Gent Sejko: Albania's economic and financial developments in 2018
Introductory statement by Mr Gent Sejko, Governor of the Bank of Albania, presenting the Annual
Report 2018 to the Parliamentary Committee on Economy and Finance, Tirana, 23 April 2019.
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Honourable Chair,
Honourable Members of the Committee,
Thank you for your invitation!
The Annual Report and the financial statements are the key instrument for the accountability of
our institution. In this light, the Bank of Albania considers the presentation of this Report as an
opportunity to foster and enhance the dialogue with the Assembly.
During 2018, the work of the Bank of Albania focused on three main aspects:
First, on the objectives and duties set out in the legal and sublegal framework, which
regulates the work of the Bank;
Second, on the objectives set out in our Medium-term Development Strategy; and,
Third, recommendations left by the Assembly of the Republic of Albania in the Resolution
"On the assessment of the activity of the Bank of Albania for 2017".
The results of our work show that the Bank of Albania marked progress in all the three
abovementioned aspects. Let me present a brief overview of developments.
In accordance with the applicable legal framework, the Bank of Albania: strives to maintain price
stability, as a precondition for sustainable and long-term growth in the country; licences,
supervises and regulates the activity of the banking sector, hence promoting financial stability;
administers the issue and circulation of the Albanian currency; contributes to the development of
the payment system; and performs a number of other specific duties, which affect the economic
life and financial system in Albania.
Based on the available information, the Bank of Albania finds that in 2018 the Albanian economy
and finances marked progress. Economic activity and employment continued to expand, wages
and domestic inflationary pressures trended upward, main banking sector's soundness
indicators improved, and a series of indicators of domestic and external economic balances
strengthened. This dynamics of developments reflects, significantly, the effect of policies,
measures and instruments we have adopted on continuous basis.
Concretely, in 2018 the Bank of Albania has:
1. implemented an accommodative monetary policy, which has boosted economic growth and
the convergence of inflation toward the target, and has contributed to improving the balance
sheets of enterprises, households, public sector and financial institutions in Albania.
2. strengthened and improved the policy, regulatory and operational framework for supervising
the banking sector, mindful of the administration of the consolidation process; and
3. created incentives for the development of the payment system and expansion and
deepening of the financial market.
With regard to fulfilling strategy objectives, the Bank of Albania has worked intensively for
adopting best central banking practices and standards. Thus, we have made progress with
regard to improving statistics; research; compliance with EU integration criteria, strengthening
the governance; and in many other aspects.
Lastly, I would like to underline that the Bank of Albania has fulfilled all the recommendations left
by the Assembly.
The Annual Report presents in greater detail the activity of the Bank of Albania in 2018, across all
the dimensions of its activity. I will present first an overview of the activity of the Supervisory
Council, the decision-making body, which also monitors the activity of the Bank of Albania. I will
then continue to present the activity of the Bank of Albania, in accordance with the main domains
of its activity.
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Activity of the Supervisory Council
The Supervisory Council exercises its powers in accordance with the provisions of the organic
law and the procedures established in the internal regulation on its organisation and functioning.
In 2018, the Supervisory Council met 15 times and approved 76 decisions, of which 55 were acts
approved for the first time and 21 were amendments to existing acts. These decisions affect the
activity of the Bank of Albania across the board. In addition to the monetary policy decisions and
revisions to regulations that govern the activity of the banking sector, other important decisions
include: (i) approval of the policy and measures for increasing the use of the national currency in
the activity of banks; (ii) approval of the policy for the oversight of payment and settlement
systems;(iii) approval of the accounting policy in accordance with the International Financial
Reporting Standards; and, approval of the Medium-term Development Strategy of the Bank of
Albania for 2019-2021. The strategy upheld the existing mission, vision, and values and updated
the list of duties for fulfilling them.
Beyond the realisation of the legal objectives of the Bank, the Supervisory Council has monitored
continuously the governance of the institution and has worked towards its improvement.
As the body responsible for the financial reporting and internal audit system, the Council has
been informed regularly, by internal and external audit functions, on the compliance with the
legislation and other acts that govern the activity of the institution. The Council has been
informed also about the institution's management policies and the use of financial assets for
the realisation of the operational activity of the Bank of Albania. Information was presented
regularly on the financial position and result of the Bank of Albania and the international
reserve management.
The internal audit has been monitored through the Audit Committee, established in 2015.
