The World Bank has issued a stark warning to Albania regarding its high level of debt, adding the government could be forced to reduce its capital expenditures.
In its latest report on Central Europe entitled “War in the Region”, the WB noted that debt in Albania continued to climb and this could increase the risk of refinancing.
“Pubic debt increased further in 2021, reaching 78.4% of the GDP. The government suspended the fiscal rule for reducing debt and issued a Euroond of EUR 650 million…At the current level, high government debt is at a significant refinancing risk,” the report reads.
“Given the current inflation and the expected tightening of monetary policy in high-income economies, reducing Albania’s public debt and strengthening the credibility of its fiscal policy are vital.”
Furthermore, while there is a chance debt could fall to 78.1% of the GDP in 2022, it depends on the international environment. If this is unfavourable, it could force the government to cut capital spending to prevent an increase to the debt-to-GDP ratio the bank wars.
In the context of the ongoing pandemic, war in Ukraine, and a global fuel, energy, and food crisis, this warning becomes even more necessary to heed. The war and ongoing sanctions could push energy, food and commodity prices to even higher levels, reducing household purchasing power and consumption.
The WB also lowered its forecast for Albania’s economic growth, at 3.2% domesticallly. This will rise to around 3.4% in 2023, the bank said.
However, the WB’s stated debt level, does not include the various public private partnerships that the government has entered in to. Furthermore, it is less than the government’s own figures of 80.1% of the GDP, reported in January.
The government used natural disasters, earthquakes and pandemics to increase public debt by about EUR 2 billion in the last two years. Most of it was used to finance disaster-related projects.
The government also authorised the debt increase to finance several long-term projects, such as the construction of the New Ring Road, the National Theater and the Llogara Tunnel while funding is still needed for the pandemic and earthquake recovery. Debt expansion was done through. a normative act, breaking a fiscal rule that is defined in the budget law, which does not allow fiscal measures that increase the debt as a percentage of GDP.
Over the past year, the government has increased public debt at faster rates than the country’s economic growth. Albanians’ per capita income has grown at lower rates than per capita debt, spelling trouble for the future.
The International Monetary Fund (IMF), in its latest report on Albania in December last year, expressed concern about the country’s growing fiscal risks and the lack of accurate data on public-private partnership (PPP) projects. Court rulings, the new guarantee scheme for the private sector and support for energy companies are also seen as added risks that increase unreported liabilities.
However, analysis carried out by Exit.al in 2020 found that public debt was already as high as 86% of the GDP. The discrepancy in figures is due to the fact the government does not formally count the dozens of PPPs it grants towards public debt.
Albania has been criticised internationally for this approach.
Looking at 2020, if we consider only the concessions of roads, health, and incinerators, the total obligation to be paid from the state budget is around half a billion euros if we add this to the total amount of regular state debt, the total increases to EUR 10.7 billion.
That is around 83% of the GDP, a figure that has likely grown more in the last 12 months.
