TIRANA, Nov. 18 – Albania’s central bank has identified the much-rumored public private partnerships and the timely execution of government spending as the key threats to the 2019 budget that the ruling majority is about to approve.
The warnings were given by central bank governor Gent Sejko in a hearing on Monday with the parliamentary economy committee on the 2019 draft budget which the governor described as slightly overoptimistic, but relying on “acceptable economic and fiscal projections.”
The central bank governor said PPPs should undergo tighter legal and financial monitoring and the government set clearer spending limits on such contracts in order to avoid potential risks to public finances and the country’s public debt reduction agenda.
“There is need for the continuous improvement of the professional capacities in the units that manage the assessment, contracting and monitoring of these projects, especially as far as their legal and financial aspects are concerned,” says governor Sejko.
“In addition, PPP contracted in the public investment area should be in compliance with strategic mid and long-term investment program as identified in the country’s development programs,” he adds.
With PPPs high on the agenda as a key tool to finance much-need public investment through initial private investment in return for government support in annual instalments for about a decade, the government has set a 5 percent ceiling on the previous year’s fiscal revenue to keep PPP spending in check, but as more PPP contracts are signed the target will likely be missed in the next few years forcing the government to undertake new tax hikes to handle their rising cost.
The central bank suggest the government should consider a clearer target based on the value of the contracted PPP and set a ceiling as a percentage of the GDP as a stronger basis to anchor potential PPP implications to the budget.
The central bank warnings comes at a time when the Albanian government has been implementing an ambitious €1 billion PPP program to upgrade road, education, health and waste management infrastructure in contracts marred by allegations of pre-determined winners following tenders with limited or no competition at all where Albanian-owned companies which the opposition has dubbed as ‘oligarchs’ have emerged as winners following pre-tender bonuses placing them at an advantage.
Taxpayer support to some controversial public private partnerships is expected to increase by around 50 percent to €100 million for 2019 as the government starts paying on three news public private partnerships, taking PPP spending to 3 percent of the previous year’s fiscal revenue, compared to 5 percent threshold that the government has set.
International financial institutions have already warned that local PPPs, most of which given the okay following controversial unsolicited proposals and without thorough cost-benefit analysis, could pose a threat to the public debt reduction agenda because of the risk of creating new arrears which if included in the public debt stock could increase it by 7 percent of the GDP considering an ambitious €1 billion PPP program.
Balanced year-round spending
The central bank governor says the government should also adopt more balanced spending throughout the year so that the traditional hike in the year’s final quarter does not negatively affect the internal financial markets and the execution of public investment.
“The pace of the execution of budget spending continues to display a high level of concentration in the year’s final quarter,” said governor Sejko.
“This ongoing phenomenon largely dictated by the non-uniform pace in the execution of public investment triggers unnecessary fluctuations throughout the year in the liquidity and interest rate indicators of the internal financial market. It also has a tendency to make it more difficult to keep spending and budget targets in check and reduces their efficiency,” he added.
Last September, the ruling majority slightly revised down the 2018 budget revenue and spending, citing Europe’s single currently trading at a 10-year against the Albanian lek as a key factor behind the underperforming government revenue hit by lower customs income due to cheaper Eurozone imports.
Latest finance ministry data shows that total government expenditure in the first eight months of this year was almost 2 percent less than planned, with public investment although higher than the same period a year ago, missing the January-August 2018 target by 3.4 percent.
“Overall budget execution in January-August resulted in a surplus in the government’s cash balance corresponding to 0.1 percent of estimated full-year GDP. The government targets a deficit of 2 percent for the year as a whole,” says a European Commission report.
Faster fiscal consolidation urged
Albania’s central bank also urges faster fiscal consolidation in the next five years when the government targets bringing public debt, currently at around 70 percent of the GDP, to more affordable levels of below 60 percent of the GDP.
“A faster fiscal consolidation would serve to accommodate the expected increase in debt servicing in the mid-term and boost space for handling potential shocks in the mid and longer-run,” says governor Sejko.
The central bank expects current historic low interest rates to embark on an upward trend as the Albanian and Eurozone economies recover, triggering a rise in debt servicing costs.
The Bank of Albania also suggests the government should continue extending debt maturity, diversify investor base in the local market and limit borrowing in foreign currency due to exchange rate risks under a free floating regime that Albania applies.
Albania recently borrowed €500 million in a 7-year bond at a rate of 3.55 percent in much lower rates compared to three years ago and in new repayment that will be favored by Europe’s single currency trading at about 125 lek, down 10 percent compared to a year ago. This year’s euro freefall against the Albanian lek has made Euro-denominated debt much cheaper for the Albanian government and businesses and households, but considerably hit the country’s Eurozone-destined exports and sizeable deposits and remittances in euro.
International financial institutions have recently warned Bank of Albania authorities to be well-prepared for timely reaction in case of external shocks
Experts have warned that due to stronger trade, investment and human ties with Italy, a possible slowdown in GDP growth in the Eurozone’s third largest economy and Albania’s top trading partner, could affect the Albanian economy more than the Turkey and global trade dispute spillover effects.
The Albanian government expects the country’s economy to recover to 4.3 percent and public debt to drop to 65.5 percent of the GDP for 2019 in more optimistic forecasts compared to key international financial institutions such as the and the World Bank and the IMF.
The Bank of Albania is the sole independent financial institution with a key role in the country’s economy through its monetary policy targeting price stability and sustainable economic growth after relations with the International Monetary Fund were downgraded to advisory in early 2017 following the conclusion of a three-year loan-supported deal conditioning the government’s fiscal policy.
