TIRANA, Dec. 14 – The International Monetary Fund has warned the Albanian government’s ambitious Euro 1 billion public private partnership project will not only fail to bring public debt down to 60 percent by 2021, but could create hidden costs which if included in the debt stock could take it to 71 percent of the GDP, a high burden for Albania’s current stage of development.
In a recent country report following an IMF mission visit to Albania, the Washington-based international financial institution expects public debt, currently at about 71.5 percent of the GDP, to drop to 64 percent by 2021 when the Socialist Party’s second consecutive term expires. The IMF baseline scenario excludes commitments for public-private partnerships but incorporates central and local government of about 1.1 percent of the GDP, some €120 million.
In another calculation, excluding existing PPPs and assuming the construction phase of newly-proposed PPPs takes four years and costs €1 billion, the IMF expects Albania’s public debt to increase to 73.4 percent of the GDP in 2018 and only slightly drop to 70.9 percent by 2021, which is about 11 percent of the GDP higher compared to the Albanian government’s target of bringing debt down to 60 percent by 2020 and eying a long-term debt target of 45 percent of the GDP.
While the PPP projects are expected to be completed in four years, the government intends to repay concessionaires over 12 years in annual instalments and road concessionaires are also expected to collect tolls to meet investment costs.
Under the Albanian government’s current methodology which omits PPPs and arrears in the debt statistics, public debt dropped to 67.3 percent of the GDP in September 2017, down from a record high of 72.65 percent in 2015, but yet remaining high for the current stage of Albania’s economic development which has forced the government to set a long-term 45 percent debt target.
“Implementation of the new PPP framework is a challenge. Given the fiscal risks posed by the authorities’ ambitious PPP agenda, [IMF] staff stressed the importance of strengthening the implementation of the PPP framework and making use of Ministry of Finance’s recently expanded legal powers to assess, veto, and monitor all PPP projects,” says the IMF.
The IMF recommends introducing an aggregate quantitative limit on the total value of all PPP contracts, in addition to the current limit on annual PPP-related budget payments, to help contain risks and empowering state statistical institute INSTAT to record PPPs in the fiscal and debt statistics in accordance with ESA, the European System of National and Regional Accounts.
The Albanian government has set a PPP spending ceiling at 5 percent of the annual tax income and says it could introduce tax hikes in case of exceeding the limit.
While the 2018 public private partnership costs pose no threat to public finances, the ambitious €1 billion PPP project that the ruling Socialists have announced for the next four years has also worried the opposition and some economy experts who say the planned road, education and health investment could create new arrears and hamper efforts to bring public debt to 60 percent of the GDP by 2021.
However Prime Minister Edi Rama who was elected for a second consecutive term with his Socialist Party last June, says the program targets putting into motion considerable capital “to trigger with higher intensity a process of all-inclusive reconstruction that has already kicked off, but needs greater financing throughout the country on the road, education and health infrastructure.”
The €1 billion PPP initiative launched by Prime Minister Edi Rama comes at a time when foreign direct investment, a key driver of Albania’s growth in the past couple of years, is set to considerably lower its contribution to the Albanian economy by 2018 as major energy-related projects such as TAP and the Devoll hydropower projects complete.
The Arbri Road linking Albania to Macedonia, some 150 schools, hospitals and healthcare facilities are on the PPP agenda.
Central bank governor Gent Sejko said he sees no risk as long as the investments are well-studied and profitable. However, some economy experts are rather skeptical over the project benefits considering the country’s troubled experience with concession contracts and even fear they could serve as money laundering schemes for drug trafficking money following rising cannabis cultivation in the past couple of years.
At about €70 million, the 2018 support to PPPs is not estimated to pose any threat to the 2018 budget considering that the government spending on these kind of investment is at only half of the 5 percent tax income threshold the government has set.
The IMF says it expects Albania’s growth to slow down to 3.7 percent of the GDP in 2018, down from 3.9 percent this year as investment by large energy related projects such as the Trans Adriatic Pipeline and Devoll Hydropower project taper off and no new major projects appear in sight to replace them.
“The medium-term outlook remains favorable. GDP growth is projected to accelerate to around 4 percent, driven by continued strong domestic demand, reforms that improve the business climate, and a strengthening EU recovery,” says the Fund.
The IMF says accelerated donor support as part of the EU accession process could lead to higher investment and a stronger credit recovery while volatile domestic politics or shocks to global growth could pose risks to reform implementation and fiscal consolidation.
The IMF’s role in Albania was downgraded to advisory in early 2017 after the conclusion of a 3-year binding deal supported by a €331 million loan also conditioning the government’s tax policies.