The committee, has discussed issues such as: (i) annual work plan and internal audit
engagements for the year; (ii) periodic reporting by the Inspector General on the auditing
activity; (iii) financial statements; and, (iv) performance of operational risk management at
the Bank of Albania. It has met regularly, without the presence of the administrators, with the
Inspector General.
Lastly, I would like to emphasise that the Council has regularly complied with Bank of Albania's
accountability obligations to the Assembly and its transparency obligations to the public, and the
financial system.
Albanian economy and monetary policy in 2018
The monetary policy maintained, even strengthened, the accommodative stance in 2018. The
policy was in line with our inflation target convergence objective, consistent with the cyclical
position of the Albanian economy, and aligned with the consolidation trend of the fiscal policy.
The Albanian economy performed positively throughout 2018. Aggregate demand increasingly
expanded, enabling thus a further increase in production, employment and wages, and
contributing to the improvement of the main economic and financial balances of the country's
economy. A few figures to illustrate it.
According to INSTAT data, the pace of economic growth accelerated to 4.1% in 2018.
Economic growth was broad based; it reflected positive contributions from the expansion of
the consumption of households and enterprises, and of exports.
According to INSTAT data, employment in the economy rose by 1.6% in the previous year,
whereas the unemployment rate fell to 12.3% from 13.4% a year earlier.
The current account deficit decreased at 6.7% of the GDP in 2018, from 7.5% in the
previous year. Its improvement reflected to a large extent the increase in the tourism-related
activity.
Budget deficit and public debt continued to record a downward trend, reflecting both the
consolidation path of the fiscal policy and the economic growth as well as the exchange rate
appreciation.
The main banking sector soundness indicators, in particular liquidity, profitability and
capitalisation, remain at satisfactory levels.
Against this backdrop, annual inflation averaged 2.0%, remaining unchanged from 2017 and
below our 3% target. Inflation stood stable owing to two effects of opposite directions. The
buildup in domestic inflationary pressures, generated by the rise in employment, wages and
production costs was offset by the rapid appreciation of the domestic currency over the first half
of the year.
The exchange rate appreciation was a decelerating factor for achieving the inflation target. The
exchange rate has moved along a slight appreciation path over the last three years, driven by
fundamental factors that dictate its behaviour such as: improvement of the balance of trade
exchanges with abroad, high levels of foreign direct investments, and reduction of risk premia in
domestic financial markets. Yet, beyond these effects, the exchange rate was subject to certain
shocks in the first half of 2018. These shocks led to a temporary imbalance of the demand and
supply for foreign currency and contributed to creating expectations for further appreciation of the
exchange rate, and were accompanied also by a change in the behaviour of certain operators in
the economy. They initiated a fast appreciation spiral in the second quarter and were
accompanied by a disorder of the functioning of the domestic foreign exchange market.
Under these circumstances, the Supervisory Council judged that the rapid appreciation of the
exchange rate jeopardised the achievement of our inflation target in the medium-term horizon.
Consequently, in full compliance with the price stability objective and without affecting the free
exchange rate regime, in June the Council decided:
To lower the policy rate from 1.25% to 1.00%. In parallel, overnight loan and overnight
deposit rates were also reduced; and,
To initiate a foreign currency purchasing programme, aimed at decelerating the pace of
exchange rate appreciation and creating the premises for a normal trading activity in the
domestic foreign currency market.
Lowering the policy rate was aimed at further reducing the costs of financing and mitigating
appreciation pressures on the exchange rate. The intervention in the domestic foreign exchange
market, as a temporary and extraordinary instrument of the monetary policy, was considered as
necessary under the conditions when the space for further lowering the policy rate was limited.
Interventions in the foreign exchange market were concentrated in the summer months. Further
on, Bank of Albania market interventions have been practically inexistent and the exchange rate
reflected the supply and demand situation in the market. Insofar results show that Bank of
Albania interventions have accomplished the objectives. The appreciation pace of the exchange
rate has diminished and the activity in the foreign exchange market has returned to normal
parameters.
In line with these developments, the Bank of Albania kept the direction and intensity of the
monetary stimulus unchanged over the second half of the year. The policy rate remained
unchanged at 1.0% while the financial market was supplied with the necessary liquidity and
informed through the forward guidance on the future path of the monetary policy stance.
