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PUBLIC EXPENDITURE ANALYSIS OVER THE YEARS IN ALBANIA 1

PUBLIC EXPENDITURE ANALYSISOVER THE YEARS IN ALBANIA

March 2005

PUBLIC EXPENDITURE ANALYSIS OVER THE YEARS IN ALBANIA2

About the author

Working team:Albert Gajo (team leader) CRD Executive director, Mirlinda Rusi (macroeconomics analysis) CRDTirana, Rozi Beqiri (data processing and analysis) CRD Tirana, Jonida Naska (graphical design)CRD Tirana.

Centre for Research and DevelopmentCRD Tirana is a non-profit organization duly registered in Tirana Court in March 2001. The aimof CRD is to collect, process and analyze data regarding development in both private and publicsector. The goal of such work is to help public institutions and business community to draft goodpolicies for the improvement of performance of both public and private sectors.

Visiting address:Centre for Research and DevelopmentRr. Luigj Gurakuqi P.15/1, Sh.1, Ap.1Tirana, Albania

Postal address:QKZHP.O.Box: 218/1Tirana

Tel&Fax: +355 4 230445

Web address:www.qkzh.orgE-mail: [email protected]

English translation:Suzana Shehu

Layout: Elvira Çiraku

Printed: albPAPER

http://www.qkzh.org

mailto:[email protected]


About the author ....................................................................................................................... 2Table of contents......................................................................................................................... 3Abbreviations .............................................................................................................................. 5Executive Summery ................................................................................................................... 7

Chapter I: Objectives and methodology1.1 Introduction.............................................................................................................. 91.2 Methodology.......................................................................................................... 101.2.1 Classification of public expenditures ..................................................................... 101.2.2 Public expenditure indicators ................................................................................ 11

Chapter II: An Overall Evaluation of the Budget

2.1 Introduction ............................................................................................................... 132.2 Factors that determine the size of public sector in Albania ...................................... 142.3 Comparison of public sector size .............................................................................. 142.4 Conclusions ............................................................................................................... 15

Chapter III: Public Expenditures According to Economic Classification

3.1 Introduction ............................................................................................................. 173.2 Personnel expenditures ............................................................................................ 173.3 Capital expenditures ................................................................................................ 183.4 Operational and maintenance ................................................................................... 183.5 Subsidies ................................................................................................................... 183.6 Expenditures on interest payment ............................................................................ 183.7 Expenditures on unemployment benefits and social assistance ................................ 183.8 Conclusions ............................................................................................................... 19

Chapter IV: Public Expenditures According to Functional Classification

4.1 Introduction ................................................................................................................... 214.2 Expenditures on education ............................................................................................ 214.3 Expenditures on public health...................................................................................... 23

Table of contents


4.4 Expenditures on general public service .................................................................... 254.5 Expenditures on defense ......................................................................................... 274.6 Expenditures on public order and security ............................................................... 284.7 Expenditures on social security and welfare ............................................................. 294.8 Expenditures on housing community and amenities ................................................. 304.9 Expenditures on art & culture ................................................................................... 314.10 Expenditure on fuel and energy ............................................................................... 334.11 Expenditures on agriculture, forestry, fisheries and hunting ................................... 344.12 Expenditures on mineral resources ........................................................................ 354.13 Expenditures on transport and communication ..................................................... 36

Chapter V: Conclusions, recommendations and future actions .................................... 38


IMF International Monetary FondKESH Albania Electric CorporationN G O Non Government OrganizationOECD Organization for Economic Co-operation and Development, ParisOSCE Organization for Security and Co-operation in Europe, ViennaCRD Centre for Research and Development, TiranaMoF Ministry of FinanceMSI Management Systems InternationalGDP Gross Domestic ProductionPDR New Democratic PartyNSSED National Strategy for Socio-Economic DevelopmentUSAID United States Agency for International Development

List of tables

Table 1: Expenditures on public health as percentage of GDP compared to international levels.Table 2: Trend of expenditures on central administration

List of Figures

Figure 1: Trends in Public Expenditure, Revenues and Budget Deficit as a percentage of GDP in1993-2003 and the plan for the years 2004 and 2005

Figure 2: Public Expenditure as percent of GDP by European Comparison, 2000Figure 3: Income per capita and budget expenditures as percentage of GDP, compared to some

European countries, 2000Figure 4: General Government Outlays by Economic Category as percentage of GDP, 1993-

2003 and the plan for the years 2004 and 2005Figure 5: Total Public Expenditure on Education as percentage of GDP, by European Comparison,

2000Figure 6: Breakdown of Public Expenditure on Education as percentage of GDP, 1994-2003

and the plan for years 2004 and 2005

Abbreviations


Figure 7: Changes Fact as percent of Plan on Education: 1999-2003Figure 8: Breakdown of Public Expenditure on health as percentage of GDP, 1994-2003 and the

plan for years 2004 and 2005Figure 9: Changes Fact as percent of Plan on Health: 1999-2003Figure 10: Breakdown of Public Expenditure on General Public Services as percentage of

GDP, 1994-2003 and the plan for years 2004 and 2005Figure 11: Changes Fact as percent of Plan on expenditure on General Public Services,

1999-2003Figure 12: Breakdown of Public Expenditure on Defense as percentage of GDP, 1994-2003 and

the plan for years 2004 and 2005Figure 13: Changes Fact as percent of Plan on Defense expenditures, 1999-2003Figure 14: Breakdown of Public Expenditure on Public Order and Security as percentage of

GDP, 1994-2003 and the plan for years 2004 and 2005Figure 15: Changes Fact as percent of Plan on Public Order and Security expenditures,

1999- 2003Figure 16 Breakdown of Public Expenditure on Social Security and Welfare as percentage of

GDP, 1994-2003 and the plan for years 2004 and 2005Figure 17: Changes Fact as percentage of Plan on Social Security and Welfare Expenditures,

1999-2003Figure 18: Breakdown of Public Expenditure on Housing Community and Amenities, 1994-

2003 and the plan for years 2004 and 2005Figure 19: Changes Fact as percent of Plan on Housing Community and Amenities Expenditures,

1999-2003Figure 20: Breakdown of Public Expenditure on Recreations, Cultures and Religion Affairs as

percent of GDP, 1994-2003 and the plan for years 2004 and 2005Figure 21: Changes Fact as percent of Plan on Recreations, Cultures and Religion Affairs

Expenditures, 1999-2003Figure 22: Breakdown of Public Expenditure on Fuel and Energy as percent of GDP, 1994-

2003 and the plan for years 2004 and 2005Figure 23: Breakdown of Public Expenditure on Agriculture, Forestry, Fishing and Hunting as

percent of GDP, 1994-2003 and the plan for years 2004 and 2005Figure 24: Changes Fact as percent of Plan on Agriculture, Forestry, Fishing and Hunting

Expenditures, 1999-2003Figure 25: Breakdown of Public Expenditure on Mineral Resources as percent of GDP,

1994-2003 and the plan for years 2004 and 2005Figure 26: Changes Fact as percent of Plan on Mineral Resources Expenditures, 1999-2003Figure 27: Breakdown of Public Expenditure on Transport and Communication as percent of

GDP, 1994-2003 and the plan for years 2004 and 2005Figure 28: Changes Fact as percent of Plan on Transport and Communication Expenditures,

1999-2003


This Report provides a comprehensiveanalysis of implementation of the budget inAlbania, and in particular of the developmentof public expenditure over the last 10 years,as well as the main characteristics of the 2004and 2005 budget plan . Such analysis is basedon information provided directly by theMinistry of Finance, mainly taking intoconsideration the economic and functionalclassification of public expenditures.

