Ardian Fullani: Bank of Albania - 2006 Annual Report
Address by Mr Ardian Fullani, Governor of the Bank of Albania, at the presentation of the
2006 Annual Report of the Bank of Albania, Tirana, 10 May 2007.
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Honourable Mr. Chairman,
Honourable ladies and gentlemen, members of the Economy and Finance Commission,
It is a special privilege for me to present to you, pursuant to law requirements, the 2006
Annual Report of the Bank of Albania.
This report provides a summary of the Bank of Albania activity in implementing the legal and
constitutional obligations. First of all let me focus on the national economy performance, and
then on more specific parts related to the institutional responsibilities and direct contributions
of the Bank of Albania to subduing inflation, maintaining financial stability, enhancing the
financial infrastructure and on our role to European and regional integration.
1. Economic developments over 2006
The country's economic development over 2006 has generally complied with its
mediumterm development plan. The overall Albanian economy has undergone comparably
satisfactory growth rates, due to the private sector's dynamism, macroeconomic stability and
the fruits of the so-far structural reforms. The banking system has provided a powerful
incentive to economic activity sustainability and to growth of credit to the economy by about
ALL 70 billion or above USD 700 million.
Based on available economic indicators, the growth rate is estimated at about 5 percent. This
growth has been associated with price stability, reflected in an annual average inflation rate
of 2.4 percent. The monetary conditions, characterised by historically low interest rates and
exchange rate stability have favoured the rise of investments and consumption in the
economy. In particular, they have also been reflected in rapid credit growth, by further
sustaining the economy growth. The fiscal developments have taken place within the
programmed limits, contributing to further consolidation of public finances and budget deficit
control.
However, the realization of capital expenditures requires a larger focus on the programmed
level, as concerns the pace these expenditures have been carried out.
The economic growth has been reflected also in the labour market. The number of employed
persons in the country has boosted, though it has not yet fully reflected the developments in
other sectors of the economy. The country's economic activity extension has been
associated with increased foreign trade exchanges. The balance of payments has been
closed in positive terms, thus supporting the exchange rate stability.
The quantitative and qualitative indicators of economic performance show a satisfactory
growth, based mainly on the activities of services and industrial production. The sales carried
out by economic enterprises during the first nine-month period accounted for about 11
percent higher than in 2005. The fact that the first quarter recorded a high annual growth of
sales shows that services and production enterprises overcame the problems entailed by
power supply constraints at end of 2005. The industry sector, particularly the process
industry has recorded positive developments. The country's trade activity continues to
ensure the majority of sales, and to record significant annual growth rates.
It is estimated that construction sector has performed almost at the same level with that of
the previous year. Direct and indirect indexes of this sector impose the necessity for a
broader attention, particularly to a better allocation of private or public financial resources.
Construction developments over the recent years, and particularly the extreme concentration
of constructions on certain territories, prove the lack of efficient urban development policies,
without guaranteeing long-term sustainability of the branch. Furthermore, construction
continues to be dominated by housing buildings, lagging behind other strategic items, such
as investments in road infrastructure, in industrial constructions, in land improvement and in
agricultural infrastructure, as well as other investments directly related to the standard of
living of small urban and rural communities.
Agricultural production during 2006 partly recovered the growth rate decline noticed in 2005.
The sector growth projection stands at 2.5 per cent for 2006, higher than the growth of 2005,
but lower than the average growth rate noticed over five latest years. Investments in
agricultural sector and financing by the banking system will increase in accordance with the
potential of this branch, providing that hurdles arising from various structural problems are
eliminated.
Agricultural land is not used at maximum, because of external and internal migration and the
problems with ownership titles. The relatively underdeveloped rural infrastructure makes
more difficult the emerging of products in the market. The parcelling out of agricultural land
impedes the effective organisation of production, decreases the profitability and raises the
agricultural mechanics utilization cost.
The Bank of Albania deems that energy remains our main challenge in the short-run and in
the medium-run.
