World Bank Report Warns of Albanian Public Debt

A recently published World Bank policy research working paper, entitled “Fiscal Rules for the Western Balkans,” has found that Albania has a “relatively high level of public debt,” and that a strong commitment of the Albanian government to comply with fiscal rules, is necessary to arrive at an acceptable debt target of 45% of GDP by 2025. Such a target would need a commitment that is “probably stronger […] than has been demonstrated in the recent past.”

The government and government-guaranteed debt of Albania was 68.6% in 2018. This number does not include the numerous public-private partnerships signed by the Rama government, designed to hide public debt in service contracts. According to the report, “Albania would need to run a surplus of 0.8 percent of GDP every year to achieve its debt target of 45 percent of GDP by 2025.”

This follows from Albania’s own fiscal rules:

In Albania, the main fiscal rule is designed to reduce debt to 45 percent of GDP. In 2008, the Law on the Management of Budgets, whose amendment requires a three-fifths majority in parliament, limited public debt to 60 percent of GDP (article 58 of law 9936 of 2008). This rule was, however, repealed in 2012 (IMF 2017). In 2016, the law was amended again, to require each budget, supplementary budget, and medium-term plan to provide for debt to decline each year until it falls below 45 percent of GDP, save in exceptional circumstances (articles 4/1 and 4/4 of law 57 of 2016). Debt is defined as the direct and guaranteed debt of general government (article 4/2). The government has also set itself the interim target of reducing debt to 60 percent of GDP by 2021 (IMF 2017). To help ensure that compliance with the rule is not undermined by optimism, the forecasts of GDP used by the government cannot exceed those published by the IMF in its World Economic Outlook—an example of the use of external checks to foster compliance with rules.

Albania’s debt rule is supplemented by several others. If the forecast annual rate of real economic growth is more than 5 percent, the cash deficit of general government must be less than 2 percent of GDP (article 4/1). There is also a golden rule, namely one that requires current spending to be paid for by current revenue while allowing investment spending to be financed by borrowing (article 4/1(4)). The government must also keep 0.7 percent of budgeted expenditure in reserve to deal with unexpected events (article 4/1). And there are rules that limit the speed at which deficits can build up during an election year: for example, the actual deficit for the first quarter of the year cannot exceed 30 percent of the planned deficit for the whole year (article 4/3).

The report also sketches out different debt scenarios depending on a commitment of the Albanian government from zero (none) to one (full):

As is clear from the graphs, even if the Rama government would fully commit to its own fiscal rules, the IMF target of a public debt of 60% of the GDP by 2021 is out of reach.

The Rama government has in the first semester of 2019 increased public expenses with 7%, whereas its income only increased with 3.8%. The current budget deficit is 6 billion lekë (~€50M).