Ardian Fullani: Recent economic and financial developments in Albania
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on
monetary policy decision of the Bank of Albania's Supervisory Council, Tirana, 25 May 2011.
* * *
Today, on 25 May 2011, the Bank of Albania's Supervisory Council reviewed and approved
the monthly Monetary Policy Report. Based on a thorough analysis of Albania's latest
economic and monetary developments and discussions on their outlook, the Supervisory
Council decided to maintain the key interest rate unchanged, at 5.25%. The Supervisory
Council judges that the current monetary conditions are appropriate to meet inflation target
and continue the economic activity stimulus.
Let me proceed with an overview of economic developments and main issues discussed at
today's meeting.
***
The Albanian economy continues to maintain a positive development trend. Recovery in
domestic demand over the first four months of the year and the positive contribution of
external demand, have impacted on positive growth of the Albanian economy. Also, the
major macroeconomic balances have remained stable and the financial system indicators
appear to have generally improved.
Following the shock of February, CPI inflation has followed a downward trajectory, reflecting
the subdued inflationary pressures on the economy and Albanian financial markets. Available
data on 2011 Q1 show that the economic activity has registered growth; however, the
persistence of some spare capacity suggests that this growth remains below potential.
Negative output gap implies the existence of low domestic demand-induced inflationary
pressures; however, persistent shocks to import prices caused inflation expectations to move
up slightly. On the other hand, relative exchange rate stability and increased domestic food
supply are factors that have made a positive contribution to lowering the inflation rate. Aiming
at stabilizing inflation expectations in the medium term, the Bank of Albania raised the key
interest rate by 0.25 percentage points at end-March. This move has been transmitted to
financial markets, in line with the time lags of monetary policy transmission mechanism.
Inflation rate rose to 4.1% in April 2011, falling back gradually towards the Bank of Albania's
target. Its performance has reflected the increases in food prices, in the excise tax of some
goods, and to some extent, the administered price inflation. Higher supply of agricultural
products, likewise in March, made a positive contribution to lowering the annual inflation rate.
Compared to the previous month, consumer price index fell by 0.6%, hitting the lowest
monthly inflation rate of April in the last decade.
Processed Foods and Non-food Consumer Goods, including oil and pharmaceuticals, have
been main drivers to inflation. The first item, following the increase in primary commodity
prices in global markets, has determined and will continue to determine the inflation rate
throughout 2011. The second item has registered positive upward values as a result of global
conjuncture of this item's commodity prices, particularly oil prices.
Besides the increase in basic food prices, April's inflation rate has reflected also the
secondround effects, being materialised in higher prices of several services. The Bank of Albania
judges that the Albanian economy should find space to face the external supply shocks or
international price fluctuations by promoting domestic production in some key sectors.
Annual inflation of tradable goods sector resulted 4.9% in April, accounting for about 73% of
the headline inflation rate. High inflation rate of this sector of the Consumer Price Index (CPI)
basket continued to be affected by high primary commodity prices in global markets, non-
optimistic mid-term anticipations related to them, and depreciated exchange rate pass-
through. On the other hand, the decline in this item's share to determining the headline
inflation was an outcome of entry of domestic agricultural supply into the market.
Nontradable goods inflation, reflecting better the domestic inflationary pressures, settled at 2.5%
in April, attesting to a slight upward trend. April's core inflation, which strips out the temporary
effects, was close to 3.3%, reaching historical highs.
Monthly paces of inflation rise, which are a better signal about inflation expectations trend,
however, registered slower paces than in the previous months. Core inflation shows that the
economy's inflation expectations, although reflecting a relatively higher rate, remain well
anchored at the Bank of Albania's target.
The Bank of Albania judges that in the period ahead, inflationary pressures along the time
horizon of monetary policy stance will remain relatively high, but their intensity will decrease
during the year. In the following, I will analyse in detail the factors determining inflation
developments and related risks.
During the first months of 2011, global economic activity continued to grow, although the
signals coming from confidence indicators suggest that risks associated with these positive
developments are in place. Global inflationary pressures have increased as a consequence
of a higher demand and persistent supply-side shocks. In advanced economies, fiscal
consolidation and public debt reduction remain the major concerns, whereas inflation pickup
has decreased the space for monetary stimulus.
In advanced economies, the positive global demand momentum has led to increased
aggregate demand, while the upward inflationary pressures have made the central banks
respond by tightening the monetary policy. In financial markets, the public balance health has
determined the yield performance in several countries, while the political tensions have
elevated the demand for safer instruments. The outlook remains highly uncertain, as a
consequence of higher global prices, fiscal consolidation in some euro-area countries and
less space for fiscal and monetary stimulus.
