Planning and Local Governance Project (PLGP) in Albania: Policy Paper: Recommendations for a More Efficient Local Borrowing Process

The Territorial and Administrative Reform (TAR) consolidated the number of Local Self-Government Units (LGUs) from 373 communes and municipalities to 61 municipalities. The Cross-Cutting Strategy for Decentralization and Local Governance (CSDLG) and a new Law on Local Self-Government (LLSG) define the rights and responsibilities of the newly established LGUs. Despite progress made, Albania continues to face major challenges in terms of fiscal decentralization, including increased autonomy of LGUs to exercise the rights and responsibilities assigned in terms of administration of local taxes and fees, and to receive adequate and predictable intergovernmental transfers. Local borrowing is a crucial pillar of fiscal decentralization, allowing LGUs to finance public services and investment projects that cannot be financed from local annual budgets. Law no. 9869, dated 4.2.2008, created the necessary conditions to enable borrowing from LGUs. However, the current situation and prospects for local borrowing in Albania remain unclear. The Ministry of Finance has issued orders to limit local government loan disbursements against approved deals, making it practically impossible to implement local projects. The public debt stock in Albania has been increasing, reaching 59.40% of GDP in 2011, close to the legal limit of 60% of GDP. The Ministry of Finance has restricted local government loan disbursements, increasing stakeholders' uncertainty. Local borrowing is still at an early stage, using only bank credit for priority public investments, despite the developments of the banking sector and the state securities market in the country. This study aims to address the issues mentioned above and present the main options for a new financing instrument for LGUs through the issuance of local bonds. The study also presents the experiences of Poland and Bulgaria, known for a sustainable macroeconomic framework, as well as the regional experience from Macedonia and Serbia in developing strategies and bond issuing. Albania is facing a high level of public debt, estimated at 1,043 billion ALL or 72.2% of GDP at the end of 2015. Local debt was 940.05 million ALL, representing only 0.065% of GDP. The study highlights the need for a more efficient local borrowing process in Albania. The Government of Albania, with the support of the USAID's Planning and Local Governance Project (PLGP), is working on the design of an integral law on local government finances (LGFL), which is expected to improve the current situation and particularly the financial perspective of the new units of local self-government. The study presents recommendations for a more efficient local borrowing process, including the establishment of a fiscal rule, central and local government consultations, analysis and transparency, and the development of local financial instruments. The study also presents the main areas for capacity development needs, including the development of a local borrowing framework, the establishment of a local borrowing agency, and the development of a local bond market. The experiences of Poland and Bulgaria, as well as the regional experience from Macedonia and Serbia, provide valuable insights into the development of strategies and bond issuing. The study concludes that a more efficient local borrowing process is essential for Albania to achieve its development goals and improve the financial perspective of the new units of local self-government.