The accommodative monetary policy implemented by the Bank of Albania has proven successful
for boosting economic growth, inducing better utilisation of production capacities and building up
inflationary pressures in the economy. The transmission of the monetary stimulus is noted in
several aspects:
First, the monetary stimulus has led to the reduction of financing costs for households and
enterprises. Interest rates are close to historical lows, across all the range of financial
instruments.
Second, the accommodative monetary policy has led to the expansion of credit in lek, and to
the reduction of existing debt service costs. Lek credit to the private sector increased at
6.7%, on average, in 2018. In parallel, the reduction by 5.6 percentage points of the interest
rate on lek credit compared to 2011 - when the monetary policy easing started - helps
Albanian firms and households to save around ALL 15 billion per year.
Third, the accommodative monetary policy has supported Albania's financial stability.
Growth of demand for goods and services and reduction of debt costs led to the
improvement of the solvency of firms and households, and has encouraged loan
restructuring. Also, the orientation of lending toward lek credit has reduced the exposure of
the economy and of the financial system against exchange rate volatilities.
Monetary policy-related measures undertaken by the Bank of Albania have contributed to the
expansion of aggregate demand and boosting economic growth. Our assessments suggest that
the accommodative monetary policy stance has contributed positively, on average by 0.5
percentage point, to economic growth in the last two years. Also the accommodative monetary
policy stance has contributed to the stability of the domestic currency. Both transmission
channels have contributed and will continue to contribute to price stability in Albania. The current
trends in the development of the economy and our projections suggest that inflation will converge
toward the target within a two-year horizon.
Banking supervision and financial stability
The main aspects of our work for safeguarding financial stability were strengthening the stability
of the banking system, enhancing its resilience to shocks, adopting international standards on
supervision and regulation, and administration of consolidation processes in the banking sector.
The Bank of Albania judges that the ability of the banking sector to withstand risks is high.
The activity of the banking sector in 2018 was stable with good performance and resilience
indicators. The financial result was positive: Return on Assets (RoA) stood at 1.3% and the
Return on Equity (RoE) reached 13%. Capitalisation and liquidity levels were above the
respective regulatory requirements. Credit risk continues to represent the main risk to the activity
of the banking sector, but the credit quality has improved from the previous year. At the end of
2018, the non-performing loans ratio was 11.1% from 13.2% a year earlier, whereas the
outstanding non-performing loans reduced by 20%.
The Bank of Albania remains committed to fulfilling all its obligations in the framework of the
national plan for the reduction of non-performing loans. In view of this goal, it has: (i) prepared a
draft-regulation on the out-of-court addressing of borrowers; (ii) expanded the requirements for
using official financial statements in the assessment of credit risk for all categories of borrowers;
(iii) initiated measures for improving the Credit Registry, and has started work for harmonising
credit reporting in accordance with international standards.
With respect to safeguarding financial stability, the Bank of Albania has continued to work for
establishing and developing macro-prudential policy instruments and for establishing early
warning systems for systemic risks. In this context, I would like to point out to two key
developments.
First one is about measures in the framework of increasing the use of the domestic
currency as an instrument for increasing the effectiveness of economic policies and
decreasing financial risks. In 2018, the Bank of Albania approved some regulatory
amendments in this aspect: (i) decreasing the required reserve for deposits in lek and
increasing the required reserve for foreign currency deposits, (ii) raising the required
minimum level for the ratio of liquid assets to short-term liabilities in foreign currency, and (iii)
setting out requirements to enhance transparency related to risks to the borrower in the
case of foreign currency loans.
Second one is about preparing the regulatory basis for setting up macro-prudential capital
buffers, in accordance with best international standards and practices. Capital buffers
mitigate cyclical and systemic risks in the banking activity, designed with a view to
preventing a fast credit growth and build-up of indebtedness; restricting direct and indirect
exposure concentration; and, restricting excessive risk in financial institutions.
With regard to improving the supervisory processes, the Bank of Albania has worked for
appraising internal risk assessment procedures, reviewing individual recovery and capital
adequacy plans of banks; adapting the regulatory framework with the legal and regulatory acts of
the European Union and Basel documents.
Financial system monitoring has been supported by on-site inspections. In 2018, full-scope and
partial examinations were carried out in 7 banks, 10 non-bank financial institutions, and 31 foreign
exchange bureaus. Particular attention has been paid to the examination of banks with a major
share in the activity of the financial market, those subject to acquisition or merger processes, or
banks experiencing rapid growth. Overall, the monitored institutions have responded duly to the
recommendations, by undertaking the relevant measures.
