Ardian Fullani: The current performance and development prospects of
the Albanian economy
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Bank of Albania's
forum with representatives of main businesses operating in Albania, Tirana, 23 November
2009.
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Dear Ladies and Gentlemen,
It is my pleasure to be among you today, to share with you our views on the current
performance and development prospects of the Albanian economy. As the most dynamic
part of the Albanian economy, your contribution has been tangible in the country's economic
development during transition. Your incentive, your willingness and devotion have brought
about tangible results in the country's development. In a single figure, the Albanian economy
performance may be summarized in the growth of above 65 percent of gross domestic
product and well-being per citizen during these years of transition. Our development prospect
remains as much positive. The country's macroeconomic stability, the continuation and
deepening of structural reforms as well as the geopolitical reality of approximation to
developed economies of the European Union, would help in a fuller release and
remuneration of your potential and energies.
Today's forum aims to highlight the economic development of the country and initiate a broad
public discussion on alternatives of the future economic growth models.
Now, let me start by making a brief statement of the latest developments of the Albanian
economy, and further dwell upon our viewpoints on the country's economic development in
the future.
Economy performance during the crisis
The developments over 2009 have indicated that the Albanian economy has been impacted
by the recent global crisis, mainly as a consequence of decreased foreign demand and
remittances, higher risk premiums, reduced and high-cost financing resources. However, our
economy continued to record positive economic growth rate during this period, while the
domestic inflationary pressures remain subdued. The country's economic activity has been
sustained by the fiscal stimulus and the preservation of steady consumer demand, while
investments and exports have recorded lower growth rate in the first nine-month period of the
year.
The economic performance over the first 9-month period of the year, albeit positive, attests to
growth rate slowdown, reflected even in the gradual slackening of inflationary pressures. In
spite of a slight improvement during 2009, the current-account deficit remains high, reflecting
high levels of consumption in the Albanian economy and unfeasibility of production
capacities to meet it. The fiscal policy has had an expansionary nature during 2009, reflected
mainly in increased budget spending, mainly due to rapid growth of capital expenditures.
Budget revenues maintained a slower-than projected rate, due to slow-down in the economic
growth rate during this period.
Consequently, the additional budget spending has been financed through the use of
privatization receipts and the higher public borrowing.
This policy has exerted pressure over the increase of government debt securities' interest
rates of long-term maturity. Financial markets attested to an improved liquidity situation and
agent's recovered confidence in these markets. The persistent Bank of Albania's liquidity
supply to the money market helped to calm the market participants down and supply the
market with funds, which served to the private sector's domestic currency intermediation.
The needs for liquidity in the interbank market have decreased, hence exerting no pressure
on short-term interest rates.
The prudent monetary policy of the Bank of Albania has helped relieve the tension in the
financial market, while the latest base interest rate cut should be translated into greater
lending to the private sector.
As we have already stated even previously, the Bank of Albania regards the future
Albanian economic activity with a prudent optimism. I mean, in spite of the great
shock we have gone through, the macroeconomic and financial stability of the country
has not been affected. Furthermore, the restoring of confidence in the banking system
opens the way to recovery of the lending process and sustaining of the economy with
funds. On the other hand, the Bank of Albania keeps on pursuing a prudent stance,
because the financial risks on the economy have not been completely overcome. The
banking system has still liquidity shortages, whereas the global economy continues to
be frail. Therefore, the economic prospect will depend on our joint work and on the
performance of global economic and financial markets.
Dear participants,
In the optics of historical developments and particularly of recent events, I would like to
briefly dwell upon several vulnerabilities that we, as the politic, supervisory and regulatory
authority, have highlighted, as well as the lessons we should draw and the issues we should
address for the country's further economic development.
Lessons from the crisis
Right from the beginning, I would like to emphasize that generally, the philosophy of
the country's economic development has been accurate. Market openness and
increased competition have made the Albanian economy benefit the fruits of private
sector initiatives. The practice of economies based on free market principles has
broadly indicated that this sector remains the most efficient engine of the economic
activity.
This process has been sustained even by the constant reduction of the state's share to the
economy, as well as by its focus on procurement of public goods and infrastructure
development. Positive financial market development has generated the necessary funds for
supporting investments and consumption in the economy. Though chiefly for historical
reasons, our banking system has based its activity on the intermediation of domestic funds of
the economy, the recent developments indicated that it remains as much capable in
generating foreign funds to provide capital and liquidity backstop to the Albanian economy.
On the other hand, the integration of our financial system into the European one has raised
the resilience of the Albanian economy to various shocks, of which the latest is still under
operation. It has also brought about a necessary expertise in terms of financial and economic
business administration, has developed the infrastructure and means of payments in the
economy and has helped efficient risk transfer in the economy.
In spite of accomplishments, I think the country's growth model needs modifications and
improvements, aiming at enhancing its efficiency and stability. Under the conditions of an
economy that requires dynamism for moving from a transition economy to an emerging one,
the commitment for a sustainable and long-term development should be the subject of
current and future economic reforms, at both, political and institutional level, and enterprise
and consumer level.
