Albania - Public Finance DPL

closed

This loan of US$120 million is the first in a series of two programmatic development policy loans (DPLs) which aims to improve fiscal sustainability by strengthening public financial management (PFM) to address arrears and through tax, pensions and energy sector reforms to support macro-fiscal stability. The series focuses on addressing weaknesses in public finance management that have resulted in the accumulation of general government arrears of 5.3 percent of GDP in 2013 and a surge in public debt from 54.7 percent in 2008 to 70.7 percent in 2013. Arrears and high public debt are now weighing heavily on Albania's growth prospects and threatening to reverse the significant progress that has until recently been made in reducing poverty. Clearance of arrears and prevention of future arrears will help boost private investment and reduce the high levels of non-performing loans (NPLs) that are currently stifling credit to the private sector. Strengthening budget preparation and execution will in turn increase transparency and credibility of public finances, limit the accumulation of new arrears and improve the efficiency and effectiveness of public spending. In parallel, raising revenues, reforming the pension system and reducing fiscal risks emanating from the energy sector are important for putting Albania's public debt on a sustainable long-term trajectory and safe-guarding macro-fiscal stability. Without reforms, Albania's pension system is fiscally and socially unsustainable while the energy sector, left unreformed, will pose a large threat to the budget and absorb increasing fiscal resources. The government recognizes that steps to strengthen PFM and reduce longer term fiscal pressures are critical for Albania to protect the fiscal space for growth-enabling investment and poverty-alleviating social services.