TIRANA, Nov. 22 – Albania’s central bank governor has warned government authorities to be careful with external borrowing which puts debt servicing at currency exchange risks.
Public debt at about 72 percent of the GDP is considered a huge burden for the Albanian economy’s stage of development with its high servicing cost putting at risk much-needed investment in key sectors such as infrastructure, education and health.
“The Bank of Albania calls attention to the rising exposure that the level and debt servicing costs pose toward currency exchange fluctuations. This means the need for increased attention toward external borrowing, especially when it comes to borrowing in commercial terms, which should be listed as the last option in the list of possible financing sources,” central bank governor Gent Sejko told the parliamentary economy committee in a hearing on the 2017 draft budget.
The share of external debt in Albania’s public debt has increased by 16 percent of the GDP while domestic debt has slightly dropped, according to finance ministry data.
External debt accounted for 33.2 percent of the GDP at the end of the third quarter of 2016 compared to only 16.5 percent of the GDP a decade ago.
Meanwhile, internal debt dropped to 36.5 percent at the end of Sept. 2016 compared 39.5 percent at the end of 2016.
The central bank says internal debt is shifting toward longer maturity, lowering its exposure to short-term fluctuations in interest rates. In parallel, Albania’s external debt is mostly in concessional terms at long-term maturity.
Albania’s public debt slightly dropped to below 70 percent of the GDP in the third quarter of the year while debt servicing also slightly fell as interest rates on both domestic and external debt were down due to key interest rates at a record low.
Finance ministry data shows public debt dropped to 69.77 percent of the GDP at the end of the third quarter of 2016 down from a record high of 72.21 percent at the end of 2015 when it climbed to 1 trillion lek (€7.5 billion).
Debt servicing, which includes interest payments plus the repayments of principal to creditors, cost the Albanian government about 41 billion lek (€300 mln) for the first three quarters of this year, slightly lower compared to the same period last year.
The Vienna Institute for International Economic Studies has urged Albania, which applies a floating exchange rate system, to consider adopting an intermediate exchange rate system allowing broader fluctuation bands to offer more certainty for exporters and serve as shield against destabilizing capital flows.
More than a third of enterprises in Albania are exposed to exchange rate risks, mainly because of having borrowed in foreign currency and using the national currency in their everyday operations, according to a survey conducted by the country’s central bank.
The central bank describes the 2017 budget which expects the economy to grow by 3.8 percent and government revenue to accelerate by 6.9 percent as quite tangible.
“Excluding possible effects of the electoral year, which have often and unfortunately materialized in lower efficiency by the tax administration, the Bank of Albania estimates that the expected level of public revenue is achievable,” says governor Sejko.
