quarterly fiscal data are published in a timely manner (5–8 weeks after the end of the quarter). - MoF publishes a quarterly bulletin on fiscal statistics with relatively detailed monthly data for the general government and an advance release calendar for the bulletin. - MoF intended to begin publishing the bulletin on its website by September 2003 and start reporting fiscal data to the public on a monthly basis. ### Budget process, transparency, and analytical shortcomings - Budget preparation and classification: - The budget process follows a regular timetable but starts late: the budget circular is generally issued only in July. - The budget calendar leaves parliament and the public one month to analyze and debate the draft budget. - The executive may transfer up to 10 percent of the approved budget of any spending agency to another with Council of Ministers’ approval, without consulting parliament. - Appropriation structure is unduly limited; GFS86-based functional classification at main category levels, broad object/economic classification, and program classification are presented but have no appropriation significance. - A more detailed object/economic classification is used for monitoring budget execution and accounting; final accounts follow the same aggregated pattern. - Following parliamentary approval, budget summary tables are gazetted but supporting documents and tables presented to parliament are not subsequently published. - Fiscal indicators and monitoring: - The overall balance of general government is the main fiscal indicator and is monitored monthly. - Other key indicators tracked monthly: primary balance, domestic balance, and public debt stock. - Subnational government activity was 6 percent of total spending in 2002 due to decentralization. - Detailed revenue and expenditure data for local governments are available to the MoF on a monthly basis and published in summary form in the MoF’s quarterly bulletin. - Forecasting and analysis weaknesses: - Progress in revenue forecasts noted in the 2003 budget, but disclosure of projections of macroeconomic indicators and revenue is limited. - Forecasts of selected macroeconomic indicators (rates of growth of GDP and inflation) are presented but not in sufficient detail and without adequate explanations. - Macroeconomic forecasts for budgetary purposes are mainly prepared by the Macroeconomic Department of the MoF and discussed by an ad-hoc committee involving MoF, Ministry of Economy, Institute of Statistics, and the central bank. - Prior to the 2003 budget, revenue projections were influenced by normative considerations (deficit and revenue targets), undermining credibility. - Revenue forecasts prepared by an ad-hoc committee comprising the Secretary General, Deputy Ministers, Directors, and Cabinet Advisers of the MoF. - MoF is in the process of establishing a tax revenue forecasting unit. - Revenue forecasts in the 2003 budget improved in quality and realism but require further strengthening and better explanation in budget documents. - A general statement on medium-term fiscal policy objectives is included in budget documents but not accompanied by indicative quantitative medium-term fiscal targets. - MTEF is discussed but not formally approved by parliament. - Budget documents contain neither a discussion nor estimates of fiscal sustainability. - Estimates of new policy initiatives and ongoing operations are not well distinguished in budget documents; costs of new recurrent activities are not well separated from ongoing operations. - Investment projects are not individually presented in the budget documents; investment details are presented to parliament but not provided in budget documents. - No formal guidelines explain how projects are prioritized in the investment budget or include assessment of recurrent cost implications of new investment projects. - Sensitivity analysis of budget estimates to changes in economic variables is limited and not published. - Main fiscal risks, including contingent liabilities, are not thoroughly discussed in budget documents. - Objectives of major policies are announced in budget explanatory sections, but actual progress is not reported against these objectives in final accounts. - Program classifications introduced for information lack statements on program objectives; therefore, no performance reports can be prepared. ### Internal controls, treasury, and audit - Internal audit and controls: - Internal controls function is very weak across central government agencies. - February 2003 law on The Internal Audit of the Public Sector provides improved regulations governing internal audit units in all Ministries, seeking to strengthen internal audit (which currently focuses mainly on compliance). - New law specifies the Internal Audit Directorate in the MoF will undertake ex-post audits of agencies associated with the ministry and provide technical assistance and guidelines to internal audit units in other ministries. - Treasury and accounting systems: - Treasury accounting system (cash-based) produces complete and detailed monthly reports on general government activities via 36 district offices and central treasury office. - Reports are based on budget classifications and form the basis for the government final accounts submitted to parliament and the State Supreme Audit Institution (SSAI). - Transactions of extrabudgetary funds are reported to the MoF separately; they are not part of the treasury. - A substantially modified accrual accounting and reporting system exists in spending agencies aiming to prepare annual balance sheets of each spending agency; individual balance sheets are compiled by MoF to prepare the total government balance sheet. - Annual reports from spending agencies are not submitted to the MoF in a timely manner, preventing timely compilation of the government balance sheet. - The government intends to integrate the two parallel accounting and reporting systems but recognizes this could be a costly process. - Protection from political interference in tax and customs administrations: - Laws state tax and customs administrations shall exercise duties independently from other central and local government bodies and prohibit other government bodies from interfering. - The General Director of Taxation is appointed and discharged by the Prime Minister upon proposal from the Minister of Finance. - The Minister of Finance appoints four of the seven members of the Tax Appeals Commission, including one from the MoF. - The Tax Appeals Commission can review cases of improper conduct by tax officials and decide outcomes by open vote. - Despite formal