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 January 2013.
* * *
Today, on 30 January 2013, the Bank of Albania's Supervisory Council reviewed and
approved the biannual Monetary Policy Statement. Based on the latest monetary and
economic developments in Albania, and following the discussions on their future outlook, the
Bank of Albania's Supervisory Council decided to lower the key interest rate by
0.25 percentage points. After this decision, the one-week repurchase agreement rate drops
to new record-low level of 3.75%. The Supervisory Council deems that further easing of
monetary conditions will help in meeting the inflation target in the medium term.
Let me now proceed with an overview of economic and monetary developments, and key
issues discussed at today's meeting.
* * *
The Albanian economy improved slightly in the seconds half of 2012. This performance was
driven by a fuller reflection of monetary stimulus and improved external economic and
financial environment. However, the economic activity remains below potential and the
growth resources appear unstable. Production growth is not reflected in decreasing the
overall uncertainties, which contain private investments and consumption, and lead to
downward credit demand and supply. The banking system has sound and liquid balance
sheets but it remains highly prudent in terms of financing long-term investments. These
tendencies will condition the economic developments over the period ahead.
Inflationary pressures were low during the last quarters. Reflecting also the Bank of Albania's
prudential monetary policy, inflation settled within its target in 2012. The increase in annual
consumer prices was 2.4% at year-end, while the annual average inflation rate was 2%. The
inflation rate increased progressively during the first three quarters and fell slightly during the
fourth quarter.
Inflation volatility was mainly driven by food prices, which were affected by the international
market and domestic production. The effect of other basket goods' prices on inflation was
low and slightly volatile. Regulated or administered price inflation was insignificant, while
higher prices for consumer goods, oil and primary commodities in the global market did not
cause any higher inflation in the Albanian economy.
From the macroeconomic viewpoint, all determinants of inflation contributed to keeping it at
low levels. The incomplete utilization of productive capacity was associated with businesses'
low demand for labour, hence no pressures for increase in wages and labour costs. Also, the
weak demand for goods and services reduced businesses' ability to dictate final product
prices and affected low levels of profit margins. On the other hand, low increase in the global
market prices and the exchange rate stability helped in keeping import prices in check.
Finally, expectations for a low inflation in the medium term were reflected in stable costs,
prices and interest rate in medium-term and long-term contracts concluded in the labour
market, in consumer goods and financial instruments.
According to data from INSTAT, the Albanian economy grew by 2.7% in the third quarter of
2012, and similar growth rates are expected for the fourth quarter as well. Services, industry
and agriculture sectors supported the economic growth, while the construction sector
continued to contract.
Assessment of third-quarter and fourth-quarter aggregate demand components confirms, to
a great extent, the expectations noticed from previous periods. Foreign demand has been
the main driver of economic growth in the country. Net export deficit narrowed in the third
quarter of the year, mainly due to growth in exports of goods and services. Third-quarter data
attest to continuation of this trend. During October-November, exports grew by 14.3%, while
imports fell by 5% on a year earlier. As a consequence, trade deficit has dropped by 15.5%,
y-o-y. On the other hand, the domestic demand has remained sluggish due to lack of fiscal
stimulus and slow performance of consumption and private investments.
Indirect available data for the third quarter of the year depict improved consumption but low
private investments due to incomplete capacity utilization on production, uncertainties about
the future and tighter financing conditions. Fiscal indicators have reflected the overall
performance of the economy and the fiscal consolidating policy pursued in 2012. Slow
growth in budget revenue and expenditure, and budget deficit contraction characterise fiscal
developments. Fiscal revenue for the first 11 months of the year increased by 2.0%, y-o-y,
reflecting the low contribution of related taxable component. Public expenditure increased by
0.9%, y-o-y, mostly reflecting the negative growth rates of capital spending. As a result, the
budget deficit of this period marked 8% annual decline.
The fourth quarter highlighted a better pass-through of monetary stimulus in financial
markets. It was also characterised by a better anchoring of interbank market rates and their
decreasing volatility. The Bank of Albania has pursued an easing monetary policy during the
last three years. The monetary stimulus has increased progressively during this period,
bringing the key interest rate to record low levels and mitigating the liquidity pressures on the
interbank market.
However, the pass-through of easing monetary policy effects on the economy has been
contained due to higher perceived risk premia and changed stance by financial market
agents and the real economy. Over the first half of the year, the domestic primary market
faced structural changes arising from implementation of new tight measures by the European
Supervisory Authorities. This development impacted on maintaining relatively high yield
rates, despite the easing monetary policy and lowering short-term interest rates in the money
market. Normalisation of the primary market in the second half of the year was reflected in
progressively falling yields over this period. This tendency might have been passed on to
ALL-denominated private sector credit costs, though with lower intensity as a consequence
of risk premia reflected in private agents' credit price. Overall, controlling the borrowing in the
domestic money market, expanding the Government securities investment base and
stabilising the risk premia in the economy create grounds for a better functioning of
transmission channels in the future. Therefore, the Bank of Albania believes that the
longterm public debt sustainability and public borrowing constraint in the domestic money market
help enhance the monetary policy effectiveness and increase the space for the private sector
credit of the economy.
Monetary indicators were characterised by slowing growth rates in the second half of the
year. They signal low monetary inflation pressures on the economy. The annual monetary
supply growth averaged 5.9% in October and November, supported primarily by
developments in the external sector of the economy. Money demand by the domestic agents
of the economy was low. The increase in households' participation in public debt securities
was reflected in lower financing of this sector by the banking system. Businesses' and
households' demand for funding decelerated significantly, reflecting the low demand for
consumption and investments. Also, banks continued to pursue a more prudential approach
in lending, applying tight standards in response to uncertainties perceived at sector level and
the economy. Responding to them, annual growth of credit to economy reached 4% in
November. Credit to economy was based on the 18% increase in ALL-denominated loans,
against the 3.2% decline in foreign currency-denominated loans. Also, credit growth
continued to be driven by increase in business loans, while consumer loans and home loans
appeared rather low.
The so-far economic activity performance and projections for 2013 support the outlook for
positive economic growth close to the previous year's figure. Foreign demand is expected to
contribute positively to Albania's economic growth, but this contribution is expected to be
lower due to unfavourable developments in trading partner countries and relatively low
diversification of Albanian exports. Private demand is also expected to be positive, taking
advantage of monetary stimulus growth and domestic savings utilization. Finally, the public
sector is also expected to provide a positive stimulus. Despite the positive growth, the
economic activity in Albania is expected to remain below its potential during the current year
and the demand-side inflationary pressures are expected to remain low during this time
horizon. The Bank of Albania deems that with a 90% probability, the annual inflation as to
four quarters ahead is forecasted to fluctuate within the 0.8 - 3.8% band. Low annual
inflation rates and forecast for their continuation over the monetary policy time horizon dictate
the maintaining and strengthening of the stimulating monetary policy over the next four
quarters.
* * *
Considering the information summarised above, the Supervisory Council deems that
consumer price pressures in Albania remain weak along the monetary policy time horizon
and have shifted downward during the last months.
Concluding, the Supervisory Council
decided to lower the key interest rate by 0.25 percentage points, to 3.75%. This decision
aims to create appropriate monetary conditions to meet the medium-term inflation target. The
easing of monetary conditions keeps the short-term financial market interest rates low,
encouraging the activity and decreasing the related liquidity trading premia. By lowering the
financing costs, the Bank of Albania aims to increase consumer loans and investments in the
economy. This transmission mechanism promotes the aggregate demand, and under current
circumstances, creates appropriate conditions for meeting the medium-term inflation target.