As a result of the high level and structure of debt, interest expenditures in Albania are two-three times higher than in other South East Europe (SEE) countries and crowd out other, more productive spending, says the World Bank
TIRANA, Aug. 14 – Lowering public debt over the medium term remains critical to macroeconomic stability and growth, warns the World Bank in a recent report on its partnership program in Albania. As a result of the high level and structure of debt, interest expenditures in Albania are two-three times higher than in other South East Europe (SEE) countries and crowd out other, more productive spending, says the World Bank. Priority actions being discussed with the Bank include: (i) clearing arrears (approximately Euro 200 million, according to International Monetary Fund estimates) and better controlling new commitments; (ii) strengthening tax administration and exploring new revenue sources; (iii) reforming power market rules and tariffs to make the sector more self-sustaining; and (iv) reforming the pension scheme to stem the pension fiscal deficit. The use of privatization revenues, whenever they may occur, toward completing the clearance of arrears and reducing debt will be of paramount importance. Recently, the Government has accelerated work on setting up mechanisms to prevent the recurrence of arrears in the future and publicly committed to clearing existing arrears as a priority. The fiscal policy roundtable, jointly organized by the World Bank, IMF, and the government in February 2013, reaffirmed the importance of fiscal consolidation and the need for a fiscal rule.
The report says the negative effects of the global crisis in 2009 exhausted the fiscal space, pushing public debt above 60 percent of GDP in 2012. The fiscal stimulus, which started in 2008, consisted of elevated public investments (mainly on roads) and increases in public salaries and pensions.
The resultant rise in fiscal deficits, combined with a 10 percent depreciation of the lek, brought public debt levels to close to 60 percent of GDP, the legal limit set in 2008. In 2010 and 2011, with fiscal space tight and revenue growth slowing, the government cut expenditures at midyear to keep its deficit targets and public debt within 60 percent. This practice, however, led to an accumulation of unpaid bills and arrears to private contractors for public works and value added tax (VAT) reimbursements. For 2012, though revenues were again lower than projected, the Government did not make a mid-year fiscal adjustment in anticipation of receipt of privatization revenues. However, a looming energy shortage in the second part of 2012 and delays in completing privatization transactions have pushed the debt level to 60.8 percent of GDP. Albania’s 2013 budget targets a general government fiscal deficit of 3.4 percent and foresees a further increase in public debt.
The World Bank says there are concerns that as growth has slowed over the last four years, so has the pace of poverty reduction across the country. While systematic updated poverty figures for Albania are not available, household vulnerability is likely to be higher than in the past. Remittances, for example, are now lower than they were earlier in the decade. Perception surveys, such as the Life in Transition Survey conducted in all the countries of Eastern Europe and Central Asia in 2010 by the European Bank for Reconstruction and Development (EBRD) and the World Bank, also confirm signs of unease. About 60 percent of respondents suggested that the ongoing crisis had significantly affected them.
Public debt
Albania’s public debt stock climbed to 62 percent in the first half of 2013, up 0.4 percent compared to the final quarter of 2012 and 3.1 percent compared to the second quarter of 2012, according to a report by the Finance Ministry. Data show Albania’s total public debt climbed to around 871 billion lek or 61.94 percent of the GDP at the end of the first half of 2013, with domestic debt accounting for 35.53 percent of GDP and external debt at 26.41 percent.
Total debt service in the first half of 2013 climbed to 27 billion lek or 1.92 percent of the GDP. Total debt service in 2012 climbed to 52.16 billion lek, up from 48.7 billion lek in 2011, accounting for 3.88 percent of the GDP, up 0.12 percent compared to 2011.
Albania’s public debt, a sizable part of which is domestic, has a large short-term component, implying risk of rollover, warn the international financial institutions. 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 IMF has warned.
Bank of Albania data show Raiffeisen Bank, the country’s biggest bank, has lowered its exposure to Albania’s domestic public debt by 10.4 percent since the onset of the global crisis in 2008. Raiffeisen’s share at the end of the first half of 2013 was at 26.31 percent of the total debt stock at the end of 2012 compared to 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 38 percent of total domestic public debt, up from 34.85 percent at the end of 2011. The Bank of Albania share has also slightly dropped to 12.91 percent, down from 14.3 percent at the end of 2011 and 17.75 percent at the end of 2008.
Meanwhile, individuals and non-banking financial institutions have increased their shares to 13.71 percent and 9.04 percent, up from 8.33 percent and 2.46 percent respectively at the end of 2008.
Energy
The World Bank says a key priority is to continue reforming the energy sector and improving electricity supply. In the last decade, during years of low rainfall, the combination of dry weather, below-cost retail tariffs, high network losses (technical and nontechnical), poor collection rates, and growing demand meant that the power sector could only maintain electricity supply at a loss, or implement extensive load shedding. In 2008, the Government embarked on a major reform of the power sector, including unbundling the state-owned electricity company (separate generation, transmission, and distribution companies), privatizing its distribution and retail supply, and taking steps to liberalize the electricity market. During the period 2009-10, the situation improved. Nonetheless, during 2011-12, a combination of drought, harsh winter, and institutional weaknesses in the system once again decreased the security of supply and necessitated significant energy imports, adding a major stress to power utilities and the state budget.
The country has to diversify the sources of energy supply and reduce the sector’s vulnerability to changes in rainfall and climate. Hydropower constitutes on average 98 percent of Albania’s current domestic electricity generation. It also presents an opportunity for the country to become a regional hydropower hub, bringing substantial revenues during wet years.
