Draft Policy Paper: Key Recommendations for the Development and Discussion of the Law on Local Government Finance

The country's fiscal decentralization dimension remains weak, with local governments hampered by inadequate and unpredictable transfers from the central government and limited revenue-generating options. In 2015, the Ministry of Finance (MoF) requested support from the Planning and Local Governance Project (PLGP) to develop a new formula for the allocation of unconditional grants and draft the first comprehensive LGFL. The new formula, developed in 2015, adjusted weaknesses in the allocative criteria and fiscal equalization among different municipalities in the 2016 Budget Law. However, it was only the first step towards aligning the municipal finance system with the strategic objectives of the decentralization reforms. The LGFL should provide a more logical and consistent legal framework, clarify fiscal and financial authorities, and improve and stabilize the intergovernmental transfer system. A Law on Local Government Finances has been in draft form since 2008 but was never actively discussed or adopted. The new Socialist Party-led Government has made decentralization a key priority, and the LGFL has been embedded in the new Decentralization Strategy, the Public Finance Management Strategy, the new Local Self-Governance Law, and the National Economic Reform Program 2015-2017. To support the Ministry of Finance in responding to the challenge, the PLGP has provided recommendations for the scope and key issues to be addressed by the LGFL, the establishment of a Working Group responsible for drafting and discussing the LGFL, and the adoption of an Action Plan with clear activities, responsibilities, and indicative deadlines. The PLGP organized a knowledge-sharing and peer-learning Workshop in early February 2016, in collaboration with the Network of Associations of Local Authorities of South-East Europe (NALAS), to share international experiences on local government finance. The workshop brought together policy makers and experts from six neighboring countries to share their experiences and best practices. The development of the LGFL is a critical step towards strengthening local governance and decentralization in Albania. The law should provide a more logical and consistent legal framework, clarify fiscal and financial authorities, and improve and stabilize the intergovernmental transfer system. The PLGP's recommendations and the knowledge-sharing workshop are essential steps towards achieving this goal. The LGFL should address key issues such as defining the objectives of the law, financing local government functions, local taxes and fees, shared taxes, intergovernmental transfers, local borrowing, and the management of local finances. The law should also establish a Working Group responsible for drafting and discussing the LGFL and adopt an Action Plan with clear activities, responsibilities, and indicative deadlines. The development of the LGFL is a complex process that requires careful consideration of the country's fiscal decentralization dimension, local government finance, and intergovernmental relations. The PLGP's recommendations and the knowledge-sharing workshop are essential steps towards achieving this goal and strengthening local governance and decentralization in Albania. The LGFL should be developed in a transparent and inclusive process, involving all stakeholders, including local governments, central government agencies, and civil society organizations. The law should be based on international best practices and take into account the country's specific context and needs.