Albanian Fiscal Deficit during the Global Financial Crisis: Structural or Cyclic?

Abstract

This work is one of the first attempts to empirically investigate the impact of the global financial crisis in Albanian public finance indicators. Fiscal deficits have widened abruptly over the last years, starting from and following the course of the global financial crisis. Evaluating the extent to which structural or cyclical factors may have contributed to this trend is important for assessing the future developments, as well as to establish appropriate fiscal policies.

An empirical investigation of the impact of global financial crisis on public finance in Albania was carried out in this paper by employing a multiple linear regression, using quarterly time series data for the period between 2007 and 2014. General government data utilized in this research have been compiled according to international standards, enabling international comparability of statistics and analysis results.

The findings reveal the existence of both structural and cyclical factors in the determination of Albanian general government deficit. The analysis results show that government capital investments and GDP growth have significant impact on fiscal deficit in Albania. Furthermore, the rise in the deficit level can be related in large part to structural factors including large inappropriately financed public investments and spending in general, energy sector issues and social security financing gap. Meanwhile, part of the rise in fiscal deficits appears to be related to various cyclical factors including changes in output growth and may be expected to reverse alongside the economic recovery.

The results suggest a reduction in the deficit after recovering from global financial crisis, but still registering high values due to structural factors of the Albanian economy. Thus, fiscal policy should aim the consolidation of public finances and the reduction of fiscal risks to the sustainability of the budget. As a result, priority should be given to the resolution of structural issues, coupled with policies that aim at economic growth and development.

Keywords: Fiscal deficit, GDP growth, fiscal policy, Global financial crisis