Govt outperforms on public debt

TIRANA, Feb. 1 – Albania’s public debt in 2011 performed better than government had planned rising by only 0.8 to 58.9 percent of the GDP, 0.4 percent less than government had projected.
Under the 2012-2014 macroeconomic framework the government expects public debt to remain within the 60 percent legal limit; at 59.4 percent for 2012, at 59.1 percent for 2013, and at 58.4 percent for 2014.
However, the International Monetary Fund has warned Albania’s public debt, currently at the legal limit of 60 percent of the GDP, will rise to 64 percent by 2016 under current fiscal policies. In its new detailed country report, the IMF says that given the high public debt, the fiscal rule should be explicitly tied to debt reduction. “Fiscal consolidation is the lynchpin for a sustainable medium-term outlook. This requires more realistic budgeting, and staff recommended an expenditure-based fiscal rule tied to public debt reduction to 50 percent of GDP over the medium term,” says the IMF report.
With public debt at around 60 percent of the GDP, Albania remains the most vulnerable country among six regional EU- aspirant South East European countries, according to a new World Bank “South East Europe Regular Economic Report” released this week.
Albania’s public debt at 58.2 percent of the GDP by the end of 2010 was the highest in the SEE 6 with all remaining five EU candidate and potential candidate countries having government debt levels of below 50 percent. Public debt levels range from 51.3 percent in neighboring Montenegro to 42.9 percent in Serbia, 36.9 percent in Bosnia and Herzegovina, 24.6 percent in Macedonia and 6.9 percent in Kosovo.
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.
Latest detailed Finance Ministry data show Albania public debt stood at 767.8 billion lek or 58.2 percent of the GDP at the end of Sept. 2011. Domestic debt accounts for the majority of 33.17 percent compared to 25.03 percent in external debt. The depreciation of Albanian national currency, lek, against the euro and the US dollar, cost the Albanian government a record 27.4 billion lek or 2.3 percent of the GDP in 2009. The depreciation impact in 2010 was at 1.5 billion lek in 2010 and is expected to be at 7.5 billion lek or 0.6 percent of the GDP in 2011, according to the Finance Ministry.
Data show the Albanian government has paid 33.4 billion lek, or 2.53 percent of the GDP in debt services during the first nine months of this year, compared to 48 billion lek or 3.9 percent of the GDP during the same period last year.
For 2012, the Finance Ministry plans to spend around 59.7 billion lek or 10 percent more on debt service compared to the 2011.
In its October regional economic outlook, the IMF also warned Albania is experiencing deterioration in reducing vulnerabilities to prevent financial turmoil mainly because of the fact that the public debt, currently close to the ceiling 60 percent of the GDP, is the highest in the region and lower only compared to Hungary’s 80 percent among Emerging Europe countries.
For countries such as Albania, Hungary and Poland where public debt exceeds 50 percent of the GDP and short-term debt accounts for more than 10 percent of the GDP, fiscal vulnerabilities remain high. Furthermore, a significant share of public debt in a number of countries is denominated in foreign currency, exposing public finances to currency risk, says the IMF.
Considering the reduction of these vulnerabilities as imperative, the IMF reiterates its warning that impacts can suddenly spread in the future.
“It is imperative that these vulnerabilities be reduced further. Countries should not take solace in the fact that spreads have remained relatively low so far. Past experience in countries with significant public finance problems shows that spreads can remain low until a very late stage,” says the IMF.
Albania’s short-term public debt, (for one year or less) is estimated at 37 percent of the GDP, up from 22 percent in 2007, standing at more than four times above the average of emerging market economies. Meanwhile, Hungary’s short-term public debt has reduced to around 13 percent compared to around 35 percent in 2011.
According to the IMF, Albania’s total external debt to GDP is expected to rise to 38.5 percent of the GDP in 2011, up from 36.6 percent in 2010 and 33.4 percent in 2009.
The situation becomes even more critical as another Eurobond issue is impossible as the Eurozone debt crisis escalates and yields soar. Borrowing from international financial institutions is also becoming more difficult as high public debt levels and economic slowdown is becoming a burden.