Ardian Fullani: Overview of recent economic developments in Albania
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, 26 June 2013.
* * *
Today, on 26 June 2013, the Supervisory Council of the Bank of Albania reviewed and
approved the monthly Monetary Policy Report. Based on the most recent monetary and
economic developments in Albania, and following the discussions on their outlook, the
Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged,
at 3.75%. The Supervisory Council deems that the current monetary conditions are adequate
to meet Bank of Albania's inflation target in the medium term. At the same time, these
conditions ensure the necessary monetary stimulus to support the domestic demand.
Let me now proceed with an overview of the economic developments and key issues
discussed at today's meeting.
* * *
Annual inflation continued its downtrend in May, settling at 2.1%. Prices of agricultural
products fell, thanks to the higher supply in the domestic market, shifting this month's
inflation down. On the other hand, prices of other goods and services of the CPI basket
ranged around the previous months levels.
From the macroeconomic perspective, consumer prices continue to reflect low inflationary
pressures, arising from both the demand and the supply side. The cyclical weakness of the
economy was associated with strong reduction of core inflation during this period. Due to
spare capacities in the labour market and capital, production costs and profit margins
increased at low levels, leading to lower increase in final prices of consumer goods produced
in Albania. Furthermore, price stabilisation in global markets and economic agents' anchored
expectations on inflation were reflected in low price rise in the domestic market. Consumer
price inflation appears to be at low rates and is expected to range in these levels, in the
period ahead.
The macroeconomic analysis, updated with the latest available information, suggests low
aggregate demand growth during the first five months of the year. Economic growth was
supported by foreign demand and higher public spending during this period, while
consumption and private investments were weak. Over the last quarters, consumption
and private investments have suffered from uncertainties for the future and tighter lending
terms. Their performance will be broadly conditioned by the improvement of these two
drivers.
In the first five months of the year, the fiscal policy was stimulating to the economy,
materialised in the rapid expansion of the fiscal deficit and public spending. Additionally, the
fiscal easing relied also on the taxation policy, as a number of taxes were reduced directly or
indirectly. Budget expenditure surged 13.3%, mainly due to public investments during this
period. Fiscal revenues fell 0.2%, mainly due to contraction in the tax component. For the
first five months of the year, budget deficit stood at ALL 38.3 billion, about 1.1 times higher
than a year earlier, affecting, therefore, the increase in the public debt to GDP ratio, to
62.4%. The Bank of Albania continues to draw the attention on the need for fiscal measures,
which would guarantee the long-term stability of the public debt, boost financial markets'
confidence in our public finance, and cut long-term costs of debt service. This objective
should be the main medium-term priority of public finances.
Data on the external sector of the economy reveal that the net foreign demand contributed
positively to economic growth in the first quarter. The current account deficit narrowed, in
annual terms, settling at 9.8% of GDP during this period. Foreign trade data for April point to
further narrowing of the annual trade deficit by about 5.3% in annual terms, thanks to the
rising exports. Meanwhile, for the first time since September 2012, total imports increased
about 3.6% in this month. As pointed out earlier, the current account deficit constitutes a
structural deficiency of the Albanian economy. Its adjustment would mitigate one of the
potential sources of risks to the Albanian economy and financial markets, and broaden the
space for implementing stimulating macroeconomic policies in the future.
Monetary indicators were in line with the real-economy developments and our analysis
reveals that the monetary inflation pressures are weak. Annual increase of money supply
accelerated in April, reversing the deceleration trend that had started in July of last year. The
broad money aggregate, M3, picked up 5.2% from 4.6% in March, mainly reflecting the
higher demand for funding by the public sector. By contrast, the private sector's weak
demand is reflected in the sluggish credit performance. Lending to the economy slowed
down further in April, marking only 0.9% annual growth. Besides the weak demand, lending
deteriorated also due to banks' prudence in lending, materialised in relatively tight standards.
This phenomenon is regionally dispersed and is dictated, to a large extent, by the
developments in the euro area's financial markets.
The main feature of financial markets developments has been the downward trend of
interest rates in recent months. The easing signals of the monetary policy were transmitted,
though unevenly, across all the market segments. The interbank interest rates followed the
latest key interest rate cut in March and remain anchored around it. In May and June, the
yields continued to fall in the primary market in line with the monetary policy easing cycle.
Deposits and loans interest rates are reacting more slowly conform to the time lag in the
monetary policy transmission mechanism, and in the presence of economic agents'
uncertainties about the future and risk premia that accompany crediting.
Insofar factual developments have not altered our base projections on economic
developments. For 2013, economic growth rates are projected to be close to those of the
past year, although the balance of risks has shifted on the down side. Foreign demand is
expected to contribute less, affected by the economic slowdown in partner countries.
Intensification of expenditures in the second quarter is expected to be counted as positive
contribution by the public sector to the aggregate demand in this period. However, its
capacity to induct stable growth on the private sector appears limited in time and restricted
by requirements for compliance with budget deficit indicators. Under these circumstances,
the domestic private demand remains a determinant factor for boosting aggregate demand in
the future. Accumulation of financial savings and easing stimulus of the monetary policy are
expected to materialise in better consumption and private spending in the period ahead.
Demand growth below the potential of the economy for the rest of the year will continue to
exercise low inflationary pressures from the demand side.
* * *
At the end of discussions, the Supervisory Council decided to keep the key interest
rate unchanged, at 3.75%. The outlook of economic and financial developments in Albania
and abroad determines the continuation of the easing monetary conditions over the monetary
policy-relevant horizon. This policy establishes the proper conditions for meeting the inflation
target in the medium-term period, contributing at the same time to the growth of aggregate
demand and full utilisation of production capacities in the economy.
Expected economic and financial developments require that the easing monetary
conditions be maintained in the monetary policy-relevant horizon. The Bank of Albania
stands ready to react duly and timely to provide the necessary monetary conditions for
meeting its inflation target.