Ardian Fullani: The banking system - promoter of economic
development
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional meeting "The
banking system - promoter of economic development", Kukës, 12 September 2008.
* * *
Dear Governor,
Dear Mayor of Kukës Municipality,
Dear Mayor of Prizren Municipality,
Dear Mr. Uldedaj,
Dear Mr. Basha,
Dear participants,
I am delighted to be here today and there are many good reasons why I was looking forward
to this gathering.
For the second time within a relatively short period of time I see this gigantic engineering
work growing every day and taking its final shape. Every single person visiting the road
segment Rëshen - Kalimash understands that what they have in front of them is an
extraordinary engineering, civil, useful, far-sighted and patriotic work.
Similarly, my return to Kukës after quite a long time has surprised me. There is now a
completed airport, cross-border activity has intensified, the climate is extraordinary and soon
this town will turn into a city with modern infrastructure. Numerous opportunities are ahead of
you. Your cleverness stands in perceiving them and making use of them cleverly in order to
enhance the opportunities of the Kukës community and the North-East region.
The other reason for making me feel delighted is the presence of my Kosovar counterpart,
Mr. Hashim Rexhepi. This meeting is of special significance. The Central Bank of the
Republic of Kosovo is now growing and consolidating day after day under the management
of an Albanian professional unlike some time ago when the management of the central bank
was the task of a foreign central banker.
Meetings of this kind are now turning into a tradition. After holding similar meetings in Korça,
Gjirokastra, Shkodra and Saranda we are now being introduced with a new reality of the
North-East region, and I believe that the town of Kukës plays a key role in this area. Through
these regional meetings we aim to be in touch with the economic and financial reality of
different regions in Albania. Given the weather, cultural, social, geographical, demographic,
objective and subjective characteristics, each region has different economic and social
development opportunities and levels. From this viewpoint, we aim to fully be acquainted with
these specific characteristics, identify all the financial and natural resources, formulate
"recipes" and other advice which would help in making more rational use of them.
Beyond what I previously stated, I would like to clarify that the exploration of the potentials
that the different regions have to offer and the identification of their level of use is also
essential in terms of the banking system's activity, in particular of the geographic expansion
and financial intermediation.
Another major reason motivating the Bank of Albania to organize these meetings relates with
the establishment of a more effective communication channel between the Bank of Albania
and the public. We believe that the direct contact with various social groups in different
geographic regions (that is to each and every family), in addition to the traditional means of
communication, press conferences, monetary policy or financial stability reports, is a very
efficient tool and frequently determinant.
I would like to dwell today on some matters of interest to the entire audience. First I would
like to make a brief outline of the Bank of Albania's latest analysis of the economic and
financial situation in Albania:
In brief, three are the main developments of greatest interest to the audience:
With regard to the international developments, the economic and financial situation has been
very complex in the last months. Inflation has turned into a point of concern in most foreign
economies, mainly driven by the high prices of raw materials, oil and food. In addition,
economic activity in developed economies has experienced sharp turns. Euro area economy
is at present in front of many questions, while the US and some Asian economies have
shown slow rates of economic growth. Credit crisis has caused many reputable international
institutions to experience large financial losses and its contamination process is still present.
Recently, the two US mortgage giants, Freddie Mac and Fannie Mae, which were on the
verge of collapse, were subject to an unprecedented and costly rescue plan designed by the
US Treasury Department. All these issues have triggered uncertainties in the markets,
causing the future forecasts to be more challenging and the participants' exasperation to
peak.
I would consider the immunity shown by our economy in terms of price stability as the most
outstanding development. Albania's economic activity is progressing in line with our previous
expectations. A few days ago, INSTAT published the inflation figure for August 2008,
according to which annual inflation marked 2.5%. Following a 12-month period of inflation
rates standing at around 4-4.5%, in line with our forecasts, it is assessed that inflation will
fluctuate in the next few months at around 3%, which is our quantitative objective.
Worth to note, however, is that the risk for its upward deviation is still present and it mostly
relates with the international developments mentioned above. The main risks stemming from
the internal environment relate to any possible deterioration of the energy situation and the
plausible implications with the fiscal situation in the future. For the moment, the main risk
stems from the lagged effects (otherwise referred to as second round effects) of certain
developments such as the rise of wages beyond an acknowledged logical level. Any similar
rise would generate new inflation, to later impose another rise in wages, which in turn would
again and again trigger inflation. I do not think this is the right path. Wage-inflation spirals
have been studied relatively early and they represent the least appropriate recipes to offset
the inflation effects.
I would like now to move to the latest performance of the banking system, with both its good
sides and the risks associated with them. The Albanian banking system is going through a
phase of swift development and promotion of new products. I believe you have noticed that
many banks have been engaged in aggressive marketing strategies which promote different
types of household loans and terms and attractive interest rates for deposits collection. In
addition, banks' branches and agencies have constantly expanded. Only during the present
year, 73 new branches and agencies have been opened and 15 others are in the process of
being opened.
