TIRANA, Feb. 27 – Albania’s public debt ended a 5-year upward trend to register a slight drop in 2016 after hitting a record high of 72.6 percent of the GDP in 2015 when it emerged as a key barrier for the country’s economic stability considering the current stage of Albania’s economic development with the debt’s high servicing costs affecting much-needed investments in key infrastructure, health and education sectors. However, uncertainties over the upcoming June general elections, a slower than expected economic recovery and some current and newly proposed public-private partnerships estimated to create new hidden debt make its reduction to 60 percent by 2020 a difficult target to achieve.
In addition to the common phenomenon of a boom in pre-electoral public spending by incumbent majorities to apparently gain an electoral advantage, the country also faces the risk of political uncertainty and instability with a negative impact on the economy, especially foreign direct investment and its emerging tourism industry.
Political uncertainty over the upcoming June 18 general elections has grown as the main opposition Democratic Party has boycotted parliament and is staging indefinite protest over free and fair elections, calling for a caretaker government to take over in the run-up to elections to guarantee elections from the use of alleged cannabis money and people with criminal records.
Economy experts have also expressed skepticism over the ruling Socialists’ recent pre-electoral initiative of injecting 1 billion euros in key sectors through public-private partnerships, warning the project risks creating new arrears and hidden public debt at a time when the country’s economy already faces high debt levels and the economy is slowly recovering.
Journalist Gjergj Erebara says Albania’s public debt has grown faster than the country’s GDP during the past decade.
“During the past eight years, Albania has increased its public debt by €2.7 billion at a time when the GDP has increased by only €2.5 billion, a situation showing how badly the borrowed money has been used by ruling majorities,” he says in an analysis on the country’s public debt situation, describing as inefficient the costly debt-financed investment on an almost €1 billion highway linking Albania to Kosovo and a €100 mln Vlora thermal power plant, the latter not operational yet since 2010 because of its costs of operating on fuel.
Moody’s Investors Service, one of the top three global rating agencies, has recently warned Albania’s high public debt level and its large domestic rollover needs remains a key challenge for Albania.
“The government continues to rely on liquidity from a domestic banking system burdened by significant non-performing loans to finance itself,” says Moody’s.
International financial institutions have warned the current debt level, among the highest in the region, poses a major threat to the country’s macroeconomic stability, urging fiscal consolidation to bring it back to 60 percent of the GDP, the recommended level for Albania’s stage of development.
The European Commission also warned in its latest Winter European economic forecast that uncertainties over the upcoming June 2017 elections, a longer than expected credit recovery and the conclusion of a three-year deal with the International Monetary Fund could put Albania’s fiscal consolidation efforts at risk.
Public debt at 70 percent of the GDP and non-performing loans at 20 percent are considered key barriers for the Albanian economy which has been growing by 1 to 3 percent in the past eight years compared to a pre-crisis decade of 6 percent annually, the latter a growth rate that is considered to bring welfare to the country’s economy suffering one of Europe’s lowest levels of GDP per capita.
Growth for 2017 is expected to pick up to 3.8 percent before accelerating to 4.1 percent in 2018 and 2019 driven by a recovery in consumption and some major energy-related projects.
However, sluggish credit, a poor recovery in the Eurozone economy affecting the country’s exports, remittances and FDI, strong exchange rate fluctuations and the pace of the structural reforms could reduce Albania’s medium-term growth projections by 1.5 percent annually, the Albanian government has announced in a pessimistic scenario in its 2017-2019 economic reform program.
In addition, a slow recovery in commodity prices could have further negative effects on the country’s key oil and mining industry and investment plans by international companies already suffering from the mid-2014 slump.
Debt drops to 71% of GDP
Finance Ministry data shows Albania’s public debt dropped by 1.65 percent to 71 percent of the GDP in 2016 while its servicing cost almost halved compared to 2015 when Albania’s inaugural €300 million Eurobond matured and the country replaced it with a new €450 million five-year Eurobond.
With loan interest rates and security yields at a record low, the Albanian government spent only 36.2 billion lek (€264 mln) in interest rates on both domestic and external debt in 2016. The interest spending marks a record low since 2008 just before the onset of the global financial crisis when public debt stood at affordable levels of 55 percent of the GDP before embarking on an upward trend fuelled by a costly loan to build a highway linking Albania to Kosovo, rising yields and accumulated unpaid bills to the private sector.
Debt servicing, which includes interest payments plus repayments of principal to creditors, cost the Albanian government some 58.2 billion lek (€424 mln) in 2016 after a record high of 100 billion lek (€730 mln) or 7 percent of its GDP in 2015.
The overwhelming foreign-owned 16 banks operating in Albania held about a third a total domestic debt at the end of 2016 with the non-bank financial institutions and households holding 15 percent each and the country’s central bank about 9 percent.
Albania’s domestic debt, which has been gradually declining in the past decade as the country has diversified its borrowing needs with the issue of two Eurobonds, still holds a slight advantage over external debt, accounting for 37.4 percent of the GDP.
More than a third of Albania’s domestic debt is short term, dominated by 12-month T-bills, the government’s key instrument for internal borrowing.
In its revised 2018-2020 mid-term budgetary program, the Albanian government expects public debt to about 79 percent in 2017 and continue its downward trend until 2020 when it is forecast to drop to its previous statutory level of 60 percent of the GDP under an austerity program that also affects public investments.
Last year, the Albanian government set a 45 percent of the GDP ceiling on public debt, making it mandatory for debt to be forecast at a lower level in every annual budget until it reaches 45 percent of the GDP.
