TIRANA, July 25 – Albania’s public debt hit a three-year low of 66.8 percent of the GDP at the end of the first half of this year, down from about 70 percent during the same period last year, also slightly reducing the country’s debt servicing.
The debt level is about 6 percentage points lower compared to the peak level of 72.65 percent of the GDP at the end of 2015, when international financial institutions voiced concern over Albania’s debt being too high for the stage of the country’s development. Experts had warned the debt level and its high servicing was putting at risk the country’s macro-economic stability and holding back much-needed public investment in key infrastructure, education and health sectors.
The 2017 first half performance shows that the government is little likely to achieve its 63.3 percent debt target for this year when tax income has performed well in contrast to the tradition of underperforming revenues in general or local election years. In addition, bringing public debt to a more affordable 60 percent of the GDP target by 2020 would require further fiscal consolidation, tax hikes and tight spending also affecting public investment considering Albania’s projected growth of about 4 percent in the next three years.
“Fiscal consolidation and debt reduction are key to curbing debt-related risks holding back economic growth and triggering macroeconomic instability,” says the Albanian government in its 2018-2020 macroeconomic and fiscal framework.
“The fiscal consolidation will make possible that the debt-to-GDP ratio continues the downward trend it embarked on in 2016. Public debt is expected to drop to 63.3 percent of the GDP for 2018, before falling to 62.8 percent in 2019 and about 60 percent of the GDP in 2020,” the government says.
Albania’s high public debt level and its large domestic rollover needs remains a key challenge for the country, Moody’s Investors Service, one of the top three global rating agencies, has earlier warned.
More than a third of Albania’s domestic debt is short term, dominated by 12-month T-bills, the government’s key instrument for internal borrowing.
“The government continues to rely on liquidity from a domestic banking system burdened by significant non-performing loans to finance itself,” says Moody’s which has kept unchanged its B1 stable rating on Albania.
The lower debt level and lower interest rates on internal and external debt, also slightly cut debt servicing to about 28 billion lek (€209 million) at the end of the first half of this year, down from about 30 billion lek (€224 million) during the same period last year.
Spending on domestic debt, accounting for about 37 percent of the GDP, was down by an annual 22 percent to 10.7 billion lek (€80 million) in the first half of this year, as the key rate has been held at a historic low of 1.25 percent since May 2016 considerably reducing the cost of internal borrowing.
Albania’s spending on debt interests during the past decade has been at about 3 percent of GDP, much higher compared to other SEE countries, crowding out more productive spending and representing a major source of vulnerability, the World Bank has warned.
Due to several costly debt-financed infrastructure projects, Albania’s public debt climbed by about 13 percent of the GDP from 2009 to 2015 when it hit a record high of about 73 percent of the GDP at a time when growth ranged only between 1 to 3 percent compared to a pre-crisis decade of 6 percent annually.
Albania’s growth is expected to pick up to about 3.8 percent of the GDP in 2017 mainly thanks to some major energy-related investment such as the Trans Adriatic Pipeline and a boost from the emerging tourism industry. Experts estimate Albania’s economy needs to grow by 6 percent annually in order to produce obvious welfare for its households who have taken to massive migration in the past couple of years, applying for apparently ineligible asylum in EU member countries, mainly Germany.
