Ardian Fullani: Recent economic and financial developments in Albania
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Monetary Policy
Statement for the second half of 2008, Tirana, 29 February 2009.
* * *
World economy and the financial system in particular were severely hit in the second half of
2008. The crisis which struck the heart of the global financial system was progressively and
relentlessly transmitted to the economic activity of advanced economies leading some of the
latter into recession. The Albanian economy has been resilient amid this hitting wave.
According to the available official data and judging upon a number of indirect indicators, the
Bank of Albania notes that the economic activity throughout the year has by and large
performed in line with the early 2008 projections both in terms of economic growth and
preservation of macroeconomic balances. The Bank of Albania in particular has met its
primary objective mandated by law, contributing to the maintenance of price stability.
Average annual inflation rate marked 3.4 percent, which is close to the central bank's
objective.
The recent global-scale developments attest to the further economic downturn. Despite the
slackening of inflationary pressures as a result of the reduced demand and the slump in
basic commodity prices, the tightening of lending standards and the fall in consumption and
investment have led to uncertainties related to the duration and intensity of this troublesome
situation. Against this backdrop, the facing of the economic activity contraction at a global
level remains an open issue. The Euro area economy is already experiencing an economic
slowdown. Euro area GDP contracted in the third quarter while the unemployment rate
reached 7.8 percent in November 2008. The U.S. economy showed quite similar features.
The further contraction of economic activity - owing to the deterioration of financial indicators
in the U.S. corporate and household balance sheets, mirrored in lower consumption
spending and reduced aggregate investment - drove the unemployment rate to reach 7.2
percent. Monetary and financial stimuli managed by central banks and the ministries of
finance have helped to bolster confidence and relieve pressure on the financial institutions.
Against this backdrop, the "resilience" shown by emerging countries is displaying the first
signs of weakening. In contrast to the first half of 2008, the latest data attest to the
moderation of economic growth rates in the majority of these countries. The channels
through which the slowdown in advanced economies has affected the emerging countries
differ depending on their development characteristics. China and India have been severely
hit by the slowdown in exports; Russia had hard times owing to the slump in raw material
prices in the global market, while East European countries have been impacted by the
tightening of funding conditions on a global level.
In contrast to many emerging countries, the Albanian economy has been sustained by
domestic demand, while - although upward - foreign demand in the form of Albanian exports
has provided a proportionally lower impact over the economic growth. Economic activity at
home has been almost entirely sustained by domestic financial resources, while foreign
financing in the form of credit lines or portfolio investment has been less considerable.
Operating within all the parameters of financial soundness, the Albanian banking system has
been dynamic and effective in channelling the savings towards the funding of corporate
production or household consumption. This process has been also facilitated by the
macroeconomic stability which enabled the fall of risk premiums in economy and helped to
gradually extend the investment horizon.
These features led the economic activity at home to record adequate growth in the first three
quarters of 2008, a period which is covered by statistical data. With regard to the last quarter,
indirect data on economic activity - mainly financial ones - suggest a slight slowdown of
economic activity, however, remaining within the projections for 2008. Manufacturing, where
construction continues to share the main weight, provided the main contribution to the
increase of turnover indicator in terms of volume. Investment in major road infrastructure
projects and the recovery of construction permits from the prolonged constraints triggered
high growth rates in construction activity during this period. In addition, the sector of services
continues to provide the primary contribution to economic growth at home. The positive
developments in domestic production have been also evidenced by the increase of economic
tendency indicator, derived from the business and consumer opinions, and by the increased
number in employed persons. In annual terms, unemployment rate fell by 1.5 percent to
12.62 percent, being mainly triggered by the increase in the average number of employed
persons in the private agricultural sector.
Notwithstanding the inflationary pressures of early 2008 - mainly triggered by supply-side
shocks - CPI annual inflation was brought back within the Bank of Albania's target during the
second half of 2008. In the second half of the same year annual inflation rates stood close to
the central bank's target - 3.0 and 2.5 percent, respectively, in both quarters. The
performance of the inflation rate in the second half mirrored the global effect of the fall in
basic commodity prices (mainly foodstuff and oil prices) as well as a more favourable price
conjuncture of goods and services in the domestic market as a result of their demand
coverage with an ever-growing supply.
The return of inflation within the targeted band was not only conditioned by the relaxation of
supply-side shocks but also by the adequate monetary conditions which provided room for
the balancing of demand and supply-side factors. Monetary policy stance was neutral
throughout 2008 and the key interest rate was kept unchanged at 6.25 percent. In tandem
with the strengthening of several banking supervision measures in terms of credit risk
management, the monetary policy has led to a more balanced credit growth and has
transmitted the appropriate stimuli for consumption and savings. The adequate monetary
policy and the keeping of inflation under check by the Bank of Albania have been also
reflected in the anchoring of economic agents' inflationary expectations close to the 3
percent target of the central bank. In absence of unexpected shocks on financial stability,
inflationary expectations or other supply-side factors, the balance of risks on inflation over
the period to follow seems to be shifting downward.