A special attention was paid also to theoverall analysis of public expenditures inAlbania by analyzing in particular the factorsthat have prevented Albanian Governmentto further increase public services. Suchanalysis showed that after 1994, the publicsector in Albania has gradually decreased insize, which is reflected by a reduction of totalpublic expenditures after 1995. By the end of2003, the total public expenditures as apercentage of GDP were estimated about29 percent. This level is 10-15 percent belowthe average of other countries in transitionand about 20 percent below that of EUMember Countries. The low level of publicexpenditures is a reflection of a relatively loweconomic level and institutional weaknesses.Weaknesses in tax collection are reflected bylow levels of budget revenues, which dontrespond to GDP growth. Decreasing of publicexpenditure in Albania has been also affectedby the need to reduce the budget deficit.

The economic classification of publicexpenditures helps to understand the purpose

Executive summaryof the use of public expenditures. Theexpenditure analysis according to economicclassification proved that, in general, allexpenditure categories funded by the statebudget have undergone a decrease aspercentage of GDP, which reflects the overalldecreasing tendency of budget expendituresin Albania. Thus, as percentage of GDP, it isnoticed a decrease in expenditures on thepersonnel wages and social insurance,investments and, especially, those on themaintenance and unemployment benefits. Inthe last two years, it has been observed adecrease of expenditures used for interestspayment of the public debt, which hasgenerated a coercive effect on the statebudget, especially, in the mid transition period.Subsidies, in general, have had not a significantweight in the Albanian budget, whereasexpenditures of social nature haveexperienced no changes at all in the 10-yeartransition period . The budget plan for 2004and 2005 reflect the same tendency of publicexpenditures according to the economicclassification.

Functional classification of publicexpenditures aims to show the direction inwhich public funds were spent. The analysisof this type of public expenditures identifiesdiscrepancies between mid-term priorities ofthe economic development and expendituresplaned for priority sectors such as educationand public health. The health sector inparticular was the most underfunded sector


as compared to the financial support receivedby the sector from other developed nations.

A series of deficiencies have beennoticed in the budget plan of 2005, withregards to the planning of public expenditures,especially on the general administration. In2005, the expenditures planed for the generaladministration are about 30 percent lowerthan the expenditures in 2003. Thisincongruity can generate problems in theoperation of central institutions during theimplementation of the 2005 budget.

The comparison of public expendituresspent each year with those initially foreseenin the plan approved by Parliament is anothertask of the working group. Such analysisrevealed big deviations, especially regardingexpenditures on social insurance andunemployment benefits during the 1999-2002 period (up to 101 percent), housing inyear 2000 (up to 642 percent), public orderand security in 1999 and 2000 (up to 113percent), etc. Such deviations prove the lackof periodic control by the Parliament overbudget expenditures and low managementcapacities of state budget by line ministries.The comparison with 1999-2001 results inan improvement of planning and control ofstate budget plans in 2002 and 2003,indicating a better performance of the Ministry

of Finance as regards the enhancement of thediscipline and efficiency in the use of budgetfunds.

The Ministry of Agriculture and Food,the Ministry of Public Health and partly thatof Education (in the last two years) are theministries that have continuously showninability to use all the funds allocated in thestate budget. Such non-accomplishments ofthe budget vary from 7 percent for education,13-14 percent for public health and 48 percentfor agriculture. This is a clear expression ofthe weak performance by the respectiveministries regarding the harmonization of theprograms funded by the state budget, as wellas those funded by foreign donors resultingin the non-accomplishment of the domesticfunding .

Finally, the implementation of theproject “Analysis of public expenditure inAlbania years” and the preparation of thisReport showed the importance of theinvolvement of independent institutions inanalyzing and monitoring public expenditures.Moreover, this report will further encouragethe other research institutions to be involvedin the process of the preparation andimplementation of the budget at bothgovernment levels, national and local.


1.1 IntroductionFor more than 10 years, Albania is undergoinga stage of transformation, with the public sectorincreasingly becoming determinant in theallocation of the resources, providing at thesame time a significant help to the GDPformation. The public sector in Albania has beengoing through a process of transformation byshifting most of the economic activities managedby public entities to private sector. Actually, theprivate sector is the most dynamic in Albaniaproviding in 2002 about 75 percent of the valueadded tax, 62 percent of employment in non-agricultural sectors and contributing to about2/3 in the GDP formation1. However, like othercountries with developed market economies,a significant part of the national wealth (ranglingfrom 25-50 percent of GDP), is distributed andre-distributed by government. In order toaccomplishing its function the governmentshould first find out sources of financing publicexpenditures, which could be either throughtaxation, issuing treasury bills, or emittingmoney (inflationary method). Having availablea significant amount of financial resources, aswell as being entitled to the right to tax, issuetreasury bonds or emitting money, thegovernment could play a key role in promotinggrowth and stability.

Likewise, the analysis on the governmentperformance could be twofolded . First, theobjective of the analysis could focus on theaspect of the budget revenue and secondly, onthe expenditures or outlays. The total budget

Chapter IObjectives and Methodology

revenues and expenditures planned to becollected and spent during a period of 12-months of activity is known as the budget planof a fiscal year. In Albania, the fiscal yearcorresponds to the calendar year. By the endof each year, the Parliament should, as a rule,approve both revenues and expendituresplaned for the coming year. Consequently, theBudget Law is one of the most importantlegislative activities of the government.

This Report provides a comprehensiveanalysis of implementation of the budget planin Albania, and in particular, on publicexpenditure. This Chapter provides somedefinitions and methodological aspects of theanalysis of public expenditures, which will helpspecialized users of this report to undertakesimilar analysis of public expenditures at centraland local levels.

The analysis of public expenditures is veryimportant for the following reasons:

1. The economic activity carried out by thegovernment is of specific nature and it doesnot follow the same rules that regulate theeconomic activity of private agents in theprivate sector. The main principle thatregulates the economic activity in theprivate sector is the voluntary exchange,which Adam Smith presents as the“invisible hand”. The government activityis not based on a voluntary exchange ofprovided services Consequently, theanalysis and transparency of expendituresincurred by the government is not only a

PUBLIC EXPENDITURE ANALYSIS OVER THE YEARS IN ALBANIA1 0

necessity, but also the only way that helpsthe public assess whether the activities andservices offered by government fulfill publicneeds and are provided ata low cost.

2. The analysis of governmental expendituresneeds to be carried out in order tounderstand the sources of financing thebudget deficit when the expendituresexceed the revenues. Theoretically, thereare three ways to finance budget deficit: (1)using monetary reserves or selling publicassets; (2) issuing treasury bonds in local orinternational financial markets; and (3)money emission. Each of these three waysproduces different impacts on the economy,consequently making such an analysis veryimportant.

3. The analysis of public expenditures is alsorequired to determine the cost of the publicservices provided by the government. Thecost analysis, i.e. the analysis of governmentefficiency, is particularly essential in thedecentralization process during which,considering the subsidiary principle, theefficiency of the two governmental levelsconsists of a basic criteria for the divisionof functions between local and centralgovernment.

4. The control of budget expenditures is animportant process to keep control on thebureaucracy. The analysis of the publicsector in various countries has proved thatthe lack of public control on publicexpenditures has increased budgetexpenditures for the maintenance of thegeneral administration, by reducing at thesame time both quantity and quality ofpublic services with a direct impact on thepublic.

This Report consists of five Chapters. In thefollowing sections of this Chapter, areintroduced some methodological elements forthe analysis of public expenditures. Chapter twocontains an overall analysis of the size of theAlbanian public sector and the factors that haveaffected its change. Chapter three provides ananalysis of the public expenditures, accordingto economic classifications. Chapter fouranalyzes public expenditures according tofunctional classification, i.e. the areas in whichpublic expenditures are incurred, during the last10year period and the main characteristics of

the 2005 draft budget. The last Chapterpresents the conclusions, recommendationsand future steps of CRD regarding the analysisof the public sector.

