Simulation of the financial consequences of the draft-Law on Local Self-Government Finance

The provisions of the draft-Law on Local Self-Government Finance (LGFL) on the unconditional grant and PIT sharing would increase local governments revenues by 31% when compared to the average of the past four years, or by 4.2 ALL billion (or USD 34.5 million). If we consider the last completed fiscal year (2016), the LGFL would increase local government revenues by 37%; or 4.8 ALL billion (or USD 39 million); If the LGFL is approved, local government revenues would improve by at least 4.1 billion ALL (USD 33 million) in 2018, 4.6 billion ALL in 2019 and 4.4 billion ALL in 2020 compared to the case where there is no LGFL at all. If the draft-Law is not approved, it can be assumed that the unconditional grant would be the one adopted with the Decision of the Council of Ministers No. 47, dated 25.01.2017, “On the approval of the Macroeconomic and Fiscal Framework for the period 2018-2020”, where the unconditional grant for 2018, 2019 and 2020 is 13.8, 14.5 and 16 billion ALL respectively. 1 Figure 1 shows the simulations of the financial consequences of the LGFL from the provisions to anchor the size of the unconditional grant to 1% of GDP and share 2% of the Personal Income Tax (PIT). The highlights in yellow and green show the increases in LGFL revenues if the LGFL is approved. the columns in blue from 2018-2020 show the simulations of the unconditional grant if the LGFL is not approved, following the existing official projections of the Government of (DCM No. 47/2017).

Figure 1 Simulations of the LGFL provisions on the unconditional grant and PIT sharing, ALL Billion 25 20.4 19.2 20 17.8 0.9 bilion ALL 0.8 15.5 0.8 3.5 14.0 3.8 15 13.3 13.0 3.3 12.9 12.2 12.5 2.5 11.2 11.6 11.6

10 16.0 14.5 13 13.8 5

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (P) 2019 (P) 2020 (P) Local Revenues without LGFL Single year support in 2017 Increase in the Unconditional Grant from the LGFL Increase in PIT sharing from LGFL Local Revenues with LGFL after 2018

Source: PLGP simulations

Figure 2 shows the financial consequences for the 61 municipalities from the increase and anchor of the unconditional grant for 2018 to 1% of GDP compared to the situation where the LGFL is not approved at all. Figure 3 shows the financial effects in comparison to year 2016 and the case when the LGFL is not approved all. Fiscal year 2016 is a more realistic indicator of the average size of the unconditional grant for the past 6-7 years. In the 2017 grant, the GoA added a one-year increase of 2.5 billion ALL which of course improved LG finances but also reduced the clarity on the actual recurrent size of the unconditional grant. In the Fiscal Indicators approved with the 2017 Budget Law, this is a separate

1http://www.financa.gov.al/files/userfiles/Programimi_EkonomikoFiskal/Kuadri_Makroekonomik_dhe_Fiskal/ Kuadri_Makroekonomik_e_Fiskal_per_periudhen_2018-2020_(VKM_Nr._47_dt.25.01.2017).pdf (Annex 2.1) line item, showing that it is an one year addition rather than part of the system. Figure 4 shows how much individual municipalities would get out of the 2% PIT sharing. Figure 2. Simulations of the distribution of the increased and anchored unconditional grant for 2018 compared to the case where the LGFL is not approved and GoA’s baseline projections (DCM 47/2017) apply.

Source: PLGP simulations

Assumptions: 1. Total forecasted unconditional grant pool for 2018, is 1% of GDP (17.1 billion ALL, up from 13 billion ALL in 2016); 2. Without a LGFL, the GoA’s projections for the 2018 unconditional grant, is 13.8 billion Lekë (as per Decision of the Council of Ministers No. 47, dated 25.01.2017, “On the approval of the Macroeconomic and Fiscal Framework for the period 2018-2020). Figure 3: The unconditional grant for 2018, compared to 2016 and to the case where the LGFL is not approved and GoA’s baseline projections (DCM 47/2017) apply.

Source: PLGP simulations

Assumptions: 1. Total forecasted unconditional grant pool for 2018, is 1% of GDP (17.1 billion ALL, up from 13 billion ALL in 2016); 2. Without a LGFL, the GoA’s projections for the 2018 unconditional grant, is 13.8 billion Lekë (as per Decision of the Council of Ministers No. 47, dated 25.01.2017, “On the approval of the Macroeconomic and Fiscal Framework for the period 2018-2020). Figure 4: Simulation of the distribution of the PIT for 2018-2020, in million ALL