We have been faced with underlined power supply constraints for about a decade. The
current crisis coincidence in time with a global environment that is rather sensitive to this
problem has relatively increased the energy import costs, which could be unsustainable in
the long run. It has resulted out of Bank of Albania surveys that the negative consequences
arising from this situation are numerous and directly related to the economic activity of the
productive sector, in both levels, corporate and small and medium sized enterprises. The
frequent recurrence of such situation poses the risk that periods of significant power
constraints are no longer regarded as accidental shocks, but they are more and more
classified as permanent factors that should be factorised in the production cost, and hence
should be taken into account in pricing policies and their expectations.
To this end, the Bank of Albania estimates that, starting from 2007, all the respective
decision-making stakeholders should apply a new concrete management policy, different
from the 15-year practice. An integral part of it should be not only the management of current
energy resources, but also concrete steps in the distribution network, as short-term
measures to pass to long-term operations, which would imply the establishment of alternative
energy sources. The solution of the energy situation at the soonest time possible will provide
positive impacts on the Albanian business, the soundness of public finances, the country's
sustainable economic development and the macroeconomic stability.
Concluding this part, I would like to point out some other issues, which I think should be
encompassed in the priority list of the country's medium-term economic and financial
development. The Albanian economy is leaving the status of a transition economy and is
approaching to that of a developing economy. This qualitative step requires further
deepening of structural reforms, enhancement of effectiveness of development policies and
enlargement of the country's absorbing capacities in terms of fostering the Albanian
economy competitiveness at regional context and beyond it.
I would highlight the constant trade deficit deepening, as an issue of the present and the
future. Even though the current cross-border position of the country is not problematic, being
materialised in such indicators as external debt, foreign reserve level or overall balance of
payments position, I would point out that the rise of exports is not sufficient, particularly in the
context of high reliability of the Albanian economy on remittances. The relatively high current
deficit, around 7.6 percent of GDP, is another argument in this regard. The latter one, also in
the presence of a fiscal deficit, increases our economy's exposure and makes necessary the
provision of foreign currency inflows of a more steady nature. This would be translated into a
need for more qualitative foreign direct investments, which in turn, would contribute to a
steady growth of exports.
To this end, taking advantage of the global environment, which is constantly searching for
new markets, I would suggest a more qualitative national marketing strategy. This strategy
should highlight professionally and contemporarily, all the recent incentives and the multiple
opportunities Albania provides. Also, I think it is just the time to integrate even the joint
regional projects into our long-term development plans. Road infrastructure, energy,
communication, tourism and other areas are still underdeveloped in regional level. Therefore,
I assess that regional projects of strategic nature raise the interest of domestic and foreign
investors. If taken separately the economies of the region are relatively small, but altogether
they form an attractive market, with more investment opportunities.
In recent years, it is noticed that the penetration of foreign investments in our region is
relatively small and mainly, it reflects the privatization process of important public properties.
The same thing has occurred to the Albanian economy. More concretely, during 2000 -
2006, the overall foreign direct investments, according to the balance of payments statistics,
are estimated to about USD 1.45 billion, about 3.5 percent of GDP realised over the same
period.
If we would identify the reasons why FDIs inflows are so modest, we might mention the
complex problems characterising our region, while different reasons that reduce the
absorbing capability of our economy exist even in the national plan.
The Bank of Albania deems that the country's current stage of development creates great
possibilities in this regard. The experience of the newly acceded countries has indicated that
the signing of the Stabilisation and Association Agreement and the following negotiations
have been associated by high FDI inflows. However, we can not assume that this
phenomenon will be automatically present even in Albania. Therefore, the Bank of Albania
deems that further deepening of structural reforms is necessary and that this process should
be followed by improvements in the business climate and by enhancement of the degree of
law enforcement.
The last but not the least, I would like to point out that the degree of economic activity
coverage with statistics is still low. The monetary policy that we are following is an as much
dynamic as visionary process. Besides the existence of efficient markets, it also needs to be
supplied with new and methodologically accurate statistics.
Besides our constant efforts and good understanding with INSTAT, we find it necessary to
appeal for a greater attention of the whole society and of respective institutions in particular,
to increasing statistical information and further consolidating the existing one. It is just the
time that all the monitoring, licensing and decision-making institutions, including also the
numerous nongovernmental organisations, must feel a great responsibility in this regard. It is
just the moment that they develop indirect measuring and estimating approaches for many
demographic, economic, social and financial indicators.
Let me now present another important issue in my speech, which has to do with one of the
main legal responsibilities of the Bank of Albania, i.e., consumer price stability.
