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, 30 April 2013.
* * *
Today, on 30 April 2013, the Supervisory Council of the Bank of Albania reviewed and
approved the quarterly Monetary Policy Report. Based on the most recent monetary and
economic developments in Albania, and following the discussions on their outlook, the
Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged,
at 3.75%. The Supervisory Council deems that the current monetary conditions are adequate
to meet Bank of Albania's inflation target in the medium term.
The present interest rates and liquidity situation in the economy provide simultaneously the
necessary monetary stimulus to boost domestic demand.
Let me now proceed with an overview of the economic developments and key issues
discussed at today's meeting.
***
According to INSTAT data, economic activity in Albania increased 1.6% in 2012. The
Albanian economy showed signs of weakness during the past year, reflecting an overall
uncertainty in the internal and external environment. Nonetheless, against the backdrop of
unfavourable developments, the main indicators of domestic and external balances remained
within healthy parameters. During this period, inflation ranged within the Bank of Albania
target band and indicators of banking system soundness improved.
Maintaining these balances provides the right macroeconomic premises for sustainable and
long-term growth.
Referring back to the performance of inflation, INSTAT data reveal that consumer prices
rose on average 2.5% in the first quarter of 2013. Inflation continues to be determined by
food prices; their contribution accounts for about 90% of headline inflation. Moreover, food
inflation was offset by the lower inflation of non-food consumer goods. Inflation of this
category reflected the downward oil price, following its decline in international markets. Also,
the price fall of long-term consumer goods provided downward effects, whereas prices of
other consumer goods did not change significantly.
From the macroeconomic perspective, inflation continues to reflect the weak pressures
from the aggregate demand-side and the absence of supply-side shocks.
Below-potential growth of aggregate demand leads to underutilisation of production
capacities and generates weak pressures on increasing wages, producer prices and profit
margins. Under these circumstances, internal pressures on consumer prices appear weak,
as reflected by the low core inflation. On the other hand, imported inflation was subdued due
to the low inflation in Albania's trading partners and the stable exchange rate.
The most recent data on the real economy are as at 2012 Q4. According to these data, the
Albanian economy grew 1.7% driven by expanded activity in the services, industry and
agriculture sectors. The activity of the construction sector continued to shrink. Data on
economic activity for the first quarter of this year remain limited.
Based on indirect indicators, our analyses point to low economic growth, relying mainly on
foreign demand, while the domestic demand components continue their sluggish
performance. Private consumption and investment remain weak in the presence of
uncertainties for the future, decelerating disposable income, tighter lending terms and spare
production capacities.
The performance of budget indicators in the first quarter of the year shows increased
fiscal stimulus. Budget deficit increased 41.5% during this quarter, reflecting the 3.6% decline
of fiscal revenues and 1.4% increase in public expenditure. The Bank of Albania once again
draws the attention on maintaining the fiscal equilibriums and keeping the budget deficit and
public debt at affordable and harmless levels for the Albanian economy. In our opinion, the
medium-term priority for the fiscal policy should be maintaining budget discipline.
In the long term, the Albanian public debt should be reduced and anchored in a reliable,
effective and transparent fiscal rule.
Developments in the external sector of the economy reveal continued positive contribution
of net exports to aggregate demand growth. Data on foreign trade for January and February
show that trade deficit narrowed 27.1% annually, reflecting at the same time the further surge
in exports and the weak performance of imports. During this period, imports shrank 9.5% in
annual terms, while exports maintained their high annual growth rates, at 18.6%.
Monetary developments were in line with the performance of the real economy during the
first quarter. In January and February, credit to the economy was weak across all its
segments.
As at end-February, the loan portfolio of the banking sector stood only 1.7% higher than a
year earlier. As we have already underlined, the main problem with regard to lending remains
the low business and consumer demand for loans. However, banks' lending policies appear
more conservative, as reflected in the relatively tight lending standards.
The forecast for subdued consumer prices and weak economic growth in the period ahead
motivated the further easing of the monetary policy at the outset of the current year. In
January, the Supervisory Council of the Bank of Albania cut the key interest rate by 0.25
percentage points to 3.75%. Through anchoring inflation expectations, easing liquidity
pressures and cutting the short-term interest rates, the monetary policy has aimed at
reducing the costs of long-term lending to the economy and supporting the growth of credit,
consumption and investments in Albania.
The Bank of Albania's easing policy did not reflect uniformly across the financial market
segments. The latest key interest rate cut was reflected swiftly and completely both in the
interbank market and the primary market of government securities. On the other hand, it was
only partially transmitted to the deposits market and even less to the credit market. These
developments illustrate the fact that, in the presence of added risk premiums and structural
changes of behaviour in the financial market and the real economy, the effectiveness of
monetary policy action is lower. Based on these reasons, the Bank of Albania decided to
support its stimulating monetary policy with a number of changes on the easing side of the
supervisory, regulatory and macroprudential framework. Set out in details in the previous
month, these measures aim at further reducing liquidity premiums and intermediation costs in
the financial markets, in order to boost lending and economic growth.
Our projections for 2013 support the assessment for Albania's economic growth ranging
close to past year's rates. Foreign demand will be the main driver of economic growth, while
the fiscal policy is expected to contribute to growth on the same direction, but at lower
intensity, in the period ahead. On the other hand, private consumption and investment
remain weak and unstable. The continuation of below-potential economic growth will
determine weak inflationary pressures in the upcoming months as well. In the absence of
unexpected supply-side shocks, consumer prices will continue to rise at low rates. With a
90% probability, four-quarter-ahead annual inflation will range within the 0.6-3.6% band. The
low annual inflation rates and forecast for their continuation over the monetary
policyrelevant horizon call for maintaining the stimulating nature of the monetary policy over
the next quarters.
***
At the end of discussions, the Supervisory Council decided to keep the key interest
rate unchanged, at 3.75%. It concluded that stimulating monetary conditions establish the
proper premises for meeting the inflation target in the medium term, and contribute to the
growth of aggregate demand and full utilisation of production capacities. The weak
inflationary pressures determine the continuation of a stimulating monetary policy by the
Bank of Albania. Lastly, the Supervisory Council reiterates the need to continue and deepen
structural reforms, which boost productivity and enhance the competitiveness of the Albanian
economy. These reforms pave the way for expanding the economic potential and should be
seen as the main instrument supporting sustainable and long-term growth for Albania.