For 2013, government has selected an overoptimistic 409 billion lek (Euro 2.87 billion) 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
TIRANA, Nov. 20 – 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 official budget scenario was introduced this week by Prime Minister Sali Berisha who said government had decided on a 409 billion lek (Euro 2.87 billion) budget for 2013, when Albania holds the next general elections and Premier Berisha will be seeking a third consecutive mandate with his Democratic Party.
“The budget foresees a variation of plus, minus 2 percent of the 60 percent debt. It could be 60 percent or 62.6 percent but it will in no way reach 63 percent. This is a clear commitment by the Finance Ministry and government to international institutions. We are relieved in front of our partners because we kept our word,” said Berisha at a government meeting this week. The Prime Minister says the budget will continue supporting wages and pension increases as well as employment and investments. “Some USD 500 million from this budget will be made available to infrastructure with roads having an absolute priority. 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.
Commenting on the 2013 budget this week, opposition Socialist Party leader Edi Rama said that government admits the public debt is higher than the 60 percent and will further increase for 2013. He described the publication of the draft budget with a 25-days delay as a violation to the law.
The overoptimistic scenario of a 409 bln lek comes at a time when 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.
The Finance Ministry had also submitted a more realistic version of the 2013 budget to government with revenues at 357.2 billion lek and expenditure at 386.2 billion lek keeping public debt at the 60 percent level. Both scenarios introduced by the Finance Ministry do 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. Latest Finance Ministry data show government revenues for the first 9 months of this year grew by only 2.3 percent to 245 bln lek year-on-year. With VAT and excise tax income far below expectations, government has failed to collect 16 bln lek (euro 112 mln) or 6.2 percent less than planned for the first three quarters of this year.
IMF debt to climb to 64%
In its latest report on Albania, the International Monetary Fund (IMF) says that for 2013, the government’s immediate priority should be arresting the upward trend in public debt, by committing to a budget that maintains debt-GDP ratio at around the 2012 level. Discontinuing the practice of programming optimistic budget revenues and then having to face budget stress once revenue outturn is lower than expected would help avoid the accumulation of unpaid bills, says the IMF.
Given the high public debt, the fiscal rule should be explicitly tied to debt reduction, the IMF had earlier warned. 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. A return to the government’s pre-crisis target of cutting debt to 50 percent could be a solid medium-term objective. While leaving debt higher than in most neighboring countries, the considerable effort implied would reassure markets and investors of policy commitment,” says the IMF.
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. 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.
In its review to the macroeconomic framework, government expects public debt to remain at 59.9 percent of the GDP for the 2012-2014 period, only 0.1 percent below its legal ceiling.
Loans to KESH risk debt
Loans to cash-strapped power utility KESH could further deteriorate the debt situation in Albania as the drought period continues and water levels in the country’s northern Drin cascade, where the key hydropower plants are situated, are almost at their stoppage point. Currently state-owned power corporation KESH is spending around USD 1 million a day on electricity imports, a figure which is expected to increase in winter. With distribution operator CEZ on the verge of departure, the whole electricity imports will be made by KESH and this will also affect public debt and its legal limit of 60 percent of the GDP. Loan guarantees to KESH are expected to increase public debt by 2 percent to 62 percent. KESH has already been recently awarded Euro 50 million to secure power imports. Government is also negotiating with the World Bank over a USD 100 million loan on KESH.
Experts divided over debt ceiling
While government is seriously examining the possibility of jumping the public debt ceiling of 60 percent of the GDP in the 2013 budget, experts and politicians seem divided over the impacts this measure could have. 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.
