Ardian Fullani: Economic and monetary developments in Albania
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on
the decision of the Supervisory Council of the Bank of Albania, Tirana, 25 November 2009.
* * *
In its meeting of November 25, 2009, the Supervisory Council of the Bank of Albania
analysed "The Monetary Policy Report for November 2009". After becoming acquainted with
the latest economic and financial developments at home, and following the discussions
related to their expected performance in the future, the Supervisory Council of the Bank of
Albania decided to keep the key interest rate unchanged, at 5.25 percent. The Supervisory
Council assessed that this interest rate is in line with Bank of Albania's goal to keep inflation
close to the target over the medium run.
* * *
Economic and monetary developments over the latest months are featured by low
inflationary pressures. Annual consumer-price inflation for October recorded 2.3 percent,
being almost in line with its performance over the last quarter. The steady and low inflation
rate has been conditioned by moderate pressures from domestic economy, due to:
•
Economic activity slowdown during this period;
•
Low exchange rate pass-through of exchange rate depreciation on Lek prices of
import goods; and
•
Stabilized inflationary expectations.
Easing of monetary conditions by the Bank of Albania, through key interest rate cut in
October and continuation of liquidity injecting operations have provided appropriate impulses
for promoting the economic activity in the future. These impulses, as always, are
administered under the conditions of an expected inflation performance close to the
threepercent target of the Bank of Albania, and stabilized expectations of economic agents for it.
The key interest rate cut by 0.5 percentage point by the Bank of Albania at end-October
aimed at strengthening the domestic demand and reviving the lending activity. Its effect on
the economy is not fully reflected yet, due to the short period of time and the time lags in
transmitting the monetary policy. However, its pass-through to the money market, which
constitutes the first link in the transmission chain, is a premise for its reflection to credit cost
in a second round. In the meantime, our liquidity injecting operations have been successful in
guaranteeing the backup of economy with funds, mainly short-term ones.
Allow me to make a more detailed description of the economic and monetary developments
during this period.
* * *
At global level, the economic activity has been supported by improved overall economic
climate, impacting on the improvement of the global economic activity, reduction of risk
premiums and stability of global financial markets. However, the global economy and the
European one continue to reflect economic vulnerabilities, which are transmitted to low
inflationary pressures. This situation conditions also the pursuit of a stimulating monetary and
fiscal policy by keeping interest rates at the historical low and by high liquidity injections.
Back to the domestic economy, we should state that the new economic data were insufficient
during October. Performance of inflation and of monetary and fiscal indicators, external trade
data and consumer and business indices confirm that the Albanian economy continues to
record positive growth rates. This growth is sustained by maintaining steady levels of the
consumer demand and fiscal stimulus given during 2009. However, available data from the
economy speak for an economic activity slowdown during the current year. Foreign demand
for Albanian products has decreased, being illustrated by export slowdown along this period,
while investments have declined.
The steady trend of core inflation and low non-traded inflation rate also indicate the presence
of low aggregate demand-induced inflationary pressures in the country's economy during
January-October 2009. This performance has contributed to absorption of shocks generated
from traded inflation, due to weakening of national currency's position in the domestic
foreign-exchange market.
Inflation during 2009 has fluctuated around the lower limit of the Bank of Albania's target.
Headline inflation in October was 2.3 percent, recording a slight rise in comparison to
September, but resting below the record of the previous year. Average annual inflation
recorded 2.1 percent, resting at the same level with that of September. Parallel to demand
factors, inflation performance is influenced even from the development of several supply
factors, such as slight downward trend in the labour cost per unit, reduced import and
producer prices, statistical effect of administered prices, thus creating an overall environment
with reduced inflationary pressures.
Fiscal policy during the third quarter of 2009 has revealed signs of mitigating its
expansionary nature. Revenues have recorded a slight rise related to the previous months,
while there is noticed a reduction in realised expenditure pace. In annual terms, during the
first nine months of the year the budget revenues have recorded a growth of 6 percent,
whereas the budget spending has increased by 22 percent. The budget deficit remains at
comparably high historical levels, but within the budget limits reviewed lately.
To a great extent, this deficit reflects the high level of public capital expenditures during
2009. Public expenditures and fiscal policy have provided a tangible contribution to the
maintaining of the economic activity along this period, but they have been associated with
increased pressures over the money markets. The Bank of Albania considers that the fiscal
policy should continue to be prudent towards these balances in the future, and should take
into consideration the long-term fiscal stability while drafting and implementing mid-term and
long-term budget plans.
External trade was featured by weakening in the trade volume during the first nine months of
the year. However, trade exchanges value recorded during September is the highest
recorded since 2009. After about three months of constant narrowing, the trade deficit
enlarged during this month by about 9 percent in annual terms. Exports dropped by about 18
percent in annual terms, though the lek's weak position vis-à-vis the Euro is a favourable
factor for exports. Imports recorded positive growth rates for the first time since January of
the current year. In annual terms, they grew approximately 1 percent, due to positive growth
rate of consumer goods import, whereas import of intermediate goods and capital has
declined.
Monetary indicators of September presented a slower performance of the banking system's
intermediating activity. In annual terms, broad money recorded a nominal growth of 2.8
percent in September, against 4.5 percent in August.
Foreign currency credit contraction and intermediation of the public sector credit by
nonbanking agents have influenced the slowdown of monetary indicators growth rate.
In September, loan portfolio of economy grew at lower rates than in the previous months.
Annual credit growth rate decreased to 13.2 percent. The credit slowdown is totally a
consequence of foreign currency credit tightening, while the ALL credit increased by 31
percent in annual terms. The major part of the new credit, around 85 percent of it, was
absorbed by businesses and was used mainly for meeting the needs for liquidity, whereas
credit for long-term investments decreased. Also, household loan portfolio growth decreased,
chiefly due to consumer credit contraction. Housing loan to households continues to maintain
positive growth rates, remaining at 5 percent in annual terms.
Domestic credit intermediation in ALL has raised the need for Bank of Albania's presence by
injecting liquidity. The banking system needs for liquidity have been met through open
market operations of the Bank of Albania, preserving an appropriate time structure of this
injection. Short-term interest rates in the interbank market have reflected decreased
borrowing cost by the Bank of Albania and have been steady. Furthermore, the primary
market was featured by agents' response to loan pricing, reducing the T-bill yield. The
12month yield, which serves as a reference rate in determining other costs, has decreased by
0.15 percentage points during November, down to 9.28 percent.
The supply for financing the government demand has been sufficient, without exerting
upward pressures on interest rates. Interest rate performance of new deposits denominated
in lek and in Euro has also been stable during September, enabling deposits return to the
system. In the meantime, new ALL and Euro credit interest rates continue to carry over
tightening lending policies by the banking system in general, and fluctuate around isolated
preferential policies.
After discussions, the Supervisory Council agreed on keeping the key interest rate
unchanged. This decision aims at further preservation and consolidation of macroeconomic
balances, regarding the macroeconomic stability as an indispensable precondition for the
long-term sustainable growth. It also guarantees appropriate monetary support for the
economy during this stage of its development. In the future, the Bank of Albania is willing to
operate in line with the actual and expected performance of economic indicators. The shifting
to the downward side of inflationary risks balance and the consolidation of financial stability
and inflationary expectations in the economy will be taken into consideration in Bank of
Albania's future decision-making.