Gent Sejko: Albania's economic and financial developments in 2022
Address by Mr Gent Sejko, Governor of the Bank of Albania, presenting the Annual
Report 2022 to the Parliamentary Committee on Economy and Finance, Tirana, 31 May
2023.
* * *
Honourable Chair,
Honourable Members of the Committee,
I am pleased to be back before the EF Committee to present the Annual Report of the
Bank of Albania for 2022. I consider the presentation of this Report, as well as the
today's hearing, fundamental for the Bank of Albania's accountability relationship with
the Parliament.
Dear ladies and gentlemen,
Meeting our mission and legal duties, realising the commitments in view of the
mediumterm development strategy, and complying with the recommendations left by the
Parliament of Albania for 2022, have been important objectives guiding the activity of
the Bank of Albania throughout 2022.
The Albanian economy has faced a wave of complex and unprecedented shocks in
recent years. These shocks have tested the sustainability of the economic and financial
balances of Albania, triggering serious challenges to Albanian businesses and
households, in turn requiring fast and coordinated reaction from public authorities.
Though it is still early to provide a final analysis of consequences from the war in
Ukraine, I am pleased to see that the Albanian economy has displayed a high resilience
against these shocks. This resilience has been shown, first, in the maintenance of a
positive economic growth rate, and second, but no less important, in the preservation of
overall economic and financial stability in the country. In particular, the rapid surge in
prices over the last year, has been brought under control and inflation has been
declining in recent months, through easing the pressures on household' budgets and
reducing uncertainties for enterprises. At the same time, the banking sector appears
sound, indicators on the stability of both public and external debt have been improving,
the financial environment is calm, and enterprises and households' balance sheets
remain solid.
These achievements are not a result of chance. They reflect, among other things,
adequate and coordinated monetary, financial and fiscal policies and the results of
continuous structural reforms which we have undertaken in the financial sector. The
proportional and timely reaction of these policies has minimised the immediate
consequences of shocks and has safeguarded the production capacity of Albania. In
parallel, continuous structural reforms have strengthened the flexibility and resilience of
the Albanian economy, by helping both the monetary and financial stability of Albania.
In my remarks today, I will provide an overview on the main directions of the Bank of
Albania's work throughout 2022 and its results. I would then like to share a brief
summary of our expectations and highlight some of our primary objectives for 2023.
***
1. The outlook for the economy, price stability and the Bank of
Albania's monetary policy
The global geopolitical and economic environment experienced upheaval in a radical
and unexpected manner at the outset of 2022, due to the Russian unjustified invasion
of Ukraine. This attack led to a rapid spike in food, energy, and commodity prices, and
in inflation, jeopardising monetary and financial stability on global and national levels. At
the same time, prevailing uncertainty, erosion of purchasing power and tighter financing
conditions worsened the world economic outlook.
Albania, as a small and open economy, is also experiencing these trends. The external
shock was reflected in heightened uncertainty, higher costs of production for
enterprises, increased cost of living for households, and an overall rise in interest rates.
The external shock had a considerable impact on prices. Average inflation jumped to
6.7% in 2022 from an average of 2.0% in 2021. First, foreign prices fuelled this
upsurge, coupled then increasingly by a rise in production costs and inflationary
expectations in Albania. Thus, overall inflationary pressures started to appear more
broadly and with increasing persistence. These features were reflected in a rapid
upsurge in core inflation during 2022. This indicator is the best barometer of more
persistent inflationary pressures.
In this new economic environment, within our legal mandate of price stability, the Bank
of Albania has embarked on the process of normalising our monetary policy stance.
The increase in the interest rate to 2.75% as at end of 2022, from 0.5% at the beginning
of 2022, led to the realisation of this normalisation. In parallel, given the elevated
uncertainties across financial markets - which faced an increase in interest rates for the
first time in more than a decade - we have intensified communication with markets and
the public, to clarify our strategy of monetary policy.
This strategy is based on three important principles:
First, normalisation of monetary policy stance was and remains necessary for
inflation to return to the target in a steady manner. The purpose of this
normalisation was to curb the pass-through of rising international prices to the
general, steady surge in prices in the Albanian economy. In this context, this
normalisation was in line with the reaction undertaken by all other central banks in
the course of 2022, and in the current year.