2. Inflation and monetary policy
Consumer goods price inflation over 2006 was generally within the Bank of Albania's
targeted range of 2 to 3 percent. Year-end recorded a 2.5 percent annual inflation rate. It was
almost similar to the 2005 annual inflation rate of 2.4 percent. Inflationary pressures, though
moderate, have been increasing over 2006. The average annual inflation rate amounted to
2.7 percent during the second six-month period of the year, from 2.0 percent it was in the first
half of the year.
In general, the annual average inflation steadiness during the recent years, speaks for the
inflation rate stability, in spite of the fluctuations in time and size of the factors that have
conditioned the consumer price performance. Developments on the demand and supply side
of the economy have been balanced, without creating premises for inflationary pressures.
The fiscal policy has observed the programmed indicators on annual basis, stabilizing the
impact of the public sector component on the aggregate demand. Also, the monetary policy
has controlled liquidity conditions and interest rate developments, and has attended the
exchange rate performance, monitoring through them the economic activity financial stimuli.
On the other hand, the low inflation rates in the recent years have been reflected in
anchoring the inflationary pressures of the economy close to the Bank of Albania's target.
The latter might have contributed to constraining the second-round effects that may be
caused in the Albanian economy by some supply shocks, such as high oil prices and
managed price rises, with which the Albanian economy was faced.
Monetary conditions and monetary policy decisions
Monetary policy decisions on the key interest rate in the economy have been taken on the
basis of constantly analysing the current and expected developments of the demand and
supply factors springing from internal and external environment. Under the conditions when
an enlivening of inflationary pressures was evidenced and in the presence of a number of
factors expected to further favour this situation, the Bank of Albania decided on changing its
monetary policy stance, at the beginning of the third quarter of 2006. This change occurred
after a neutral period that had lasted about one year and a half. The monetary policy change
was materialised in raising the key interest rate twice during the second half of 2006. In July
and November 2006 the one-week repo rate was lifted respectively by 0.25 percentage point.
The maturity in monetary policy decision-making was reflected in the time lag between both
tightening movements in the interest rates.
In July-November 2006, many assessments have been made on the degree of banking
market response and sensitivity to monetary policy stance on interest rates. The interest rate
rise by 0.5 percentage point is estimated to have normalised the annual monetary supply
growth rates, fully responding to the public and private sector demand for monetary assets.
Monetary policy operations have assisted in stabilizing inflationary pressures of economic
agents in the medium run.
Fiscal policy
The Bank of Albania has estimated that during 2006, the fiscal policy provided a satisfactory
support to inflation developments. Fiscal indicators were realised in accordance with the
budgetary program, preventing premises for inflationary pressure rise in the economy. During
the fourth quarter of 2006, a high concentration of budgetary spending was noticed. The
budget deficit realization as of year-end, estimated at about 3.2 percent of GDP or 0.7
percentage point less than that of the previous year, has influenced on the contraction of
inflationary pressures and control of monetary expansion.
Demand factors
During 2006 domestic demand has significantly sustained the positive economic growth
rates. Good performance of the domestic demand has been indicated by a number of
economic activity indicators. Hence, the sales index for the first nine-month period of the year
recorded an annual growth of 12.4 percent. In particular, the rise of imports of machinery and
equipment and the real estate credit growth are indicators of investment expansion in the
country. The domestic demand has been increasing also due to rapid growth of lending
activity, which recorded a 57 percent increase in annual terms. Notwithstanding the positive
effects of investment expansion, the domestic demand growth exercises pressure on the
overall price rise.
In absence of any obvious inflationary pressures on the demand side, it is estimated that the
Albanian economy is making use of free capacities without raising the costs and final prices
of goods and services. Also, it should be highlighted that part of this domestic demand has
been met by rise of imports and trade deficit, thus mitigating the pressure on consumer
prices.
Supply factors
Import prices
The Albanian economy is a relatively open economy and therefore, import prices constitute
an important element of the country's inflation. Generally speaking, the economic conditions
of trade partner countries of Albania have been favourable during this year, easing the
control on supply side pressures and enabling the observance of inflation target.