Which are the vulnerabilities noticed in this regard?
First, domestic consumption and investments have been the main beneficiaries, while the
Albanian economy has not yet succeeded in establishing a competitive export sector,
capable of generating steady foreign currency income, which would enable the preservation
of external economic balances. From another viewpoint, this development does not seem as
balanced in sectoral terms. So, some sectors such as trade, construction and services have
contributed disproportionally the country's development while others, such as agriculture and
industry have contributed less.
Second, Albanian economy continues to suffer from structural vulnerabilities, which contract
its competitiveness in international markets of products and capital. This behaviour is
illustrated even by international competitiveness indices compiled recently by the World
Economic Forum, where Albania is ranked below regional countries. Some acute problems
refer to the need for enhancing education and infrastructure, in all dimensions. Both these
problems restrain the attraction of foreign investments and impede the country's
development.
Third, efficiency in using the economy funds should be improved even at micro level. This
implies the need for improving private businesses' management and control systems,
enhancing analytic and forecasting capabilities, as well as transparency.
Allow me to further deal with some of the above-mentioned issues.
Stable economic development of the country
As we have continuously underlined in our periodical reports, the economic growth over the
recent years has been strongly supported by the banking system lending. The growth of
banking lending has provided an impulse of about 7 percentage points of GDP in the last five
years, making a pronounced and evident contribution to the growth of consumption and
investments in economy. Their growth has provided room for expanding the production basis
and improving the welfare. However, it has also generated macro and microeconomic
imbalances.
At macroeconomic level, the high consumption and investments were followed by increasing
inflationary pressures and higher trade and current account deficit. These signs of
overheating were clear signals that that level of consumption could not be kept for a long
time, hence calling for controlling measures by the monetary authority.
This is also the key to understand our prudent monetary policy during the period 2006-2008.
The institutional investment we have made during these years in terms of consolidating
macroeconomic and financial stability was rewarded with a much more moderate and milder
impact of the global crisis than in the regional countries. In concordance with the modern
philosophy of macroeconomic administration, the Bank of Albania remains committed to not
allowing that rapid and short-term economic growth impair the long-term development
perspectives of our country.
At microeconomic level, the growth of consumption in economy was followed by increased
indebtedness in Albanian households' and businesses' balance sheets and by
overinvestments in certain sectors of the economy. Both these indicators are either at lower
levels than in the regional countries, or at similar levels; hence, they cannot be specified as
problematic. However, their rapid growth rate creates the idea of a short-term vision of the
economic agents, and in particular cases, even avoidance of rationality.
Dwelling upon household consumption, the Bank of Albania invites all economic
agents to be more forward-looking and realistic in their consumption and savings
plans. This invitation does not imply the contraction of consumption or the change of
preferences related to it, but merely placing it in the context of long-term plans that
equal income and expenditure at a household level. Beyond the time-related
dimension, as we have continuously drawn the attention, borrowers should be
cautious as regards their loan currency. This implies that the matching of their loan
currency with that of their income would be their best protection. In a more pragmatic
approach, this advice may be reduced into an appeal for a close consultation with the
banking system and the financial market's specialized agents.
The latest global crisis - in particular in the US and England - showed that the impaired
households' balances sheets create room for strong economic shocks and condition the
country's long term growth. On the other hand, it showed that the countries that succeeded in
preserving a clear certificate of consumer's financial soundness, wherein Albania is part of,
had a more moderate impact and enjoy good premises for a more rapid growth. In a
philosophical approach, the key lesson of the market economy is that all consumption must
be paid for. There is no free lunch.
Back to businesses and investment loans, whose portfolio is 2/3 of the total banking system
credit, my message is the same in principle: expand the time span of your decision-making
and foreign investment and base them on detailed and scrutinized business plans' analysis.
What I would like to underline is that this message should be perceived by you
urgently, since you have the necessary financial and human resources to be more
prudent in borrowing and investments. Time is ripe for the Albanian businesses to
avoid the group behaviour, where one business idea is almost automatically followed
and adopted by other businesses, without first studying the market size, the
competitive advantages, the level of expertise or the financial efficiency of using the
funds, according to all the chains a careful and prudent decision-making should go
through.
The latest tendency for diversifying the Albanian businesses is useful in principle; however, it
should not be made to the detriment of specialization and efficiency, or even less without first
making the macroeconomic and sectoral analyses.
The inter-sectoral performance of the economy is another issue I would like to discuss with
you today and which I briefly mentioned earlier in my speech. The country's economic
development has been characterized by a growth and investment model which has
favoured the services and construction businesses, compared to the exporting
industries or the competitive ones in imports. Although this performance somehow
reflects the tendency to perform similarly to the economic structure of developed and
advanced economies, it has resulted in over-investments in certain sectors. The
economy development cannot be stable if the allocation of funds is not carried out by
adhering to the principle of sector productivity and efficiency. The misuse of financial
funds impairs the agents and the whole economy, providing severe and long-term
consequences on corporate balances sheets and debts, on labour market and on
capital and technology allocation among sectors of the economy.
