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, 25 July 2012.
* * *
Today, on 25 July 2012, the Supervisory Council of the Bank of Albania reviewed and
approved the quarterly Monetary Policy Report. Based on the analysis of Albania's latest
economic and monetary developments, and following discussions on their performance
outlook, the Supervisory Council of the Bank of Albania decided to decrease the key interest
rate by 0.25 percentage point, taking the one-week repurchase agreement rate to a new
historical minimum of 4.0%. This decision reflects the Supervisory Council's opinion that the
further eased monetary conditions in economy are adequate to meet the inflation target in
the medium run.
Simultaneously, the eased monetary conditions will provide a further incentive to the
economic activity at home, by increasing the monetary stimulus to support the domestic
demand.
Let me now proceed with an overview of the economic and monetary developments and key
topics discussed at today's meeting.
***
During the first half of 2012, the Albanian economy continued to maintain the parameters of
macroeconomic and financial stability, against an increasingly challenging global context.
Consumer price inflation, budget deficit and public debt indicators, balance of payments and
financial situation of the banking system were stable or improving.
In particular, the Albanian financial sector remains well-capitalised, liquid and able to conduct
its intermediation role. During this period, the Albanian economy experienced some shocks
on the supply side, with structural movements in the domestic financial markets, and a
slowed domestic and foreign demand. These developments drove the fall in GDP in the first
quarter of 2012 and made difficult the implementation of stabilising policies on the aggregate
demand.
The Albanian economy is expected to record positive growth rates as tensions may be
reduced in the second half of 2012.
Average annual inflation marked 1.9% in the second quarter of 2012, increasing by
0.8 percentage point compared to the first quarter of 2012.
The gradual rise in consumer prices has mainly reflected the increase in unprocessed food
prices, whereas prices of processed foods and those of non-food consumer goods lowered
their contribution to inflation during the second quarter of 2012. The other categories in
consumer prices basket showed a serene performance, and were characterised by low
inflation rates.
Within the macroeconomic context, consumer prices continue to reflect weak inflationary
pressures, both on the supply and demand sides. On the demand side, the presence of free
capacities in using the production factors is reflected in the costs control in economy and in
declining pressures on inflation.
On the supply side, the slowdown of imported inflationary pressures, decrease in oil and
basic materials prices, steady administered prices, low inflationary expectations and minimal
second-round effects did not generate inflationary pressures. Consumer price inflation
remains at low rates and is expected to maintain the same rate in the period ahead. These
estimations conditioned the retaining of the during
stimulating nature of monetary policy
the second quarter of 2012. The key rate stood at the lowest historical level, providing eased
monetary conditions in order to meet our inflation target and support the Albania's economic
activity. Also, the Bank of Albania has continued to inject sufficient liquidity demanded by the
banking system, against an expanded collateral base and at adequate maturity terms.
According to recent data from INSTAT, the Albanian economy recorded an annual fall of
0.2% in the first quarter of 2012. Industry contracted 19.3% y-o-y, mainly due to the
significant decrease in electrical energy output. Also, Construction decreased its activity in
real terms, by 17.6%, thus providing a negative contribution to the performance of the gross
domestic product. By contrast, Services contributed positively to the economic activity,
pointing to an annual growth of 6.0%. Agricultural sector grew 4.5%, y-o-y during this period,
providing a positive contribution to the growth of the gross domestic product.
Estimations on the aggregate demand in the first quarter of 2012 suggest a continuing weak
domestic demand. The consolidated fiscal policy determined the lack of fiscal stimulus in this
period and a downturn in public sector's demand for goods and services. Private
consumption remains slow, thus reflecting the prudent consumer's behaviour and the
increasing tendency for saving. Private investments also remained low. Given the free
production capacity, Albanian businesses found less room to increase their investments in
machineries & equipment, and production, while the demand for resident buildings remains
weak.
At the same time, foreign demand was sluggish in the second quarter of 2012, owing to the
problems in euro zone and in our main foreign trade partners. The weak foreign demand,
and the problems in electrical energy production, imposed the slow increase of the Albanian
exports.
Data on economy for the second quarter of 2012 are incomplete. Indirect data signal a weak
recovery of the economy in this period. Their analysis supports the estimation for a
continuing sluggish aggregate demand, especially of the domestic demand. On the
production side, economic sectors are expected to maintain in the second quarter of 2012
the dynamic showed in the first quarter of 2012.
Fiscal developments in the second quarter of 2012 were in line with those observed in the
first quarter of 2012, characterised by the consolidated fiscal policy and its inclination to
maintain budget deficit and public debt targets. This behaviour is reflected in the contraction
of budget expenses by 2.5% in the first half of 2012
Furthermore, fiscal revenues increased by 3.7% during this period, continuing to show a slow
dynamic of their taxing component. The performance of public expenditure and income in the
first half of 2012 is materialised at the significant contraction of budget deficit in annual terms,
at 37.7%. This deficit was ALL 16.8 billion in monetary value, and is assessed at 2.6% of
GDP.
