Indermit Gill, the World Bank chief economist for Europe and Central Asia, said Albania’s public debt is 20 percent higher compared to other similar middle-income economies and its cost is affecting other priority sectors such as health and education
TIRANA, March 19 – The World Bank has once again reiterated the threat Albania’s public debt, currently hovering at around 60 percent of the GDP, poses to the country’s economy which after the 2009 global crisis has stuck into moderate 3 percent GDP growth rates. Indermit Gill, the World Bank chief economist for Europe and Central Asia, who last weekend presented a report in Tirana said Albania’s public debt is 20 percent higher compared to other similar middle-income economies and its cost is affecting other priority sectors such as health and education.
“The best public debt level is based on the experience of other countries. For every given group of countries, there is a given debt level. For the big economies it is up to 90%. For small developed economies it is 60%, and for economies like Albania it is 40 to 50%. Beyond this limit, you must convince the foreign investors for funds at reasonable terms. Beyond the 40% level, the financing becomes more expensive. This is the reason,” said Gill presenting the “Golden Growth: Restoring the lustre of the European economic model” report.
Asked about the measures government can take to lower public debt, the senior World Bank official advised improving the tax collection efficiency as a tool to increase government spending and stimulate growth.
Considering Albania’s economic performance during the past 20 years after the collapse of the communist regime a success story, Gill said he was optimistic about Albania’s future.
“When I analyze Albania’s performance, I consider it a success case. You can rarely find a country that has increased the per capita income in such a short time, and for me this is a success story. I think that the future is optimistic. Although the economic situation might have changed now, Albania needs more efforts than earlier to keep this pace,” added Gill.
The World Bank senior official also advised doing more to facilitate the inflow of foreign direct investment. “Anything that helps FDI will help innovation in a country like Albania. FDI is closely related to the development of countries which are not known for high productivity.
Reacting to the World Bank’s comments, Finance Minister Ridvan Bode described Albania’s public debt as not posing real threat to the economy, saying that its overwhelming majority was internal and exposed to low risk.
“Around 97 percent of the Albanian public debt is exposed to low market risk and only 3 to 4 percent is exposed to the global crisis and EU debt crisis. We handle debt either through T-bills in lek in internal market or through development banks which offer long-term deadlines and low interest rates. In this sense out debt cost is relatively lower compared to other regional countries,” said Bode who has been Albania’s Finance Minister for the past seven years.
Public debt highest, most expensive among EU aspirants
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 World Bank “South East Europe Regular Economic Report.”
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 neighbouring 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.
According to the Finance Ministry, government spent 5.7 billion lek less on debt interest rates for 2011. Interest payments, which represent about 13.4 percent of total current expenditures, dropped to about 3.1 percent of GDP, down from about 3.4 per cent in 2010. However, from 2012 to 2014, interest expenditure is expected to remain at an annual 3.6 percent of the GDP.
Failure to execute planned reform programme, both economic and institutional, could put downward pressure on Albania’s government bond rating, Moody’s Investor Service, one of the top three global credit risk rating agencies has warned in its latest country report on Albania whose public debt has been lingering at around the legal limit of 60 percent of the GDP since 2009 and is projected to slightly drop to 58 percent only by 2015.
The International Monetary Fund has warned Albania’s public debt, currently at the legal limit of 60 percent of the GDP, will rise to 64 percent by 2016 under current fiscal policies.
“It is imperative that these vulnerabilities be reduced further. Countries should not take solace in the fact that spreads have remained relatively low so far. Past experience in countries with significant public finance problems shows that spreads can remain low until a very late stage,” says the IMF.
The situation becomes even more critical as another Eurobond issue is impossible as the Eurozone debt crisis escalates and yields soar. Borrowing from international financial institutions is also becoming more difficult as high public debt levels and economic slowdown is becoming a burden.
Pension reform
The World Bank senior official also stressed the need for a pension reform suggesting increasing retirement age as one of the options to lower the rising deficit in the pension scheme.
“The general rule is that it very difficult to keep a sustainable social protection system at a time when people are encouraged to retire early and life expectancy has increased,” said Gill.
According to the World Bank, Albania’s 8.2 percent of the GDP expenditure on social protection is just below the 10 percent limit which risks investments in other key priority sectors such as education and health.
Without ruling out the possibility of increasing retirement age, Finance Minister Ridvan Bode considered the reform a necessity. “Several key measures related to the contribution rate, the number of participants in the scheme and the fight against informality need to be taken,” said Bode.
The pension reform is another area the World Bank is assisting Albania as the deficit in the scheme continues widening and social security contributions remain low. “The Technical Assistance will undertake pension modeling to understand the fiscal sustainability and the benefits of the current system, and the impact of various reform options,” says World Bank country manager Kseniya Lvovsky.
As the pension reform initiated back in 2002 concludes next year with the retirement age having gradually increased to 65 years for men and 60 for women, the number of new pensioners in Albania will double, having extra costs for government to cover the deficit in pension scheme.The Labour and Social Affairs Ministry says some 27,000 people are expected to retire in 2012, which is double compared to current annual trend.Finance Ministry data in the 2012 draft budget report show the deficit in the pension scheme in 2012 will rise to 38.188 billion lek, (USD 380 million) compared to an expected 38.037 billion lek for 2011 under new expected cuts, which means an extra 151 million lek (USD 1.5 million) only if optimistic targets on social security collection rates are met under the government scenario.The government has also admitted the need to reform the current pension system, initially announcing an initiative to further gradually increase the retirement age but withdrew later after the reform was not welcome. Controls carried out by the High State Audit show that a considerable number of big businesses pay social security and health insurance contributions for a single person. The situation with small businesses also remains problematic with an estimated 1.29 contributors per business. The current ratio is 1.4 contributions to 1 pensioner at a time when a stable pension scheme requires at least 3 contributions for one pension.
WB: Changes to restore lustre
The World Bank “Golden Growth” report says recent changes in and outside Europe necessitate change. The report proposes the adjustments needed to make trade and finance work even better, to encourage enterprise and innovation in parts of Europe which have begun to lag, and address shortcomings in the functioning of labor markets and governments. The changes proposed would restart the European convergence machine, make Europe’s enterprises competitive, and help Europeans afford the highest standards of living in the world.
The “Golden Growth: Restoring the lustre of the European economic model” report documents the impressive achievements of the European growth model over the last 50 years. Accounting for the stresses it is experiencing and assessing the longer-term challenges that Europe will face, the report then evaluates the six principal components of the model: Trade, Finance, Enterprise, Innovation, Labor, and Government. It finds that the European growth model has been a powerful engine for economic convergence, helping developing countries in Europe catch up to their richer neighbors and become high-income economies