Second, the speed and intensity of normalisation has followed a gradual and
prudential process, led by new information and in harmony with the direction of
fiscal policy, as well as with developments in the financial market. In this view, I
would like to highlight that our monetary policy stance has been - on the one hand
- consistent with the return of inflation to the target, and - on the other hand -
prudential, in order to have the least possible effect on both economic activity and
financial stability. I would also like to emphasise, that the normalisation speed in
Albania has been lower than that implemented by our trading partners, due to the
fact that fiscal policy has followed a consolidating trend throughout 2022, while a
strengthening of the exchange rate has restrained transmission of imported
inflationary pressures to the domestic market. The increase in key interest rates
throughout 2022 and going forward, in the absence of these factors, would have
been faster and more aggressive.
Third, even with the presence of normalisation, the overall stance of monetary
policy continued to remain accommodative for boosting both consumption and
investments, as it provides better financial conditions for a more balanced
performance of aggregate demand and supply in economy.
The monetary policy has been transmitted smoothly across financial markets. Its
transmission to the interbank market has been immediate and complete. It has been
rapid to the government securities market, and it still continues to the deposits and
credit market. Nevertheless, despite increasing interest rates, credit flows continue to
remain positive and the Albanian banking sector continues to provide necessary funds
to the economy for expanding activity and for meeting liquidity needs. The volume of
credit to the private sector grew by 12.3%, on average in 2022, while credit portfolio
quality remained at good levels, and the non-performing loans ratio stood at the lowest
levels in the last decade. The financial sustainability of the banking sector and its
positive approach towards lending was conducive to the continued support of the
economy with funding.
In a more general view, the first effects of our reaction are notable in curbing the
increase of inflation. The latter, after increasing progressively up to October 2022,
declined to 7.4% at the end of 2022, and stood at 4.6% in March 2023. In parallel,
expectations of economic agents on inflation in the future has been declining, standing
close to our target. Our assessments show that in the absence of our actions, inflation
would have averaged 4.5 percentage points higher throughout the 2022-2024 horizon,
having a considerable impact on the purchasing power of households and on the
nonperforming loans ratio.
On the other hand, despite the presence of external shocks coupled with tighter
financing conditions, the Albanian economy maintained a growing trend, in terms of
production, employment and wages. Thus, economic growth in 2022 was relatively
high, around 4.8%, continuing recovery after the pandemic. Economic growth continued
to have good allocation by sector, and was underpinned by expansion in consumption,
investments and Albanian exports. In addition, the labour market has improved notably.
Employment grew by 4.2%, the unemployment rate declined to 10.8%. In addition, the
increase in labour force participation showed an ever higher number of employed
Albanian citizens. Our confidence surveys show that enterprises have a high demand
for employment, while a lack of labour force continues to restrain increases in their
businesses. All these components of the labour market have been reflected in the
dynamic growth of wages. In particular, wages in the private sector rose by an average
rate of 12.2% in 2022.
Lastly, allow me to point out that progress was also recorded in 2022 in terms of
improvement in the stability of both foreign and public sector's balance sheets. In more
concrete terms, Albanian exports grew by 42% in 2022, driven by a growth in tourism
income, which opened the way for the reduction in both the trade deficit and the current
account deficit of the country. The latter dropped to 6% of GDP in 2022 from 7.8% of
GDP in 2021. Along with the rapid increase in foreign direct investments and the
stability of domestic financial markets, they paved the way for a strengthening of the lek
exchange rate over the year. Also, the budget deficit of Albania, according to fiscal
data, dropped to 3.7% of GDP in 2022 from 4.6% of GDP in 2021. Public debt was
reduced to 64.6% of GDP in 2022 from 74.5% in 2021, while public debt was reduced
to 64.6% of GDP from 74.5%. This improvement reflected both an increased effect of
the nominal base of revenues and the fiscal consolidating stance implemented
throughout 2022.
Honourable Members of Parliament,
The Bank of Albania is confident that the normalisation of monetary policy is the right
monetary policy stance, in compliance with our legal obligations and for the purposes of
safeguarding the macroeconomic balances of Albania and for the sustainable and
longterm growth of society's welfare.
In parallel, the Bank of Albania has also paid attention to the strengthening of the
financial stability of the country, throughout 2022. Let me now explain in greater detail.
***
2. Banking supervision and financial stability
Geopolitical tensions and volatilities in international markets have found our financial
system relatively prepared in general and the banking sector in particular. The
improvement of risk management systems by banks themselves and the Bank of
Albania's continuous monitoring and supervision have played a crucial role in this
regard.
