LAW. TAX. TRANSPARENCY

Quantitative Easing and public debt of Albania

If the government implements a policy of balanced budget, but allows an increase in the

deficit due to the inherited budget situation and in order to solve the invoice issued in the

past about to pay obligations to its citizens, then the consequences in such case is to increase

Interest rates and to influence to the raise of inflation rate in the medium term.

In the case of study of the impact on an giant economy like the U.S., Gale and Orszag (2004),

presents the conclusion that for every expected percent of increase of budget deficit by

increasing the public debt, the trend of rising interest rates ranging from 25 up to 35%. Alper

and Forni (2011) present another fact, that for every 1% increase in the public debt to GDP

ratio, the reaction of interest rates will be at 1 to 7 percentage points.

The supply with new money is closely linked to the budget. The deficit, unless accompanied

by a change in deposits of Bank of Albania (BoA), can indirectly affect the trend of interest

rates. Citizens, commercial banks and the BoA can respond to interest rate changes in ways

that may affect the currency. The budget deficit, maybe can not be covered by the

government if investors are not willing to bear it, even if interest rates are not increased yet.

The reason for the lack of desire to keep the burden of national debt from them is affected

by the fact that they maybe can not be convinced by the performance of the government in

maintaining budgetary commitments for the settlement thereof, or when they see the

government make a shortcut by asking the BOA to issue fresh money in circulation over

several years. In this way, Albania can not continuously increase its debt levels exceeding the

levels of economic growth. If this happens, then it would be expected the leaving of investors

and their departure from Albania, as they will not want to be carriers of a higher burden of

tax. But, they also do not want to live an increase in inflation rate, which will be dictated by

the dumping of money in circulation in a prolonged and uninterrupted way. Investors, at best,

can accept large deficits for 1 year or a few years to the extent that will be linked to the real

government commitments amounting to convince the public debt has obvious signs of his

decrease in a future period.

Financing new money to budget

Numerous studies have analyzed the possibility of connection between the budget deficit and

financing of the general price level, as funding is the main reason for inflation. One of the

most essential issues in the formulation of financial policies is related to how to establish

effective control of inflation, the money supply and the budget deficit.

Real format of the Albanian economy and monetary market today is situated in balance with

the real level of currency in circulation. Given this balanced situation also the price level is

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checked by control of the money supply. Behind this monetary logic it lies BoA. But, when the

budget deficit is higher then it is necessary an increase of the level of revenues collection,

mainly based on the narrowing of tax evasion.

If performed issuance of money from BoA, in order to be paid with extra money the social

debts (payments for the victims of comunism, payments for the owners of lands and terrains

ocupied by another peoples or civil works, not paid invoices for the past periods from

goverment for work done from private companies etc.), then the new and fresh money into

the hands of citizens and businesses need to be subject to review of the law of income tax

because of taxing principles. All the subjects should have equal treatment before the law. All

citizens of Albania, which will have new money as an extra income should have the tax

treatment as the citizens that are taxed because of makin profits from capital or work.

In case where fresh money issued into circulation shall be accompanied by other measures

from BoA and Government, then it would be acceptable by investors as within the

monetization budget process remains the solution of the most acute problems of new

Albanian capitalist history. This situation is considered an extraordinary moment that holds

within itself the same economic logic that carry economies after the solution of these national

dramatic situations.

One way to determine to which extent of the public debt will be willing the investors to

finance it should be if we can comparison the experience of countries with situations with

very high public debt and how it was the solution in these practices. If we find similarity of

Albania with these countries about the natural resources and human induced in use, and also

how they have used the monetization policy and how it is the tax performance. If we can

analyse the tax performance, it is important to see the strategy of increasing the revenues

narrowing evasion and broaden the base and not increasing the tax burden for compliant

taxpayers.

Money supply policy should be expansionary and in introverted cycle. Fiscal policies need to

dominate monetary policy. Prior to initiating the policy of payment of property rights etc., it

should hapen the economic analysis and real growth trends in the medium term. In order to

control inflation, so in the same line the money supply should be checked. Every indicator of

money supply (aggregate M1, M2, M3 and so on) should not be calculated as a simple sum of

indicators, but through comparability should beoriented the fiscal policy to enhance the

effectiveness of the budget.

Implementation of the policy that assumes issuing new money by BoA which will be oriented

directly to the citizen who has a property legal right problem, or to other citizens/businesses

considered as social debts for the Government should definitely be a strong commitment and

unprecedented until now by the country's budget. BoA is unable to carry out alone this

process, as long as a strong element in entire process is the necessary fiscal policy for the

entire period.

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By channeling new money in the hands of citizens through their bank accounts, the possibility

of increased consumption is expected. The main component of aggregate demand will

increase. On the other hand, the increase of prices of goods and services will continue to

increase investment, employment and wages in response to increased consumption and

inflation.

Overt money financing?

Do we need to follow the rules or the monetary and fiscal good practices combined with the

rules?

Let see some key explanations that need to be taken carefully, if will be decided to apply this

strategy.

What about the theories of helicopter money or overt money in circulation?

- It represents the best combination of monetary and fiscal policy and having as an

essential condition the strong coordination and accurate of fiscal and monetary

authorities;

- Suits to the current situation where we have a very low interest rate, high public debts

and liquidity shortages are present;

- There will be no impact on the increase in interest rates, demand for loans from the

government and will not affect the programs of investment in the economy. Also there

will be no effects as prescribed by Ricardian Equivalence.

- It can be implemented by BoA and the MoF together providing a controlled and

effective implementation in the economy, finance market and society;

- It can not create a situation similar to the period of financial crisis in the US and Europe

(asset price bubble). If inflation begins to rise beyond the objectives set, then remove

excess money from circulation. But this step may be needed in subsequent periods,

as land becomes supersaturated by money put into circulation.

Given the fact that monetary policy implemented until now does not apply to this new way

of monetary policy, due to the lack of effectiveness with the ordinary instruments, then it

must convince the Parliament that the reduction of the budget deficit should not be a priority

within a political mandate. Trying to adjustment and deficit reduction within a mandate might

be a good idea as long as the fluctuations of liquidity in the economy will not occur or will be

with peripheric influence.

Under the quantitative easing policy and with the application of financing tools as above, the

central bank wins (after deducting the interest paid on treasury bills), as well as budget wins.

So the budgets of all the parties remain the same as if not actually purchased treasury bills,

just as is the case with the issue of the new currency in circulation combined with other forms

of deficit financing.

The injection of large volumes of new money in the private sector and citizens is not an

important stimulant for economic growth, besides the impact on consumption growth. But

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with the growth of consumption will have an increase of acceptable prices of goods and

services to the private sector, which are as a result of the increased supply level to 3-4% of

GDP of money in circulation. It jumps of money in circulation more than necessary and is

unbalanced by the offer of goods and services that are on the market. In this way, money

issued into circulation would need to have effective control of the government to be directed

towards productive expenditures, such as public market of assets, creation of participation in

concession contracts secure and profitable orientation to Eurobond and looking to invest

money in the world markets which require investment of significant funds.

On the other hand, the establishment of a specific regulatory framework and fiscal policy and

adoption of the agency, which will specifically examine the process. The mission will be by

focusing on the one side to the money which will be added into circulation with the options

granted to profit. And on the other side should not create opportunities for concentration

and enrichment of individuals most adapted to such projects who know the ways how to

benefit from cash circulations.

ALTAX CENTER, February 2015