Oil prices
Consumer prices during 2006 were influenced by a stressful situation in the interbank oil
price market. The impact of this factor, as concerns the intensity of operation in inflation rate,
was not uniform, being higher during the first nine months of the year and recording a decline
during the last quarter.
Exchange rate
During 2006 exchange rate developments have dampened inflationary pressures of the
supply side. The national currency has been appreciated against the American dollar and
has maintained unchanged its position vis-à-vis the euro. The lek's appreciating tendencies,
though weakened in the recent months, have led to the decline of import price in domestic
currency. In this way, the exchange rate has contributed to containment of the high
international oil price effect and to maintaining a low inflation rate.
Agricultural production
Agricultural production is one of the main domestic factors, which condition the consumer
price developments. The quantity of domestic agricultural production influences instantly on
foodstuff price level. During 2006, the seasonal effect of agricultural production rise appeared
later than in the preceding years, leading to foodstuff price decreases only in September and
October.
Production prices
During 2006 the production prices continued the downward trend noticed since April 2005.
However, the concentration of production price index on the productive sector of industry
makes difficult its comparison to consumer price index. Also, the domestic production share
is not yet a determinant component of goods supply in the domestic market, thus not
affecting the consumer prices.
Wages and unemployment
The good performance of the economic activity during 2006 was also reflected in labour
market indicator, and particularly in unemployment rate. New employment possibilities were
created, making unemployment rate continue its downward trend observed since more than
two years ago. Improvements have also been made in terms of incomes. So, government
sector wages, the minimum wage and pensions have increased in accordance with the
budget plan. The so-far inflation performance shows that Albanian economy does not suffer
from any significant discrepancy between wage rise and productivity.
Inflationary expectations
The business and public expectations in short- to medium-term have fluctuated around the
inflation rates recorded. According to Bank of Albania periodic estimates, the public
expectations have converged, mostly around 1-3 percent. In the meantime, the business
expectations on price performance have reflected a high volatility. The monetary policy and
the consolidation of macroeconomic stability have played an important role in anchoring the
expectations of public at large to Bank of Albania's inflation targeted rate.
3. Money supply
During the major part of 2006, monetary indicators have reflected the stabilised demand for
monetary assets. The average M3 growth rate resulted to 12 percent. The demand for
money of the public sector grew by 3.3 percent during 2006. This relatively low borrowing
has balanced the high lending rates of the private sector, positively impacting on the
maintaining of monetary stability. In compliance with the trend noticed over the latest years,
monetary developments have been characterised by shifting to longer-term monetary assets.
Currency outside banks has followed the general trend of the demand for money. The
currency outside banks to M3 stood at 24.2 percent at year-end or 1.7 percentage points less
than in the previous year. In nominal terms, the currency outside banks grew by ALL 13.6
billion or 9.1 percent.
The macroeconomic environment during 2006 has been favourable for a steady growth of
banking system lek deposits. The positive real interest rates have been associated with
further rise of lek deposits. They rose by 38 billion during 2006, satisfying the needs of the
economy for ALL 35.9 billion and the needs of the government for credit in ALL.
In 2006 foreign currency deposits rose by about 29.4 percent. The higher growth rate of
foreign currency deposits versus the money supply growth rate led the ratio of foreign
currency deposits to M3 to about 29 percent. The share of foreign currency deposits to total
deposits rose to 38.5 percent, against 35.5 percent in 2005.
4. Demand for money
The increase in the demand for money reached its peak in December, by an annual rise of
16.7 percent. The main contribution to the increased demand for money throughout the year
was rendered by credit to the economy. This contribution recorded its maximum in June,
being mitigated during the coming months due to growth of public borrowing. Foreign
currency position has maintained a relatively steady weight in establishing monetary assets
during the year.
Credit to the economy
The banking system developments and the increased role of banks as financial
intermediaries, have led to significant expansion of lending activity during the recent years.
The loans portfolio amounted to ALL 191.2 billion or 21.3 percent of GDP at end of 2006.
The loans portfolio for the economy constituted 31.3 percent of total banking system assets
and about 37.4 percent of the banking system deposits.
During 2006, credit to the economy increased by ALL 69.3 billion in absolute terms,
compared to ALL 52 billion in 2005. During two latest years, commercial banks have better
met the increasing demand for ALL loans, which at end of 2006 constituted 29 percent of the
loans portfolio, thus evidencing a moderate extension of its share.