Data on developments in foreign trade of economy reveal a contracted trade exchange in
the first five months of 2012. Value of exports marked a low annual growth of 1.3% in this
period, reflecting the moderation of foreign demand and price developments in global
markets. In this period, imports shrank by 2.0% in annual terms. These developments
resulted to a decreased trade deficit in the first five months of the year by the annualised rate
of 4.2%. Developments in foreign trade were determined mostly by electrical energy trade
exchanges in this period. Excluding this effect, the growth in exports would be higher and the
contraction in imports deeper, resulting in a contracted trade deficit, at 18.1%.
The performance of monetary indicators was in line with the developments in the real
economy and our analysis show contained monetary pressures on inflation. The annual
growth of M3 was 8.7% in May, maintaining the average rates of the previous month of the
current year. The growth paces of money supply slowed down compared to a year earlier,
reflecting the lower demand of economic agents for money. The consolidated fiscal position
was coupled with a decrease of public sector borrowing, whereas private agents of economy
reflected a low demand for financing. Lending to the private sector rose by 7.5% in May,
pursuing the slowing trend, which has started since the end of previous year. Along with the
low demand of businesses and households, its performance reflects the selective and
prudent behaviour of banks in lending.
Regarding lending problems, the Bank of Albania deems that banking system's balances are
sound, sufficiently liquid, and well capitalised to comply with the economy's demand for
monetary assets.
The positive position of its balances triggered the lending growth during the past years, while
many countries in our region experienced contraction of lending. The banking system has
reviewed and tightened lending standards during the last years; this behaviour to enhance
the financial discipline of the economy is welcomed and shall positively support the long-term
growth of Albania. On the other side, credit performance is increasingly experiencing the lack
of demand, which is triggered by the consumers and businesses reluctance to carry out
expenses and investments.
Bank of Albania deems that, notwithstanding the cyclical situation of Albania's economy, the
perspectives on medium and long-term development remain positive. This is reflected by the
interest of foreign investors to increase their exposure toward the Albanian economy. In
particular, economy sectors related to exports, tourism and agriculture, which serves to the
domestic and regional markets, provide unused development potentials.
Bank of Albania deems that, within the sound business' logic parameters, the Albanian
entrepreneurs and consumers have room for a more active approach toward the growth of
investments and their consumption.
Financial markets showed low interest rate fluctuation and operated under sufficient liquidity
terms in the second quarter of 2012. The transmission of reduced rates is also observable in
lek deposits market, followed by normal growth pace of deposits. By contrast, government
security yields increased in the primary market, particularly the long-term yields. This
performance has reflected the re-positioning of some agents in this market and the demand
for financing in this period, without implying a shift of inflationary pressures. At the beginning
of July, ratios improved and borrowing costs were reduced in the primary market. The
second quarter also transmitted signals on eased interest rates on ALL credits from banks.
Nevertheless, credit-lending paces remain low and mainly designated for short-term use,
leading to fluctuating interest rates.
The introduction of new financial intermediaries, specialised in channelling the public savings
to government securities, was a positive development, worth mentioning in the analysis of
financial markets for the first half of year. His development along with the increased public
interest on government securities, enhances the deepness of our financial system, improves
liquidity, enhances its risk management capability, limits the interest rates fluctuation,
increases the Albanian public debt stability and provides pressures to reduce the financing
cost of the public sector.
Verified performance of economic activity at home and the information filtered from indirect
indicators have shifted downward our basic projections for the economic performance for
the rest of year. This shift reflects the materialisation of some risks around the previous
basic projections, being expected and factorised in our scenarios. The domestic economy is
expected to slow down during the rest of year, being conditioned by the weakening of the
domestic and foreign demand.
Given the consolidated fiscal behaviour and the slowed foreign demand, the performance of
the private domestic demand will determine the economic activity growth. However, its two
components, consumption and investments, have not shown any recovery signal so far.
Expected developments at home and abroad result in a contained balance of inflationary
pressures, determining a slow increase in consumer price in the future. The demand growth
below the potential of the economy in the upcoming period will continue to exercise low
inflationary pressures. At the same time, the pressures generated by supply-side factors
appear contained. Based on the insofar developments of the determinant factors of inflation
and the projections for their development in the future, with 90% probability, inflation will
range within 1.0% - 3.3% band after 12 months.
***
Based on the analyses of the information set out above, the Supervisory Council
holds that pressures on consumer prices at home remain low over the monetary
policy relevant horizon; they have been, however, on the downside over the recent
months.
On the demand side, below-potential economic growth will continue to generate low
inflationary pressures, while shocks from the supply side are expected to be moderate.
The expected developments in economy and inflation imply that the simulating nature of the
monetary policy will be retained during the period ahead. The Bank of Albania remains
heedful to future developments and new information, ready to respond in the appropriate
time and extent in order to comply with its legal mission.
At the conclusion of discussions, the Supervisory Council decided to decrease the
This decision aims to establish the
key interest rate by 0.25 percentage point, at 4.0%.
appropriate monetary conditions to comply with the inflation target in the medium run. The
monetary policy, also, provides the necessary support to simulate the aggregate demand.