Debt to pay debt, is the agreement coming at the right time for Albania?

Debt to pay debt, is the agreement coming at the right time for Albania?

Tirana, March 3, 2014/Independent Balkan News Agency

By Edison Kurani

International Monetary Fund approved a 457 million USD loan agreement with the Albanian government. This is a loan issued at lower interest rates than those in the market and it’s the biggest one ever allocated to Albania for budgetary support.

This agreement comes at an important period for Albanian public finances which are in a miserable state.

Authorities in Albania say that this debt is issued to back the economy and the reforms. In fact, this debt will be used to pay the debts that Albania owes to businesses for services carried out in the past. This amount is 500 million USD or 5% of the GDP of Albania.

IMF claims that this fund aims at lowering the risk posed to public finances, by aiming to reduce public debt below 60%. According to IMF, this objective requires strong measures in fiscal policies and expenses.

Experts believe that the agreement gives way to financial and institutional support for the Albanian economy, Albanian government and Albanian enterprise.

The details of the agreement

Official sources from IMF provided for IBNA the details of the agreement. The total amount that the Executive Board of IMF decided to allocate to Albania to support the program of the reforms of the authorities is 457.1 million US dollars or 330.9 million Euros (SDR 295.42 million). This amount is 492.4% of the IMF’s quota for the country.

The term of the agreement is 36 months. IMF demanded an immediate payment of 23.55 million SDR (around 26.4 million Euros or 36.4 million USD).

The loan will be divided into 9 installments. Based on the 3 year agreement, 110 million Euros will be paid back every year.

Lipton: Economic improvement is expected, debt must be reduced

David Lipton, first vice director and acting chairman of the Executive Board of IMF, predicts that the Albanian economy will improve during 2014. According to him, this will be based on the projected reduction of basic risks in the fiscal domain, the payment of arrears, the tackling of the high level of bad loans and the launch of structural reforms.

Nevertheless, the dangers are significant and the needs for refinancing are great, claims Mr. Lipton.

Speaking on the agreement, Mr. Lipton says that it will help Albania “to meet its needs for foreign financing, by offering at the same time the necessary support to strengthen the fiscal and debt stability, to lower the danger posed to public finances and to put the economy in a medium term growing sustainable path”.

Mr. Lipton says that Albania’s public debt must not be over 60% of GDP. “The high level of debt requires fiscal consolidation which aims to reduce public debt and bring it to a level below 60% of GDP in the medium term. This will require significant measures in tax policies and expenses. The reduction of arrears and the introduction of a mechanism which prevents their creation will also be critical”.

Mr. Lipton sees the revival of the economy on a further moderated facilitation of monetary policies. According to him, this will help in the economic revival, in case expectations for inflation and financial stability remain well anchored”.

“Nevertheless, -notes he,-this must be carried out cautiously as a result of the dangers from the high exposure toward foreign currencies”.

The Albanian government has several plans to reform pensions, energy, finances of local government, public administration and business environment. Speaking on behalf of IMF, Mr. Lipton says that these measures are welcome.

“If these reforms are implemented like they should, they will improve Albania’s capacity to attract investments, they will improve the perspective for sustainable medium term growth and reduce fiscal risks”, says Mr. Lipton.

IMF also claims that the World Bank and European Union are also able to offer assistance for the program of reforms carried out by authorities.

Minister of Economy: The start of economic spring for Albania

Minister for Economic Development, Trade and Enterprise, Mr. Arben Ahmetaj says that the approval of the Agreement is the proof of direct trust of international institutions and partners in the determination of the Albanian government in carrying out reforms.

“The endorsement of the agreement gives way to economic, financial and institutional support for the Albanian economy, Albanian government and Albanian enterprise”, says Mr. Ahmetaj.

The minister says that the 3 year agreement signed between IMF and Albanian government to support reforms and the economic development of the country, is the start of economic spring for Albania.

Minister of Finance: We will start to pay off debts

Through this agreement, the Albanian government is looking to pay the arrears for services offered by private businesses.

The Minister of Finance, Shkelqim Cani says that the IMF program aims to reduce public debt at a level suitable for a country like Albania, but without threatening economic growth, on the contrary, by helping it.

The agreement with the IMF gives way to fresh financing or grants from the World Bank and European Union, needed to support the budget and pay off government debts toward businesses.

“After this agreement, we’re expected to endorse an agreement with the World Bank and European Fund”, says Cany.

Head of IMF mission for Albania: There must fiscal order

The head of IMF mission for Albania, Nadeem Ilahi says that the funds being allocated by IMF don’t have a particular destination. He says that these funds are being transferred to the Ministry of Finance in order to use them based on its needs. Nevertheless, Illahi says that this debt will be used by the government to pay its debts to private businesses.

“Today we have a debt comprising of arrears accumulated throughout the recent years by the failure to pay government invoices, contractors and taxes”, says Illahi in an interview for the Voice of America.

Illahi suggests that there must be a plan according to which the government pays the arrears and reduce debt through what IMF considers to be a fiscal order.

Mr. Illahi says that within 5 years, Albania will be able to have an acceptable level of debt.

Why is Albania suffering a crisis?

Lending in the economy has fallen, along with consumption and private investments. Bad loans have also increased. Mr. Illahi analyzes the factors for such situation. “In order to analyze the state of the economy, we must go back 5 years, when the economy was hit by the crisis. Many countries of the Balkan region suffered this crisis, while Albania didn’t suffer it that much. Part of the reason relates to the fact that the domestic engine of the economy was well operating. What has happened with the global crisis has affected Albanian economy, including the problem of arrears, where private contractors and businesses have not been paid and this causes a problem of liquidity in the economy. This has an effect on their ability to make fresh investments and to pay bank loans.

In Albania, there has been a falling trust of domestic factors in the economy of the country. On the other hand, Albanian exports have not been that bad.

Thus, the main problem consists on the domestic factor. As far as restoring trust in the private sector is concerned, Nadeem Ilahi says that the reintroduction of the contract that exists between private business and the government is an important element.

“Here we have to deal with two elements: first of all, the government must pay every invoice incurred in the past and secondly, the private sector must pay its taxes. Once such situation is achieved, then there is a stimulus for the private sector to move forward.

DP: Agreement with the IMF, the government must show responsibility

Democratic Party praised the agreement between the IMF and the government by saying that it came at a difficult moment for the Albanian economy.

“This agreement comes at a time when the government is leading the economy to recession, when there’s a lack of vision and program, when the measures that have been taken have degraded and at a time when Albania has the highest taxes in the region”, says Laura Vorpsi, spokeswoman of the Democratic Party.

According to the opposition, all these factors combined with the lack of order and security, have led to a fall of economic growth to the lowest levels of the transition period.

“For the first time, our economy has a minus 3 level of crediting”, says Vorpsi.

“We hope that through this agreement and the rigorous oversight of IMF, the government will implement the necessary agenda of reforms”, says Vorpsi. She added that “given the way things are going now, there’s a fear that IMF may not be able to find the right partner at the Albanian government, which is irresponsible and arbitrary”. /ibna/