Corporate credit constitutes the main share of banks' portfolio, amounting to 66.5 percent of
the total at end 2006. In annual terms, corporate credit increased by 52 percent. The credit
distribution structure by use has tended to be more uniform in comparison with the previous
year. Most of corporate loans (34.5 percent) have been used for purchasing machinery and
equipment, while 23.2 percent of corporate loans portfolio has been used for financing
investments in activity area expansion.
In 2006 the household credit was 7 percent of GDP, or 33.5 percent of the total loans
portfolio. More than half of loans to households (59.3 percent) have been extended for
financing real estate purchases, while the financing of consumer goods purchases has also
increased. The ratio of consumer loans to total household portfolio is 27.3 percent, from 20
percent in the previous year. In particular, consumer loans increased obviously during the
summer holidays and during the end-year celebrations.
Concerning lending to specific sectors, it should be underlined that trade remains the sector
mostly credited by the banking system, by 22.4 percent of the loans portfolio. The growth
rate of credit to construction has been inhibited during 2006. This sector presented
temporary improvement signs during the summer, then turned back to the downward trend.
In the meantime, the low volume of credit to agriculture speaks for constant structural
problems that inhibit lending to this sector.
Given the geographical coverage with loans, it is observed that 68 percent of the portfolio is
concentrated in Tirana. Durrës and Vlora come afterwards, by respectively 8 and 4 percent
of the loans portfolio. This reveals the high economic importance of Tirana, and the need for
improving the economic infrastructure in the rest of the country.
Net foreign assets
The foreign currency position of the banking system improved during 2006. Net foreign
assets of the banking system amounted to US$ 2.4 billion at yearend, recording an annual
growth of about US$ 440 million.
Government demand for money
The government account has had an unusual performance during 2006. During the major
part of the year, the government demand for money was negative, concentrating the planned
domestic borrowing on two last months of the year. The overall deficit financing for 2006
resulted to about ALL 22.6 billion.
5. Financial market and interest rates
Year 2006 was characterised by an increased activity in money and capital market, while the
interest rate performance was generally oriented by the Bank of Albania's monetary policy.
Under the conditions of excess liquidity, the interest rates had a downward trend during the
first half of the year. The interest rates went upward after the tightening signal of monetary
conditions in the second half of the year.
The interbank market was more active during 2006, thus ensuring a more efficient way of
banks' excess liquidity management. The average daily volume of transactions amounted to
All 1.6 billion or ALL 0.2 billion more than the previous year average. The interbank market
was characterised by narrowing the interest rate spread according to maturities and their
positioning close to key interest rate. The average overnight-weekly interest rate spread
dropped to 0.7 percentage point in 2006, from 1.6 percentage points in 2005.
In the first half of 2006, there was a constant decline in treasury bills yields and government
bonds, due to low government demand for funds. In the second half of 2006, following the
Bank of Albania's tightening signals and the increased demand for liquidity in the system,
there was a gradual rise of these yields. The yields increased respectively by 0.83, 0.45 and
0.98 percentage point in comparison with the previous year.
The government bonds issues has increased compared to the previous year, making the
banks' portfolio, as the sole participants in this market, increase to ALL 37.0 billion. The
share of bonds to total government securities increased 22 percent in 2006 from 12 percent
in the previous year. Their maturity structure varies from 2 to 5 years. Five-year bonds were
issued for the first time in November of this year, for the amount of ALL 6.3 billion. The
demand for them resulted higher than the issued amount.
Lek deposit interest rates went down during the first half of 2006, and up after the tightening
monetary policy signals. The interest rates were raised faster for long-term maturities,
reflecting the adjustment of their term to long-term government debt rise.
Lek credit interest rates went down for all maturities during 2006. The weighted average
interest in December 2006 fell to 12.92 percent, from 13.50 percent it was in the previous
year. Though the intermediation cost declined in comparison to the previous year, the spread
level is still high. It is influenced by imperfect competition in this market and by higher risk
nature of loans extended in ALL.
The interest rates of deposits denominated in lek and euro continued to go up, as a result of
monetary policy tightening by the Fed and the European Central Bank during 2006.
