Investments with public capital, the public debt and influence on the money market

The budget programs for 2023, in their limitation related to the high public debt, as it appears at the beginning of the second 6 months 2023 (64.78% of GDP), despite the mitigating effects with at least 4% in decrease from the devaluation of the Euro against the Lek continue, so that their applicability is affected by the objective of reducing the fiscal deficit.

In 2023, when the Euro has quickly depreciated by at least 10% compared to the end of 2022, this is also being used as a powerful absorbing instrument precisely by having prevalence over other budget lines.

Of all the studies on the sudden strengthening of the local currency, it is not mentioned that it is affected by the strengthening of the economy (exports) and foreign investments, since their effect is not transmitted so strongly even in double-digit developments, as in the case of China or Singapore.

A surprise monetary factor is one that has market spillover effects that come outside of formal channels. If they were to go through banking channels they would be controllable, but in the meantime they would not be at these levels since a significant part would have to justify the source of their creation.

In this situation of the Albanian budget, it seems that this large and immediate fluctuation of the exchange rate is enough to restore the power of the budget for new loans in the future.

In fact, from the practices of many budgetary realities of highly indebted countries, they have intended that a very influential instrument, such as the stimulation of a trade surplus, also serves as a complementary relief of external debt service costs.

The debt-to-export ratio, as an indicator of the progress of trade relations as a function of the trade surplus, which is also used to assess the validity of credit, could improve (ie, decline) as long as the current account surplus would be part of exports exceeds the difference between the effective rate of return on external debt and the growth rate of export earnings (Dornbusch, 1985).

However, the use of the foreign trade instrument seems unlikely to be realized based on the 8-month statistical data in 2023[1], which show a trade deficit the same as the period of 2022. But, apart from that the perspective of foreign trade is presented in the decrease of imports by 5% and exports by 9%.

Consequently, the ongoing debt problems take on a different importance for the state budget if the fiscal instrument is used with a prevalence over the monetary or commercial approach.

This moment of strengthening the fiscal approach takes its rightful place due to the fact that the Lek has been eroded in nominal terms and devalued strongly and in real terms, despite continuous fiscal deficits in the last decade. This means that the impact on budget expenditures has the same effect as on private sector and household expenditures.

In 2023, starting from the erosive effects of several years of public debt, the state budget is consuming all the increased income from taxes and fees to pay the increased costs of public investments, as well as expenses for administration and maintenance of the entire structure and public assets.

While, capital investments with public funds have a direct effect on the monetary supply in the economy through the increase in transactions from the Treasury, it is important the clarification of the difference between the supply in Lek that is carried out within the year, with the effects of real production caused by completed capital investments . So, delays in the completion of public assets are a strong influence on the stable and long-term monetary supply in the market, as they actually lower the expectations of the economy and negatively affect the expected productivity of public investments[2]. The Albanian public should keep this firmly in mind when discussing the effects that the economy and the monetary market have from investments with public capital, which can rarely be completed in the planned period.

In the conditions, when the effects of the distribution of budget expenditures are found to be at low levels of implementation in relation to budget programs, this is seen to affect the supply of Lek with at least 6% of the entire annual value of the budget, i.e. a bidding value in lower market.

The influencing weight of the non-realization of public expenditures (operating and investments) according to the program is not the main one in the strengthening of the Lek.

The government’s objectives are centered around increasing public investment to provide a short-term boost to the labor market, based on research showing that infrastructure investment is about the most efficient fiscal support that can be provided to a depressed economy[3].

But not accepting the whole truth, there is also a large amount of economic evidence that shows that public investment, although it is an important long-term driver of productivity growth and therefore of average living standards, by the way they have been implemented and the delays unjustified did not meet this criterion.

The fundamental problem with today’s economy is the decrease in the pace of aggregate spending[4]. Undertaking new projects to build roads and schools, hire teachers and scientists, and renovate homes and businesses after the 2019 earthquake has helped, but is not the right thing to do to address the need to create new jobs and shifted expenses towards the strata with social problems.

The infrastructure economy cannot respond to the diverse and long-term needs for employment, security and guaranteeing well-being, especially for young people. In the end, none of the experienced experts strongly suggested that development necessarily and only from infrastructure, since it is more important for governments to maintain statistical levels of indicators. Thus, the reality from the “Berisha 2” government and the reality in the last 10 years have made decisions for an economy that has maintained itself, caring little for well-being and proper qualitative growth to fill the gap with the region and Europe.

This situation is exactly as mentioned also in the reports of foreign organizations, that the economy continues to function far below its potential. But since public investment must be financed by debt to maximize job creation, all the poor performance of the related government segments has also created a low money supply in the Lek market, leaving a supply of increased loans and debts in foreign currency, or in other words a part of the amount of money that the economy has no power to attract. If we add to this situation the entry of money in the form of foreign investments between formal market channels mixed with informal money, then the period of market disorientation begins. In cases of delayed interventions by institutions or interventions without influential weight, then the chaos of the market begins and the increase of its uncertainty for the future.

In the long run, if the economy were to return to its potential, the appropriate financing for these projects would depend on the economic circumstances prevailing at the time. If the returns from public investment are large enough, then they can clearly improve the welfare of current and future generations despite being financed by debt. What is even more important in the long-term sense is not only how they are financed, but when and how they are realized to make the created asset productive.

In conclusion, if we were in the situation of strong macroeconomic performance, the confidence in saving in the local currency could also improve and therefore an increased demand for long-term investments in the local currency[5]. On the other hand, if the policy to reduce the public debt would be matched with the increase in the demand for investments in Lek as it offers more opportunities to invest in securities, we would have a well-developed financial market, which would offer amortization right to not feel the devaluation of the Euro so strongly and to depend only on political decisions and market speculations.

[1] https://www.instat.gov.al/media/12550/tregtia-e-jashtme-gusht-2023.pdf

[2] Public investment builds a country’s capital stock by devoting resources to basic physical infrastructure (such as roads, bridges, rail lines, airports and water distribution), innovative activity (basic research), green investment (clean energy sources and the environment). , and education (primary and advanced, as well as employee training) leading to higher productivity and higher living standards. While private actors also invest in these areas, they do so on a much smaller scale, in part because the benefits of public investment accrue not only to those who undertake the investment, but to a wide range of people and businesses.

[3] https://www.imf.org/external/pubs/ft/wp/2014/wp14148.pdf

[4] are total household consumption, total capital investment, government spending, and net exports, which equals total exports minus total imports

[5] https://www.imf.org/-/media/Files/Publications/WP/2018/wp1821.ashx