1.2 Methodology1.2.1 Classification of public expenditures

In general, the methodological aspects regardingthe analysis of budget expenditures are relatedto budget expenditure classification and theperformance and tendency indicators of thepublic expenditures. Considering the type andscope of the analysis we want to accomplish,there are many ways of classification of publicexpenditures. Subsequently, the publicexpenditures could fall into two groups, (1)expenditures totally used by publicadministration; and (2) expenditures re-allocated by the state budget. In the first groupare identified expenditures related withpersonnel expenditures and capitalexpenditures. This type of expenditures aretotally used in the form of wages, personnelinsurances and investments. The second groupincludes expenditures for social assistance andvarious subsidies. Such expenditures are notused by the public administration, but by certaingroups of individuals in need, who benefit fromthe re-allocation of funds to their advantage .

The main classification of publicexpenditures and most commonly used for thepurpose of analysis are:

(i) Economic classification(ii) Functional classification(iii) Institutional classification

Economic classification of public expenditureshelps to understand the purpose of the use ofpublic expenditures. Considering their nature,they do not show the direction of the allocation,but the economic nature of public expenditures,such as:a. Public sector consumption (for salaries and

social security of the personnel staff)b. Maintenance expendituresc. Subsidiesd. Capital transferse. Payment for interests of treasury bonds

The analysis of public expenditure according to

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economic classification could provide an answerto questions such as: How has the nature ofpublic expenditures on public administrationchanged as compared to capital investment? Aremaintenance expenditures stable? What is theeffect of public debt? What is the interventionscale of the government through subsidies? InChapter three of this Report we try to providean answer to some of these questions.

Functional classification of publicexpenditures aims to show the direction inwhich public funds are spent. According to theinternational classification of publicexpenditures, the functional classification isrelated with:

a) maintenance of central administrationb) defensec) public order and securityd) educatione) public healthf) housing and territory adjustmentg) art and cultureh) energyi) agriculture and forestryj) mining industryk) transport and telecommunication

Chapter four of this report provides a detailedanalysis of the expenditures, according to theoperational classification, focussing specificallyon analyzing the tendency of such expendituresin the last decade, as well as on assessing theefficiency of the budget drafting throughidentifying the deviations between incurredoperational expenditures and those initiallyallocated in the state budget draft.

Institutional classification ofexpenditures sorts expenses according to theinstitutional destination. For each publicinstitution, the draft budget allocatesoperational expenditures and expenditures forinvestments to be used in the exertion of theactivities by the relevant institutions. Theanalysis of such expenditures has not beenincorporated in this Report, considering that itwas very difficult for the working group to collectdata about relatively longtime intervals of budgetexpenditures, according to institutionalclassification. Annex 1 provides generalinformation regarding the list of institutions andfunds they have spent during the 2003 fiscal yearand those planned for 2004 and 2005.

1.2.2 Public expenditure indicators

The public expenditures can be presented inseveral ways . Some of the most used are asfollows:1. In Absolute value. Public expenditures can

be determined as absolute value in thedrafting and implementation process ofstate budget, considering that theidentification of the expenditures in thetreasure is always made by absolute value.The indicator in percentage of the ratiobetween current versus \ planned budgetexpenditures derives from the and will bewidely used in this report to analyze theefficiency of budget drafting . The indicatorof budget expenditures expressed inabsolute value is used only in cases whenwe need to compare changes inexpenditures budget year to the other.

2. Percentage of increase compared to theprevious year. Such indicators show thedynamics of the increase (or decrease) inpublic expenditures. It is important tomention that in this form, these indicatorshave a limited use. This is due to the factthat these indicators are result of thecomparison of the indicators in absolutevalue. When there is a comparison of twoconsecutive years, other factors that mayhave led to deviations in budgetexpenditures are taken into consideration.Such factors may be, for instance: inflation,exchange rate, variations in the GDPformation, etc.

3. Percentage to total expenditures(structural indicator). Structuralindicators are frequently used in the analysisof public expenditures, according tofunctional classification. The variations in thestructure of expenditures, from one yearto the other show the variation of thespecific weight of a particular/determinedcategory of public expenditures to totalexpenditures. The use of this indicator isspecifically limited to comparative analysisof international level. This is due to the factthat, in many countries, the expendituresfor the payment of interests for public debtmay be of such specific weight that candeform the accurate presentation of thestructure of expenditures and complicatethe comparison of data to other countries.

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In this case, it is recommended that theweight of expenditures on debt interest beeliminated.

4. Percentage of GDP. The indicator ofpublic expenditure as percentage of GDPis one of the most frequently usedindicators. This is because it showstendencies of public expenditures at aspecific time. It could as well as be used asa comparative international indicator.Presentation of the public expenditures aspercentage of GDP reduce a number ofweaknesses that indicators in absolute valuecontain.

5. As a GDP ratio adjusted withpurchasing power parity indexPPP. This typeof indicator is used for international levelcomparisons of public services cost. In this way,we can accurately assess the expendituresincurred for education of one student or thoseincurred on public health for one hospitalizedindividual, etc.

(Footnotes)1 See: Ministry of Economy and SME AgencyReport “Small and Medium Enterprises inAlbania” Annual Report 2004, October 2004.

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2.1 IntroductionThe Economic developments in the last 100years have proved true one paradigm presentedby one of the representatives the GermanHistorical School, Adolph Wagner (1835-1917),who claimed that public expenditures wouldincrease over time as market economy grows.The Wagner has explained the increasingamount of the public expenditures by thegovernment with the increasing governmentrole in more developed market economy. Suchrole is related with market characteristics whichwould require the government to play a moreactive role for guaranteeing a normal operationof institutions, as well as the development ofan infrastructure needed to support balancedeconomic developments and, especially, theincreased public demand for an improved publichealth system, education system, public orderand security, urban development, etc.The economic literature tells us that an increaseof public expenditure is related to the fourfollowing factors:First, the urbanization growth and the internalmigration of large part of population from rural tourban zones led to an increase in needs of thepopulation for public services goods, such asinfrastructure, public schools, hospitals etc.Second, technological improvements conditionthe qualitative improvement of services in general,in particular, of those provided by public sector,which consequently lead to an increase of costper unit of service and the increase of publicexpenditures needed to purchase such services.

Chapter IIOverall Evaluation of the Budget

Third, the global development requires a largerinvolvement of governments in conflictresolution and intervention in various regionsin the World. Therefore, war expenditures orthose for peacekeeping or aid missions keepalso growing. Fourth, the increase of income and livingstandards of the population lead to a higherdemand for improved public services andconsequently to increased expenditure to affordthem.However, the overall increase of publicexpenditures and public sector is conditionedby these factors:First, by tax levels, as it is known, taxesrepresent in itself a subtraction from privateconsumption or a reduction of businessesprofit, which means that taxes cannot beincreased beyond a limit which is undesirablefor the businesses or public in general. Basedon this fact, it has been tested that the relationbetween the level of taxes, on one side, andrevenues on the other, is a “U” turn shapefunction, which means that an increase beyonda certain limit of the taxes would lead to thedecrease of budget revenues and not to theirincrease.Second, the size of budget expenditures is indisproportion with the size of public debt. Thelarger is the public debt accumulated from thebudget deficit, the larger is the part ofexpenditure that goes for the debts interestsand, consequently, the smaller is the part ofbudget expenditure that goes for publicservices.


Third, the size of the public sector depends evenon the confidence of the public towardsgovernment with respect to the fair and efficientadministration of the available budget revenues.When the business community and public ingeneral think that the government shows noefficiency in the allocation of resources, notransparency for incurred expenses and furthermore that there is corruption in the use ofpublic funds, they do not respond to fiscalliabilities and try to impede every effort madeby government to increase budgetexpenditures.

2.2 Factors that determine the size ofpublic sector in Albania

In 1993, the size of the public sector in Albaniacomprised approximately 40 percent of GDP (seeFigure1). In the following years, the public sectorhas gradually shrunk up, which is reflected bydecrease in the total of public expenditures. Figure1 shows that the total of budget expenditures in1994 went down to 33.1 percent of GDP, 31.2percent in 1996 and 29.5 percent in 1997, thelatter being the year with the biggest budget deficitby 12.9 percent of GDP and the lowest level ofbudget revenues - 16.6 percent.

