Ardian Fullani: Promoting a public debate around the new economic
growth model
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Meeting with
AgroBusiness and Banking Sector Representatives, Lushnja, 13 March 2014.
* * *
Dear guests,
It is a great pleasure for me to be here today to discuss one of the most important sectors of
the Albanian economy - agriculture. Moreover, the fact that this meeting takes place in one
of the areas with extraordinary potential for the development of this sector - I am referring
here not only to Lushnja, but the entire Fier district - is very significant.
I do not think I am surprising anyone, particularly those engaged daily with entrepreneurship,
when I state that the recent years' global economic crisis had an easily recognisable impact
on the Albanian economy as well. The pace of economic growth has slowed markedly,
particularly in the past two years. According to the latest forecasts, the Albanian economy is
expected to pick up slightly in the next few years due to improved monetary and financial
conditions, and the fact that our trading neighbours are, similar to Albania, showing the first
signs of recovery after several years. However, we expect growth to remain weak for a while
yet compared to the pre-crisis period.
Under these circumstances, the Bank of Albania has been promoting a public debate around
the new economic growth model, even before this global financial crisis took hold.
The central bank's stance has been clear and transparent to the public. We have constantly
stated that the main sources of economic growth in the two decades of transition are
reducing markedly, and the Albanian economy needs to be re-oriented towards new sectors
in the very near future. The Bank of Albania sees agriculture - and, in a broader sense, the
entire agro-business - as one of the main sectors standing at the front of this re-orientation.
My presence here today, and Bank of Albania's presence, should serve as a confirmation of
our commitment to discussing the new growth model and the primary role that agriculture
should play in it.
* * *
The Albanian economy had a very difficult year in 2013. Domestic demand, and
consequently economic growth, hit one of the lowest levels in history. The inflation rate hit
the lower bound of the Bank of Albania's target tolerance band, while budget deficit and
public debt increased considerably.
The economic performance was also accompanied by uncertainties surrounding the external
economy - Albania's trading partners in particular -, but also the domestic economy
considering that 2013 was an election year. All the above contributed to the deceleration and
a more cautious behaviour of economic agents. Some of domestic product indicators saw
significant changes. Worth mentioning is the construction sector, one of the top contributors
to economic growth during 2000-08, which has shrunk considerably in the past years.
Fortunately, the Albanian banking system remains solid and well-capitalised. Despite the
increasing non-performing loan portfolio, banks have sufficient capital to address this
phenomenon. I would like to elaborate more on this latter point.
The performance of lending has become the focus of attention for policy-makers and
economic agents. The slower economic growth was followed by sharp deceleration in
lending. The reasons are quite understandable: on the one hand, businesses have reduced
their demand for loans due to uncertainties relating to the sale of their own products; and on
the other hand, banks have been pursuing a more conservative approach to lending, being
uncertain about the success of different business plans.
Global theory and practice suggest that the investment and credit cycles progress in line with
the performance of aggregate demand. In other words, we will see a stable recovery of
lending only when economic growth recovers at a steady pace.
However, as we have already stated, we believe that there is room within the Albanian reality
for a better performance of lending. Channelling savings into profitable investments and
supporting businesses with lending are the reasons for the existence of the banking system.
We have been constantly emphasizing this message, and we have taken concrete steps,
which have lowered the banking system's financing cost and provided incentives for lending
through an adequate regulatory environment.
The Bank of Albania expects the situation to improve in the next few months, following the
macro prudential measures we have taken to facilitate lending, and banks' cleaning up of
balance sheets and credit restructuring. I did not intend to make a random overview of the
situation, but to show the Albanian economic reality at this moment and present the future
challenges. It is easily understandable that the weak economic growth calls for innovative
solutions from other new sectors.
There is room for banks to lend to profitable projects as they continue to collect deposits and
maintain sound levels of financial ratios. It is now the responsibility of all policy-makers to
help entrepreneurship, in order to get a clear view of the right investments for the future. We
have stated in our reports that the new sources of growth should originate from competitive
sectors in the domestic and, even further, in the external market, so that the trade balance
keeps on showing the improvements of 2013.
Export growth is important in the long run to offset the moments of weakness in domestic
demand, by diversifying the sources of income. Although the economy benefits from the
increase in the exports of mineral products, the latter are often exported without any sort of
processing in the domestic market and, consequently, make little contribution to improving
productivity and competitiveness of the Albanian economy.
Bank of Albania's research and analyses show that traded goods' sector has shown
increasing productivity compared to the non-traded one.
During the 2000s, the Albanian economy was most focused on non-traded sectors like
construction, and hotels and tourism, with a low share in the growth of productivity. Improving
them and successfully facing competition in the international markets should lie at the core of
Albania's new economic growth model. Bank of Albania's analyses suggest that these
structural changes will contribute to recovering the economy at a faster pace in the years
ahead and restoring the previous growth rates.
The agriculture sector meets the above criteria to lie at the core of this new model better than
any other economic sector. On the other hand, we must recognise that despite Albania's vast
natural resources, we have not managed to fully utilise these potential resources for the
agriculture sector to face competition in the international markets. The Bank of Albania sees
great potential in agriculture, which, for a number of reasons, could not materialise in the
past years but can become more beneficial in the future. Unlike other sectors, whose future
benefits may be limited, agriculture may represent an important source for a second period of
dynamic economic growth.
