Stronger national currency reduces Albania’s public debt stock

Tirana Times
By Tirana Times July 10, 2018 12:14

Stronger national currency reduces Albania’s public debt stock

Story Highlights

  • Finance ministry data shows Albania’s public debt, almost half of which is external, dropped to 65.8 percent of the GDP at the end of the first quarter of this year, down from a 4-year low of about 70 percent of the GDP at the end of 2017

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TIRANA, July 10 – The sharp strengthening of Albania’s national currency against the euro is also having some few positive effects on the Albanian economy, and it’s mostly the Albanian government that is benefiting through lower repayment of loans denominated in Europe’s single currency.

Finance ministry data shows Albania’s public debt, almost half of which is external, dropped to 65.8 percent of the GDP at the end of the first quarter of this year, down from a 4-year low of about 70 percent of the GDP at the end of 2017.

External debt, which accounted for 30.14 percent of the GDP at the end of March 2018 and whose 57 percent was denominated in Europe’s single currency, had a key impact, dropping from 32.8 percent of the GDP at the end of 2017 and an almost record high of 34.26 percent of the GDP at the end of 2016.

The finance ministry, which reports the public debt stock in the national currency, says it calculated the Euro-denominated debt at the first quarter of this year at 130.44 lek, down from an average of 132.95 lek in 2017 and 135.23 lek in 2016.

Albania’s external debt dropped by €25 million to €3.81 billion at the end of the first quarter of this year compared to December 2017 with the strengthening of Albania’s national currency against the euro estimated to have had the key impact.

The Albanian economy growing by a strong 4.45 percent in the first quarter of this year, an almost decade high quarterly growth fuelled by a strong recovery in the energy sector, also had a key impact on the lower debt as a percentage of the GDP.

The Albanian lek has also considerably appreciated against the U.S. dollar which traded as low as 105 lek in March 2018 compared to an almost record high of about 130 lek in early January 2017.

About 11.3 percent of Albania’s external debt was denominated in U.S. dollar in the first quarter of this year, down from 11.5 percent in 2017, says the finance ministry.

With the Europe’s single currency having traded by an average of about 127 lek in the second quarter of this year, the Albanian government is expected to benefit both in terms of lower external debt stock when converted into the national currency as well as lower debt repayment in the coming quarters.

External debt interest payment cost the Albanian government about 2 billion lek (€15.7 million) in the first quarter of this year, the same 0.12 percent of the GDP compared to early 2017.

At 70 percent of the GDP, public debt is considered one of the key threats to Albania’s economy with its high servicing cost curbing much-needed public investment and posing a key threat to the country’s macro-economic stability.

The government targets bringing public debt down to 60 percent of the GDP by 2021, but the IMF has warned such an optimistic scenario is endangered by an ambitious but rather controversial €1 billion public private partnership that the ruling Socialists are implementing on key road, education infrastructure that could create new hidden debt because of accumulated unpaid bills to local concessionaires not registered in the debt stock.

Due to several costly debt-financed infrastructure projects, Albania’s public debt climbed by about 13 percent of the GDP from 2009 to 2015 when it hit a record high of about 73 percent of the GDP at a time when growth ranged only between 1 to 3 percent compared to a pre-crisis decade of 6 percent annually.

Lower local and external debt interest rates reduced Albania’s debt servicing,  which includes interest payments plus the repayments of principal to creditors to about 32 billion lek (€251 million) or 3.7 percent of the GDP in 2017, down from an average of 4 percent of the GDP in the previous five years.

The strengthening of the Albanian lek is also having a positive effect on borrowers in Europe’s single currency who have their income in the national currency in repaying their debt.

However, the overall effect on Albanian’s highly euroised economy is considered largely negative because of huge losses that exporters to Eurozone countries are incurring and damage that local producers are facing from cheaper imports.

Half of the country’s savings and credit is denominated in Europe’s single currency which has led Albania’s central bank to implement a de-euroisation strategy in order to reduce negative effects stemming from currency exchange fluctuations.

Albania’s central bank and the government claim the euro’s free fall in Albania is a result of recovering economy and higher euro inflows from FDI, tourism and migrant remittances.

However, the main opposition Democratic Party and some economy experts have linked the national currency’s constant strengthening to alleged illegal euro inflows resulting from the peak 2016 cannabis cultivation and ongoing drug trafficking in the country, considered a major cannabis producer and a key transit route for cocaine and heroin for European markets.

 

Tirana Times
By Tirana Times July 10, 2018 12:14