The Government of Albania is currently implementing a number of reforms with the aim of reducing rigidities in public spending and freeing up resources for more efficient spending. Public debt has surged since 2008, reaching 71 percent of GDP in 2014. The increase in public debt resulted from loose fiscal policy, the need to support the state-owned power generation company, and external shocks. At the end of 2012, the parliament revoked the 60 percent of public debt-to-GDP limit, without replacing it with any other fiscal or debt anchor. In 2013, public debt increased further, reaching 70.2 percent of GDP, as government arrears to the private sector of 5.2 percent were recognized. The fiscal consolidation program that began in 2014 and is included in the medium-term fiscal framework contains a reduction in the public debt-to-GDP ratio starting in 2015. The fiscal deficit reached 5.6 percent of GDP in 2014, including a repayment of arrears of 2.4 percent of GDP. The annual budget law for 2015 has introduced fiscal measures on both the revenue and expenditure sides, which suggests a further narrowing of the fiscal deficit to 4.8 percent of GDP in 2015. Albania’s public debt is projected to fall below 60 percent by 2019, as sustained fiscal consolidation combined with solid GDP growth is expected to put public debt on a steep downward trajectory. This path is, however, vulnerable to changes in the fiscal policy stance, GDP growth,financing terms, and the exchange rate, as well as the realization of unexpected contingent liabilities from the energy sector.
The energy sector poses significant fiscal risks.
About 98 percent of Albania’s energy is generated from hydropower. Recurrent energy shortages due to fluctuations in rainfall, persistently high distribution losses (about 43 percent in 2013), and regulated tariffs below energy costs have resulted in sustained fiscal support from the Government in the form of guarantees for power imports and liquidity injections to the energy generation company KESh. In the distribution sector, low collection rates from households, businesses, and public institutions have contributed to the financial woes of the publicly owned distribution company (OShEE), which faces an unfunded deficit of US$550 million. In February 2015, the Government prepared a Power Sector Financial Recovery Plan, the implementation of which is supported by the World Bank–financed Energy Sector Recovery Project.
The World Bank supported the design of the Public Financial Management Strategy, which is also serving as the platform for European Union (EU) budget support. The recently approved Policy- Based Guarantee aims especially at improving macro and fiscal stability.