Ardian Fullani: Overview of Albania's latest economic and financial
developments
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, on the Monetary Policy
Decision-Making of the Bank of Albania's Supervisory Council, Tirana, 29 January 2014.
* * *
Today, on 29 January 2014, the Supervisory Council of the Bank of Albania reviewed and
approved the Monetary Policy Statement of the Bank of Albania on the second half of 2013.
Given Albania's latest monetary and economic developments and discussions on their
outlook, the Supervisory Council of the Bank of Albania decided to keep the key interest rate
unchanged, at 3.0%.
The Supervisory Council deems that the inflationary pressures from the real and financial
sectors of the economy are weak and will remain so. These circumstances require
maintaining a stimulating monetary policy over the period ahead. The monetary stimulus,
transmitted through the low key interest rate and ongoing liquidity injection, provides the
proper conditions for meeting our inflation target in the medium term.
Let me now proceed with an overview of the economic developments and key issues
discussed at today's meeting.
***
Year 2013 was a difficult one for the Albanian economy. Aggregate demand and economic
growth remained at low levels; inflation fluctuated around Bank of Albania's lower targeted
band, while the budget deficit and public debt increased sharply. The unfavourable economic
environment, both at home and abroad, led to this performance. Moreover, Albania's June
parliamentary elections added uncertainties to the economy and financial markets. As we
have already stated, consumption and investments continue to suffer from low confidence
and tight lending terms. Fiscal policy is faced with a high public debt level, which has limited
the possibilities for macroeconomic stimulus. On the other hand, the external environment
was characterised by ongoing euro-area problems, hence limiting our export growth and
making financial markets pursue conservative policies in terms of lending to developing
economies.
However, 2013 saw positive developments. Financial markets were characterised by
improved liquidity and downward interest rates, in response to Bank of Albania's easing
monetary policy. Also, introducing new financial agents and instruments has further
deepened these markets. The banking system remains solid and well- capitalised, regardless
of increase in non-performing loans. The current account deficit has dropped, creating better
premises for a sustainable external position of the economy and stable exchange rate. These
developments have contributed to maintaining macroeconomic stability.
Analysing the specific developments in the second half of 2013, the official data show a
slowing economic activity and a sustained downtrend in inflation.
Average annual inflation reached 1.5% in the fourth quarter, remaining unchanged from the
third quarter. In December, inflation rate edged up to 1.9%, almost entirely due to higher
prices of foods, particularly unprocessed foods. Prices of other CPI basket items were
generally stable and affected slightly on inflation.
From the macroeconomic viewpoint, the low inflation rate was determined by the sluggish
aggregate demand, lower imported inflation and subdued inflation trends.
Third-quarter gross domestic product dropped 2.3%, driven heavily by short-term shocks
arising from full fiscal stimulus withdrawal and post-election uncertainties, which impacted
negatively on consumption, investments and tourism over this period. Excluding agriculture,
the other sectors of the economy dropped, in annual terms.
All the aggregate demand components performed poorly over the second half of the year.
Private consumption was at low levels, reflecting the low consumer confidence and the
decelerated income growth. The low inflation rates contributed to maintaining the savings
value. However, Albanian households continue to show a cautious behaviour toward
consumption. Also, private investments deepened the downtrend in the second half of the
year. The performance of this component has reflected the lower final demand, the boosted
uncertainty and the tight bank lending terms. Periodic surveys report that the financial
position of businesses remains difficult and this restrains their ability to invest.
Fiscal policy was stimulating in 2013, mainly concentrated in the first half of the year. The
fiscal stimulus is carried out by increasing spending and reducing taxes. The latest fiscal data
are as of November 2013. During the first 11 months of the year, the budget deficit increased
71.5% in annual terms, budget spending increased 4.7%, while fiscal revenues dropped
3.1%. The revenue drop was due to easing tax policy and poor economic performance.
