Ardian Fullani: Overview of Albania's recent economic and financial
developments
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, on the Monetary Policy
Decision-Making of the Bank of Albania's Supervisory Council, Tirana, 27 June 2012.
* * *
Today, on 27 June 2012, the Supervisory Council of the Bank of Albania reviewed and
approved the monthly Monetary Policy Report. Based on the analysis of Albania's latest
economic and monetary developments, and following discussions on their performance
outlook, the Supervisory Council of the Bank of Albania decided to keep the key interest rate
unchanged at 4.25%.
The Supervisory Council deems that the monetary conditions are adequate to meet the
inflation target in the period ahead, while they provide the needed monetary incentive to
support the domestic demand.
Let me now proceed with an overview of the economic and monetary developments and key
topics discussed at today's meeting.
***
marked 1.9% in May, continuing to pursue a gradual upward trajectory.
Annual inflation
Inflation rate in May was largely driven by the rise in food prices, whose performance
triggered inflation's behaviour over the last two years. The impact of other commodities'
basket on inflation remains stable and slightly volatile.
Within the macroeconomic context, the analysis of economic and financial developments
reveals the lack of strong and sustainable inflationary pressures, which is reflected on the
current low annual inflation rate. As aggregate demand increased below its potential, free
production capacities were created in the economy, generating weak pressures on the
increase in wages. Imported inflation remains moderated, owing to the contained
performance of core commodity prices, the moderated inflation in Albania's trade partner
countries and the stable exchange rate. Also, economic agents' inflation expectations remain
low, administered prices provide a minimum effect, and monetary developments and liquidity
in the economy are in line with the mid-term price stability.
Data available on the economic performance for the first five months of 2012 show that
economic expansion slowed down. Estimations based on indirect, qualitative and quantitative
data reveal a sluggish production sector in the first quarter of 2012, whereas services
improved compared to the fourth quarter of 2011. On the demand-side, economic
developments in this period show a moderated foreign demand and a sluggish domestic
demand. The latter is determined by the weak performance of private sector's expenditures
and investments, and the low fiscal stimulus.
January - May 2012 is characterised by a consolidating behaviour of fiscal policy.
Budget deficit decreased by 6.5% y-o-y during this period, reflecting the increase in budged
revenues and expenses, by 2% and 0.8%, respectively. Notwithstanding the short-term
reduction of fiscal stimulus, Bank of Albania deems as indispensable for the public sector to
focus on consolidating and reducing public debt indicators. The implementation of this policy
will provide short- and long-term benefits to the Albanian economy in the form of lower risk
premiums in financial markets and more credit opportunities for the economy.
Foreign demand, the main source on the increased aggregate demand in the last two years,
appeared moderated during the first four months of 2012. The relevant partial information,
obtained from the external trade data, shows a contraction of 4% in Albanian exports during
the first months of year.
This contraction is largely driven by the reduced exports of electric energy. Excluding the
latter, Albanian exports grew by about 7% y-o-y, albeit insufficient to maintain the growth
paces during 2012. At the same time, imports shrank during the first four months of 2012, by
1.8% in nominal terms. These developments are materialised in a narrowed trade deficit in
goods and services, by about 2.3% for this period. The narrowed trade and current account
deficit are welcomed, particularly given the high fluctuation of global financial markets.
Monetary developments were in line with the performance of the real economy. Monetary
supply rose by 8.3% y-o-y in April, about 0.5 p.p lower compared to March. This deceleration
reflected the lower financing by banks to the government and the decelerated demand of the
private sector for monetary assets.
Annual increase of credit to the private sector marked 8.1% in April. Given that uncertainties
concerning the external and domestic macroeconomic developments augmented, private
sector's demand for banking credit continues to fall. Households demand for consumer or
mortgage loan shows weak, due to their increased propensity toward savings. Business
demand for credit has been downward, due to the failure to utilise producing capacities in full
and the uncertainties on the demand performance in future.
The banking system continues to be increasingly prudent regarding crediting, albeit its
balance sheets remain completely sound and able to encourage credit growth at home.
The decelerated crediting is a known phenomenon within the context of global financial
markets, and characterises the developments in all regional economies. Banking credit and
foreign direct investments are the two main financing sources of private sector's long-term
investments slowdown in Albania. In this light, the Bank of Albania deems that businesses
and banking system have room for closer collaboration and better mutual understanding to
support crediting.
Financial markets operated under liquidity terms and showed low interest rate fluctuation.
Indicators related to soundness of the banking system are positive and stable, and adequate
to enhance financial intermediation. Interest rates in the domestic currency trended
downward in April and May, notably in inter-bank and deposits markets. This tendency was
followed by increased inter-bank trading and lek deposits. On the other side, the relatively
high yields rates of government Treasury bills, since the beginning of year, seem to
considerably factorise structural changes in primary market and do not transmit added
inflationary pressures.
In the light of the Bank of Albania's analysis on the expected fiscal and monetary
developments, this trend may return in the second half of year, along with the improved
demand and supply ratios for public sector securities.
Basic projections on the expected economic performance in the future continue to align with
our previous estimations for an economic growth, but below its potential. Economic
slowdown in Albania's trade partner countries is expected to impose a sluggish foreign
demand during the rest of year. Given the lack of room for a substantial fiscal stimulus, the
main drivers of domestic demand will be the consumption and private investment, which
have shown few recovering signal so far. Overall, the expected economic developments at
home and abroad are expected to condition a slow rise in consumption prices at home.
Real and monetary sectors convey low pressures on prices; also, inflation in global markets
is expected to be low, whereas inflationary expectations are anchored.
The gradual subsiding supply shocks and the termination of base effects impact are
expected to be followed by a slight rising inflation trend in the second half of year. At a high
probability, consumer prices inflation is expected to remain below the target over the medium
run. These circumstances, in the absence of unexpected shocks, encourage the further
maintaining and strengthening of the monetary policy's stimulating nature. The reconfirmed
commitment of the government to continue the fiscal consolidation process even in the next
review of budget, as well as the calmer situation in global markets, will pave the way to
review the monetary policy position.
***
Based on the analysis of the information set out above, the Supervisory Council holds that
inflationary pressures on consumption prices at home remain low over the monetary policy
horizon. On the demand side, below-potential economic growth shall continue to generate
low inflationary pressures. Also, supply-side pressures, both of external origin and generated
by the macroeconomic environment at home, are expected to remain moderated. At the end
of the discussions, the Supervisory Council decided to keep the key interest rate
unchanged at 4.25%.
The Supervisory Council remains committed to meet the main target of the Bank of Albania,
to maintain price stability in the medium run.
Without jeopardising this target, the Supervisory Council remains vigilant and monitors
carefully the macroeconomic and financial developments at home and abroad, to assess the
monetary leverage for supporting the economic growth and maintaining the domestic and
external equilibriums at home.