The 100 million dollar loan would be much needed for the Albanian government at a time when major infrastructural works are underway, public debt cost is on the rise and revenues have stagnated
TIRANA, Jan. 16 – The World Bank says it is ready to assist the Albanian government with a USD 100 million loan or even more only if the public debt currently at the legal limit of 60 percent of the GDP is gradually reduced and the economy is kept growing by improving its competitiveness. Speaking in a recent meeting with reporters World Bank country director for Albania Kseniya Lvovsky conditioned the assistance package, currently under negotiation, with tough reforms. “If our joint assessment with the Albanian government unveils the need for this huge amount (USD 100 mln) and if the Albanian government outlines a tough programme of reforms on the financial sector, the economic growth and competitiveness, we will be able to offer this amount, and even a bigger amount than this,” said Lvovsky, adding that negotiations were still under their initial stage to make concrete specifications.
The 100 million dollar loan would be much needed for the Albanian government at a time when major infrastructural works are underway, public debt cost is on the rise and revenues have stagnated. Issuing another Eurobond is impossible at these times as the Eurozone debt crisis has put yields at staggering rates compared to the affordable 7.5 percent yield for the 5-year 300 million Euro bonds government sold late in 2010.
Borrowing from the domestic market would also harm domestic businesses and individuals as lending keeps growing at moderate rates due to bad loans at a record 18 percent of the total credit. Raiffeisen Bank Albania, the leading commercial bank in the country which has announced has withdrawn available financing for Albania.
The only solution has been borrowing through T-bills and T-bonds in auctions organized by the Bank of Albania. Rising public debt costs and the need to finance the budget deficit have forced the Albanian government to borrow 42.4 billion lek (Euro 307 million) in 3, 6 and 12-month Treasury Bills since December 29 in two separate auctions organized by the Bank of Albania. In the latest auction held on Jan. 10 yields for 12 month T-bills slightly rose to 7.11 percent, up from 7.04 percent in the previous auction held on Dec. 29.
This week, on Jan. 16, government borrowed another 2.5 billion lek (Euro 18 million) in two-year T-bonds at a coupon rate of 8.6 percent.
With one of the highest public debt levels in the region, lower only compared to EU member Hungary, World Bank experts say this makes Albania most vulnerable, citing budget deficit which at 3 to 3.5 percent of the GDP remain problematic.
Adding to these risks in domestic and international financial markets, international financial have become more rigorous about lending conditions as the Eurozone faces tough times with Italy and Greece, Albania’s top trade partners in severe debt crisis.
The Albanian government is currently negotiating with the World Bank on two loans, the first supporting the financial sector and the other promoting economic growth and competitiveness.
Ronald Hood, a World Bank expert says negotiations are focusing on two aspects, the macroeconomic framework covering the public debt and the more specific aspect dealing with the financial sector or economic growth and competitiveness.
World Bank assistance to Albania will also focus on bad loans, which at 18 percent of the total credit is another issue preventing economic growth as tight lending standards and high interest rates remain barriers to boost lending which even under normal conditions would be suffering as investments and consumption have dropped and expectations remain pessimistic.
“It is clear that Albania has been affected by a high rate of non-performing loans, and for this reason we are working with the Central Bank, the Finance Ministry and Financial Supervisory Authority and other partners to try drafting a mid-term plan to handle this issue. We also want to strengthen the Central Bank and Finance Ministry capacities to better monitor the financial system performance. In short, we want to strengthen capacities to respond to deteriorating Eurozone impacts on Albania,” said Michael Edwards as quoted by a World Bank statement in Albanian.
The pension reform is another area the World Bank is assisting Albania as the deficit in the scheme continues widening as social security contributions remain low. “The Technical Assistance (TA) will undertake pension modeling to understand the fiscal sustainability and the benefits of the current system, and the impact of various reform options,” says WB’s Lvovsky.
Government reaction
Reacting to declarations made by World Bank experts, Finance Minister Ridvan Bode did not make it clear whether the Albanian government would accept the World Bank conditions on the approval of the big loan.
“The Finance Ministry is at work and dealing with everything; the World Bank, the EBRD, the Bank of Albania, with other ministries and everything else, but you should be convinced that in all of our everyday activities we are guided by public interest, by the interest of the Albanian economy. We will materialize everything that is of public interest, and everything we will consider economically inappropriate for the country, will surely not be accepted,” Bode told reporters.
2012 investments
The World Bank says it will approve USD 55 million in new loans for 2012 to help strengthen social safety nets as economic growth has slowed down and remittances, a vital source of income for the poor have been shrinking since 2008.
“Our main focus in 2012 will be to help Albania mitigate the impacts of the continued eurozone crisis. In Albania, most of this new financing will be used to strengthen and expand the reform program that we have already planned to support through the Government and Competitiveness development policy loans (DPL). Our assistance will also focus on reducing fiscal vulnerabilities and the level of public debt. Support can be also provided to protecting the financial sector from external shocks. In Albania, most of this new financing will be used to strengthen and expand the reform program that we have already planned to support through the Government and Competitiveness development policy loans (DPL). Our assistance will also focus on reducing fiscal vulnerabilities and the level of public debt. Support can be also provided to protecting the financial sector from external shocks,” says Lvovsky.
The World Bank has been working with the Albanian government over the past years on reforming the social assistance programs. Amending the law on social assistance adopted early last year was an important and timely act. A World Bank team recently visiting Albania is working with the Ministry of Labor on a project to support the implementation of these changes and improve efficiency, administration and equity of social assistance. Additional financing will increase the size of this project from $25 mln to $40 mln, with the financing for this project expected to be approved in April 2012.
Another major project under preparation with the Ministry of Public Works is the Water Sector Investment Project. The project aims to improve water supply to the Durres area, including municipalities and rural communes north of Durres, and the operation of the Durres water utility. The World Bank expects to approve $40 million for financing this project in the second half of 2012.
Taking stock of its entire program in 2011, the World Bank approved $47 million in new lending; mobilized grant resources of $ 6.4 million in trust funds to support flood management, natural resource development, public administration, and corporate reporting; provided small grants totaling $ 200 000 to 25 civil society organizations and published 6 new reports on Albania development issues, including the RER. This is not counting several other regional studies and global reports, like Doing Business, that cover Albania.
Public debt threat
With public debt at around 60 percent of the GDP, Albania remains the most vulnerable country among six regional 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.
Latest detailed 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.