Increased attention has been paid to the supervision for the implementation of measures for the
prevention of money laundering, in cooperation with the Directorate General on the Prevention of
Money Laundering (DG PML). Cooperation with the DG PML was more intensive in the
framework of the evaluation process for Albania by the Committee of Experts on the Evaluation
of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL). The Bank of
Albania participated actively in fulfilling the comments related to the technical and effectiveness
questionnaires. In the final MONEYVAL report, the effectiveness level of financial institutions was
rated as "substantial/considerable". In particular, banks show better awareness of the AML/CFT
risks and of legal obligations, and have generally taken due measures in a way that is
commensurate to the assessed level of AML/CFT risk. The evaluation process was
accompanied by a plan of measures for addressing the main problems identified in the report;
their realisation will continue in 2019 as well.
In the framework of consolidation in the banking sector, in 2018 some changes took place in the
ownership structure of the banking system. As a result of these changes, 14 banks operated in
the Albanian banking system as at the end of the year. Intesa SanPaolo Bank acquired and
merged with Veneto Bank, and the American Bank of Investments acquired and merged with
NBG Bank Albania. I would like to underline that these changes were dictated by developments in
the banks' home country or their international strategies rather than by domestic issues in the
Albanian market. Moreover, at the beginning of 2019, changes in ownership were rendered
possible in the case of International Commercial Bank and Societe Generale Albania. Changes in
ownership took place also in two other banks, with one of them reflected in a higher share for
domestic capital in the market. The Bank of Albania deems that the consolidation of the banking
system is a welcomed development, which will revitalise the banking activity, will enhance the
efficiency of the banking industry and will bolster development and innovative policies with regard
to credit and payments.
In the capacity of the Resolution Authority, in 2018, the regulatory and procedural framework for
resolution planning was prepared for harmonisation with international standards. In addition, the
initial phase for the preparation of individual resolution plans has started. Also, during 2018 was
established the Resolution Fund and the procedures for monitoring its management by
deepening the cooperation agreements with the Deposit Insurance Agency.
Lastly, I would like to reiterate that safeguarding financial stability is a responsibility not only of the
Bank of Albania but also of other regulatory agencies and the Government of Albania. Policies
and measures for safeguarding financial stability and strengthening banking system's resilience
require all parties to continue the coordinated, inter-institutional and multi-dimensional efforts.
Functioning of safe and efficient payment systems
The Bank of Albania has dedicated particular attention to guaranteeing the security and efficiency
of the core infrastructure of payments in lek, through its role as both operator as well as overseer
and catalyst of the payment systems. Both systems operated by the Bank of Albania, the
Albanian Interbank Payment AIPS) and Albanian Electronic Clearing House (AECH) have
operated with no disruptions, efficiently and safely. In 2018, the Bank of Albania undertook a set
of measures to further improve the legal and regulatory framework on the oversight of payment
systems and payment instruments. The changes are aimed at adopting the European practices
for promoting innovation in the field of payments and establishing premises for private initiatives.
One of the main achievements on the improvement of the legal framework is the finalisation of
the draft-law "On Payment Services" (PSD 2) which transposes the relevant EU Directive. Its
approval and implementation will promote competition and innovation in retail payments, will
enhance transparency of these services and will provide a framework on consumer's protection.
The National Payment System Committee (NPSC), which is chaired by the Bank of Albania and
brings together public and private stakeholders in the field of payments, approved the Albanian
National Retail Payments Strategy (2018-2023). The purpose of the strategy is to improve the
retail payments market, promoting the use of electronic payment instruments and broadening the
financial inclusion of the population. The strategy will be implemented through the improvement
of the legal and the regulatory frameworks, through improvements in infrastructure and financial
education.
Other activities
In the field of statistics, the Bank of Albania continued its work for the methodological
approximation of statistics with international standards and their alignment with the acquis
communautaire. In cooperation with INSTAT and with expertise from the European Union, the
Bank of Albania coordinated the work to develop indicators of macroeconomic imbalances for
Albania. During 2018, the EUROSTAT carried out an evaluation mission of the Statistical System
in Albania, which assessed that the statistics of the Bank of Albania are in line with the principles
of the European statistics Code of Practice.
