Spending on public debt service exceeds public investments

Total debt service, which includes spending on interests and repayments of principal to creditors cost the Albanian government 2.16 percent of the GDP in the first half of the year.
TIRANA, Sept. 16 – Total debt service cost the Albanian government 30.6 billion lek (around euro 215 million) in the first half of this year, up from 27 billion lek (Euro 190 million) during the same period last year, severely affecting public investments which at around 20 billion lek (Euro 140 million) in January-June 2014 hit a record low in the past six crisis years.
Finance Ministry data shows total debt service, which includes spending on interests and repayments of principal to creditors cost the Albanian government 2.16 percent of the GDP in the first half of the year.
Public debt, which is expected to climb to a record 72 percent of the GDP in 2014, will remain Albania’s key barrier to growth with total debt service expected at 66 billion lek (Euro 462 million), more than three quarters of the planned 84 billion lek in investments for 2014.
Public debt, including government arrears at 5 percent of the GDP, is estimated to have climbed to 70.5 percent of the GDP in 2013, and is expected to further climb to 72 percent of the GDP before going on a downward trend starting 2015, according to the 2015-2017 macroeconomic and fiscal framework.
Since 2008, public debt as a percent of GDP has increased by more than 10 percentage points. Total debt service, which includes payments plus repayments of principal to creditors cost Albania around 56 billion lek (Euro 393 million) in 2013, but dropped to 4.9 percent of the GDP compared to 5.01 percent in 2012.
In the second quarter of 2014, Albania’s total debt stock climbed to 917,641 billion lek (around Euro 6.43 billion) or 64.71 percent of the GDP, excluding arrears of around 5.3 percent of the GDP.
Domestic debt accounted for 38.32 percent of the GDP, compared to external debt with 26.39 percent.
What’s particular about Albania’s debt maturity in the past five years is that the short term debt share has been reduced by 10 percent from 2010 to 2013 while the share of long-term debt has increased by 12 percent.
While public debt climbed to around 70 percent of GDP in 2013, including unpaid bills and arrears of around 5.3 percent, Albania has reduced rollover risks by cutting the share of its short-term debt to around 47 percent of the total debt stock, down from 53 percent at the end of 2012 and 57 percent at the end of 2009 in the onset of the global financial crisis.
Meanwhile, the share of long-term debt rose to 49 percent in 2013, up from 43 percent in 2012 and only around 37 percent at the end of 2009.
Publicly guaranteed debt, which mainly includes loans to KESH power corporation, stood at 3.8 percent of the GDP in 2013, up from 3.3 percent in 2012 and 1.33 percent at the end of 2009.
Among short-term debt instruments, 12-month T-bills, the key instrument of government’s internal borrowing accounted for around 38 percent, down from 43 percent in 2012 and 40 percent in 2009. Second come 6-month T-bills with 7.5 percent at the end of 2013 and 3-month T-bills with 1.53 percent of the total debt stock.
Albania’s share of long-term debt is dominated by 5-year T-notes with around 18 percent, followed by 2-year notes with 15.7 percent, and 3-year notes with 6.3 percent.
“Insufficient fiscal consolidation could undermine fragile investor confidence, affect the domestic and external rollover of public debt and impact bank holdings of government paper,” warns the IMF in its latest report.
Debt holders
Bank of Albania data show Raiffeisen Bank, the country’s biggest bank, has lowered its exposure to Albania’s domestic public debt by around 14.5 percent since the onset of the global crisis in 2008 as part of its funding withdrawal policy. Raiffeisen’s share at the end of the second quarter of 2014 dropped to 20.13 percent of the total domestic debt stock, compared to 29.5 percent in 2012, 34 percent in 2011 and around 37 percent at the end of 2008.
However, Raiffeisen’s withdrawal has been compensated by other commercial banks which have increased their share to 42 percent of total domestic public debt, up from 37.45 percent in 2012, 34.85 percent at the end of 2011 and 34.6 percent at the end of 2008. The Bank of Albania share also slightly dropped to 11.79 percent at the end of the first half of 2014, down from 12.48 percent in 2012, 14.3 percent at the end of 2011 and 17.75 percent at the end of 2008.
Meanwhile, non-banking financial institutions increased their domestic debt share to 14.23 percent at the end of the second quarter of 2014, up from 6.16 percent in 2012, 3.7 percent in 2011 and a mere 2.46 percent in 2008.
The share held by individuals slightly dropped to 11.85 percent at the end of the first half of 2014 but was up from 8.33 percent in 2008.
External borrowing by the government of Albania consists of multilateral and bilateral official credits, syndicated bank borrowing, and a Eurobond. The most important multilateral creditors to the government are the World Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Council of Europe Development Bank, and the Islamic Development Bank. The most important bilateral creditors are Germany (through KfW Development Bank), Italy, and Austria.