Ardian Fullani: Bank of Albania - progress during 2006
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the "Round Table on Target
Inflation 2", Tirana, 8 December 2006.
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Ladies and gentlemen,
I want to conclude this Round Table by thanking you all for your contributions. We are really happy
that you came to Tirana for discussing the monetary policy strategy of the Bank of Albania. This
Round Table on Inflation Targeting was an excellent follow-up of the Open Forum. At the Open Forum
last year in December we globally discussed the many preconditions for Inflation Targeting. During
these two days of the Round Table, yesterday and today, we went far deeper on these complex
issues. These issues need to be solved before the Bank of Albania can put a fully fletched Inflation
Targeting regime into place.
At this Round Table we have discussed the progress that the Bank of Albania has been making during
2006. One of the discussed topics was the econometric modeling and forecasting. The Bank of
Albania uses now a reliable analytical framework that provides information useful to the monetary
policy decision making. Under Inflation Targeting more information would be needed about the
expected inflation developments in the future.
As laid down in the central bank law, the primary objective of the Bank of Albania is to achieve and
maintain price stability in Albania. For keeping prices stable we need to be able to forecast the
development of prices in the future. Our current econometric models provide us information about
these future developments. Our internal studies show now that the Bank of Albania is able to make
reliable forecasts.
We also discussed the consequences of situations where the consumer price index increases, let us
say, more than 3% at an annual basis. This may for instance happen due to higher electricity prices, or
higher oil prices. These energy prices are a main share of our daily expenditures. Therefore, they are
a main share of the total basket of consumer prices for the "average" Albanian household. However,
the focus of our discussions was the analyses of the further impact on the Albanian macro-economy.
Higher prices will lead to a lower purchasing power. Households will buy less in case of a price
increase, under the condition of unchanged household income. Then, if many households in Albania
start consuming less, the Albanian economic growth will suffer. The Albanian production will slow
down due to the overall lower demand for goods and services.
This process can take some time. But, anyhow, each economist will agree that strong increases in
prices are bad for the economy. A high inflation, that is another way of saying a strong increase in
prices, will harm economic growth.
The Bank of Albania aims at an average increase of the consumer price index of 3%. The Bank of
Albania will set the interest rate for keeping expected price increases to 3% plus or minus 1
percentage point. It has built a macro-econometric model with all these channels that transmit
monetary policy in the Albanian economy. The main purpose of the model is to analyze the reaction of
prices, private consumption and business investment and so on, in reaction to changes that may take
place. We call these changes in analytical terms "shocks" to the economy.
Our macro-econometric model is promising. Very promising. But for building econometric models we
need statistics. Albania has statistics, but we need better statistics. For the year to come, the Bank of
Albania wants to improve the statistical framework. The Bank of Albania needs better statistics, I said.
With "better" statistics I mean here "more" statistics, "reliable" statistics and "user-friendly" statistics.
We need to measure all macro-economic developments in the economy better. And we need to keep
track of these developments. Our Albanian history is still short. We only have time series for about 15
years. In time we will logically have longer time series. Our time series need to become timely
available and they should be fully understandable.
Inside the Bank of Albania we can work more on statistics. In the year 2007 the Bank of Albania will
improve its own database on monetary and financial statistics, and on the balance of payment
statistics. But, for other statistics we depend upon our national statistical office, INSTAT. We also
depend on other institutions for providing us with relevant information.
Next to the broadening and deepening of the statistical framework the Bank of Albania will improve
upon its communication with the public. We discussed during this Round Table the transparency of the
Bank of Albania. We concluded that significant progress has been achieved.
But next to transparency, the Bank of Albania wants to improve upon the information that it provides to
the public. The Bank of Albania aims at making monetary policy understandable to everybody. We
know already that money matters. The more money we possess, the more we can buy, and the more
our economy will grow. The more our economy grows, the more people can share. Poverty will be
reduced. But what about monetary policy?
We all know that higher wages or lower prices are beneficial for our personal pockets. The higher the
wages, or the lower the prices, the more we can buy. But for the Albanian economy as a whole, there
is a flipside. This flipside is inflation.