The same characteristics more or less apply to the District of Kukës as well. Currently, six
private banks perform their banking business in Kukës, while two other banks are in the
process of commencing to operate. As of end June 2008, the banking system has extended
a total of about 1.2 billion leks of new credit (around 15 million USD) of which 66% to
households and the rest to the businesses in the area. It is nice to notice that this figure
accounts for about 66% of deposits collected in this region, providing evidence for a relatively
high financial intermediation level.
The rapid development of the banking system, the high competition in the banking market
and banks' eagerness to win their market shares requires greater prudence. The Bank of
Albania has taken a number of measures to increase prudence in view of attaining the
banking system stability. In its last meeting, the Supervisory Council of the Bank of Albania
took the following decisions:
•
Some amendments to the regulation "On risk management in the activity of foreign
banks' branches";
•
Some amendments to the regulation "On capital adequacy ratio";
•
Some amendments to the regulation "On credit risk management";
•
Approval of the regulation "On minimum requirements for information disclosure
from banks and branches of foreign banks";
•
Approval of the regulation "On transparency of banking and financial products and
services".
The entire package of regulations was launched in the open forum we had this spring with
the banking system. This package aims to better discipline the banking system in terms of
assessing credit risks, setting penalties for banks when non-performing loans increase,
encouraging lending in lek and enhancing transparency with bank clients for each product
and service.
Dwelling further on the issue of financial stability, I would like to underline that the Bank of
Albania is scrutinizing cautiously the developments in the external sector of the economy,
which for the moment remain a concern in terms of long-term developments in economy. The
stable growth of imports in goods and services and the current deficit deepening require
special attention. The main implications relate among others with the financial stability at
home while they have their roots in the imposed correction of long-term imbalances within a
very short period of time.
Triggered by the increase of real estates prices, the steady appreciation of the lek, workers'
remittances and the rapid growth of credit and budget expenditure during the present year,
the high current deficits have become a dominant phenomenon in the external sector of the
economy. Their automatic and abrupt adjustment would prompt the correction of exchange
rates to the rapid and strong depreciation of the lek, drop in private and public consumption
and reduced economic activity which could generate crisis in the external sector and spread
to economy, hence, jeopardizing the financial stability at home. Availing myself of this
opportunity to address to the audience I would like to explore this issue further. Skipping the
theoretical arguments, I would note that the high current deficits mainly originate from the
consumers' behaviour.
In plain words, what I am trying to say is that in a general economic level we consume more
than we produce. This extra consumption, which is mainly financed by borrowing, is mainly
driven by our expectations for higher income in the future. That is, in a household level, there
is deficit, triggered by the insufficient income to cover household consumption.
The international financial crisis and the negative consequences on the global economic and
financial activity stem from household consumption beyond the sources (providing additional
financing from banking loans) and the rise of real estates prices. This consumption approach
was followed by the increase of current deficit and long-term liabilities for households.
When these liabilities exceeded the long-term equilibrium level, the household sector could
no longer pay off the accumulated debt.
What were the consequences?
An extreme and constrained adjustment of consumer behaviour and approach. Households
could no longer pay their debts to banks and maintain the same level of consumption. These
individual imbalances altogether appeared in a macro level, mainly in the form of abrupt fall
of demand, slower economic activity and depreciation of the exchange rate (US dollar
depreciation). Naturally, the financial system could not escape from being affected by this
challenging contagion.
What I have stated above points out the necessity of making thorough analysis at a micro
level in addition to the macro ones. That is, the recipes for attaining a stable macroeconomic
situation should begin and be sustained by prudent analyses at a micro level.
It is for this reason that I would like to dwell on and explore one of the indicators that affects
the structure and modelling of household budget. I refer here to workers' remittances which
have played a key role in smoothing consumption and at a lower level, meeting investment
needs, mainly for real estates and small household businesses. Remittances have somehow
offset the low productivity and the negative effects triggered by unemployment. In addition,
they have helped to preserve financial stability, by establishing more balanced ratios
between income and expenditure.
Given the importance of workers' remittances, one would rightly raise the following question:
What is their perspective? How can they be managed more effectively?
For a relatively long period of time, they have been vital to our country. According to a Bank
of Albania survey on the first quarter of 2008, about 26% of Albanian households living in the
territory of the Republic of Albania are recipients of remittances from abroad. Households'
geographical distribution indicates that 59% of recipient families live in the rural areas while
the rest in the urban ones, receiving about 66% and 34% of total workers' remittances,
respectively. Remittances represent the most important component of rural families' monthly
income, accounting for about 40%.
The largest part of workers' remittances (about 70%) for the first quarter of 2008 was used
for non-productive purposes. About 48% was used for consumption, which entails meeting
households' everyday needs for food, clothes, furniture, etc., 16% for construction and
reconstruction and 10% for education and medical purposes.
Around 19% of remittances are used for investment and savings, providing evidence for their
economic impact on Albania.