protections, improperly defined tax provisions allow political interference into tax and customs operations. ### Key statistics and factual points (preserved verbatim) - Law and instruction dates and numbers as listed above. - Civil service coverage: about 3,000 central government and 5,000 local government civil servants. - Quasi-fiscal activity reduction period: over the past 2–3 years. - Preparation timing: draft budget generally finalized in November; budget circular generally issued in July. - Executive reallocation authority: up to 10 percent of the approved budget of any spending agency. - Subnational government spending share: 6 percent of total spending in 2002. - Debt stock: 64 percent of GDP at end-2002; more than half was domestic debt. - Debt service expenditure: 12 percent of total government spending in 2002. - Treasury reporting: quarterly bulletins published 5–8 weeks after the end of the quarter; MoF intended website publication by September 2003. *Source: References and excerpts from the IMF content unit titled "References: Law No. 9880, dated 12.12.02, on some changes in Law No. 8560, dated 22.12.02 “On Tax".* ### 33. The legislature generally reviews budget execution around mid-year as part of ### The legislature generally reviews budget execution around mid-year as part of the revised budget presentation ### Mid-year review and legislative access to budget execution - The government is not legally required to present a formal mid-year review to parliament; under the Organic Budget Law, the government is only required to present a formal mid-year review of budget execution to the Council of Ministers, but not to parliament. - Each year since 1999, the government has presented a revised budget to parliament in the middle of the year and provided the legislature in this context with a review of budget execution through mid-year. - The quarterly statistical bulletin provides detailed data on a regular basis to the public, allowing parliamentarians and others to monitor budget execution. ### Timeliness and dissemination of audited final accounts - The MoF prepares final accounts relatively soon after the end of the fiscal year and the SSAI starts analyzing these accounts early. - Audited final accounts become available timely, i.e., nine or ten months after the end of the fiscal year. - Example: the preparation of the 2001 final audited accounts was completed in September and published in October 2002. - The audited final accounts are disseminated widely through hard copy publication and the SSAI’s website. ### Assurances of integrity: data reliability, accounting, reconciliation, and audit - Budget data are mostly reliable, but: - The variance between budget and actual outturn of main fiscal aggregates is not well analyzed. - There is no distinction between foreign grants and loans in reporting; all foreign grants are included in foreign financing. - The overall balance target, although approved by parliament as an upper limit, is not a meaningful and reliable variable because: - Due to the lack of distinction between foreign grants and loans, the overall balance as measured from below the line can deteriorate due to higher-than-expected foreign grants. - Since the target is defined on a cash basis, it can be achieved by accumulating payment arrears (although this does not appear to have been the case in recent years). - Monitoring of budget execution during the fiscal year appears adequate, but analysis of the variance between annual budget projections and actual outturns for several years back is not undertaken systematically and regularly. - Prior to the 2003 budget, revenue projections have tended to be too optimistic and the estimation of the revenue impact of new tax measures has been inadequate; significant progress in these areas has been achieved in the preparation of the 2003 budget. - Accounting policy statements: - Included in the final accounts, but not in the budget documents. - It is generally known that the final accounts are cash-based; no statement of accounting policy is included in the budget documents. - A parallel modified accruals accounting system is well documented and reflected in the balance sheet reports of individual spending agencies and the government’s annual balance sheet report. - Accounts reconciliation and fiscal reporting: - Mostly effective; Treasury reconciliation and reporting is well established, but not always timely. - Monthly reconciled reports are available within 20 days after the end of each month. - Final annual accounts are compiled four months after the end of the fiscal year. - Debt stock and financing flow data are available on a monthly basis, but they are not easily reconcilable. - External audit: - Independent from the executive under the 1997 Law on the State Supreme Audit Institution. - The chairman reports directly to parliament, appointed upon proposal from the President of the Republic for a term of seven years, with the possibility of reappointment; the chairman enjoys the same immunity as a high court member and has full access to information. - The external audit institution audits government final accounts and has a detailed annual audit program of central government agencies, extrabudgetary funds, and SOEs. - The external audit institution is well equipped and staffed; quarterly reports are published in hard copy and on the institution’s website. - There is no independent external audit of local governments reporting to their legislature. - Legislative follow-up: - Audit reports are submitted to the Economy, Finance, and Privatization Committee and the Legal Committee of parliament. - These committees debate the reports and call the chairman of the SSAI and relevant government officials to testify; further legal actions are referred to the judiciary if necessary. - Audit reports are also discussed in parliament. - External scrutiny of macroeconomic and fiscal projections: - Permitted but limited due to the absence of published assumptions and methodology and institutional capacity constraints outside the government. - Little independent review of forecasts exists, not even at the parliamentary level. - Recently both parliament and local NGOs have intensified their monitoring and scrutiny of the government’s economic and fiscal policies. - National statistics office: - The Institute of Statistics operates on the basis of a 1993 law; a new draft law has been approved by the Council of Ministers and is being submitted to parliament. - No political pressures or influence in the Institute’s operations; the draft law reconfirms independence in accordance with EU standards. - Fiscal data is provided