Improving Public Debt Management
In the OIC Member Countries
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C) Policy RecommendationsThe Albanian government has implemented challenging reforms in public debt management
with the intention to adopt global best practices. The success is remarkable: first, the creation
of the General Directorate of Public Debt Management and the formulation of a clear strategy
have contributed to the accountability and transparency of public debt management. Second,
the structure of public debt has been moved in line with the strategic objectives. As a result,
interest rate and refinancing risks have been reduced.
The analysis, however, reveals a number of risks: rollover risk is still high: (1) the average
maturity of outstanding marketable debt is low. In 2015 financing needs amounted to more
than 37% of GDP. (2) A substantial part of public debt is held by domestic banks. This creates a
vicious link between public finances and the banking sector: public default would damage the
banking sector and difficulties in the banking sector endanger government’s success in placing
its bonds on the domestic market (World Bank, 2014a). These risks are enhanced by the fact
that the government revenues relative to GDP are low. This restricts fiscal leeway and makes it
more difficult for government to run substantial surpluses in order to reduce public debt
levels. Therefore, it is important to improve the tax system focusing on tax compliance and an
expansion of the tax base.
The Bank of Albania purchased substantial shares of sovereign bonds: in 2014 and 2015,
where data is available, the Bank of Albania purchased about 20% of newly issued government
securities while it held about 10% of all outstanding government securities. This poses the risk
that monetary and financial policies are not clearly separated and that the central bank cannot
implement an independent monetary policy. Public debt management is well recommended to
further diversify its investor base.
The average maturity of domestic sovereign bonds is still relatively low. Public budget
management might benefit from the low interest rate environment to lengthen the average
maturity of debt to reduce refinancing risk and reduce the amount of bonds issued annually.
It is important to achieve a balance between domestic and foreign borrowing. Overreliance on
domestic borrowing by the public sector may lead to a crowdingout of private sector credit.
Given that the domestic investor base is limited, access to foreign investors makes the
government more independent from domestic developments. After the successful issuance of
Eurobonds public debt management should try to turn this instrument of exceptional financing
into a general one. Eurobonds might be issued on a regular basis. In general, Albania should
reduce its reliance on concessional external debt and broaden its base of international
investors. While a stable macroeconomic development and close links to the EU might be
helpful preconditions, a clear commitment to the public debt management strategy might be
helpful in itself. In this sense, it is important that Albania continues its process of fiscal
adjustment in order to buildup a good reputation.