After the crisis of 1997, the size of the publicexpenditures as a percentage of the GDP showsa slight increasing trend, with its highest levelof 32.7 of GDP in 1999 and the lowest level of28.8 percent of GDP in 2003, a result which,under the conditions of unvaried budgetrevenues (as a percentage of GDP), has led tothe decrease of the budget deficit with 5percent of GDP in 2003 (the lowest levelthroughout the transition period).

Figure 1 helps us also realize that thedecrease of budget expenditures in Albaniafrom 1994 and on is a consequence of theinability of the tax department at Ministry ofFinance to respond to the GDP growth and,consequently, the revenues do not correspondwith the GDP growth. Thus, the generatingrhythm of revenue from tariffs and taxes has

either decreased from year to year orremained unchanged. Another factor that hasconditioned the decrease of public expendituresin Albania, especially after 2000, was the needfor a decrease of the budget deficit, which, aswe already highlighted, went down from 9.3percent in 2000, to 5 percent of GDP in 2003.In the draft budget for 2004 and 2005, it hasbeen foreseen no increase of budgetexpenditures as percentage of GDP; on thecontrary, the level of public expenditures tendsto go down, whereas the budget deficit remainsthe same.

2.3 Comparison of public sector sizeAs we already highlighted in the first section ofthis Chapter, the size of public sector, i.e. the

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level of public expenditures is correlated withthe level of the economic development of acountry. This hypothesis is proved also by thedata in Figure 2, which shows the size of the

public sector as percentage of GDP for anumber of European Countries with variouscharacteristics, Members or Non-members ofEU and their prospect of joining the EU family.

Figure 2 shows that among countries selectedin 2000, Sweden has the largest public sectoras percentage of GDP; its expenditures go upto 59 percent. In the rest of the EU countries,public expenditures comprise 50 percent ofGDP; Spain and Italy ranking last, withrespectively 38 percent and 44 percent. Publicexpenditures in Poland are very close to theEuropean level (44 percent) followed by theCheck Republic with 37.4 percent, whereas inthe other group of remote-prospect countrieswe see Croatia with a public expenditure of46.5 percent and Bulgaria with 38.5 percent ofGDP. Among the European Countries, Albania

has the smallest public sector size with about29 percent of GDP in 2003.

The same results are noticed when wecompare the size of public sector with incomeper capita, given in Figure 3, where the GDPindexed by purchase power parity has been takenas an assessment basis. This indicator is calculatedand published by IMF. Albania, with a per-capita-income indicator of $ 4,000, has also the lowestlevel of public expenditure, followed by Bulgaria,etc. Certainly, this rule has got its own deviations,as the size of public sector is affected by otherfactors as well, such as social democratic traditions(Sweden, for example), etc.

The data presented in Figure 2 and especiallythose in Figure 3, clearly show the correlationbetween the economic development and thesize of public sector on one hand, and theinstitutional development, a pre-requisite thatguarantees economic development, as well asincreases the opportunity for generation ofhigher budget revenues (in proportion with

GDP) and consequently, a better satisfaction ofpublic needs through the program of publicexpenditures.

2.4 ConclusionsAfter 1994, public sector in Albania has graduallydecreased, which is reflected by a reduction of

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total public expenditures in the following years.By the end of 2003, total public expendituresgiven as a percentage of GDP were estimatedto be about 29 percent, which is 10-15 percentbelow the average of other countries intransition and about 20 percent below that ofthe EU member countries. The low level ofpublic expenditures responds to the low

economic level and institutional weaknesses.Weaknesses of taxation institutions have beenreflected by the low level of generatedrevenues, which do not respond to GDP growthrhythms. Decrease of budget expenditure inAlbania has been also affected by the need toreduce the budget deficit.

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3.1 IntroductionThe Chapter one highlights that the economicclassification of public expenditures enables usidentify which are the directions where budgetfunds are used, according to the nature of theseexpenditures: expenditure on wages and socialinsurance , subsidies, capital expenditure, etc.Such analysis is important as it provides an

Chapter IIIPublic Expenditures According to Economic Classification

answer to a series of questions, such as, what isthe trend of public expenditures over the yearsaccording to their nature, for example, thechange in expenditures on salaries, what is thechange of the level of capital expenditures orinvestments? Are subsidies significant in theAlbanian budget? How has the budget deficitaffected the size of expenditures on interests?To what extent is the state budget accomplishingthe function of re-allocation of funds, etc?

To answer the above questions, we havepresented Figure 4 showing all the publicexpenditures incurred according to economicclassification for the 1993-2003 period andthose planed for 2004 and 2005.

3.2 Personnel expendituresFigure 4 shows that in the first period oftransition, 1993-1996, expenditures onpersonnel wages and social insurance consistedof the largest part of the public expenditures,


being at an almost stable level of about 8 percentof GDP. Gradually, this share of expenditureshas decreased in contrast with GDP, reachingits lowest level of 6 percent in 2003.Expenditures planned on wages and socialinsurance in the projected state budget for the2004-2005 period are at the same level.

3.3 Capital expendituresCapital expenditures, which have been coveredby state budget funds, have had a relatively highfluctuation over all the transition years inAlbania. Thus, according to Figure 4, capitalexpenditures in 1993 consisted of 9 percent ofthe GDP, whereas a year after , they result witha fall to 3.4 percent; in 1995 they consist againof a sufficiently high level of 8.3 percent of GDP.After 1998, an increasing trend of capitalexpenditures was noticed, reaching its highestlevel in 2001 which was an electoral year ,with7.4 percent of GDP, to decrease again inthe last two years, with a relatively low level ofcapital expenditures in 2003 (4.2 percent ofGDP). In the draft for 2004 and 2005, capitalexpenditures consist of respectively 5.1 and5.4 percent of GDP.

3.4 Operational and maintenance expendituresFigure 4 shows that maintenance expenditures,that include all procurement expendituresincurred by the administration, other than thoseon wages and social insurances or capitalexpenditures, have shown a decreasing trendfrom year to year. Maintenance expendituresin 1993 and 1994 comprised respectively 7.7and 8.2 percent of the GDP, going down to 4percent in 1998 and further going down until2003, with the lowest level in their history 3percent of the GDP. According to theprojections for the draft of 2004 and 2005, themaintenance expenditures that are covered bythe state budget will be still decreasing to thelevel of 2.4 percent of GDP in 2005, which willcertainly be reflected in the quality and quantityof public services that will be offered by thestate budget in 2005.

3.5 Subsidies

Figure 4 shows that the share of subsidies inthe total budget expenditures of Albania isrelatively low throughout the transition period.However, the figure shows that subsidies in1993 consisted of 2 percent of GDP, due to thescheme of subsidies for certain sectors andproducts such as fuel or urban transportation,whereas in 1996, subsidies went down to 0.4percent of GDP. In 2000 and in 2001, subsidiesmarked a rise again to 1 and 1.3 percent of GDP,due to an increase in subsidies by governmentto KESH (Albanian Energetic Corporation) inthis period. In 2003, subsidies fell to 0.7 percentof GDP, with a further decrease foreseen in thedraft budget for 2004 and 2005.

3.6 Expenditures on interest paymentIn Figure 4, we see that following 1998, thepayment of interest for the internal debt hasexerted a considerable pressure on budgetexpenditures. Such expenditures in 1998comprise 7.8 percent of the GDP, from about 3percent they used to be 2-3 years ago. After1998, there is a gradual decrease of thepressure, with payments for interests in the lasttwo years consisting of approximately 4 percentof the GDP. The decrease in expenditures forinterests has mainly resulted from the gradualreduction of the budget deficit, especially after2001, as well as the decrease of interest ratesfor this debt, due to the control over theinflation in Albania, which was reflected by thecontinuous decrease of bank interests.Increased pressure of interest rate paymentsin the years 1997-2000 influenced the decreaseof the quota for other expenditure categoriescovered by the state budget, such as those forthe personnel and maintenance expenditures.

