TIRANA, March 21 – The International Monetary Fund has warned of a series of risks on the horizon facing Albania’s growth prospects, mainly related to developments in the EU, Albania’s key trading partner, and problems at home with high public debt levels and a controversial €1 billion public private partnership program threatening its reduction to more affordable levels.
The comments come after an IMF mission visited Albania this month in the first post-program monitoring after relations between the Washington-based lender of last resort and the Albanian government were downgraded to advisory in early 2017 following the conclusion of a 3-year binding deal supported by a €331 million loan also conditioning the government’s tax policies.
The IMF expects Albania’s growth to slow down to 3.7 percent in 2018 when two major energy related investment such as the Trans Adriatic Pipeline and a big hydropower plant project complete their investment stage after driving FDI and economic growth for the past four years.
Mid-term prospects remain lukewarm as the IMF expects Albania’s growth to remain almost unchanged until 2021 when the ruling Socialists’ second consecutive mandate expires, with growth ranging from 3.7 to 3.9 percent. The forecasts are considerably lower to the Albanian government’s optimistic scenario of growth recovering between 4.2 percent to 4.5 percent over 2018-2021.
When it comes to public debt, currently at about 70 percent and posing a key threat and high burden to the Albanian economy, the Albanian government expects it to gradually drop to 60 percent of the GDP by 2021. However, the IMF has warned Albania’s ambitious €1 billion PPP project will not only fail to bring public debt down to 60 percent by 2021, but could create hidden costs which if included in the debt stock could take it to 71 percent of the GDP, a high burden for Albania’s current stage of development.
The IMF says growth in the EU, where Italy and Greece are Albania’s main trading partners, remains subdued due to unresolved crisis legacy issues, weak productivity growth, and demographic headwinds.
“There are also global risks from a sudden financial market correction, political uncertainties and protectionist policies which could dampen confidence and growth. A slowdown would adversely affect Albania through trade, investment, and banking channels,” says the IMF report.
The IMF says slowly recovering credit hampered by declining by still high levels of non-performing loans and difficulties in collateral execution, adverse weather conditions affecting the country’s wholly hydro-dependent domestic electricity generation and new market entrants in the banking sector replacing EU-owned banks could also pose threats.
In addition, insufficient progress in implementing structural reforms, in areas such as energy, public financial management and judicial reforms, can undermine investor confidence, significantly reducing donor and capital inflows, and lowering growth, warns the IMF.
“Now is the opportune time to accelerate reforms to mitigate these risks and build up defenses against adverse shocks in the future,” said the mission led by Anita Tuladhar, the head of the IMF team for Albania.
IMF forecasts show Serbia and Albania, the Western Balkans leading economies, are expected to enjoy the highest growth rates among regional EU aspirant countries over the next four years.
PPP, arrears threat
In its latest report, the IMF reiterates its warning over the government’s ambitious Euro 1 billion PPP program for the next four year following earlier calls to suspend the controversial project until guarantees are put in place to reduce potential risks to public finances.
“These processes are critical given the large contingent liabilities frequently embedded in PPP contracts over a long-term horizon. The current practice of unsolicited proposals should be eliminated,” says the IMF.
The Albanian government has already concluded a €240 million 13-year deal over the construction of a highway linking Albania to Macedonia and is about to conclude another deal over a €244 million 21-km highway linking Tirana to northern Albanian route following an unsolicited proposal by a major Albanian company.
The two Albanian concessionaires are supposed to build the highways with their own investment in two or three years and manage and maintain them for eight to ten years in return for annual instalments paid by the Albanian government and finance part of their investment by introducing tolls.
Albania has already had troubled experience with a more than a dozens of concession contracts in the key health, customs sectors which are expected to cost taxpayers about €70 million in 2018 and much more in the next few years as more PPPs become operational.
Accumulated unpaid bills central and local government units owe to the private sector is another threat facing the country’s public finances, says the IMF
The IMF says local and central government arrears climbed to 1.8 percent of the GDP at the end of 2017, an amount equal to about €200 million considering Albania’s €11 billion GDP.
“Stronger enforcement of budgetary commitment controls is crucial to prevent the buildup of arrears. Unfunded commitments in the medium-term budget and value-added tax (VAT) refund delays have led to an accumulation of new arrears of around 0.9 percent of GDP in 2017 (of which, 0.7 percent of GDP in VAT refunds), which need to be resolved rapidly,” says the IMF.
Timely VAT refunds is one of the main issues facing medium-sized and big businesses in Albania despite legal changes having made refunds automatic within 30 days for businesses exporting more than 70 percent of their total sale value as of mid-2016.
The accumulation of new arrears comes after some €500 million was cleared in 2015 in payments to private sector companies contracted for public works under a two-year deal that is estimated to have strengthened private sector balance sheets, reduced nonperforming loans and supported domestic demand, although credit is still struggling to return to positive growth rates.
