New Year festivities are around the corner. A magic time is, once again, upon us when people put behind the disappointments of the past to eagerly embrace a better promise of the next year. This time, the magic is especially needed.
The economic news around the year-end is grim. According to the just released World Bank’s regular economic report (RER) covering Albania and five other countries in South–East Europe (SEE)[1], the Eurozone recession continues into 2013, while several Western Balkan countries have negative or no growth this year. Against this picture, Albania’s projected growth of still positive 0.8 percent in 2012 – despite the odds of close economic ties to Italy and Greece, power sector problems, and budget crunch – speaks for admirable resilience of its economy. But it is not nearly enough to maintain tangible improvements in living standards and jobs. The prospect for Albania in 2013 is the same as for the group of six SEE countries - a sluggish growth of about 1.5 percent.
At such time, the report argues, accelerating fiscal and structural reforms is the best recipe for resuming faster growth rates. For Albania, this means to decisively address a grave situation in the energy sector, by not only securing electricity supplies for the upcoming winter but also charting a plan to put the sector back on a viable path, with full respect of market rules by all participants, customers including. This means redoubling efforts to improve the business environment – an area where solid progress has been made but slowed down vis-a-vis other SEE countries. Improving coverage and quality of public infrastructure remains critical for growth and private investment, but should be done in a fiscally sustainable manner when increased expenditures are balanced with additional revenues.
For Albania, maintaining fiscal sustainability while supporting growth is the key challenge. It has been made tougher this month after the legal debt ceiling of 60 percent was removed to allow further increase in public debt. Why, some may question, limiting and gradually reducing public debt is so important now, when the economy and families desperately need more government support? I found the clearest answer during my recent visit to Peshkopi and Burrel. The needs of municipalities - to improve the lives of residents and encourage business development - are huge. They need roads, schools, clinics, water supply, public places, centers for youth, you name it… Mayors keep asking whether IFIs can help. In fact, IFI financing for such projects is available – just to mention one example, the compact of Euro 30 billion over the next two years for Central and South-East European countries announced by the EIB, the EBRD and the World Bank in November. Yet, because of high public debt leading to high debt servicing costs and roll-over risks, the country cannot take full advantage of this long-term financing, even when offered on concessional terms. To accelerate capital investment - and thus borrowing - for municipal roads, water, irrigation and other development needs, fiscal space has to be created first or, at least, in parallel. This can only be achieved through steadfast commitment to containing recurrent spending, increasing revenues, and accelerating structural reforms. One-time privatization revenue can help with, but not substitute for, the permanent positive impacts of these reforms on both growth and public finances.
For the first half of 2013, Albania is at disadvantage: the time when the economy particularly needs tough choices and unpopular measures, like restricting public sector pays and increasing tax receipts, coincides with the electoral campaign which makes such actions unlikely. Political leaders compete in promises that would not help restore the health of public finances, such as tax relief. The reality is: no government that will come to power in 2013 will be able to afford reducing taxes. Any government will have to work on streamlining the tax procedures, improving collection efficiency, and identifying new sources of revenues, while protecting the poor through targeted social assistance programs.
Yet, I see a light ahead, too. There will be a government with a fresh mandate at mid-year. This will provide an opportunity to reinvigorate a robust agenda of economic reforms that Albania had been known and acclaimed for. To catch up for the months of focus on short-term political gains, it is essential that thinking about specific priorities and actions after June 2013 is taking place now, to prepare the ground for resuming reforms without delay. The role of non-partisan institutions with a longer time horizon, such as the central bank, civil society think-tanks and technical cadre within the government, is critical in this process. An independent fiscal council is worth considering. The World Bank and other development partners are here to help with expertise and advice, as requested.
This opportunity feeds my hope, my dream, my wish that, barring new major shocks, 2013 will be better for Albanians. It must be. Happy New Year!
[1] The report covers Albania, Bosnia and Herzegovina, FYROM Macedonia, Kosovo, Montenegro, and Serbia. See more on www.worldbank.org/eca/seerer