3.7 Expenditures on unemployment benefits and social assistanceExpenditures on payment of unemploymentbenefits and social assistance express the re-allocating dimension of the state budget, as theyare transferred to groups of population in need.In Figure 4, such expenses are presented asexpenditure on unemployment benefits andsocial assistance. Expenditures on the paymentof unemployment benefits as percentage ofGDP have decreased from 5.2 percent in 1993

Public

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to 1.2 percent of GDP in 2003, and are foreseento remain at the same levels in years 2004 and2005. In the meantime, other socialexpenditures have undergone afluctuationthatmarked the highest levels in2000, especially in 2001, when they reached7.4 percent of GDP and the lowest levels in1993 and 2003, respectively 5.8 and 5.9 percentof GDP, which shows that the re-allocatingfunction of the state budget has not experiencedsignificant fluctuations in the 10-year transitionperiod.

3.8 ConclusionsThe analysis of the expenditures according tothe economic classification proved that ingeneral all expenditure categories funded by the

state budget have had a decrease as percentageof GDP, which reflects the overall falling trendof budget expenditures in Albania. Therefore,as percentage of GDP, we observe a decreasein the expenditures on personnel wages andinsurance, on capital investments and, especially,those on maintenance and unemploymentbenefits. In the last two years, we see a decreaseof expenditures for the payment of the publicdebt interest rates, which has had a coerciveeffect on the state budget in the mid transitionperiod. Subsidies hold an insignificant weight inthe state budget, whereas expenditures of socialnature have experienced no changes in the 10-year transition period. The draft budget for2004 and 2005 does not affect the trend ofpublic expenditures according to economicclassification. Pub

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4.1 IntroductionThe analysis of expenditures according to theirfunction is very important, as in this way we canidentify the sectors in which public expenditureshave been used. This serves to the first and finalaim of the public, which is to know in whatsectors were invested the funds. In addition ,the analysis shows in fact how and to whatextent were accomplished the political prioritiesdetermined to support specific sectors. Theanalysis of expenditures according to theirfunction by means of the given indicator aspercentage of GDP can also help to betterdetermine future goals, considering that wecannot define accurate prognoses without firstknowing the history of public expenditures forthe past periods. Finally, the analysis ofexpenditures according to their function issignificant from the point of view of comparingthe level of expenditures incurred in Albaniawith those of other countries that have equalor higher economic level.

In this Chapter, the analysis ofexpenditures according to their function will becarried out by means of indicators whichexpress expenditures as percentage of GDP, aswell as in the absolute form. Based on the latter,we will be able to assess the efficiency of thedraft budget, by calculating the percentage ratioof differences between expenditures incurredand those projected in the budget.

Chapter IVPublic Expenditures According to Functional Classification

4.2 Expenditures on educationEducation consists of a priority sector in almostall the developed and developing countries. Themain goal of public expenditures on educationis to create an education system that can helpall children under 14 years to access basiceducation, as well as facilitate a qualitysecondary and university education to all thestudents who have got the capacities and desireto attend it. The development history of allWestern Countries has proved that theinvestment on education has been adeterminant factor in the domestic economicdevelopment through the increase of laborproductivity, incitement of technologyimprovement and utility of advantages createdby the increase of market space. This is the mainreason that western countries have relativelyhigh levels of public expenditures on education.Consequently, Figure 5 shows that countries likeSweden and Estonia invest 7.8 and 7.5 percentof the GDP out of public funds on education.The average of the EU member countries in1999 was 5 percent, whereas for CandidateCountries it was 4.9 percent of the GDP.However, countries like Bulgaria have lowerexpenditures on education as compared to theaverage of other European Countries, with3.8 percent of GDP.


Figure 6 indicates that expenditures oneducation in Albania as percentage of the GDPhave been decreasing in the last 10 years. In1995, the level of expenditures on educationas percentage of the GDP marks the highestlevel in its history, with 3.68 percent. The levelof expenditures remains the same in 1996 Inthe successive years it marks a fall to,respectively1 3.28 percent in 1997, while in

1998 expenditures on education went down to2.96 percent of GDP. An insignificant increaseof the expenditures on education is noticed in1999-2001, but such increasing rhythms are notmaintained in the next two years. On thecontrary, in 2002 the expenditures on educationexperienced the lowest level of 2.89 percent.In 2003, the expenditures on education reachedat an even lower point, 2.85 percent of GDP.

According to the 2004 draft, the expenditureson education are expected to be higher ascompared to 2003, but the increasing rhythmsare not constant The opposite case proves inthe 2005 draft, with the expenditures oneducation expected to undergo further

decrease. Such a situation shows that there is atotal lack of conformity with the priorities definedby the government in the National Strategy forEconomic and Social Development, whereeducation is viewed as a priority sector in the draftbudget of 2004 and, especially, that of 2005.

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The indicator that expresses the deviations ofthe incurred expenditures from those foreseenin the draft shows that the expenditure incurredin the sector of education in the 1999-2001period was higher than what was projected ,with practically 14 percent in 1999, 10 percentin 2000 and 6 percent in 2001. Meantime, inthe last two years, the budget revenue was notaccomplished; in spite of the low level of draftbudget in 2003, the generated budget fundswere 7 percent lower.

4.3 Expenditures on public healthPublic expenditures in the sector of the publichealth aim to meet all the needs of thepopulation for the pre-detection/vaccination,primary health care system and hospitalservices. A complete, well-organized andefficient health system is an important pre-requisite to improve the standard of living ingeneral, to increase the working capacities andthe longevity.In developed market economies the cost of thehealth service is covered both by public andprivate resources through the health insurancesystem. In total, for all OECD countries, theexpenditures on public health in 2000, consistedof approximately 8.1 percent of GDP, about 70percent out of which, that equals 5.5 percentof GDP, is covered by public funds and the restby private resources.

2001

7,79,09,77,38,67,09,510,79,46,88,48,96,39,27,510,913,9

8,4 (6,0)

(2,0)

2000

7,7 (5,6)8,6 (6,2)9,2 (6,6)7,1 (6,6)8,3 (6,8)6,7 (5,0)9,3 (7,2)10,6 (8,0)9,4 (4,6)6,7 (5,1)8,2 (6,0)8,6 (5,5)6,0 (4,2)9,0 (5,8)7,5 (5,4)10,7 (5,9)13,1 (5,8)8,1 (5,8)(8,0)(5,1)(3,0)(2,53)

Table 1: Total Expenditure on Health as apercentage of GDP by International

Comparison

AustriaBelgiumCanadaCzech RepublicDenmarkFinlandFranceGermanyGreeceHungaryItalyNetherlandsPolandPortugalSpainSwitzerlandUnited StatesOECD averageCroatiaMacedoniaBulgariaAlbania

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Table 1 shows that in 2001 the expenditures onpublic health have an increasing trend in allOECD member countries. In this table, we canalso see that the highest level of expenditurescovered by public funds is observed in countriessuch as Germany and Croatia, with 8 percentof GDP, France with 7.2 percent and Denmarkwith 6.8 percent, etc. The only country amongOECD members where private expenditureson public health are higher than the publicinvestments is the U.S., where out of a GDPtotal of 13.1 percent (highest level), 5.8 percentis covered by public funds and 7.3 percent bythe private ones.

Such data shows the importance andrelatively significant weight that expenditures onpublic health comprise in developed marketeconomies, which is not the case of Albania, withthe latter having a very low level of publicexpenditures in the sector of public health andpractically never reaching beyond 2.5 percentof GDP over the last decade. There are threefactor by which could be explained the low levelof funds allocated in the sector of public health:

- First, the overall low level of publicexpenditures, which conditions the lower

share to the public health sector.- Second, despite of programs and strategies

developed by the Albanian government,with public health declared as prioritysector, in figure 9 we can see that publicexpenditures on public health in years haveexperienced a decreasing trend. Thus, in1994, expenditures on public healthcomprised 2.43 percent of GDP, whereasin 1998 they fell to 1.73 percent. Whileexpenditures in 1999 increased to 2.39percent, they were reduced again to thelevel of 2.08 percent. Likewise, the 2005draft budget plan of 2005 foresees adecrease of budget expenditures on publichealth as compared to the draft of 2004.