In this context, I would like to make evident that the activity of the Bank of Albania
throughout 2022 was focused in three directions:
First, at the outset of the war in Ukraine, we carried out a complete assessment of
the risks jeopardising the banking system from exposures stemming from markets
related to the war. Ultimately, these exposures were minor. Nevertheless, in
collaboration with commercial banks we conducted some stress test exercises to
determine the capacity of banks to face the possible financial costs from this
shock. The results from these tests showed that the banking sector was liquid
and well-capitalised, able to withstand the assumed shock.
Second, the rising trend of interest rates in international markets spurred banks to
frequently assess their balance sheets in a considerable manner, which had
potentially unfavourable affects on the intermediating activity of banks. In this
context, we conducted an intensive process of dialogue with banks to monitor and
manage this risk, which so far remains contained.
Third, 2022 was characterised by an intensive wave of cyber-attacks against the
most critical sectors in Albania, including the banking sector. The focus of our
analyses and examination was cyber risk. We increased the requirements for
banks to invest in optimum management of this risk. The banking sector has
intensified its diligence towards protective systems and preventive measures and
has strengthened its capacities for monitoring and neutralisation of cybernetic
attacks.
In spite of these challenges, developments in 2022 were positive for the banking
system. Financial intermediation has continued to expand, financial results have
been positive and at comparable values with the previous year, the capital
adequacy ratio stood at 18% showing a considerable ability of the banking sector
to withstand risks; while the non-performing loans ratio dropped close to 5.0%.
Our regular analyses on systemic risks to the banking system, show these risks
remain contained.
Further consolidation of banking activity was also an important development in 2022.
OTP bank purchased the shares of Alpha Bank in Albania, bringing the number of
banks in the Albanian banking system to 11.
Beyond monitoring the soundness of the banking system, we have oriented our work
towards the further strengthening of banking supervision and consolidating resolution
plans. Some of the priorities in the work of the Bank of Albania in this regard have been
the following:
First, the Bank of Albania continued improvement of its supervisory and regulatory
framework aiming at its approximation with EU acquis and Basel principles.
Revision of regulations has been aimed at implementing the requirements on
strengthening the capitalisation standards for banking activity;
Second, in the same line, we have further progressed towards assessment of the
equivalence of our supervisory and regulatory framework with the EU acquis. This
equivalence is quite important to reduce the operation costs of the banking
industry in Albania and to further prompt expansion of the banking sector and
development of financial markets. In this context, we carried out an independent
assessment of equivalence, pursuant to the new methodology published by EBA.
This re-assessment concluded that both our regulatory framework and
supervisory practices have a high convergence with the European Union
standards. Based on this conclusion, we submitted our request to EBA to include
Albania in their official assessment process.
Third, we completed the regulatory framework on payment services. Upon the
approval of the Law "On payment services", the sub-legal acts regulating the
activity, supervision and management of risks for entities which provide payment
services were approved in 2022. Completion of the regulatory framework enables
the safe and effective functioning of electronic money institutions, by creating the
premises for increasing payment services, strengthening competition in the
market, and enhancing both transparency and protection of Albanian consumers.
Fourth, the recommendations from the Committee of Experts of CoE on the
Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism -
MONEYVAL were implemented. As an integral part of the national plan in relation
to Anti-Money Laundering Measures and the Financing of Terrorism, the Bank of
Albania has fulfilled its responsibilities, improving the regulatory framework and
strengthening the effectiveness of the oversight process. In addition, we have
continued with on-site examinations on issues related to the prevention of money
laundering, with a particular focus on issues related to the financing of terrorism
and the implementation of international sanctions. Administrative measures have
been taken on breaches which have been discovered.
Fifth, the banking sector was rigorously monitored through on-site examinations
and off-site analyses. Assessment of credit portfolio quality, assessment of
operational risk, information technology risk, liquidity risk, governance systems
risks as well as assessment of transparency with clients have been the focus of
examinations. Entities which have been under monitoring - banks and non-bank
financial institutions - follow a prudential approach related to risk management,
and overall their activity is in compliance with the regulatory framework.
Last, resolvability has been strengthened. In the capacity of Resolution Authority,
the Bank of Albania has completed and communicated the resolution plans for all
banks, including the resolution strategies of specific banks, the minimum
requirements on financial assets needed for loss absorption and recapitalisation,
as well as requirements for increasing resolvability. Banks have progressed in
terms of increasing financial capacities and the ability to provide operational
continuity in resolution, while we have submitted a set of recommendations to
minimise the potential impediments for implementation of the resolution plan.
Along with the primary objective of preserving price stability and its role in
supporting the financial stability of the country, the Bank of Albania is responsible
for other activities as well, which are considerably important for the development
and growth of society's welfare. I will provide a brief summary on some of these.
