TIRANA, May 5 – The Albanian government has set a 45 percent ceiling on public debt, currently hovering at a record 70 percent of the GDP and considered a key risk to the country’s macro-economic stability.
Under a draft law on the budget management system approved this week, the Albanian government says the public debt will be forecast at a lower level compared to the preceding year until public debt drops to 45 percent of the GDP. An exception is made for the so-called extraordinary circumstances in case of natural disasters, state of war or a GDP growth forecast of less than 1 percent when public debt stands below 60 percent of the GDP. While no timeline has been set, bringing public debt to 45 percent of the GDP could take Albania more than a decade of tight measures.
The government also commits to set aside 1 percent of total spending in the annual budgets to compensate for potential risks related to exchange rate fluctuations or interest rates with an impact on the country’s public debt.
Half of privatization revenue will also be used to cut the public debt level and the remaining 50 percent will go to public investments.
The new draft law also envisages a ceiling for government commitments to public-private partnerships at not more than 5 percent of annual tax revenue.
The bill also disciplines spending during electoral years considering the country’s experience of soaring spending and widening deficit in general and local election years often used by incumbent majorities to gain an electoral advantage.
“The execution of the deficit until the first half of the year cannot be higher than 55 percent of the annual deficit determined in the budget law,” says the bill.
Setting a debt ceiling has also been a requirement by international financial institutions after Albania lifted its statutory limit of 60 percent of the GDP in 2012.
Albania’s public debt slightly dropped to 69.3 percent in the first quarter of this year, down from a historic high of 72.2 percent of the GDP at the end of 2015 and 68.4 percent in the first quarter of 2015 while debt servicing slightly increased, according to a finance ministry report.
The figures indicate the public debt which is considered too high for the current stage of Albania’s economic development and a drag on much needed public investment, is on track to register its first decline since 2010 when it stood at about 58 percent of the GDP.
The Albanian government and the IMF expect the country’s public debt to embark on a downward trend in 2016 that will gradually bring it back to 60 percent of the GDP by 2019.
The government spent about 9.3 billion lek (€65.7 million) in interest rates on public debt during the first quarter of this year, up 4 percent compared to the same period last year as yields on internal borrowing dropped to a historic low.
Albania’s public debt hit a historic high of 72.2 percent of the GDP in 2015 when it climbed to more than 1 trillion lek (€7.5 billion) while its servicing cost almost doubled to 100 billion lek (€722 mln) compared to 2014, posing a serious threat to the country’s public finances and much-needed public investments, according to finance ministry data.
At 72.2 percent of the GDP, the public debt was almost 12 percent higher compared to its previous statutory limit of 60 percent of the GDP until 2012 but no longer included government arrears of 5 percent of the GDP in accumulated unpaid bills to the private sector cleared during the past couple of years.
Albania had a similar debt level in 2000 following the collapse of the pyramid investment schemes when debt was at 72.4 percent of the GDP but gradually reduced in the following decade before climbing to 70 percent in 2013.
Last November, Albania managed to secure €450 million in a new five-year Eurobond at a coupon rate of 5.75 percent, down from 7.5 percent in its inaugural €300 million Eurobond.
“Spending on interest, at about 3.2 percent of GDP, is already much higher in Albania than in the other SEE countries, crowding out more productive spending and representing a major source of vulnerability,” says the World Bank in a recent report.