- Institutional weaknesses of the Ministry ofPublic Health, the lack of a clear strategyfor the reformation of the public healthsystem have led to the absence of necessarypressure and lobbying with the governmentand Parliament on the increase of publicexpenditures on the public health sectorand the creation of an efficient system thatwould attract private funding of publichealth through the scheme of healthinsurance.

The institutional weaknesses of the Ministry ofPublic Health can be proved also by the deviationindicator of incurred to projected expenditures.Figure 8 shows that, over the last three years, the

Ministry of Public Health has not been able tomanage all the funds available in the state budget,cancelling in this way 13 percent of the funds in2001 and 2002, and 14 percent of funds in 2003.

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The failure to use all the funds allocated for thepublic health sector, is mainly a deficiency tocarry out investments, which may have been ofthe nature of co-funding by international donorprograms/ projects and leading the Ministry ofPublic Health to a failure to use the public funds.

4.4 Expenditures on general public serviceThe group of expenditures for general publicservice includes all direct expenditure incurredfor the operation of central institutions(ministries), as well as the expenditure for themaintenance of judicial administration and otherinstitutions subordinate to the Council ofMinisters, such as agencies or variouscommittees created on basis of the legislationin power. Figure 10 shows that, in 1995 thoseexpenditures on general public serviceincreased to 2.8 percent of the GDP ascompared to 2.1 percent in 1994. Following thisyear, expenditures on general public service

went down in 1997 to the lowest level in theirhistory, to 1.8 percent of GDP. In 1999, theexpenditures on general public service grew tothe level of 3.1 percent of the GDP, mainly dueto the increase in the investments made by thegeneral public service, which consist of 0.8percent of the GDP. During the electoral yearof 2001, expenditures on general public serviceexperience an evident decrease, going down tothe level of 2.6 percent. But the physicalexpenditures incurred by the general publicservice experienced quick rhythms of increasein 2002 and 2003, becoming in this way thebudget item with the strongest increase ofexpenditures incurred. In 2003, suchexpenditures reached the highest level ever, 3.7percent of GDP, which indicates a growingpressure of the Albanian bureaucracy for theincrease of administration expenditures on theback of expenditures directly offered to thepublic, such as those on education and publichealth.

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The evaluation of expenditures planed for 2004and 2005, as a percentage of GDP, shows thatexpenditures on general public service willundergo an obvious decrease. In fact, such adecrease of expenditures planed for the generalpublic service does not comply with what we findin the governments reports about the changesregarding downsizing of current structures of the

general public service, in terms of the number ofinstitutions, number of employees and the levelof salaries. For a detailed picture on this issue, wehave carried out a detailed analysis of budgetindicators for the absolute expenditures on generalpublic service, considering both expenditures inthe draft and those really incurred. Such data ispresented in Table 2.

Table 2 shows that the absolute values ofexpenditures projected for 2004 and 2005 arealmost equal, with about 20 trillion Lek for eachyear. This level of expenditures correspondswith the planed level of expenditures for years2002 and 2003, whereas expenditurespractically incurred in 2002 are about 24 trillionLek, whereas in 2003 such expenditures go upto about 28 trillion Lek. The high deviation ofexpenditures planed for years 2004 and 2005from what was practically incurred in 2002 and,especially, in 2003, shows an anomaly of the

budget drafting process in those two years,which will certainly force the government gobeyond planed expenditures to enable a normaloperation of general public service. Moreover,Table 2 shows that in the last two years, 2002and 2003, the public expenditures for thecentral government has been much morequicker than the local ones. The governmentfinances extrabudgetary expenditures for thecentral administration by using either thereserve fund of the Council of Ministers or bychanging the budget during current fiscal year.

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In fact, figure 11 indicates also the anomaly of thebudget drafting regarding the paragraph ofexpenditures on public administration. In 2000 wesee a non-accomplishment of public expendituresthat went up to 41 percent of the projected ones,whereas in 2001 we see that incurred expendituresare higher than those planed by an amount thatvaries from 19 percent in 2001 to 16 percent in2002 and 31 percent in 2003.

4.5 Expenditures on defense

Figure 12 shows that, in 1994, the expenditureson defense in Albania comprised a relatively highlevel, 2.49 percent of GDP. Following this year,a decrease of expenditures on defense is noticedyear in year. They fell to 1.16 percent in 1998and maintained this level for several successiveyears, facing another decrease in 2003, whenexpenditures on defense marked 1.05 percentof GDP. About 90 percent of the totalexpenditures on defense fall under currentexpenses and only 10 percent comprised byinvestments (0.10 percent of GDP).

In the 2005 draft, expenditures on defense areagain foreseen to be lower, reaching 0.98percent of GDP. Such a level of expenditures

for the defense is one of the lowest among theBalkans countries and beyond.

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The deviation indicator of incurredexpenditures compared to those projected ondefense (figure 13) shows fluctuations of theirdirection in various years. In 1999 we noticethat the incurred expenditures are 9 percenthigher than the plan, whereas a year later theyare 12 percent lower from what was projected.In 2002, the incurred expenditures on defenseare 8 percent higher than what was planed.

4.6 Expenditures on public order andsecurity

Expenditures on public order and security the1994-2003 period experienced evident

fluctuations. Looking at figure 14, we can realizethat in 1994 expenditures of this type comprised2 percent of the GDP. The following year theyincrease to 2.2 percent and decrease again to1.9 percent in 1996.After 1998, it seems that expenditures on publicorder and security have become a priority tothe government. This is proved by the factthat expenditures, as a percentage of GDP,increased from 2 percent in 1998 to 2.3 percentin 1999, and 2.4 percent in 2000. After thisperiod, we see a relatively lower level ofexpenditures; in 2003, they experience thelowest level ever going down to 1.6 percent ofthe GDP.

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Figure 14 show that current expenditurescomprise the largest part out of totalexpenditures on public order and security.Whereas, investments are only 01-02 percentof the GDP for almost the entire period of 1997-2003. In the draft of 2004 and 2005, a slight

increase of 1.7 percent is foreseen aspercentage of GDP for expenditures of thisgroup, which remain in this way one of the itemswith the smallest weight in the budgetexpenditure forecasts especially for 2005.

In years 1999 and 2000, current expenditureson public order and security were two timeshigher than those foreseen in the budgetestimate (see figure 15), which shows thatincrease of expenditure on public order andsecurity in those two years was an initiative bythe government, approved later by theParliament as current expenditure. After thatperiod, the indicator of deviation of currentexpenditures from those planed indicatesinsignificant differences. On the contrary,current expenditures are lower than thoseplaned by 2 5 percent in 2001.

4.7 Expenditures on social security andwelfare

Expenditures on social protection for familieswith insufficient income and unemploymentbenefits are funds that reflect the allocatingfunction of the state budget. Figure 16 showsthat such expenditures comprise a considerablepart of public expenditures, which surpass eventhe expenditures allocated for education andpublic health altogether for the entire 10-yearperiod of 1994-2003. In 1994, such fundscomprised 9.58 percent of the GDP. After 1997,we observe a decrease of such expenditures aspercentage of GDP practically they went downto 6.77 percent in 1999, reaching their lowestlevel in 2003, when current expenditures onsocial security and welfare comprised 6.71percent of GDP.

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In the draft of 2004 and that of 2005 wasforeseen a further decrease of suchexpenditures, respectively to the level of 6.65percent and 6.58 percent of GDP. In spite of

this decrease, expenditures on social securityand welfare comprise again the largest share ofbudget funds allocated by the state budget.

Figure 17 shows that, in the period from 1999to 2002, there were obvious deviationsbetween incurred and projected expenditureson social insurance and welfare. In this period,current expenditures are estimated to be higherthan those in the draft, by 83 percent in 1999and 101 percent in 2002, which reflects obviousanomalies in the planning process of the budgetfor such expenditures.