Simultaneously, the interest rates of loans extended in these currencies went up. The
interests of six-month to one-year loans in Euro and six-month loans in USD underwent the
highest rise. At end of 2006, the weighted average interests of loans in USD amounted to
9.42 percent and interests of loans in Euro amounted to 8.17 percent, from 8.47 percent and
7.95 percent they were respectively at end of the previous year.
6. Exchange rate
During 2006, the Albanian lek has maintained its appreciating trend against the principal
foreign currencies, though at a low intensity. In effective nominal annual terms, the lek has
been appreciated on average by 1.1 percent during 2006. During the previous year, this
appreciation was 2.8 percent. The lek-foreign currency interest rate spread, though
downward during three latest years, continued to be at positive levels.
Economic developments during 2006 have sustained a stable domestic currency. The lek's
appreciating pressures have been concentrated mainly on July-August and December.
Besides the seasonal entry of foreign currency, which is the main factor of the lek's
appreciation over this period, the key interest rate increase has also been reflected in the
market. The high foreign currency supply over this period has been absorbed partly by the
Bank of Albania's interventions, in respect of the target on the rise of net international
reserve and in compliance with the country's overall macroeconomic program.
7. Monetary policy instruments
Fixed-price one-week repurchase agreement is the main instrument employed during 2006.
According to the liquidity situation, the Bank of Albania has switched from repurchase
agreements to reverse agreements, while the maturity term has changed from weekly to
quarterly. This spectre of movements has been imposed by seasonal factors, by the budget
behaviour and by the need to reveal certain monetary policy signals.
To meet longer-term needs of the market for liquidity during the four last months of 2006,
four Treasury bill outright purchase transactions were carried out, at a total nominal value of
ALL 3.2 billion.
During 2006 commercial banks employed the overnight deposit facility for investing their free
liquidities with the Bank of Albania, on average at ALL 1.6 billion a day or ALL 0.82 billion
more than in 2005.
Overnight credit has been employed only in seven cases, despite the lack of liquidity over the
third quarter of the year. For the fourth consecutive year, the final lending facility of the Bank
of Albania, i.e., the Lombard loan was not employed at all.
The required reserve instrument was used constantly even during 2006, for withdrawing the
banking system liquidity. The monthly pace of ALL required reserve rise during 2006 was on
average higher than in 2005, 0.92 percent versus 0.76 percent, reflecting the rise in the
respective categories included in the required reserve account.
8. Foreign reserve management
During 2006 the gross foreign reserve, estimated and reported in USD, has been increased
by USD 368.06 million, recording the value of USD 1,793.12 million as at end of December.
Out of this growth, about USD 205 million is accumulated from Bank of Albania's
interventions in foreign currency. They were intended at meeting the quantitative target for
these assets and mitigating the volatility over the peak periods of foreign currency supply.
While the exchange rate effect has been positive, at USD 106 million, the rest of the growth
has been contributed by receipts from foreign disbursements.
9. Banking system performance
The banking system continued its stable development during 2006. The net banking system
result for 2006 stood at a profit of ALL 7.45 billion, about 12.9 percent more than in 2005.
Revenues from the principal activity (net income from interest) resulted to 31.2 percent more
than in the previous year, reflecting the banking system orientation to activities of higher
return and a rise in the overall volume of assets.
At end of 2006, the net income from interests was 92.6 percent of the gross banking system
incomes, compared to 84 percent at end of 2005. This indicator has recorded constant
growth, particularly over three last years, reflecting the overall net income sustainability for
the banking system.
During 2006, the banking system assets grew by All 127.7 billion, or about ALL 57.6 billion
more than the growth of assets noted in 2005. The main contribution to the growth of banking
system assets was given by large banks, though their share in the market is downward. The
estimates show that the lending activity concentration level is lower than that of assets and
deposits concentration.
The significant growth of lending has been associated with increased share of
nonperforming loans portfolio, by about ALL 3.1 billion compared to end of 2005. The loans
portfolio quality indicator, expressed as a ratio of nonperforming loans to total loans portfolio
in gross terms, is estimated at 3.1 percent as at year-end, against 2.3 percent as at year-end
2005.
The banking system capability of covering loss loans with capital has been downward, but
still at good levels. The "non-performing loans to outstanding loans (net)" indicator, which
estimates the net size of exposur