Fiscal developments in 2013 worsened the public debt dynamics. This debt tends to increase
over the periods of economic slowdown, in response to fiscal counter-cyclical policies and
the impact of automatic stabilisers. However, given the essential role of fiscal sustainability in
the overall economic and financial stability, and the high level of Albania's public debt, the
Bank of Albania has requested and supported the taking of measures to control and reduce
this debt in the medium term.
In this context, we reiterate our message for anchoring this process to a fiscal rule, which will
orient the fiscal policy in the long term, and will be reliable and transparent for all Albanian
and foreign economic agents.
Developments in the external sector of the economy signalled a sluggish foreign demand in
the third quarter of the year. Though trade deficit dropped, the external sector impacted
negatively on the economic growth due to lower tourism revenues. In October and
November, the external trade data show ongoing annual nominal contraction of the trade
deficit, at 11.9%. This contraction was due to increase in exports by 12.0% and decrease in
imports by 2.0%, over this period. The Albanian economy's capacity to maintain and speed
up the positive export growth rates will determine the country's medium-term and long-term
economic growth. In the medium term, increasing exports helps offset the domestic demand
sluggishness, while in the long term, increasing competitiveness of the Albanian economy in
the world markets should be to the core of Albania's new economic growth model.
The low demand for consumption and investment, and the banks' conservative lending
policies, have slowed the monetary indicators. The increase in the money supply slowed
down to about 2.5% in October and November due to private sector's lower demand for
funding. Lending to economy continued to contract and in November, it was 2.4% lower than
a year ago.
The above monetary and economic dynamics has exerted weak inflationary pressures. The
low aggregate demand has expanded the negative output gap. The labour market pressures
have been subdued against a setting of unchanged unemployment rate, moderate wages,
and partially-used capacities. These developments have affected the control on output costs
and profit margins, and are reflected in low core inflation rates over this period.
Also, imported inflation has been downward due to lower primary commodity prices in the
international market and stable exchange rate.
Based on the economic outlook and aiming to encourage aggregate demand, the Bank of
Albania lowered the key interest rate by 0.5 percentage points, at 3.0% in the fourth quarter.
Also, Bank of Albania's monetary policy decisions are associated with ongoing liquidity
injections and orientations toward the future monetary policy stance. This policy has
managed to keep liquidity premia and inflation in check, by contributing to lowering the
interest rates in the interbank, government debt security, lek loan and deposit markets.
However, the lek loan price has not fully reflected our monetary policy, indicating the
presence of high risk premia and containing the monetary stimulus transmission to the
economy. These risk premia are also reflected in other lending terms, unrelated to the loan
price, and appear tighter as compared to their historical performance.
***
Under the Bank of Albania's baseline scenario, the economy will improve slightly during the
current year. Increase in exports and a better performance of consumption and investments
will continue to support the aggregate demand. The monetary policy will support the
domestic demand, by maintaining macroeconomic stability and ongoing injection of monetary
stimulus in the economy. Also, payment of arrears will help improve the balance sheets of
firms and the private sector, and is expected to improve business borrowing. Excluding the
payment of arrears, the 2014 budget has projected a fiscal adjustment needed against the
backdrop of a rapidly increased public debt. Reflecting the weak economic and monetary
dynamics in the country, inflationary pressures are expected to be weak.
After four quarters, inflation is expected to vary 0.7%-3.8%, with a 90% probability of
occurrence. This will require maintaining a stimulating monetary policy even in the medium
term.
***
At the end of discussions, the Supervisory Council decided to keep the key interest
rate unchanged, at 3.0%. Given the expected inflation developments, the Supervisory
Council deems that the monetary policy will remain stimulating in the medium term.
The monetary stimulus intensity may increase further over the periods ahead, in the
event the economic and monetary developments continue to shift the balance of the
downside inflation risks. In any case, the Bank of Albania remains determined to
ensure price stability, in accordance with its inflation target.
The Bank of Albania deems that 2014 will be a turning point for the Albanian economy.
Maintaining financial and economic stability, improving external environment, pursuing
stimulating macroeconomic policies and continuing structural reforms would open the way to
Albania's stable and long-term development.