to the Institute by the MoF; major statistics are accessible through its website. - Albania is a participant in the IMF’s General Data Dissemination System (GDDS) and the government continues to improve its national statistical systems using the GDDS as guidance. ### IMF staff commentary: overall assessment and key shortcomings - Progress and strengths: - Albania has made much progress in improving fiscal transparency and meets the standards of the fiscal transparency code in several areas. - Responsibilities among branches of government are clearly defined. - Government operations are generally well distinguished from central bank activities and, in most cases, public financial institutions and SOEs. - Mechanisms for coordination of budget and extrabudgetary activities are well defined. - Budget accounting is relatively strong. - Final accounts are disclosed in a timely way; external auditing of government activities is well-established. - The Organic Budget Law is commendable in many aspects. - The government publishes timely fiscal data on the general government in commendable detail in a quarterly statistical bulletin and intends to improve reporting through website disclosure and monthly statistical bulletins. - Shortcomings: - Transparency of tax laws and instructions is weak in places; some provisions are ambiguous and inconsistent with other laws, allowing discretion and fostering corruption. - Taxpayers are not sufficiently informed about frequently changing tax laws and instructions (e.g., import regulations). - Budget preparation problems: - Inadequate level of detail in the budget appropriation structure, giving the executive too much discretionary power. - The budget preparation process is relatively short, leaving insufficient time for parliament and the public to analyze the draft budget. - Coverage and depth of budget documents limited in macroeconomic context, fiscal policy objectives, fiscal sustainability analysis, and coverage of quasi-fiscal activities. - Preparation of the MTEF is not well integrated with the annual budget. ### High-priority recommendations on tax transparency and procedures (as listed) - The government should review tax laws and supporting instructions to ensure consistency between them and eliminate improperly defined provisions that are subject to interpretation and discretion. - Audit and control procedures in the General Taxation Department and the General Directory of Customs should be strengthened. - Tax revenue forecasts should be prepared on a tax-by-tax basis and by using statutory tax rates and realistic estimates of tax bases. - The government should include instructions on tax procedures in pamphlets distributed to taxpayers, and ensure their wide dissemination. - All tax laws and instructions should be published timely and widely, including on websites. - Tax appeals procedures should be strengthened and barriers of entry for appellants should be lowered. - Taxpayers’ access to information should be improved by publishing, while preserving taxpayer anonymity, the decisions of the tax appeals commission and judicial rulings on tax matters. - The authorities should prepare and publish a tax expenditure analysis, demonstrating to parliament and the general public the costs of providing tax concessions. ### High-priority recommendations on budget preparation and quality (as listed) - The appropriation structure in the budget document should be expanded as soon as possible to cover object/economic classifications of recurrent expenditure programs and investment projects. - Following the introduction of the expanded budget appropriation structure, any transfer exceeding 10 percent from one expenditure item within a recurrent program or investment project and from one program to another, as well as from one investment project to another, should be submitted for approval to parliament. - The current practice of allowing transfers in the appropriation of one spending agency to another by up to 10 percent of the total with consent of the Council of Ministers but without approval of parliament should be reformed. No such transfers should be allowed without parliamentary approval. - Foreign grants should be separated from foreign loans in the presentation of the budget and in fiscal reports, with foreign grants being shown together with revenue above the line and foreign loans, as is the case now, below the line. Progress on separating foreign grants and loans will require intensive follow-up by the authorities on the implementation of the recently issued instruction on the reporting of foreign grant and loan financed projects (paragraph 11). - To allow more time for budget preparation at the administrative stage, the budget process should start significantly earlier in the year (e.g., April) than is now the case. - To provide more opportunity for public scrutiny and parliamentary debate, the draft budget should be submitted to parliament earlier than mid-November as is currently the case. The government could also consider discussing key budget parameters at an early stage with the parliamentary Economy, Finance, and Privatization Committee. - The preparation of the MTEF should be better integrated into the annual budget cycle, and the discussion of medium-term perspectives and projections should be incorporated into the annual budget. This would give parliament the opportunity to discuss the MTEF, while ensuring consistency between medium-term and annual projections. - The budget documents should provide more macroeconomic context, a fuller analysis of fiscal objectives and policies, a fiscal sustainability analysis, and more detailed estimates of contingent liabilities and quasi-fiscal activities in the electricity and water sectors. - The government should present to parliament a mid-year budget review, which should also be published, including on the MoF’s website. ### Other recommendations (as listed) - The government should publish a summary report on its equity holdings and the financial operations of SOEs at least once per year. - The authorities should develop formal guidelines and procedures for evaluating and prioritizing projects included in the investment budget. - As local government activities are set to expand further, it would be useful to consider a more detailed reporting on these activities in the government’s statistical bulletin on fiscal data. - External audit of local government operations should be undertaken by the Supreme Audit Institution and results should be reported to local government councils. *Source: IMF staff report excerpt.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03202.pdf_