4.8 Expenditures on housing communityand amenities

Current expenditures on housing throughNational Housing Entity, in 1994, comprised2.98 percent of GDP. After that year,expenditures went down continuously, reachingtheir lowest level in 1997 by 1.08 percent ofthe GDP. In 2000 and 2001, expenditures onhousing community and amenities seem to beagain a priority of the government, as currentexpenditures increase to 1.59 and 1.66 percent.

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In the plan of 2004, current expenditures forhousing community and amenities are planedto be lower than current expenditures in 2003,which comprised 0.12 percent of GDP. Thedecrease of expenditures for this item seemsto be a consequence of decentralization, and

their largest part needs to be covered by thelocal budget. The same tendency is evident inthe plan of 2005, where we notice a decreaseboth in current expenditures and investmentsas well, reaching the lowest level in their history,by 1.14 percent of GDP.

The indicator of current expenditures ascompared to those planed (figure 19) showsthat, in 2000, the government has spent funds642 percent higher than those planed. Increaseof current expenditure in this year is explainedby the changes that government made in thehousing procedure, using budget funds toprovide loans for housing to high officials ofstate administrations. The same procedure

followed also in 2001. Whereas in 2002 and2003, we notice that current expenditures were16 to 20 percent lower than those planed.

4.9 Expenditures on art and cultureArt and culture seems to have had the largestsupport in the years 1995 and 1996. In figure20 we see that expenditures in this direction

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comprise respectively 0.74 and 0.66 percentof GDP. In the years 1997-2000, expendituresin this sector remain constant, but at a lowerlevel, fluctuating from 0.44 - 0.47 percent ofthe GDP. Due to the increase of expendituresfor investments (“Return to Identity” project

that aimed at restructuring of facades ministriesin “Dëshmorët e Kombit” Boulevard) in 2001,we notice a slight increase of such expenditures,reaching up to 0.51 percent, but in 2003,current expenditures on art and culture markedtheir lowest level, 0.37 percent of GDP.

The draft budget of 2004 and especially that of2005 marked a further relative decrease of

budget support for art and culture, as forecastsof expenditures for this year went down to 0.26percent of GDP.

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By comparing current expenditures to theprojected ones (figure 21), it is noticed thatin the 1999-2003 period expenditures on artand culture have been continuously projectedbelow their optimal level. This was result ofthe fact that current expenditures have alwaysbeen above the foreseen level. The largestdeviations of current expenditures to thoseplaned are mainly noticed in the 1999-2001period, with a level up to 35 percent in 2000.Whereas in the years 2002 and 2003, currentexpenditures were higher than the projectedones, respectively by 5 and 11 percent.

4.10 Expenditure on fuel and energy

Figure 22 indicates the dynamics of deviationsin expenditures used by the state budget assubsidies for fuel and electricity. Referring tothe figure we see that in 1994, expenditureson this budget item comprised a relatively highlevel, practically about 1.31 percent of theGDP. In this period, one of governmentpolicies was to subsidize the production ofwood lumber and import of liquid gas so thatthe increase of their consumption wasstimulated, in hope that consumption ofelectricity for household needs would bereduced. In 1995, due to further liberalizationof economy, such subsidies were almosteliminated, going down to insignificant levels(0.03 percent of the GDP) in 1996.

After 1999, expenditures of state budget in thisdirection were , reaching their highest level in2001, when their total comprised 1.62 percentof GDP. Out of the total, the largest part wascomprised by current expenditures, practically1.43 percent of GDP. The major factor that ledto increase of expenditures on fuel and energy,was the financial support the governmentprovided to KESH (Albanian Corporation ofEnergy) to face the energy crisis resulting fromthe very long drought weather of years 1999-2001 and the difference between thepurchasing prices in regional energy marketsand the average consumer price in Albania.

KESH used such budget funds to subsidize theprice of electricity imported at abroad.Improvements in KESH management ofcombined with the increase of consumer pricesin the domestic market, led to a decrease offunds from state budget to support KESH. Inthis way, subsidies for electricity after 2001experienced an obvious decrease, reaching thelowest level of 0.22 percent GDP in 2003.

A characteristic of the 2005 draft budget isthe reduction to zero of current expenditures, i.e.subsidies for energy and fuel resources, increasingto some extent expenditures on investments inthis sector, which are expected to go up to thelevel of 0.44 percent of GDP in 2005.

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4.11 Expenditures on agriculture, forestry,fisheries and hunting

Agriculture is one of the most important sectorsof Albanian economy. About 50 percent ofactive labor forces are engaged in this activity.In the mid 1990s, the contribution of agricultureto the GDP was about 50 percent, but it fellgradually, though it continued to mark relativelyhigh levels during 2002-2003, with about 23-25 percent, as compared to the input ofagriculture in other European Countries whichcomprises less than 10 percent of the GDP.Although agriculture does not have an evident

contribution in the European economy, aconsiderable part of the state budget is fundedin the form of various subsidies to this sector.

Figure 23 shows that starting from 1994,funds to this sector increased from 0.68 percentof the GDP to 1.38 percent in 1996. Followingthis year, budget expenditures on agriculture,forestry, fisheries and hunting have decreased,reaching the lowest levels in 2003, when totalexpenditures for this sector reached the lowestlevels ever , 0.66 percent. Such a decrease waslargely affected by the significant reduction offunds for investments; practically they werereduced from 0.68 in 2002 to 0.38 percent ofGDP in 2003.

In the draft of 2004, expenditures on agriculture,forestry, fisheries and hunting were foreseen toincrease to 0.84 percent, with an evident increase

of expenditures on investments, but such increasingrhythms are not proved in 2005, when funds forthis sector go down to relatively low levels.

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Figure 24 shows that current expenditures onagriculture, forestry, fisheries and hunting havealways been lower than those planed for thissector. Such deviations increase from 28 to 48percent in 1999 and 2000, while we see arelative improvement in years 2001 and 2002,when such deviation went down to 4 percentof GDP But in 2003 the Ministry of Agricultureand Food was not capable to accomplish allplaned programs, leading thus to the cancelingof 31 percent of foreseen funds.

4.12 Expenditures on mineral resourcesExpenditures on mineral resources have beendecreasing from 1994 to date. From figure 25we can tell that such expenditures comprised

0.96 percent of GDP. This relatively high levelof such expenditures in this period is explainedwith the need of funding after (omission ofword, specify) the closing down of the largestpart of mining industry, which asked for anincrease of expenditures to conserve the minesand especially compensate the miners. In 1998,such expenditures went down to a very lowlevel of 0.16 percent. In 1999, an immediateincrease of 0.73 percent was noticed, whichresulted from the increase in funds forinvestments in this sector; in spending suchfunds, in fact the government went beyond whatwas planed in the budget estimates for that year.Exactly in 1999, we see that currentexpenditures overpass those planed by 501percent (see figure 26).

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After 2000, an immediate decrease of suchexpenditures followed, that mark the lowestlevel ever in the 2005 draft budget, where public

expenditures on mineral resources compriseonly 0.06 percent of GDP.

In figure 26, we can see that currentexpenditures have been almost always higherthan those planed (except for 2002, when theyare 2 percent below the plan). The deviationgoes from 501 percent in 1999 to 110 percentin 2000, 64 percent in 2001 and 79 percent in2003, which talks of obvious weaknesses in theplanning process of budget for this sector.

4.13 Expenditures on transport and communicationTransport and communication are key factorsto the economic development of a country.Under the conditions of a market economy,transport and communication are fundamentalelements that affect the cost of economictransactions and the stable development of acountry, especially the development of rural andsuburban zones. In Albania, the need forsupport to this sector in the transition periodwas indispensable, due to the very low level andthe overall backwardness that Albania inheritedin the sector of transport and communication.

