Why Albanian debt is dangerous

Intermit Gill, high rank economist at the World Bank for Europe and Asia, explained for Top Channel why a debt level at 63% of the GDP is dangerous for our country.

Indermit Gill: It is not the government that decides the optimal debt level, nor the World Bank or the IMF. This is decided by the market, because the market lends the money. The best way to see if there is room for a higher debt is to check if the market is concerned and starts lending money in short maturation terms and with higher interest rates. When interest rates are increasing and terms are getting shorter, the country has reached a high debt level that is not stable. The lower the revenues per capita, the less developed the country’s institutions and the lower is the optimal debt level. We usually say for countries with good incomes that 60% is a good point to start being concerned, but for countries with average incomes such as Albania this level would be at 40%.

 Top Channel: There’s a debate about what is the best way for Albania to reduce the debt. Some experts and IMF advised to increase taxes. Others say that the best way is to cut spending. What is your advice?

Indermit Gill: The best way is to see the experience of countries that have already succeeded with this, such as Turkey, Bulgaria and others. Turkey reduced the debt level from 80% to 40% of the GDP. How did they do it? There are three main things. The first and most important is the economic growth. The second is that these countries had a reinforced currency, which lowered the foreign debt. The third thing is a primary surplus, meaning that their incomes were higher than the spending. The key question here is time related. What are the immediate measures that should be taken? The best recipe can be found in policies oriented towards the economic growth, which do not require additional public spending. Albania can do this through many things. They can make it easier for the business to invest. They can facilitate the property registration and tax payment, in which Albania is among the countries with the lowest ranking in the world. Also improving the energy supply or facilitating construction permits. The government is undertaking some of these reforms, but with more efforts they could benefit much more. The second element would be facilitating exports.

Top Channel: Why do you think that export growth would be a good way to have higher economic growth?

Indermit Gill: Albania has access to the entire European market, which is a $14 trillion market. It is better for you to access this market than look at the domestic market for economic growth. If you see the experience of the most successful countries, especially in Central Europe, their exports reach more than 50% of the GDP. Albania had a very low starting point. Exports in 2004 had increased with 22%. Today they’re around 35%. For a small country like Albania, this indicator should be at least 50% or 70%. I think that this is the best way for Albania to have an economic growth, and the best way to stimulate exports is to make sure that there will be a friendly environment for foreign investments.

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