Ardian Fullani: Recent developments in the Albanian economy
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on
monetary policy decision of the Supervisory Council of the Bank of Albania, Tirana,
30 September 2009.
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The Supervisory Council of the Bank of Albania reviewed the Monthly Report of Monetary
Policy, at its meeting of September 30, 2009. After getting acquainted with the latest
economic - financial developments at home and at the conclusion of the discussions on their
expected future performance, decided to keep the key interest rate unchanged, at 5.75
percent. This interest rate is in consistency with the maintaining of inflation close to the Bank
of Albania target for a medium-term period.
* * *
The analysis of the latest economic and monetary developments confirmed our expectations
for an overall downturn of the economic activity at home and a reduction of the domestic
inflationary pressures, for a relaxation of monetary markets and a slowing recovery of
financial intermediation, and has also highlighted the still fragile equilibrium of the economic
and monetary indicators.
The conclusions of our discussions converged to a decision-taking to keep the key interest
rate unchanged. The purpose of this position is to further maintain and consolidate the
established balances, thus considering the macroeconomic stability as an indispensable
precondition for a stable and long-term growth.
The economic activity at home is backed up by an improvement of the overall global climate,
during the last two months, by attempting improvement signs of lending activity and by the
seasonal effect of summer time. Global economy is being characterised by a more
moderated downturn of the economic activity at industrialised countries, accompanied with a
growth of the world trading activity and low inflationary pressures at global level.
Nevertheless statistical data regarding the Albanian economy still remain at low level, the
indirect indicators suggest this later is characterised by a positive economic growth, but
slower compared to the succeeding years. The low pace of both retail sales and budget
revenues increase, the exports slowdown, the lower expansion of lending to the economy
and business and consumer's confidence indexes show that Albanian economy is going
through a slower growth phase relative to the one of previous year.
This situation is also mirrored on the low inflationary pressures, revealed by the low level of
core inflation, which is a proper appraiser of the domestic demand pressures. In August
2009, annual inflation pointed to 2.2 percent, remaining within the targeted band of the Bank
of Albania, but close to its lower limit. Seasonal tendency of prices' behaviour was confirmed
to have the same intensity even during this period, by keeping the inflation value at the same
rate with that of the preceding month. The average annual inflation marked 2.2 percent,
equal to the value of the previous year, revealing the full elimination of the first round effects
of the previous year increases in terms of raw material and electric prices.
Fiscal policy persisted to be also expansionary during July, notwithstanding at more
moderated paces. Budget revenues stood at the same rates of projection fulfilment with the
previous months - accounting for 94 percent - while expenditure were met by 98 percent of
the projected target, maintaining the same level with the three previous months. This effect
provided advantage to the expansion of budget deficit in this period. As we have
underscored even previously, the increase of both budget deficit and public expenditure does
support the economic activity in terms of a low demand of the economy, but it also is
accompanied by the increasing tendency of the public debt interest rates. The increasing
review of public expenditures and budget deficit rate is forecasted to preserve this effect
even during the remaining part of 2009, while a more balanced fiscal position for 2010 would
reduce the pressures on monetary markets, by establishing more spaces for the rise of
monetary stimulus.
The external sector data regarding second quarter 2009 reveal a further reduction of the
Albania trade exchanges with the rest of the world in annual terms. According to preliminary
data, these development tendencies have persisted even during July 2009. Exports
decreased by 17 percent relative to the same month of previous year. Imports performance
incurred the same development declining by about 8 percent in annual terms. External
economy developments are accompanied by the maintenance of high trade deficit rates,
which affect the imbalance of the demand to supply ratios for foreign currency in the
economy.
Nevertheless, the maintaining of the exchange rate flexibility, the correcting tendency of
trade deficit and the attraction of savings denominated in ALL, as higher interest rates and of
low inflation, serve to relaxed and prudential volatilities of the exchange rate and to a strong
position of ALL in the short-term and medium-term period.
Monetary indicators of July have reflected the more relaxed dynamic of financial
intermediation. External sector highlights of the economy have affected the negative paces of
the foreign currency component of money stock. However, banking system carried out the
intermediation to increase lending in ALL extended to private and public sector with positive
paces. Thus, while monetary supply picked up at slower annual paces, about 4.4 percent,
M2 aggregate maintained high paces of the annual growth at 9.7 percent as at July. The
slowdown of lending pace to economy in foreign currency and the lower supply of foreign
currency inflows from external sector have led to a negative annual pace of deposits growth
denominated in foreign currency of the system. Lending to private sector increased by 15.8
percent in real annual terms, relative to 17.9 percent in June. Lending to business provided
the main contribution on the monthly growth of credit, a constant phenomenon, which this
month appeared particularly more emphasised. Credit denominated in ALL maintained the
average annual increase rate, by about 28-30 percent, but the slowdown of lending
denominated in foreign currency has led to the decline of credit growth pace.
The open market operations of the Bank of Albania met the liquidity needs of the banking
system. Bank of Albania has injected all liquidity demanded from commercial banks, by
preserving at the same time an accurate time structure of this injection. Notwithstanding the
improved liquidity situation, yields rates in primary market have persuaded the increasing
tendency of the current months. The increase of risk evaluation from banks is mainly
reflected in the determination of long-term yields that is confirmed by the rise of 2 and 5-year
bonds yields. The performance of new deposits interest rates denominated in Euro and ALL
appears stable during July. New credits interests' rates denominated in ALL have persuaded
the decline in July, while this month recorded a tightening of new loan cost denominated in
Euro.
At the conclusion, by framing the forecasts for a relaxed inflation and within the target set out
by the Bank of Albania for the future, the Supervisory Council of the Bank of Albania decided
to keep the key interest rate unchanged. This movement is a continuance of the careful
monetary policy pursued by the Bank of Albania during the year 2009, a policy which has
aimed the transmission of controlled monetary stimulus and the keeping of inflationary
expectations close to the targeted band of the Bank of Albania. Recent developments
suggest that the expose of inflationary pressures is being shifted in general on the falling
direction. The higher transmission of the recent increasing trend of the raw material prices in
the world market composes a risk in terms of the increasing direction of consumer prices.
The performance of exchange rate, of inflationary expectations and the country fiscal
position, shall continue to condition the balance of risks in future.
The expected relaxation of these occurrences in terms of a well-stabilised financial
environment shall provide the needed spaces for the growth of monetary stimulus in the
economy.