Policy Paper: Recommendations for a More Efficient Local Borrowing Process in Albania

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 major investments. Law no. 9869, dated 4.2.2008, created the necessary conditions for LGUs to borrow from banks. However, the current situation and prospects for local borrowing in Albania remain unclear. The Organic Budget Law (OBL) defines the limits of public debt to 60% of Gross Domestic Product (GDP), including state debt and local government debt. In 2010, the public debt stock was at 57.71% of GDP, increasing to 59.40% in 2011, and the Ministry of Finance issued orders to limit local government loan disbursements against approved deals, making it practically impossible to implement local projects. The procedures and debt instruments for local borrowing are still at an early stage, with only bank credit being used for priority public investments. The study on local borrowing 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, with the level of public debt being very close to the limit of 60% of GDP since 2010. At the end of 2015, public debt was estimated at 1,043 billion ALL or 72.2% of GDP, while local debt was 940.05 million ALL, representing only 0.065% of GDP. Commitments to sign loan agreements with local government were realized only in 2010 and 2014. The study aims to present the main areas for capacity development needs and to provide recommendations for a more efficient local borrowing process in Albania. The legal framework for local borrowing in Albania is defined by Law no. 9869, dated 4.2.2008, and the Organic Budget Law (OBL). The law allows LGUs to borrow from banks, but the high level of public debt presses the Ministry of Finance to restrict local borrowing. 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 study presents the main options for a new financing instrument for LGUs through the issuance of local bonds. The issuance of local bonds can provide LGUs with a new source of financing for public services and major investments. 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. The study aims to provide recommendations for a more efficient local borrowing process in Albania. The recommendations include the establishment of a fiscal rule, central and local government consultations, analysis and transparency, and the development of local financial instruments, including local bonds. The study also aims to present the main areas for capacity development needs, including the development of LGUs' financial management capacity and the establishment of a local borrowing framework.