No one can generalize whether debt is good or bad. Instead, we have to consider that public debt is very much like a nuclear force. If used properly, it becomes a source of energy to the economy and prosperity of people. Otherwise, it devastates the economy and people. It is how debt is used that is the single most important issue. In fact, despite repeated efforts to bring some scientific rigor to what could be considered as the appropriate amount of debt, it will always remain a matter of interpretation and speculation.
The main convergence criteria, commonly known as the Maastricht criteria, foresee that EU countries should have:
1) inflation not higher than 1.5% above the average of the 3 best performing member countries;
2) budget deficit not higher than 3% of GDP;
3) public debt not higher than 60% of GDP.
Should these criteria be a basis for exclusion, today 16 EU countries would be losing their membership.
Albania meets the inflation and deficit criteria but does not meet the debt criterion. Naturally, differences on how the debt is used become more visible if we compare the reality and economic potential of each of the above-mentioned economies.
What does our debt look like?
Prior to going any further into the topic, it is necessary that to take a snapshot of our debt situation today. The government’s commitment that public debt will be no more than 60% of GDP by the end of 2017 is now a paper wish. Albania’s public debt for 2017 according to government statistics stands at 71.5%, while IMF says it is 71.8%. By contrast, the Albanian government predicts that public debt will fall to 68.7% of GDP in 2018, whereas the IMF thinks the debt for this year will grow to 72.4% of GDP. Similarly, for 2019, the government predicts that debt will drop to 66.4% of GDP, while the IMF thinks it will be at 69.8%. These debt projections are developed in the context of the economic growth assumed by the government at 3.9% for 2017, and 4.2% and 4.3% respectively for 2018 and 2019 – higher than IMF predictions, coupled with a low inflation below 3%.
The composition of our public debt shows an increasing trend towards external debt, which in 2017 is reported as 46.9% of the total, compared with only 28.5% in 2007. Lastly, the debt service (interest + repayment) today stands around 77 billion lekë, or 15.5% of the 2018’s annual budget.
It is very likely that today’s debt is higher than what the government’s and the IMF forecasts. Preliminary estimations suggest that it is in the range of 73–80% of GDP, but this is not apparent due to delays in the accounting for overdue liabilities to third parties, which exceed €300 million, and in particular related to liabilities from concessions and PPPs that are estimated today to be around 6% of GDP, and will only increase steeply in the future. If the government is to stick to its PPP expansion policy, otherwise known as the €1 billion project, then the Albanian public debt in the medium term may approach the level of 90% of GDP.
I believe that the Albanian public debt is large and will be difficult to manage due to short-term maturities. Moreover, it follows a wrong tendency of favoring external financing sources instead of domestic ones. Against this perspective, it is vital that our debt should be rebalanced in favor of domestic financing, to eliminate to the greatest extent possible the exchange rate risk, and to allow the interest earned remains in the Albanian economy.
The principal concern that such policy would shrink the private sector borrowing is no longer justified. The Bank of Albania’s policies have not managed to increase the level of confidence, as lending to economy has stalled in the last 5 years. There are no signs that this situation is about to change. It is also of no surprise that Bank of Albania’s regular lowering of the basic policy rate – now at 1% – has failed to revive the lending to economy. It is clear that the costs of servicing the current debt will increase considerably and quickly – beyond what they constitute in 2018’s budget.
In light of recurring difficulties to collect revenues that continue to characterize budget performance, this will become a growing concern because of a long-held suspicion that the Albanian economy is not experiencing any growth, but is rather stagnating. If the effect of Trans Adriatic Pipeline and Devoll Hydropower Plant investments – contracted before 2013 – is removed from calculating the country’s GDP, the growth rates become minimal, if not inexistent.
The underlying concern regarding public debt growth is related to today’s structural weaknesses of the Albanian economy as well as the projects that we keep financing through borrowing, which do not guarantee the higher growth rates required to cope with existing debt services and future borrowing needs without causing serious macro-fiscal constraints.
Having shown that the current path is unsustainable, it is important therefore to use debt financing in a more prudent manner. This does not suggest that it should be removed completely – as long as it remains the only credible borrower in the market this would be nonsensical – but that it rather should finance projects of a higher return.
In Part 2 of this series the necessary steps that the government should undertake will be presented.