The Albanian economy should be re-oriented towards those sectors whose capacity to
compete in the international markets is the best signal for the development potential. The
Albanian economy being a net importer of food products hints at a low level of
competitiveness and represents one of the major future challenges. Lushnja is one of the
main regions of the Albanian agriculture the recovery of our economy should start from - and
holding this meeting here today is not mere coincidence.
Bank of Albania's analyses have been paying increasing attention to developments and
related perspectives in this sector. As we speak, 47% of the Albanian population and around
49% of the labour force lives in rural areas and engages in agriculture-related activities.
According to the latest data for 2012, around 24% of the land area is used to cultivate
different agriculture cultures. However, despite the vast resources concentrated in agriculture
and the important role it plays as the main source of income for a considerable part of the
population, only 20% of gross added value comes from this sector.
The low share in economy in proportion to the considerable number of the population
involved in agriculture indicates the low productivity in this sector. The latest data show that
the exports of "food, beverages and tobacco" account for 6.2% of total exports. Livestock and
agricultural products share 0.78% and 2.3% in total exports, respectively, whereas
agroindustry shares 3%.
Fier district represents a considerable part of production factors in agriculture.
The latest data show that Fier shares 18% in total agricultural land, thus being classified as
the district with the highest share in the country.
In 2012, more than 56 thousand farms were registered in Fier, the highest number on a
country-level. This number accounts for 16% of total farms in the country, providing the
highest share of income from the sale of agricultural products, and about 20% of Albania's
total income. Related to livestock, Fier, and mainly Lushnja district, have a considerable
share in livestock products. As a district, Fier produces 20% of total livestock production
(milk), whereas Lushnja produces 9%.
The above setting witnesses private efforts and entrepreneurship to develop this sector. In
order for this process to go ahead at a more accelerated pace, the policy-makers should
identify the advantages and problems this sector encounters, in order to address them
quickly.
In 2012, the Oxford University published a book focused on economic growth in
SouthEastern European region. This book elaborates on a number of structural problems and
challenges facing the Albanian economy, in its efforts to develop further. Agriculture has
significant share in this analysis.
Some of these problems are acknowledged and frequently mentioned, such as the important
infrastructure-related issues that include the road, watering, draining, storage and processing
systems. Problems with land ownership and the transformation of its function for other
activities continue to remain a major obstacle for the country's normal development, and
raise ongoing concerns relating to the price and use of this important factor of production,
and further on, to the normal functioning of product markets and other land-related factors.
Agriculture is affected by other structural problems that need a long-term solution.
Averagesize farms continue to be relatively small, thus restricting the development and growth of
average productivity, or differently known as "the economies of scale". There are many
reasons behind this. We can mention the inheritance of the communist system and the
separation of land after its collapse. As it was stated above, the lack of a normal land market
also due to ownership problems, naturally plays an important role in establishing larger farms
and, consequently, more competitive ones. These problems also affect the agricultural
sector-bank relationship and the lending activity at home.
The recent data show that lending to the agricultural sector accounts for 1.25% of total
lending to businesses, on average. It is a considerably low figure, which should raise our
concern, considering that this sector contributes by one/fifth to the gross domestic product.
I believe that there are two reasons driving the banking system to be reluctant to finance
different projects in this sector. First, risk classification and categorisation for credit to
agricultural sector is a commitment different from the other activities. The lack of
formalisation, even for matters such as regular maintenance of information and statistics
about ownership, and financial statistics, damage the farmers' credibility from the early steps
of lending. I find that there is room for prudential intervention by public institutions, not to
condemn farmers, but to better prepare them and assist them in formalising their business.
In light of this, the Bank of Albania has in the past years initiated a campaign to improve the
financial education of the Albanian people. The recent results of our questionnaires indicate
that the Albanian urban population shows increasing and a more complete knowledge
related to various financial problems they encounter. But the results on rural areas reveal
that the education level remains considerably lower.
Second, the Albanian agricultural sector suffers from the lack of information and evaluation.
As I noted above, one of the reasons why banks hesitate to increase their lending is the lack
of complete information on farms and their products. Further, the quality certification
standards for Albanian products remain low. One of the main reasons restricting higher
exports and, consequently, higher production, is the lack of certification in accordance with
the highest standards for all the Albanian agricultural products. This type of certification does
not only prove the elementary food security required by the European markets, but also
establishes a starting point for competition in the market.
The presence of these standards at a reliable level would lead to the improvement of all
market mechanisms, by helping bank lending in proportion to the quality of products. In the
framework of concerns facing the agricultural sector, the Bank of Albania has increased its
interest in microcredit institutions.
In many developing countries, these institutions have led to an increase in lending,
particularly to the agricultural sector and the rural population in general, thus trying to work
out the formalisation and evaluation problems I stated above. I find that the successful
experience of microcredit institutions in other countries could be imported to Albania.
Consequently, all policy-makers should get closer to these institutions and help them grow,
as the microcredit institutions are the ones that have great potential to become important
lenders to the private agricultural enterprises, better than any other intervention by financial
and public institutions.
Let me conclude by saying once more that the agricultural sector should be an important
source for Albania's further development. But the solution to the problems facing this sector
calls not only for greater attention, but above all, for a modern way of thinking and a more
concrete cooperation between all related stakeholders. I, therefore, hope that today's
meeting will contribute to drawing the attention towards this important sector and push
forward the required structural reforms, which would also encourage the cooperation
between agriculture and the banking and financial sector.