Bank of Albania governor Ardian Fullani called for a new fiscal rule after the removal of the 60 percent of the GDP public debt ceiling, implying that the central bank does not approve of a situation where public debt limits are legally undetermined
TIRANA, Nov. 26 – Ruling majority MPs decided this week to abrogate an article of the budget law which makes it compulsory for public debt to stay within 60 percent of the GDP, arguing that the increase in public debt will help promote economic growth in these times of crisis and secure power supply for the country. Opposition Socialist Party MPs of the parliamentary economy committee described the move as harmful to the Albanian economy and the management of the public debt already at its legal ceiling of 60 percent of the GDP, saying that a dangerous precedent was being set.
“For 2013, government argues that the right fiscal policy would be an expansionist one, targeting to stimulate economic growth. The materialization of this fiscal policy takes public debt for 2013 to 62.6 percent of the GDP, bringing the necessity of the amendment of the budget system law,” said deputy Finance Minister Nezir Haldeda.
Socialist Party MP Mimi Kodheli argued that the per capita public debt had increased to 316,000 lek (Euro 2,222) in 2012, up from 250,000 lek in 2008. The majority of debt is short-term and at high interest rates, said Kodheli, also the deputy head of the parliamentary economy committee. Socialist Party MP and former Finance Minister Arben Malaj says that under the new amendments government is taking over Parliament’s competences on public debt. Commenting on Prime Minister Berisha’s statements that the 2013 budget is the biggest in the country’s history, Malaj said ‘it’s enough to observe that the deficit gap is deepening and that bad loans are increasing to understand that Albania is in crisis.”
The changes need a simple a majority of 71 votes which the Democratic Party-led majority can approve on its own. The 60 percent of the GDP public debt ceiling was legally established in 2008 when public debt stood at only 54 percent of the GDP.
Governor appeals for new fiscal rule
Speaking this week after introducing the monthly monetary report, Bank of Albania governor Ardian Fullani called for a new fiscal rule after the removal of the 60 percent of the GDP public debt ceiling, implying that the central bank does not approve of a situation where public debt limits are legally undetermined. He called on the political class to approve a clear fiscal rule on public debt. “A necessary solution, which of course is not the magic key, is a new fiscal rule. I am making an open invitation to the Albanian political class to sit down and conclude with a fiscal rule which will be an important instrument for the long-term stability of the public debt and a window with all its flexibilities in cases when interventions in extraordinary situations are envisaged. At the same time, it will serve as a guarantee to domestic and foreign investors as far as its transparency is concerned,” said Fullani.
Loan guarantee to KESH
Apart from the controversial article on the public debt ceiling, the draft law on the 2013 budget also foresees that guarantees to state-owned power corporation KESH to borrow for electricity imports will no longer be calculated in the public debt stock.
“For the first time, an exception has been made only on the loan guarantees that will be given to ensure power supply because the value remains unknown to us and government authorization has been made legal,” said a Finance Ministry public debt director.
Socialist Party MP Erjon Brace said the approval of a law without ceilings risks the country’s financial stability at the time when the country’s energy system has plunged into a crisis which will have negative impacts for the next two to three years.
“Think twice before approving this law because I am convinced we will go beyond the 70 percent level,” said Brace. Government expects public debt to climb to 60.5 percent of the GDP for 2012 and 62.6 percent in 2013.
Debt to climb to 62.6%
For the first time in the past decade, Albania’s public debt will officially exceed its 60 percent of the GDP threshold, further endangering the country’s macroeconomic stability as GDP growth in the past few years has stuck into moderate growth rates mainly due to spillover impacts from the EU crisis and high public debt levels. For 2013, government has selected an overoptimistic budget which could increase public debt, already at its legal ceiling of 60 percent of the GDP by another 2.6 percent to 62.6 percent. The overoptimistic scenario of a 409 bln lek (Euro 2.87 billion) comes at a time when government revenue for the first three quarters of the year has frozen and public debt stands at the legal limit of 59.8 percent of the GDP. Public debt declined from 70 percent in 2000 to 54 percent in 2007 in the context of successive Fund-supported programs. This path was reversed with the fiscal stimulus in 2009. “Under current policies public debt would rise to 64 percent of GDP by 2016,” the IMF has warned. Albania’s public debt sharply rose to 59,3 percent in 2009, up from 54.7 percent in 2008 after loans taken to finance the Durres-Kukes highway linking Albania to Kosovo which cost around 1 billion euros and higher government spending in the general election year.
Majority MPs say jumping the debt threshold, currently compulsory only under the budget law and not by Constitution, could help keep the economy growing in these times of crisis, while the opposition and some experts consider exceeding the limit at these times of crisis as dangerous. Both the IMF and World Bank have stressed Albania’s need to reduce public debt levels in order to achieve long-term sustainable growth.
