TIRANA, Oct. 9 – The worsening trend of loan performance and problems in the electricity sector pose new risks to Albania’s outlook apart from the euro area crisis and public debt currently at the legal ceiling of 60 percent of the GDP, says the IMF in its concluding statement on Albania.
“Another risk to the outlook is the worsening trend of loan performance, which if not arrested, could exacerbate negative feedback to the economy. Structural impediments in the electricity sector are a source of fiscal risk, and unless dealt with urgently, could result in supply constraints, further affecting the economy.” says the IMF.
Non-performing loans
The rising level of non-performing loans is a concern and requires prompt action. NPLsحainly in trade, construction and manufacturingبave risen faster than in other countries in the region, largely because of the economic slowdown, government’s nonpayment of suppliers’ bills, and continued delays in collateral execution. This has affected the profitability of banks and their ability to extend credit to the economy. Concrete actions, such as easing collateral executionءllowing property prices to adjust to market forces by facilitating foreclosure sales (including, by removing the regulated price floor), increasing efficiency of private bailiff offices, and limiting inconsistent application of the lawءnd clearing unpaid government bills and VAT refunds would help, suggest the IMF.
Bank of Albania data show non-performing loans climbed to a record 21 percent during the first half of this year. However, the 16 commercial banks operating in Albania doubled their profits to 2.3 billion lek in Jan-June 2012, up from 1.1 billion lek during the same period last year.
Public debt to exceed 60% limit
Despite the attempts to control budget spending, public debt could breach the 60 percent statutory debt limit this year, and is not expected to decline much over the medium term, even if the budget registers small primary surpluses, warns the IMF.
With an elevated public debt, Albania faces substantial risks. The large share of short term public debt translates to high fiscal financing risks. In the medium term, rising public debt could also hamper growth prospects by crowding out private sector credit and affecting the government’s ability to finance crucial development projects.
With buffers depleted, new fiscal stimulus to support the weak economy is not an option; instead, fiscal consolidation is needed to lower risks from elevated debt. Setting an ambitious but feasible long term debt target to anchor fiscal policyزeducing the debt-GDP ratio to 40 percent by 2022طould strengthen the economy’s resilience to shocks, while allowing for a more gradual adjustment to accommodate development needs. 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 levelءn adjustment of the fiscal deficit by about 0.6 percentage points of GDP. This would strike an appropriate balance between signaling the government’s commitment to debt sustainability, and limiting the adverse impact of fiscal consolidation on the weak economy, financial sector stability, and social outcomes. Fiscal prudence in the run up to elections is needed to preserve market confidence. To achieve the medium term debt target (consistent with about 53 percent debt-GDP ratio in 2017), a cumulative fiscal consolidation of about 3.1 percentage points of GDP would be
Tax and expenditure reforms would be needed to achieve the long-term debt target while supporting growth. Yet, because the scope for additional revenues through adjusting tax rates also has limits, spending control would also be requiredسtaff views social security reform and keeping public wage growth in line with inflation as essential.
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.
Privatization receipts should be utilized in a balanced manner, to reduce debt and clear unpaid bills.
Growth is now slowing and persistent macroeconomic imbalances need to be addressed. Key priorities in the period ahead are: ensuring debt sustainability, strengthening the banking system’s resilience, and advancing growth-enhancing structural reforms.
Unchanged fiscal policies will not tackle underlying vulnerabilities. Public debt is elevated and fiscal financing needs are the highest in the region primarily because of high rolloverطhile economic rebalancing is incomplete, including a large external current account deficit that persists in double digits.
Gloomier picture of global economy
The International Monetary Fund (IMF) presented a gloomier picture of the global economy than a few months ago, saying prospects have deteriorated further and risks increased. Overall, the IMF’s forecast for global growth was marked down to 3.3 percent this year and a still sluggish 3.6 percent in 2013.
“Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses,” said IMF Chief Economist Olivier Blanchard.
In its new October World Economic Outlook, the IMF expects the Albanian economy to grow by 0.5 percent this year, 1.7 percent in 2013 and 2.5 percent in 2017. Average inflation rate is expected at 2 percent in 2012 and 3 percent in 2013, remaining within the central bank’s 3 +-1 percent target band. Current account deficit is expected to drop to 11.8 percent of the GDP in 2012 and 11.5 percent in 2013.
The escalating crisis in the Eurozone, especially impacts from top trade partners Italy, Greece, and public debt at the legal ceiling of 60 percent of the GDP will keep Albania on the verge of recession this year, an IMF official unveiled this week. Speaking at a joint press conference with the country’s Finance Minister and central bank governor after concluding a two-week visit, Nadeem Llahi, the new IMF representative for Albania said the Fund expects the Albanian economy to grow by only 0.5 percent this year and 1.3 percent in 2013 in a forecast which does not include around Euro 1 billion from the sale of oil firm Albpetrol and four small and medium sized enterprises. The IMF forecast, which is the most pessimistic among international financial institutions, is six times lower compared to the reviewed government target of 3 percent.