As at the end of 2018, the international reserve reached EUR 3.4 billion, sufficient to cover 6.7
months of imports of goods and services and 156% of the short-term external debt. In order to
increase the flexibility of managing the needs for foreign currency liquidity, an agreement was
finalised with the Bank for International Settlements for a foreign currency credit line. The
agreement constitutes an important mechanism available to the Bank of Albania in the event of
an emergency situation.
Research continued to support the decision-making process for formulating and implementing
Bank of Albania's policies. During 2018, the focus of scientific research was on issues related to
monetary policy, safeguarding financial stability, and coordinating these two objectives. The
results of the research are shared with national and international experts in scientific panels and
are published in discussion papers.
An important part of Bank of Albania's development strategy is the establishment of transparent
and long-standing relations with the public. The Bank of Albania has fostered its communication
with the public to provide its opinion on economic and financial developments, as well as on the
Bank's role in keeping macro-financial balances. Also, it complied with the obligations under the
law "On the right to information" duly informing the public, as requested.
During the year several national and international conferences and forums were organized,
discussing topics that are at the centre of the current debates and of interest for the country's
development. Notably, the annual conference organized in cooperation with the London School of
Economics and Political Science this year was dedicated to new approaches in the framework of
monetary policy and the challenges to economic integration. This conference brought together
distinguished personalities of central banking from advanced economies and regional countries,
central bank governors, academics and representatives of international regulatory authorities.
Conferences and discussion forums served to foster cooperation with our key partners such as
the Albanian financial system, central banks of European countries and international financial
institutions. Fostering co-operation was rendered more concrete with several agreements
concluded, notably with the European Central Bank and the Single Resolution Board. These
agreements pave the way for the Bank of Albania's full participation in the supervisory colleges of
relevant European banks present in the country and for exchanging information on resolution
planning for cross-border banking groups.
Financial education is an important tool for enhancing the effectiveness of the transmission of
Bank's decisions to the economy. In addition to educational publications, various activities were
organized throughout the year, mainly targeting the younger generation. Also, the Museum
situated within the Bank of Albania has facilitated the logistics arrangements for undertaking
educational campaigns.
Last but not least, the Bank of Albania remains a serious partner in the national commitments for
joining the European Union. The Bank of Albania's obligations under the European integration
process are included in the medium-term development objectives of the Bank of Albania. It
coordinates Chapter 4 "Free movement of capital" and Chapter 17 "Economic and monetary
policy", and it contributes to 6 other chapters of the acquis. The Bank of Albania has fulfilled the
obligations deriving from the Stabilization and Association Agreement, the National Plan for
European Integration and the recommendations of the European Commission. Specifically, it
continued to implement measures to (i) reduce the level of non-performing loans, (ii) reduce the
level of euroization in the financial system; (iii) harmonise the regulatory supervisory framework
with the requirements of Basel III and Basel IV; (iv) approximate directives on payment services;
and (v) increase the transparency of monetary policy.
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As part of this report, I would like to highlight an important aspect for guaranteeing good
governance at the institution: the internal audit systems. The internal audit is independent from
the management, guaranteed through the Inspector General, appointed by the Parliament.
Fostering internal control and monitoring systems and procedures
In 2018, the operational risk management function - a new function at the Bank of Albania -
consolidated and matured. It is based on the international risk management standards as well as
on the best practices of central banks. In the last assessment, the level of Operational Risk
Management has shifted from 'ad-hoc' to 'managed', thus overcoming the 'basic' level. This
assessment exceeds the Bank of Albania's objective.
This year, the project for "Drafting and Implementing the Bank of Albania's Business Continuity
Management Program" continued and is currently in the final phase of its completion. The
purpose of this project is to ensure the continuity of critical processes and to restore normal
business as soon as possible in the event of a crisis or emergency situation.
Audit engagements in 2018 focused on: (i) giving an opinion on the adequacy of internal audits
set by the Management for the audited functions / processes, including supporting applications
for the activities; and (ii) other not planned audit and non-audit engagements upon special
request by Administrators or other external institutions.
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Honourable Chairman,
Honourable Members of the Committee,
At the end of my presentation, I would like to assure you that the Bank of Albania will continue to
be committed to complying with our legal objectives, and to implement our institutional duties and
commitments.
The perspectives on country's development remain positive, yet challenges lie ahead.
Addressing them requires the attention and the commitment of all policy makers and regulatory
agencies in the country.
The economy, the financial system and the Albanian public, as well as our domestic and
international partners will continue to find in the Bank of Albania a reliable, professional and
transparent partner.
Thank you for your attention!