3. Other activities
The payment systems managed by the Bank of Albania have guaranteed maximum
availability and have functioned safely and effectively throughout 2022. Along with the
existing payment systems in lek, in January 2022, the AIPS EURO for the settlement of
the domestic euro-denominated transfers started operation for the first time, with
significantly lower costs and with shorter delivery times than the previous process. It
has been assessed that Albanian businesses and consumers saved around EUR 10
million from the use of this system throughout 2022.
In parallel, the development of payment services infrastructure has supported the
expanded use of e-payment instruments and the financial inclusion of the population.
Our statistics display a growth of 18% in card payments, e-money payments and home
banking payments. The use of electronic payments per capita reached 17 payments,
though the objective for 2023 was 10 payments, as outlined in the Albania National
Retail Payment Strategy (2018 -2023). Currently, the Bank of Albania is working on the
implementation of an instant payment infrastructure. This novelty in the field of
payments aims at reaching those market segments which do not use electronic
instruments.
In the field of currency issue, in 2022 circulation of the new series of Albanian
banknotes was completed with the denomination of 10.000 Lekë. The new series bears
contemporary and sophisticated security features. An educational campaign on the use
of the national currency accompanied the entire process.
The Bank of Albania has scrupulously managed the international reserve, by observing
the main objectives of liquidity and security. Despite the problems faced by international
markets in the last year, the level of our foreign reserves is in compliance with our
adequacy criteria and with the best international practices.
The Bank of Albania has fulfilled its institutional obligations in the framework of the
National Plan for European Integration. Since the opening of negotiations in July 2022,
the Bank of Albania has intensified its participation and contribution in bilateral meetings
with the European Commission, while it has continued economic and financial dialogue
through the participation in joint committees with the authorities of the euro area market.
Enhancing transparency and accountability through open communication has guided
our relationships with the general public and with interest groups. Though, our decisions
cannot be adequately conveyed in an economic environment, which is characterized by
a limited degree of financial education. For this reason, in 2022, work has been done on
drafting and implementing the "National Strategy of Financial Education and Inclusion",
which aims to improve financial literacy and inclusion of the public at large.
Finally, significant improvements have taken place in terms of improving the
governance of the institution, through updating risk management systems and ensuring
business continuity with the best international practices. In particular, due to the
organized cyber-attacks that the country faced last year, the Bank of Albania paid
special attention to the enhancement of stability in: the banking sector; in markets;
and in the payment systems which the Bank of Albania operates. In more concrete
terms, the Bank of Albania reviewed continuity plans for the recovery of the institution's
activity in the event of a cyber-attack, intensified the controls and monitoring it performs
on the systems and services it provides, and strengthened cooperation with local
institutions, such as the National Electronic Certification Agency and Cyber Security
(AKCESK) and the Albanian Association of Banks, as well as with international
institutions, such as the International Monetary Fund and the World Bank.
***
Honourable Members of the Committee,
Concluding, allow me to re-emphasise that price stability has been and remains the
main mission of the Bank of Albania. Preserving the purchasing power of our national
currency, guaranteeing the value of Albanian households' savings, supporting financial
stability and establishing the most optimum crediting conditions for a long-term period,
are the best service we can do for the Albanian economy.
Our projections suggest inflation will reach the target in 2024, driven by the stability of
prices in global markets and the effects of monetary policy stance normalisation. A
gradual increase in the key interest rate towards a neutral level will drive both demand
and supply in the economy to a more sound balance. In parallel, economic growth is
expected to maintain stable growth rates in the medium term, despite the short-term
volatilities which are expected in the current year and in the next one. From its side, the
Bank of Albania will continue to adapt its monetary policy stance to the new economic
reality. We will make sure that this stance is prudential, - on the one hand - consistent
with the price stability target and, on the other hand, - coordinated with the fiscal policy
direction and development in financial markets.
In parallel, the latest episodes of stress in the US and Swiss banking systems have
returned focus to the importance of a regulated and well-supervised financial system. In
this view, allow me to point out again that the Albanian banking system appears liquid,
profitable, well capitalised, and able to carry out its primary function of financial
intermediation and of preserving the value of Albanian households'
savings. Nevertheless, the Bank of Albania will carefully monitor the situation, and will
continue attentive supervision and regulation of this system, in addition to taking care of
regulatory and supervisory framework alignment with the acquis communautaire.
Lastly, I will re-call the importance of continuing with structural reforms as an
indispensable instrument for growing the potential of the economy, enhancing its
resilience against adverse shocks, and increasing the welfare of society.
Thank you for your attention!