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Albania Public Expenditure and Institutional Review: Restructuring Public Expenditure to Sustain Growth

Available in: Albanian

Albania Public Expenditure and Institutional Review: Restructuring Public Expenditure to Sustain Growth

Lead Authors: Alia Moubayed
December 2006
Albania has seen average annual growth rates of seven percent since 1997, and successful macroeconomic management has contributed to growth and poverty reduction. Over the last three years, the poverty ratio has fallen by seven percentage points. However, productivity gains are slowing, and to sustain growth and poverty reduction, Albania will need to increase private investment. Albania also has a substantial opportunity to improve the productivity of public spending, both as an independent source of growth and as a complement to increasing the productivity of capital. Given ever-present resource constraints and trade-offs, the government needs to adopt a new public finance strategy that restructures public expenditures while accelerating institutional reforms aimed at restoring discipline and credibility in expenditure management.

Presentation [pdf: 409kB]

Chapter 1: The Strategic Setting

While the size of Albania’s government at 29 percent of GDP is reasonable, resource mobilization is distortionary, and government spending is inefficient. Weak institutions and fiduciary practices in the public sector jeopardize the overall governance environment and undermine the efficiency and productivity of capital spending.

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Chapter 2: Fiscal Trends

Although fiscal consolidation has underpinned macroeconomic stability and high growth, the quality of fiscal adjustment hampers long-term growth prospects. This chapter outlines the elements of a public finance strategy built around expenditure restructuring and alleviating the burden of labor taxation.

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Chapter 3: Public Financial Management

Despite progress towards reforming public financial management systems, Albania must still achieve greater efficiency in the use of public resources. It lacks a predictable and policy–led budget process, and weaknesses in budget execution persist. This chapter evaluates the performance of public financial management systems and processes and provides recommendations for improving resource allocation and use.

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Chapter 4: Public Investment Management

Albania needs to use its public investment resources more effectively to sustain infrastructure improvements in the face of declining international assistance. Resource fragmentation with little strategic focus undermines the efficiency of spending. This chapter recommends a unified approach for strengthening public investment planning and management.

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Chapter 5: Government Employment: Providing Incentives for Performance and Integrity

To carry out the agenda outlined in this report, the Government will need an effective civil service and public sector. This chapter looks at the size, structure, and costs of public employment and identifies priority areas for improving performance through pay system reforms and better payroll management.

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Chapter 6: Education

Despite improvements in education, attainment levels remain low, inequalities are high and increasing, and education does not equip students with the skills to succeed. Education spending is a low 3 percent of GDP. This chapter suggests how funding can be increased and reallocated to support improvements in secondary enrollment and address regional disparities.

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Chapter 7: Health

Health financing and spending are not utilized to protect the poor or to improve the performance of health providers. This chapter recommends that Albania gradually shift to a single payer system, as well as improve the balance of private and public spending for more efficient use of resources.

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Chapter 8: Social Protection

An increasing share of public funding is going toward the social insurance system, rather than social assistance, and the share of non-poor who are benefiting from these programs is growing. The current pension system is unsustainable and will need to be fundamentally reformed. This chapter recommends improving targeting for social assistance programs and consolidating programs to increase effectiveness.

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Chapter 9: Water

The efficiency and financial performance of the water sector is weak and dependent on budgetary transfers. This chapter argues that improving utilities collection and cost recovery and reducing losses could save up to 0.8 percent of GDP per year in public subsidies, and free up money for expanding access to poor households and improving water quality.

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Chapter 10: Transport

Albania spends considerable public resources on the transport sector, but the road network is in poor condition. The chapter recommends better balancing between development and maintenance expenditures, improved assets management, and a new framework for private sector participation as a source of financing to improve spending efficiency.

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Chapter 11: Power

Albania relies on domestic hydropower production and imports to cater to rapidly growing demand, leaving the sector and economy vulnerable to hydrological conditions, import availability, and price fluctuations. The chapter recommends expanding generation, transmission, and distribution capacity, reducing losses and implicit subsidies, and improving collections while strengthening the safety net for vulnerable consumers.

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