Despite these figures, their future prospective is yet unclear. The integration of Albanians into
their host countries, their economic and financial situation and other similar reasons have a
negative impact in the long term. Our analyses and assessments show that the difficult
economic situation the developed economies have been experiencing, expressed in the
economic slowdown, unemployment growth and increase of inflation, has also provided its
impact on the performance of remittances which have grown less this year relative to the
previous years. Empirical studies of the Bank of Albania show that the cease of these flows
would put our consumption model and the long-term balance of the external sector of the
economy in the difficult position.
Our concern related to the household budget stands in the fact that the behaviour model we
adopt at a household level can also affect the behaviour model of given regions.
The Albanian economy has by and large made evident progress, detaching itself from the
IDA country group. Macroeconomic indicators have for a relatively long period been positive
and stable. However, beyond the nationwide average indicators, detailed statistics by regions
indicate that welfare in mountain areas has progressed at slower rates relative to the other
regions. According to World Bank assessments, an average resident in the mountain area
has 12% less per capita real consumption than the average resident in Tirana, while in 2002
this figure was 9%. According to the same source, the average rural coast resident has 34%
higher per capita consumption than the average mountain rural resident. Generally, poverty
has a strong positive relation with the family size and a negative relation with age and
education.
In contrast, the District of Kukës has great potentials for more prosperity in this area. First,
your district is distinguished for its rare natural beauty and diversity from the mountain and
ethnographic tourism viewpoint. The opening of the border with Kosovo in particular has
provided us with real opportunities to perceive the Northern Alps as a single complex with
their continuity to Kosovo and why not to Montenegro. I think the completed airport, which
could very well be used for the transportation of winter sports fanatics, is another strong
point. It is the local authorities' task, to undertake in co-operation with the local stakeholders
projects and feasibility studies, which in a later time may be submitted and presented to the
central authorities or the specialized international operators. I would like to inform you that at
the moment, their interest is overwhelming and concrete. Time is ripe for you to increase the
marketing of these potentials and point out their strong advantages accurately.
Second, your district is well-known for being rich in minerals. I do not know if you have any
geological inventories or maps which accurately identify the mineral resources. If you don't,
this is too late. The current price structure is very favourable and I believe that any
reactivation of existing mines and the opening of new mines implies more employment, more
hope for this region and fewer migratory movements.
Third, your district, in particular the town of Kukës, finds itself in a crucial economic
crossroad, not only in terms of roads but also of air. Unfortunately, statistical information
related to cross-border economic and financial activity is missing. Nonetheless, I have to
admit that the potentials are not being rightly handled. We are the same people, speaking the
same language and sharing the same customs, hence, there is no point for us to be held
back by the absurd barriers of time. The completion of the new road and its stretch to the
largest harbour in the country create the proper grounds to turn the Kukës town into an
extraordinary transit point for passengers, goods, services, art and culture.
Fourth, your district should make clever and great use of the presence of a university in this
town. My call is just plain: invest in mobilizing a professional and specialized teaching team.
Spend on education, on knowledge and the culture it produces. In this context, the local
government could set financial stimuli. The final goal will be to establish a national
educational centre, which serves to the local community living on both sides of the border. I
honestly hope the future managers grow and be a product of this university.
Fifth, I believe you should pay your utmost attention to the presentation and spreading out of
information on the potentials your district has to offer. Pretending you possess something
that is worth it is only one side of the coin. The other is how able you are to find buyers, to
get them buy what you want to sell. In this context, the complete identification, regulation,
presentation and promotion of these great potentials are of prime priority. For analogy
purposes, I would like to bring an example: It is now for two years that the Bank of Albania
has been organizing the yearly competition "The Governor's Award for the best diploma
thesis". Last year, the third prize went to a student of the University of Shkodra for a very
original thesis which introduced the potentials and opportunities of the Puka Region, the
development of mountain tourism and the positive macroeconomic impact it will bring to the
region. This paper was assigned a prize for the originality of the topic chosen to be explored
and the economic impact its presentation may have. The thesis did not only seek to present
a profitable business opportunity, but also make an assessment of the positive impact this
investment would have on the life of the community. The positive influence on the latter is
crucial for important strategic investors. We awarded this paper not only for its original
exploration by a passionate student from Puka, but also to increase public awareness and
promote this new and modern mentality. When a single student manages to produce this
much, a university, a local community and all of us together have great potentials to achieve
even more. I brought with me today a copy of this thesis.
Dear participants,
I tried to briefly discuss some issues that I personally find vital and benefiting for you and the
Bank of Albania. Perhaps my speech may have sounded somehow provoking; however I
believe this is the right time for us to put a halt to some transition phenomena or
impairments. Although I am aware of the numerous and complex problems, I can clearly see
some light at the end of the tunnel. The chances are right there. Our duty is not to waste
them. On behalf of the Bank of Albania I assure each institution, individual, company,
undertaking or initiative that we are open to collaborate for the best of future progress and
prosperity of this community.
Thank you once again for your attention and hospitality.