Source: PLGP simulations

Assumption: 1. Total pool to be allocated is 774.4; 831.2 and 871.2 million ALL for 2018, 2019 and 2020 respectively following the existing forecasts (DCM 47/2017); 2. The allocation follows the exact distribution of the other existing shared taxes (Small Business Tax, Vehicle Circulation Tax); Simulations of the Unconditional Grant and PIT sharing. The Unconditional Grant Increase in Local Revenues from the LGFL 13 + 2.5 GoA Projections without Increase in the 13 bln With LGFL bln LGFL Unconditional Grant PIT Total baseline if wrt. wrt. sharing Increase LGFL not 2016 2017 2018 2019 2020 2018 2019 2020 2016 2017 (D) (C+D) approved (A) (B) (C) Tiranë 1,531 1,913 2,200 2,463 2,660 1,714 1,837 2,082 669 287 486 317 803 Durrës 573 736 823 893 961 636 678 762 250 86 187 71 258 490 577 654 706 756 515 547 609 164 77 138 29 168 Shkodër 491 555 626 676 724 492 523 583 135 70 133 30 163 420 511 569 615 659 446 474 529 149 58 122 31 153 Vlorë 384 466 528 571 612 414 440 491 144 62 114 35 149 Korçë 325 395 440 476 510 345 367 410 115 45 95 22 116 Kamëz 374 453 504 542 578 404 426 472 129 51 100 12 112 Lushnjë 285 346 388 419 449 305 323 361 103 42 83 19 102 Dibër 315 375 409 435 465 320 339 376 94 33 89 5 94 Lezhë 231 281 313 339 363 246 261 291 83 32 67 16 84 261 319 354 381 408 280 297 330 92 34 73 9 83 220 255 285 308 331 224 238 266 66 30 61 16 77 Kukës 250 293 319 338 361 249 263 292 70 26 71 4 75 Krujë 219 259 282 298 319 218 231 257 63 23 64 8 72 205 268 292 311 333 229 242 269 87 24 63 4 67 Malësi e Madhe 184 260 289 311 333 229 242 269 105 28 60 2 62 170 240 272 294 314 216 228 254 102 32 57 4 60 Bulqizë 197 235 257 277 297 203 215 239 60 22 54 4 58 Kavajë 154 189 210 227 243 165 175 195 56 21 45 11 57 183 208 226 243 260 177 188 209 43 19 49 7 57 Gjirokastër 147 180 204 221 236 160 170 190 57 24 44 10 54 Vau I Dejës 154 203 221 234 251 172 183 203 67 18 48 3 51 Divjakë 154 185 203 218 234 161 170 189 49 18 42 5 47 Gramsh 160 194 214 231 247 170 180 200 54 19 44 3 47 Mirditë 152 183 201 217 232 159 168 187 49 18 42 3 45 Tropojë 150 180 196 210 225 154 163 182 46 16 42 2 43 140 170 187 201 215 148 157 174 47 17 39 4 42 142 171 186 200 214 147 156 173 44 15 39 3 42 Selenicë 130 158 172 182 195 134 142 158 42 14 38 1 39 Kuçovë 119 143 157 170 182 125 132 147 38 14 33 5 38 117 157 171 182 194 134 142 158 53 14 36 2 38 Mallakaster 122 147 161 173 185 128 135 150 38 14 33 4 37 Sarandë 95 105 120 135 145 97 103 116 25 16 24 14 37 97 118 133 144 154 105 111 124 36 15 28 8 36 Cërrik 106 131 142 150 161 111 118 131 36 12 31 3 34 Vorë 86 115 125 129 139 94 100 111 38 10 31 4 34 Has 108 130 142 151 162 111 118 131 33 12 31 1 32 Rrogozhinë 100 131 144 155 165 114 121 134 44 13 29 3 32 105 115 125 129 138 95 100 112 21 10 30 2 32 Ura Vajgurore 92 114 127 137 147 100 106 118 35 13 27 5 32 106 127 138 148 158 109 115 128 33 11 30 1 31 97 114 125 135 144 100 105 117 28 11 26 4 30 96 105 115 124 133 90 96 107 19 10 25 5 29 91 111 121 128 137 94 100 111 30 10 26 2 28 Himarë 83 100 113 122 131 89 95 106 30 13 24 3 27 96 109 119 128 136 94 100 111 23 10 25 1 26 Kolonjë 95 104 113 122 130 89 94 105 19 9 24 2 26 Përmet 86 98 111 120 128 88 93 103 25 13 23 2 26 82 97 106 112 120 83 87 97 24 9 23 1 24 Pukë 82 99 107 116 124 85 90 100 25 9 22 1 24 82 95 104 112 119 82 87 97 22 9 21 3 24 Poliçan 73 89 99 107 114 78 83 92 26 10 21 2 22 Fushë Arrëz 66 73 79 81 86 59 63 70 13 6 20 0 20 Tepelenë 62 73 81 88 94 64 68 75 19 8 18 2 20 57 66 76 82 88 60 64 71 19 9 16 2 18 Delvinë 47 59 65 70 75 51 54 60 17 5 14 2 15 47 55 60 64 68 47 50 55 13 5 13 1 14 Këlcyrë 48 56 61 66 70 48 51 57 13 5 13 1 13 Libohovë 35 39 42 41 44 30 32 36 7 3 12 1 13 25 30 33 35 37 26 27 30 7 3 7 0 7 TOTAL 11,393 13,862 15,436 16,689 17,894 12,112 12,862 14,362 4,043 1,574 3,324 774 4,099

Source: PLGP simulations