“Crossing the 60 percent mark, in turn, carries a high risk that markets will take it as a sign of macro-economic instability and react badly, making furthermore difficult to support both growth and fiscal policy objectives,” says Kseniya Lvovsky, World Bank Country Manager for Albania.
TIRANA, Nov. 13 – 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.
Prime Minister Sali Berisha also implied government could exceed the public debt by two percentage points in 2013, saying that “austerity measures would endanger economic growth. Speaking to journalists last weekend, Berisha said “next year we have committed to keep the public debt at around 60 percent, plus minus 2 percent. Personally I am convinced we must avoid measures infringing economic growth.” He argued that countries applying austerity measures are plunging into deeper recession.
Sherefedin Shehu, a ruling Democratic Party MP says the 2013 budget should not be a hostage to the debt threshold but support the economy. “In this period it is considered an economic stimulus and this is the only argument for the increase of debt but a moderate increase is the best standard because debt can produce economic growth at a certain level,” said Shehu. Sybi Hida, another Democratic Party MP also says exceeding the public debt limit is no problem if the measure serves as a stimulus to the economy. Government should provide more support to the private sector with its public finances even though having to increase spending,” says Hida.
Opposition
Opposition MPs and experts describe scenarios to increase public debt beyond the 60 percent as dangerous to the economy. Mimi Kodheli, a Socialist Party MP and deputy head of the parliamentary economy says both government scenarios of keeping public debt at the current 60 percent level and increasing it to 64 percent are dangerous at a time when the economy has been affected by crisis. Socialist Party MP and former Finance Minister Arben Malaj says government should draft a realistic budget without excess optimism despite 2013 being an electoral year. “If wages and pensions increase because of rising deficit this is the most harmful policy which could lead to a situation other countries are suffering from currently. Under conditions when debt gets out of control, the first thing that must be done is stopping it and there are two ways of stopping it, increasing budget revenues and cutting spending. The package that is being applied by crisis-hit countries today is the cut in spending,” said Malaj. Former Socialist Finance Minister Anastas Angjeli says the 2013 budget should have a clear fiscal policy of promoting economic growth, keep deficit under control and in no way exceed the 60 percent limit.
Experts
Zef Preci, the director of the Albanian Institute for Economic Studies, says that 2013 is expected to improve Albania’s growth which means public debt will be under control. According to him, the efficient use of money to promote domestic production, employments and exports, making the economy more competitive is more important than the public debt level. “I must say that the destination and efficient use of money with as little corruption as possible and benefit to the Albanian economy is more concerning than the public debt level. The transparency of public funds and the respect of priorities handling global crisis impacts remain problematic,” says Preci.
Ardian Civici, a member of the Bank of Albania Supervisory Board, says the public debt burden is becoming more concerning because of its rising cost and the slowdown in economic growth. “Under these conditions we should absolutely be careful with behaviour toward public debt, not only in the now formal debate of ‘over or below 60 percent of the GDP,’ but above all in understanding behaviour to debt,” says Fullani.
International institutions
Both the IMF and World Bank have stressed Albania’s need to reduce public debt levels in order to achieve long-term sustainable growth. “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. 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,” says the IMF.
The World Bank also says gradually reducing the elevated level of public debt in times of economic downturn is in the best interest of the Albanian economy and citizens. “Staying too close to 60 percent carries a significant risk of crossing it over if a major shock to the budget occurs, as for example, nearly happened during the last winter due to unforeseen electricity imports. Crossing the 60 percent mark, in turn, carries a high risk that markets will take it as a sign of macro-economic instability and react badly, making furthermore difficult to support both growth and fiscal policy objectives,” says Kseniya Lvovsky, World Bank Country Manager for Albania.
2013 budget scenarios
At a time when government revenues are almost at standstill, eight months before the new general elections, Prime Minister Sali Berisha has unveiled an overoptimistic budget of 400 billion lek supporting wage and pension increases. The overoptimistic scenario of a 400 bln lek under conditions when revenue increase has frozen would take public debt to 63.5 percent of the GDP, 3.5 percent more than the legal ceiling.
Finance Ministry sources say they have 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. 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.
Constitutional changes on public debt ceiling
With public debt standing at the legal ceiling of the 60 percent of the GDP and projected to remain unchanged even for the next three years, the High State Audit has proposed to sanction its legal ceiling under constitution. However, in an answer to the High State Audit, the Finance Ministry says the debt stock cannot have a limit. “Under conditions of floating exchange rates, debt stock results are different and could bring negative effects to the external and internal market as well as creditors’ perception on Albania. The interpretations later further deteriorate the debt service damaging public finances and their management,” says minister Bode in his answer to the High State Audit.
Finance Minister Ridvan Bode has described Albania’s debt as controllable and within forecasts. Lowering public debt and budget deficit at a strong pace at a time when domestic and foreign demand is suffering means further escalating the crisis, said Bode. Currently, the 60 percent ceiling for the public debt is only foreseen in the budget law. The adoption of this rule in the Constitution means that under no circumstances the public debt can exceed 60 percent of the GDP.
Debt jumps to 59.8%
Albania’s public currently stands at around 60 percent of the GDP. Finance Ministry data show public debt rose to 59.8 percent of the GDP at the end of the third quarter of 2012, up 0.45 percent compared to the end of 2011, standing just 0.2 percent below its legal threshold of around 60 percent of the GDP. At the end of the third quarter of 2012, public debt stock climbed to 814 billion lek at the end of the first 9 months of 2012, up from 772 billion lek at the end of 2011. Domestic debt represented 56.6 percent of the total debt stock. External debt accounted for 43.4 percent in the first quarter of 2012 compared to only 39 percent in 2009 before Albania made its Eurobond debut. Public debt at around the legal ceiling of 60 percent of the GDP, and bad loans at 20 percent are the key threats to the Albanian economy which since 2009 has stuck into moderate 3 percent annual growth rates, international financial institutions have warned.
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.