In figure 27, we see that in 1994, theexpenditures on transport and communication

comprised only 0.59 percent of GDP. In 1995,this category of expenditures increased to 1.76percent of the GDP. In this period, the workfor the construction of Tirana-Durrës highwaystarted with funds by the state budget. After aperiod of relative decrease, in the years 96-97,referring to figure 27, we see that expenditureson transport, especially those for investments,are continuously increasing, starting from 1998and reaching their peak in 2001, with a total of3.23 percent of the GDP, 2.94 percent out ofwhich were for investments. In years 2002 and2003, current expenditures on transport andcommunication undergo an obvious decrease,reaching in 2003 the level of 1995 by 1.76percent.

In the 2004 draft is foreseen a relativeincrease of expenditures for this sector, but suchan increasing trend is not evident in the 2005draft, where expenditures comprise 1.67percent of the GDP. From figure 27, shows aswell that in the 2005 draft there is a decreaseof operational expenditures for this sector to0.20 percent of GDP, from 0.37 percent in 2003,indicating therefore a relative reduction ofexpenditures for maintenance of transport andcommunication infrastructure networks.

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Figure 21 shows that in 2001 currentexpenditures were 35 percent higher than thosein the initial annual draft budget . In all otheryears subject of the analysis, we notice that

expenditures on investments are lower ascompared to the draft, from 2 and 3 percent inthe years 1999 and 2000, to 11 and 6 percent,respectively in 2002 and 2003.

Considering these deviations and the fact that2001 was the year of general parliamentaryelection, we can draw the conclusion that

projected budget expenditures in this year wereexceeded due to electoral pressure that mayhave been exerted on the government aboutincrease in expenditures for that year.

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ConclusionsSome of the major conclusions that resultedfrom the overall analysis of public expenditureindicators are:

1. The size of the public sector in Albaniareflects the low level of the economicdevelopment.

2. The gradual downsizing of the public sectorhas resulted from the need reduce the statedeficit and the incapability to generatebudget revenues at higher rhythms than theGDP growth level.

The analysis of public expenditures accordingto economic classification showed that:

1. The last two years have been characterizedby a gradual decrease of expenditures oninvestments and maintenance, which willaffect the stable economic rhythms for thecoming years.

The analysis of public expenditures accordingto the functional classification highlighted thefollowing important issues:

1. There are discrepancies between midtermpriorities of the economic development andexpenditures projecetd for priority sectorssuch as education and public health.

2. Public health is the sector with the highestdeviations of allocated funds as comparedto other more developed countries.

Chapter VConclusions, recommendations and future actions

3. In the draft budget of 2005 we noticehandicaps, especially on expendituresallocated to the central administration. In2005, the expenditures planed for thecentral administration are about 30 percentlower than current expenditures in 2003,which can cause anomalies to theperformance of central institutions in theprocess of budget implementation.

4. Comparison of current expenditures tothose in the draft was characterized byobvious deviations, especially regardingexpenditures on the economic aid andunemployment benefits in the period 1999-2002 (up to 101 percent), housing in 2000(up to 642 percent), public order andsecurity in 1999 and 2000 (up to 113percent), etc. Such deviations are a clearexpression of the lack of periodic controlby Parliament over budget expendituresand poor capacities in the management ofstate budget by line ministries.

5. Comparison with 1999-2001, shows animprovement of drafting and monitoring ofthe state draft budgets in 2002 and 2003,which indicates a better performance of theMinistry of Finance regarding theimprovement of discipline and the efficiencyin use of budget funds.

6. The Ministry of Agriculture and Food, theMinistry of Public Health and partly that ofEducation have been (in the last two years)continuously unable to use all the fundsallocated in the state budget. Such non-accomplishments of the budget vary from


7 percent for education, 13-14 percent forthe public health and 48 percent foragriculture. This is a clear expression of apoor performance by the respectiveministries as regards the harmonization ofprograms funded by the state budget, aswell as those by foreign donors withconsequences in non-accomplishment offunding domestic resources.

RecommendationsIn the implementation stage of this project, theworking group underlined somerecommendations, remarks and suggestions forthe members of Parliamentary Commissionsand especially the Commission of Economy andFinances, with regard to the draft-budget of2005. Below, you can find a summarized versionof these recommendations:1. In spite of relatively limited opportunities

to re-allocate the budget funds amongvarious budget items (due to the overall lowlevel of public expenditures), it isrecommend that expenditures on socialprotection and unemployment benefits bere-considered and brought down, followingat the same time more direct policies toalleviate poverty through encouraging ofemployment. The same can applyonexpenditures on public order andsecurity and increase by the same amountexpenditures on education and publichealth.

2. Re-consider again the opportunities for anincrease of 2005 budget revenues beyondthe level projected by the Ministry ofFinance, increase public expenditures onitems such as maintenance and investmentsin priority sectors.

3. Further improve the way of presentationfor budget indicators, especially regardingallocation of expenditures on investments,as well as determine fairer and clearercriteria about the way the reserve fund forthe Council of Ministers and thecontingency fund (created first in 2005) willbe used.

4. Make improvements to the organic budgetlaw in order to improve transparency andparticipation in initial discussions of groupsor lobbies that are interested in directionsof implementation of budget expenditures.

Future actionsWhile organizing the training and informingactivities with the Parliamentary Commissions,journalists for economic and social issues,representatives of NGO-s, state andinternational institutions, the working groupwelcomed many remarks and suggestions aboutthe role that independent organizations shouldplay regarding their enhanced participation inthe drafting and implementation process of thestate budget, in country level. The following aresome of them:

1. Training/informing activities with deputiesto Parliament should be carried outperiodically and be of a more intense andtechnical nature, especially in the first yearsof Assembly legislatures.

2. The overall presentation of the trainingmaterial and the qualification level of theworking group from CRD were consideredas highly professional, especially highlightingthe simplicity and objectivity of thepresentation for various indicatorsregarding accomplishment of budgetexpenditures. Thus, the training materialwas positively commented and evaluatedby all Parliament members, independentlyof their political preferences. Based on thisreality, they suggested that suchpresentations be made every year while thestate budget packet is being discussed.

3. Comparison of the indicators of state budgetexpenditures were requested to involve notonly developed countries, but also theBalkans region and be illustrated withcomparative indicators for budgetexpenditures according to economicclassification.

4. Special evaluations and request were alsomade by deputies on budget revenueindicators and they raised the need for anindependent evaluation of the taxationsystem and the level of budget revenues inAlbania.

5. Independent presentations and monitoringof state budget should be periodicallyaccomplished during the calendar year,according to various accomplishment stagesof the draft budget.

6. The experts of World Bank who werepresent in the final meeting highlighted the

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need that along with the state budgetexpenditures be analyzed the revenues aswell. They requested that more detailedanalyses are carried out with regard tobudget expenditures, especially regardingthe most important and priority sector,along with the cost analysis of servicesprovided, contrasted this to the level andefficiency of such expenditures in othercountries.

The above-mentioned suggestions andrecommendations were considered andanalyzed by the Board of Directors in CRD,which concluded that:

1. CRD has all the necessary professionalcapacities to further deepen the analysis ofbudget expenditures and revenues,according to the above mentioneddirections.

2. In 2005, within the existing structure ofCRD will be created the section of publicsector analysis. From 2005 and on, thissection will focus on the accomplishmentof the following activities:

a) Analyze budget revenues and theefficiency of taxation administrationin the collection of tax revenues.

b) Analyze and monitor, according toadministration levels, (local andcentral) budget expenditures oneducation and public health.

c) Organize training and informingactivities for local government,aiming to increase communityparticipation in drafting andimplementation of local statebudget, as well as in theharmonization of midtermdevelopment programs with theannual budget.

d) Organize a more complex trainingand informing activity for deputiescoming out of general elections ofsummer 2005.

e) Prepare at the end of 2005 thesecond annual report on the statebudget, which will represent thesynthesis and analysis of budgetexpenditures and revenues.

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public expenditure analysis over the years in ...qkzh.al/publications/pubexpenditen.pdfpublic...

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