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, says the IMF
TIRANA, Nov. 15 – With public debt at around 60 percent of the GDP, Albania remains the most vulnerable country among six EU- aspirant South East European countries, according to a new World Bank “South East Europe Regular Economic Report” released this week.
Albania’s public debt at 58.2 percent of the GDP by the end of 2010 was the highest in the SEE 6 with all remaining five EU candidate and potential candidate countries having government debt levels of below 50 percent. Public debt levels range from 51.3 percent in neighboring Montenegro to 42.9 percent in Serbia, 36.9 percent in Bosnia and Herzegovina, 24.6 percent in Macedonia and 6.9 percent in Kosovo.
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 recent sign of weaker growth in Albania and its relatively high level of debt may mean that Albania could be also negatively affected this time. While there appears to be some room for domestic borrowing this may crowd-out financing for private sector. Access to external market will continue to be difficult,” says the report.
Latest Finance Ministry data show Albania public debt stood at 767.8 billion lek or 58.2 percent of the GDP at the end of Sept. 2011. Domestic debt accounts for the majority of 33.17 percent compared to 25.03 percent in external debt. The depreciation of Albanian national currency, lek, against the euro and the US dollar, cost the Albanian government a record 27.4 billion lek or 2.3 percent of the GDP in 2009. The depreciation impact in 2010 was at 1.5 billion lek in 2010 and is expected to be at 7.5 billion lek or 0.6 percent of the GDP in 2011, according to the Finance Ministry.
Data show the Albanian government has paid 33.4 billion lek, or 2.53 percent of the GDP in debt services during the first nine months of this year, compared to 48 billion lek or 3.9 percent of the GDP during the same period last year.
For 2012, the Finance Ministry plans to spend around 59.7 billion lek or 10 percent more on debt service compared to the 2011.
GDP growth downgraded
Citing effects of a further global slowdown and the deepening of the Eurozone crisis, the World Bank has lowered Albania’s GDP growth estimate to 3 percent for 2011 and 2 percent for 2012 which remains the most optimistic compared to other international financial institutions such as the IMF and the EBRD.
The effects of a further global slowdown and the prolonged uncertainties around the Eurozone crisis will influence SEE6 economies through trade, foreign direct investment (FDI), foreign banks, and remittances, according to the report. All these transmission channels would be affected by deeper economic and financial tensions in the EU and the Eurozone
“Our projections are for the growth in this region of 2.5 percent in 2011 and 2.1 percent in 2012,” says Ron Hood, Lead Economist in the World Bank’s Poverty Reduction and Economic Management Sector Unit in the Europe and Central Asia region and lead author of the report. “However, even these modest growth projections assume that the Eurozone crisis is solved in an orderly manner. Should the crisis worsen, economic growth in these countries could be much worse.”
While the region has made significant progress over recent years, it is at risk from the effects of a further global slowdown and needs to adopt policies that support stability and longer term growth, suggests the World Bank.
The presence of foreign banks creates another channel of potential influence. The share of foreign banks in the total assets of the region’s banking system stands at around 89 percent.
“Whereas overall banking systems in SEE6 countries appear resilient, with high liquidity and significant capital buffers, existing credit and funding risks are being magnified in the region, driven primarily by adverse developments in the EU, an overhang of non-performing loans from banks in many SEE6 countries, and slowing economic growth,” warns Hood. “Almost all foreign banks in SEE6 are from EU countries, with a comparatively high share of Greek and Italian owned banks. Further stress on their respective parent banks could potentially create another credit crunch in the region.”
While immediate financing needs of fiscal deficits appear to have been secured, longer term prospects will remain difficult, warns the report. The sharp rise of gross external and government debt to GDP between 2008 and 2010 is mainly attributed to government borrowing aimed at financing fiscal deficits used to smooth out crisis effects. The SEE6 group is heterogeneous regarding the level of external debt, with the total debt in Montenegro and Serbia above the regional average, while Albania has the biggest public debt as a percentage of GDP.
Improving employment opportunities remains another major long term challenge for the SEE6, concludes the report. The high level of unemployment among youth and the low participation of women is a striking feature of the SEE6 labor market. Moreover, much of the unemployment is long term and several countries have aging populations.
“Future growth will need to be driven more by investment and improvements in productivity that enhance competitiveness and productive capacity, rather than by the externally financed consumption and investment in real estate and other bubble assets,” says Jane Armitage, World Bank Country Director and Regional Coordinator for South East Europe. “Countries in South East Europe need to address longstanding structural reform challenges. This will allow them to take better advantage of the access to markets, inflows of foreign direct investment, bank finance, and remittances that closer integration with the EU offers.”
The special feature of the report is the focus on education, and on Research and Development (R&D) and Innovation.