To minimize such risks, the Bank of Albania advises you to discontinue the inertial
moves in your behaviour and realistically assess the regional and European context in
your choices. The competitive advantages of Albania should not be sought only in
natural resources, or in meeting of yet unserved demands of the Albanian market, but
also in the cheap work force of the country and in its position as a future EU member.
The increasing interaction with the banking system would help to clarify your plans
and reduce the financial risk, providing you with the opportunity to focus on business
risk administration you are specialized in.
Completing my discussion related to stable development of the country, I would like to
underline that the banking system can and should do more in this respect.
The financial system is the brain of a market economy; it determines the expected
return and risk of investments in the economy, enabling later on the prioritized use of
limited financial funds. Despite its good performance, the Albanian banking system
should do more to incorporate macroeconomic and sectoral analyses, and also the
country's financial stability in decision-making. The development of research units
within large banks is actually a requirement of the time we are living in. Moreover, more
efforts should be made, to increase the support of small and medium-sized enterprises with
funds. In addition, a more aggressive marketing of derivative instruments, which will lower
the corporate financial risk, particularly of those operating in the export sector, requires a
greater attention from the banking system.
What I just mentioned will be an important part of the future philosophy of the Bank of
Albania in the field of structural reforms in the financial market and in developing and
advancing its supervisory and regulatory function in it.
Structural vulnerabilities and the need for reform
A useful lesson that the Bank of Albania has learnt from the crisis is the need to continue and
deepen the structural reforms in the economy. These reforms, not only will create a more
appropriate environment for promoting the private entrepreneurship, but will also increase
the economy's resilience to shocks. They also help to absorb foreign direct investments,
which are the best support to the country's development in the medium and long run.
However, as stipulated even in the EBRD's report, Albania is among the few countries that
have continued structural reforms even during 2009.
In this regard, Albania has lagged behind the regional countries, attracting in total only about
USD 1100 per capita of FDI during the 20 years of transitions.
In the entire broad framework of reform-related problems, I would like to dwell today upon the
need for investments in education and infrastructure. A well-known business maxim is that:
Employees are a company's most precious asset. To the Bank of Albania it signifies that
the higher the professionalism, the higher our institutional independence.
To a broader sense, this is also relevant for the national economy. Our country's progress,
the convergence with the developed countries of East Europe and even beyond, with the
European Union countries, will depend on our level of education. Competition in national and
international markets is above all based on the generation of ideas and their use in the final
products. Referring again to the Global Competitiveness Index, Albania is ranked the 90th as
regards the level of education and high-level training, and only the 109th and 126th
respectively at the level of business sophistication and innovation. These vulnerabilities will
ever-increasingly become an obstacle for the country's economic growth in the future, unless
addressed on due time.
Public reform in the education system and the need for more backup funds should be a
priority of every development policy. On the other hand, I consider that the Albanian business
can and should do more for supporting the Albanian education. First, the business can and
should be more supportive to higher education institutions, at the same time cooperating with
them in the area of market research and student training. The economic development history
shows that the countries, which have invested in education, are currently in the group of
most developed countries of the global economy. Second, I think that more efforts should be
made in attracting and absorbing the brain in the administration and management of your
businesses.
Investing in education, in enhancing professionalism and expertise, is the best
investment we can make for the future of our country.
Parallel to this, the enhancement of our development infrastructure should be a priority issue.
Beyond the road infrastructure development, which rightly is a priority of the public sector,
the Albanian business can and should do more in this regard. The use of common business
resources to resolve problems in supplying electricity, water and sanitation, and local roads,
should be regarded as an effective option of overcoming these problems. Creating
differentiated and specialized development areas will open more opportunities to them to
benefit from scale economies and common solution of problems. Also, computer and
telecommunication infrastructure are sectors, which can and should be addressed more
efficiently by the private sector.
Business administration and transparency
Though I addressed some problems even earlier in my speech, now I would like to dwell
briefly upon the problem of administration and corporate transparency enhancement.
Corporate administration is the linking bridge between ideas and results. It affects
funds usage efficiency and differentiates profitable from non-profitable businesses.
In light of this, I think that the above-mentioned issues, the extended time span of
investments, their support in market researches and prudent business-plans, the
orientation of businesses' positioning in national, regional and global context, the
increase in specialization and professionalization, the fostering of cooperation with
the financial system, require ongoing investments in terms of your management.
Finally, I think that transparency of your businesses is an aspect that deserves a greater
attention. Its enhancement would help first of all the trading and financial transactions among
businesses, fostering confidence and decreasing their risk. Also, the long-term and ongoing
relation with the financial system is conditioned by reciprocal transparency between parties.
Beyond the banking system relations, transparency is a serious obstacle in the establishment
and operation of capital market in Albania. In this regard, I think that the Albanian business
should be aware of the fact that transparency enhancement and increased formalization are
in its long-term interest.
Dear participants,
Long-term visions are translated into success achieved through work and short-term
sacrifices. The Bank of Albania invites you to foster the cooperation in resolving these
problems of mutual interest.
Thank you!