Returning to Albanian economy, the latest data on 2011 Q1, obtained from business
confidence surveys, the performance of external trade activity, and monetary and fiscal
indicators, support the continued recovery of the domestic economic activity, primarily due to
positive contribution of production sector. External demand and fiscal stimulus are factors of
major influence on this growth. The data analyzed by the Supervisory Council show that Q1's
budget spending rose by 16.8%, sustained in part by ALL 12.5 billion budget deficit increase,
compared to the same period a year earlier.
April's data show a decelerated growth of budget revenues over this period, underlining the
necessity of taking measures to observe the budget deficit projection. Real economy data
suggest a slow consumption growth, due to uncertainties about employment outlook. On the
other hand, better performance of business credit and increase in capital goods imports
suggest that investments have been positive, reinforcing the grounds for a sustainable
economic growth in the future. Continued business investments in turn require the response
of consumer demand, about which the Bank of Albania judges that there is room for
recovery. On the other hand, long-term investment growth will be conditioned by the ability of
the Albanian economy to attract foreign capital. In this context, responsible institutions at
macro and microeconomic level should further strengthen the work for structural reforms,
which develop the comparative advantages of the Albanian economy and enhance our
economic competitiveness in goods, labour and capital markets. The Bank of Albania judges
that preserving the macroeconomic stability parameters is an indispensable condition to
orient its work towards maintaining price stability and supporting financial stability at home.
2011 Q1's data on trade activity performance at home show a slight trade deficit narrowing,
due to increased imports and decelerated export growth over March. Merchandise trade
deficit shrank by roughly 0.3% y-o-y, accounting for 22.1% of GDP. Import coverage by
exports ratio averaged 44.5%, or up 9 percentage points from the same quarter of the
previous year. During the period under analysis, exports in value continued their upward
trend having started since 2010 Q1 and expanded by 45.4% y-o-y. However, following a
speeded-up growth over the first two months of the year, our export growth rates were
significantly mitigated in March. During the same period, imports grew by 15.9% y-o-y. The
division of imports according to their final use highlights the rapid growth of imports of
intermediate and capital goods. The outlook of these trends may be associated with
expanded current account and trade deficits in the country. The Bank of Albania is very
attentive to this development, since it significantly conditions the external balances of
Albanian economy and the foreign exchange market.
Monetary expansion during 2011 Q1 was in line with economic agents' money demand,
marking a steady year-over-year growth of roughly 11%. The 6.2% y-o-y growth of real
money supply remained close to historical lows. Moderate growth rates of M3 aggregate and
other monetary indicators are in line with so-far assessments of existence of contained
monetary inflation pressures. This trend is also supported by developments of currency
outside banks. This indicator continued to fall y-o-y, and together with the shift of deposit
structure to longer maturity terms, it indicates economic agents' lower preference for liquidity.
In March, the annual broad money expansion was supported by increased private sector
credit, which rebounded in line with its seasonal trend path. The upward contribution of
private sector's demand for money has offset the gradual decline in net foreign assets. Public
sector's demand for money has been upward, supportive to the government's more active
stance over the first quarter of the year. In annual terms, the private sector loan portfolio
grew by 11.5% from 10.3% in February.
Business loan remains the main contributor to expanding the private sector lending. In the
meantime, in March, household loans also showed positive signs.
Overall, financial markets performed positively during the first four months of 2011. The
information transmitted from financial markets shows agents' anchored inflation expectations.
Key interest rate rise at end-March is passed-through to short-term money market interest
rates, leading to a slight flattening of T-bill yield slope. In deposit market, interest rates
continued to fall, reflecting also the correction of their high rates having been marked after
2008. The foreign exchange market has operated smoothly and the exchange rate has
continued to depreciate at low annual paces. The Bank of Albania has supplied the interbank
market with the necessary liquidity for their normal functioning.
To sum up, the Bank of Albania judges that the relatively high inflationary pressures over the
first quarter of the year generally resemble transitory shocks. Other factors affecting inflation,
such as current and expected economic performance against the potential rate of
development, expansion of monetary assets in the economy, and the public's expectations of
financial markets, exert inflation-restraining impact.
Our projections for the rest of the year support the maintaining of positive performance of
Albanian economy. Consumption and private investments are expected to grow further,
whereas following the 2010 slowdown the fiscal sector is expected to provide a positive
contribution to economic growth. However, the demand growth is likely to be below our
economy's potential even for 2011. This will condition the downward inflation pressures from
the domestic economy, which are expected to offset the foreign price rise effect. On the other
hand, the Bank of Albania is determined to take appropriate measures to meet its inflation
target in the medium term.
***
The Supervisory Council judges that, based on the above overview, medium-term inflationary
pressures are in check. Inflation expectations remain anchored at the Bank of Albania's
inflation target. In the absence of any unexpected shocks, inflation is expected to be within
the Bank of Albania's target over the medium term. Also, the risks around this central
scenario appear to be balanced.
At the end of the discussions, the Supervisory Council concluded that monetary conditions
appear suitable for meeting the inflation target in the medium term and decided to maintain
the interest rate unchanged, at 5.25%.