In this context, worth noting is the contribution of fiscal policy which has ensured the
preservation of macroeconomic balances by keeping the budget deficit at adequate levels.
The carrying out of public spending in line with the budget plan has facilitated the control of
domestic demand pressures and has bolstered confidence in the country's macroeconomic
stability. Budget revenues collected as of end November have met the 11-month plan of the
Ministry of Finance by about 96.4 percent, while expenditures met 92 percent of the plan.
Following the developments in the first half of 2008, budget performance for the period July
to November 2008 was characterized by a more active carrying out of expenditure. Budget
deficit created after the first half of 2008 was mainly financed through foreign resources.
On the other side, the external sector of the economy continued to be characterized by the
deepening of current account deficit, which in annual terms, increased by 48 percent in the
third quarter of 2008 to about 252 million euros. As a share of GDP it accounted for 13.7
percent which is about 5 percentage points higher than the same period the previous year. In
addition to the trade deficit widening, the deepening of current deficit was also triggered by
the narrowing of the positive balance of revenues and current transfers' account. Its stability
is imperative to ensure Albania's financial stability and a stable and long-term economic
growth. Therefore, the dynamics in the balance of payments developments remains an area
which needs constant monitoring by the Bank of Albania.
Monetary indicators had a stable performance in the second half of 2008, although the end of
the period showed signs of their downward growth rates. Average annual growth rate of
money supply was about 13 percent. A small part of deposits were withdrawn from the
banking system in the last months of 2008 as a result of depositors' concerns following the
vague situation in the global financial system. In relative terms, these withdrawals made up a
small share in commercial banks' balance sheets and did not affect the banking system's
soundness indicators or impair its financial intermediation role. Credit to the private sector
continued to provide the main contribution to money growth. In annual terms, credit growth
fell during the second half of 2008 relative to the first half the same year. Intermediation
indicators increased further; the ratio of loan portfolio to deposits and total assets was 63 and
43 percent, respectively, as of end November. Following September, the structure of loan
portfolio by currency displayed a higher annual growth rate of lek denominated loans. The
performance of loan portfolio by customer attests to higher annual growth rates of business
loans relative to household loans. In contrast to the first half of 2008, loan portfolio to
construction and trade shifted downward while loans to industry increased slightly in the
second half of the year.
The performance of money markets during the second half of 2008 was conditioned by the
developments in monetary indicators and the real economy. As experienced by many
countries, the increased vulnerability of banks to liquidity has brought about the reduction in
the interbank trading volume and upward interest rates on deposits. The coverage ratio of
Government demand for money has reduced and some risk premiums have increased in the
last two months. This performance brought about the increase in Government securities'
interest rates and in a few cases in the loan interest rates. In response to these
developments, the Bank of Albania intervened in the money market by injecting liquidity at
different maturity rates. In addition, the central bank changed in November the form of repo
auctions to auctions with undetermined amounts in order to better satisfy the banks' needs.
* * *
Economic and financial developments have by and large been positive during 2008.
Economic growth performed in line with the early year projections, while the main indicators
of macroeconomic and financial stability remain solid. The negative impact of developments
in global economy was marginal. However, as in other emerging countries, the Albanian
economy cannot remain immune for long to the direct or indirect impact of the global
economic crisis. The Bank of Albania public statements have constantly noted that the global
crisis impact over the Albanian economy will largely depend on its intensity and duration. The
persistence and deepening of the global economy crisis signal that the Albanian economy
will go through a harder economic environment in 2009, which may call for the solution of
many issues.
The slowing remittances and the tightening of financing conditions are the channels exposing
the Albanian economy the most to shocks in the global economic environment. The expected
impact of these factors would materialize in a slower economic growth in 2009. We note that
the economic and financial programs of all economic agents need to reflect and consider this
prospect. A slower economic growth does not necessarily translate into a crisis in Albania,
but rather as a temporary development propelled by external factors. Hence, promoting
policies need to be formulated based on this underlying premise. They should at no case be
designed to the detriment of long-term macroeconomic stability, which represents one the
most treasured assets the Albanian economy has achieved during the transition years.
The preservation of financial stability remains crucial for the long-term economic
development and under constant consideration in the Bank of Albania decision-making
process. In this context, confidence in the banking system and in its balance sheets would be
the most rational behaviour of any individual, business or other agent in the Albanian
economy. Global experience shows that the mutual interaction between the real economy
and the banking system in terms of savings, use of payment infrastructure and expertise in
the area of financial counselling and support with funds is a key feature of economies that
have managed to progress and leave behind the transition countries' level.
In conclusion, I would like to assure the public that the Bank of Albania remains committed to
creating the proper premises which boost economic activity at home, without infringing the
objective of price stability. In addition it will keep working on firming up financial stability in
the country. The Bank of Albania decisions will be a direct contribution to smoothing out the
negative effects deriving from the international crisis and they will help to ensure the further
maintenance of economic and financial balances at home.