Ardian Fullani: Pushing the boundaries - the challenges facing Albania
Discussion by Mr Ardian Fullani, Governor of the Bank of Albania, at the 11th Euromoney Central and
Eastern European Forum - Pushing the boundaries: ensuring competitiveness in the CEE, Vienna,
18 January 2006.
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The march onward to new markets has pushed the boundaries of industry ever farther east in the
CEE. CIS countries are currently experiencing an economic boom while much of 'Old Europe'
stagnates. There has been a recent boom in domestic markets, FDI, real estate, commercial
development, among others.
Will this high level of investment continue, and under what circumstances? What can the Central Bank
Governors do to continue to encourage this new growth? Are there any downsides? How do
Governors keep the balance between growth and stability?
Will this high level of investment continue, and under what circumstances?
The Albanian economy has continued its good performance also during 2005 with the exception of the
end year when we encountered some electricity shortages. The positive performance concerns both
the economic activity and the macroeconomic stability. Our opinion on the robust economic
performance is based on an increased volume of sales, improvement of revenues from tax and VAT, a
rise in the volume of lending to the economy, as well as a reduction in the unemployment rate.
The creation of 13400 new jobs in the private sector during the last 4 quarters indicates robust growth
and it is another indicator of the increased capacities of domestic production this year. Except for the
service sector, BoA's survey on business confidence shows an increase in the number of employees
in manufacturing and construction sectors in the second quarter, where the actual index for the latter
surpassed expectations. The preliminary data of the latest survey indicate that employment level has
also increased in the third quarter contrary to an expected fall from the previous quarter.
While it is true that there has been a recent boom in domestic markets, the picture is more mixed if we
look at individual segments. Thus, FDI are still not there in Albania. Although it is well positioned to
attract foreign direct investments, with its favourable geographical location, competitive salaries, and
natural resources, foreign investors have been reluctant to commit their resources given the actual
state of business environment.
Domestic investment seems to lag behind too, based on some surveys of Bank of Albania. An
important source of domestic investment has been remittances. The Bank of Albania estimations
indicate that total workers' remittances have reached around 1,028 million (one billion) of USD or 13.5
percent of GDP. This is twice as high as revenues from export of goods, which makes "work force" our
main country export. Furthermore, remittances are estimated to be three times higher than foreign
direct investments (FDI) inflow and its value exceeds by far official aid from abroad. During the first
stage of transition in Albania policies for optimising the administration and utilisation of workers'
remittances for developing purposes have been completely lacking. A few sporadic measures have
aimed at driving workers' remittances into official channels and improving savings and investments
incentives of emigrants in the country but have been by and large inadequate. More recently, we have
taken a more attentive approach toward remittances and their potential contributions in financing the
growth and development of the country. More specifically we are working in three main areas (1)
improvement of statistic (2) brining workers remittances into formal channels (3) directing workers
remittances toward country's development needs.
There has been a boom in other areas of economy like real estate and commercial loans. Credit to the
economy grew by 60-70 percent on annual terms. On GDP terms, credit to the economy has grown by
3 percentage points during 2005, approaching the level of 11 percent of GDP. It has been the main
source of the monetary expansion during this period has been the increase in the volume of lending to
the economy, which is a shift from government borrowing and from foreign assets. Foreign-currency
loans continue to be preferred due to lower interest rates, hence accounting for nearly 75 percent of
total loans at end-July. The rapid credit growth has so far had no effect on overall credit quality. The
ratio of non-performing loans fell to 3.5 percent of total loans in March, down from 4.2 percent in
December last year.
Nowadays foreign banks in Albania hold around 95% of the total assets. Most of the assets is owned
by banks coming from the European Union area. This ample participation of foreign banks has
certainly had positive implication on both banks' governance and the quality of services. This latter
has improved considerably in the recent years with the privatisation of the ex-Savings Bank, still the
biggest bank in the country. As a result, we have experienced an increase in the banking network
throughout the country's territory, a gradual restructuring of the banking system balance sheet
including a quick increase in the lending to the economy, introduction of ATM and other new banking
products etc.. Banks with private Albanian capital, that have been licensed in the last three years,
have been active in trying to position themselves in these changing market. They offer a full range of
banking services, having the advantage of better understanding the local environment.
Despite the above achievements, the economy is still fragile and considerable progress is needed to
establish an attractive framework favourable to investment and sustainable growth, driven by private
sector development. Customs procedures, tax administration, land and construction permits, sector
licensing, and the judiciary system are the major obstacles to investment in Albania.
What can the Central bank Governors do to continue to encourage this new growth? Are there
any downsides?
Governance and institution building reforms remain critical for developing a rules-based business
climate and attract increasing levels of investment. Under this framework the Bank of Albania is
committed to go ahead with additional structural reforms to enhance banking sector intermediation and
financial services provision. In close consultation with commercial banks, governmental institutions,
and the private sector, the Bank of Albania developed an action plan for increasing the use of the
banking system in the regular conduct of business.
