Albania's general budget deficit narrowed by 67.7% y/y to ALL 11.7bn (EUR 83.7mn) in January to May 2014, data from the finance ministry showed. The improvement was due to a 9% y/y increase in budget revenues coupled with a 7.5% y/y drop in expenditures.

In our calculations, the deficit accounted for 0.8% of the projected full-year GDP, down from 2.7% in the same period a year earlier.

The increase in budget revenues was supported by a 12.1% y/y rise in tax receipts. Within this group, revenues from VAT increased by 20.5% y/y to ALL 50.3bn, with VAT on domestic consumption up by 28.2% y/y and VAT, collected by the customs, rising by 18.2% y/y. Revenues from corporate income tax (CIT) increased by 25.1% y/y.

The growth in VAT and CIT revenues was sufficient to offset falling revenues from excise (down by 7.4% y/y) and personal income tax (down by 9% y/y). Total social contributions were up 4.4% y/y in the observed period.

On the expenditure side, capital expenditure declined by 60.2% y/y to ALL 13.7bn. In our view, this sharp decline could be attributed to the higher base effect, since the high level of public investment in H1 2013 was influenced by the election cycle. Current expenditures dropped by 2.4% y/y to ALL 131.2bn reflecting lower expenditures on operation and maintenance (down by 28.3% y/y).

Last year Albania's general budget deficit widened by 42.7% y/y to ALL 65.4bn, as revenue fell while expenditures increased. In our calculations, the deficit accounted for 4.9% of the projected full-year GDP, up from 3.5% a year earlier. We note that the government projects the budget deficit to widen to 6.5% of GDP in 2014.