The 2013 budget foresees total revenues to be at 360 billion, up 5.7 percent compared to the expected 2012 revenues and deficit at 3.4 percent of the GDP. The new budget expects the Albanian economy to grow by 4 percent in 2013, up from 3 percent in 2012, which is three times higher compared to what international financial institutions expect for the Albanian economy.
FinMin: Economy faces three top challenges
Introducing the 2013 budget at the parliamentary economy committee, Finance Minister Ridvan Bode said the Albanian economy currently faces three main challenges related to the global financial crisis, the electricity situation, and next year’s general elections.
“The first challenge has to do with the global and regional economic situation. In 2012, there was a gloomy picture of the Eurozone, a strong blow which regional economies experienced. The orientation of the Albanian economy through its key partners Italy and Greece shows the Albanian economy is oriented toward the eurozone and not outside it at a time when 85 percent of transactions, economic and trade and financial exchanges are oriented toward this space. In addition, the channels of communication with the eurozone economy in regional countries have now increased, the banking system is more vulnerable, and communicates more directly with parent banks and capital of the countries they flowed from.”
Bode said the second challenge was related to increased risks from the electricity system. “The issues created in the energy sector because of the privatized company which operates in this sector and because of the specifics in 2012, the price conjectures in global energy markets have led to a situation where risks from the energy sector to the economy have increased for 2013 and in this respect the proposed draft budget reflects the vulnerability of the Albanian economy from the energy sector.”
The Finance Minster ranked the 2013 general elections as the third challenge for the 2013 budget. “2013 is an electoral year and makes it necessary for projections to be prudent and conservative so that each momentary distraction does not affect the balances of the Albanian economy, which are priceless to keep the country’s economy in a positive trend in the mid and long term. Speaking about the new fiscal package, Bode described it as stimulating to further increase investments and remove barriers in customs offices, VAT on machinery and equipment for some priority sectors.
Income from possible privatizations which are in an advanced stage, has not been taken into consideration, but will serve to improve the budget deficit, public debt level, said Bode. The 2013 budget does not take into account Euro 850 million from the sale of Albpetrol oil firm to U.S based Vetro Silk Road Equity in which Albanian oil magnate Rezart Taci has the majority 51 percent stake. Government also expects between Euro 150 to 200 million from the privatization of four small and medium sized hydropower plants whose tender has been postponed to December 10, 2012.
Few days ago, government approved a fiscal package which reduces taxes for coffee importers, levies a 30 percent tax on timber exports, increases fines to informal businesses, and makes procedures on small purchases completely digital. Government has earlier decided to lift VAT on imports of machinery and equipment as well as cement and steel for the construction of hydropower plants. The Finance Ministry proposes that the 20 percent VAT on imported machinery and equipment will be lifted only for investments of Lek 50 mln (Euro 351,000) or more. However, the garment and footwear industry, the country’s top exporter which this year has been suffering crisis impacts from lower demand by crisis hit EU partners Italy and Greece, will have VAT on machinery imports removed for all kinds of purchases.
Debt service
Public debt service at the end of September 2012 was estimated at 2.59 percent of the GDP, with internal debt interest rates accounting for 1.91 percent of the GDP, principal payments for 0.46 percent and external debt interest rates for 0.22 percent. For 2013, the Finance Ministry expects expenditure on public debt service to increase by 15 percent to 64.1 billion lek (Euro 450 million). Albania’s public debt service dropped to 3.71 percent of the GDP in 2011, down from a record 3.89 percent back in 2010. Estimated at over 800 billion Lek currently, the public debt costs the Albanian government 3 percent of the GDP or 50 billion lek (euro 357 million) in interest payment annually.
What puts the Albanian public debt more at risk is that it accounts for more than double the annual revenues, while interest expenditure has risen to 3.4 percent of the GDP, compared to an average of 1.3 percent in the SEE 6, the IMF has warned.
Domestic debt holders
Bank of Albania data show Raiffeisen Bank, the country’s biggest bank, has lowered its exposure to Albania’s public debt by 5.29 percent to 28.91 percent of the total debt stock in the first three quarters of this year compared to the end of 2011.
Implying the withdrawal of Raiffeisen, the country’s biggest bank, from Albania’s public debt in 2012, central bank governor Fullani said earlier that liquidity imbalances were created causing a rise in government security yields and limiting the transmission of the monetary policy. However, Raiffeisen’s withdrawal has been compensated by other commercial banks which have increased their share to 37.69 percent of total public debt, up from 34.85 percent at the end of 2011. The Bank of Albania share has also slightly dropped to 13.49 percent, down from 14.3 percent at the end of 2011.
Meanwhile, individuals and non-banking financial institutions have increased their shares to 15.66 percent and 4.25 percent, up from 12.92 and 3.73 percent respectively at the end of 2011.
Although having lowered the key interest rate by 1.25 percentage point to a historical record low of 4 percent since Sept 2011, the Bank of Albania interventions in the monetary policy have been poorly reflected in lowering and T-bill yields and interest rates for loans in the domestic currency lek.