More spending will lead to higher prices in the medium to long term. And these higher prices, I can
also say "higher inflation", is damaging for the Albanian economic growth. For this reason the Bank of
Albania safeguards price stability. Our main task is to keep prices stable. In order to do so, we set the
main interest rate.
The Bank of Albania wants to communicate better on all these monetary policy issues. It wants to
explain the monetary and financial benefits at the micro and at the macro level. It wants to explain
better why it is aiming for an inflation rate of 3%. The communication strategy of the Bank of Albania is
to explain the working of the monetary policy issues and its own tasks, to you all.
The understanding of the public is needed for a good conduct of Inflation Targeting. Credibility has to
be gained. As said before, a solid statistical framework is also indispensable. Reliable statistics can tell
us about the past and the present. On the basis of this, the Bank of Albania can use its econometric
models to forecast the future. The Bank of Albania can conduct monetary policy, and can target
inflation better, in case of better forecasts.
We can stress the preconditions. But the fulfillment of all preconditions for Inflation Targeting depends
also on others in the Albanian economy. Under Inflation Targeting, the monetary policy aims at a
precise inflation target in the medium term. The Bank of Albania can only reach this target in case the
interest rate setting affects the deposits, credits, private consumption and business investment, GDP,
like in a developed market economy. Only in this case can monetary policy be effective.
Therefore, some preconditions for putting full fletched Inflation Targeting in place can not be met
ONLY by the Bank of Albania. They depend upon the development of the Albanian economy, they
depend upon the provision of statistics by INSTAT and others, they depend upon the understanding of
the public. They also depend upon other key players like the Ministry of Finance and they depend
upon the efficient working of the financial markets. Other preconditions for Inflation Targeting can
partly be met by the Bank of Albania.
The full implementation of Inflation Targeting can therefore take place ONLY conditionally.
One can compare this situation with the tailoring of a suit for a special occasion. Let me make this
comparison.
One can find a good tailor and ask him to make a suit for a special occasion. All measures can be
taken, such as the length of the arms and the length of the legs. The suitable materials can be found.
One needs the appropriate fabric, in the appropriate color. Upon all these preconditions of (1) the
good tailor (2) the precise measures (3) suitable materials, the tailor can start the tailoring of the suit.
But, there is still no guarantee that the suit will fit you perfect. Or, it may happen that you look
appealing in the tailor-shop, but not at the day of the special occasion. For instance, the temperature
may have fallen so that you need an additional coat, or even a different fabric. Or, the environment of
the special occasion may make you look overdressed. You tried to make it perfect, but the
environment is lagging behind. Factors that you could not influence yourself can make you look
different from how you had wished to look with the new suit. Conclusion: The suit is not suitable, or
better, the suit is not (yet) suitable.
For this reason we have to try the tailored suit regularly. All preconditions for Inflation Targeting need
to be checked and re-assessed on a regular basis.
At this Round Table we discussed econometric modeling, statistics and communication, also the legal
framework, the internal governance at the Bank of Albania and the arranged agreements with the
Ministry of Finance and INSTAT. During this year we drafted the new Banking Law. This law increases
customer protection, sets the legal grounds for credit information registry, introduces new rules for risk
administration, bringing more confidence in the banking system as well. With the assistance of the IMF
legal department we revised the agreement with the Ministry of Finance. These agreements were
standardized to emphasize the role of the Bank of Albania as fiscal agent. Moreover this agreements
aim at creating a cooperative and partnership environment. We remain committed to further increase
cooperation with major governmental agencies to ease their proper understanding of monetary policy
process, its implications and the need for harmonized and coordinated policies.
Concluding I would like to underline that we are carefully evaluating the degree to which these
preconditions are met before shifting to fully fledged inflation targeting in the medium run. Such
strategy will further increase the effectiveness of the monetary policy in Albania further consolidating
the price stability and contributing to sustainable economic growth. We will re-assess all preconditions
regularly through these types of meetings with foreign professionals. In the meantime we are
establishing a professional dialog among central bank, INSTAT, Ministry of Finance and other
government institutions.
Once more, ladies and gentlemen, I thank you very much for your contributions. I wish you a safe
return back to your home countries.