Regarding an important aspect of our central bank, the banking system stability, a lot of work has been
done to encourage the development and consolidation of a sound banking and financial system for the
country economic progress. Measures supported by the Bank include the privatization of the Savings
Bank, the development of a deposit insurance system, improvement of the bankruptcy framework and
collateral enforcement, and strengthening of bank regulation and supervision, which will also assist the
Government's anti-money laundering efforts. The IMF has provided technical assistance to the Bank
of Albania. The IMF has also funded a resident adviser to support the implementation of the
institutional development program for banking supervision developed by the Bank of Albania In the
wake of the large Savings Bank privatization, the financial sector is showing welcome dynamism and
the BoA is stepping up prudential vigilance. The recent FSAP exercise will certainly help to advance
reforms in the financial sector.
Bank of Albania is also committed to increase the mutual relationships with all international partners.
We are trying to be a real partner in the discussing table, arguing on the economical-financial policies,
through presenting its solution alternatives, being elaborated not only on the economic logic base but
also on the Albanian reality. I am satisfied that, in the end, Albania is on the way to get a new
PRGF/EFF arrangement with IMF which suits its actual needs very well. Given Albania's difficult
legacy, together with the setback of the 1997 events, the country needs to accelerate its reform
agenda, not least to for it to be grouped together with countries like Macedonia for EU accession
purposes. This requires significant investments, improvements in public institutions, and technical
assistance in all sorts of fields. The PRGF element allows Albania not only to access many of these
resources from the IMF and WB organizations but also have the support of the Albanian government
in absorbing more effectively available EU funds.
We are also working for the institutionalisation of the cooperation between the central banks of the
region. Judging from the meetings we have recently organised with some of the regional banking
authorities, the initiative on regional cooperation has been welcomed. Nevertheless, I believe that it is
the right time to carry out concrete measures in this direction through the establishment of a club of
regional banks, which would enable the exchange of experiences and the consolidation of
cooperation, mainly in the field of further financial/banking sector development in Southeastern
Europe. Bank of Albania will continue to actively support and promote the establishment of this club in
the future. I want also mention here the "Convergence" program which is a novel financial
development program sponsored by the World Bank to promote public-private policy dialogue in
South-East Europe. It could serve as an effective instrument to catalyse our efforts in bridging the gap
with banking association and the other counterparts in the region.
How do governors keep the balance between growth and stability?
Theoretically, the answer would be to apply some kind of a 'Taylor Rule' by putting even weights on
both output gap and inflation. However, for a small, open and developing economy the empirical
experience may not be that simple. One issue would be how able are countries like ours to pursue
independent monetary policies.
An argument that I do advocate is that the Albanian economy is a relatively flexible economy, as it
manages to bring inflation to normal levels in quite a short period of time. Rigidities, observed in some
other economies, seem not to apply in the case of Albania. Here, I have in mind the long hiring and lay
off procedures or the variety of rules related to the goods and services markets. Most importantly, the
adoption of a flexible exchange rate regime has been and still is one of the main contributors to
economic flexibility, which has a direct impact over the high mobility rate of the Albanian economy.
Due to this flexibility Albania has shown impressive results in terms of price stability. Inflation has been
distinguished generally by lower rates relative to other transition economies. In the last five years,
inflation has stabilized at moderate levels as measured both at the end and average period figures,
though it sometimes diverges from the target due to unforeseen shocks and speculative factors that
are mainly beyond the central bank's control. We will continue to aim inflation rates around the 3
percent level.
However, several threats may prevent the bank from reaching the target while preserving growth. To
begin with, the signalling power of monetary aggregates targeted by BoA may start to deteriorate. This
might involve changes in the administrative prices and structural reforms in general, fiscal uncertainty
issues, the impact of dollarisation on the effectiveness of monetary policy, the potential decrease in
foreign remittances and its implication on exchange rate volatility, financial system development and
stability etc. Also, what's more important, as the economy gets more and more formal we may start
losing some of the flexibility seen so far, making it more and more difficult our task of keeping inflation
down with little real costs.
In face of this forthcoming developments, we are considering alternative regimes such as IT that could
both transmit central bank signals better and are more suitable to keep a better balance between
economic shocks and inflation. On top of theoretical benefits of an IT regime compared to the other
regimes, (summarised in a series of paper by Mishkin et al. (1997, 2000, 2002)) such as broader
information base it utilises, its relatively higher flexibility with regard to supply shocks, the fact that it is
easily understood by the public, there is also the successful reference to regime shifts in other
European transitioning and developing economies can be made, such as the Czech Republic,
Hungary, Iceland, Poland and Turkey.
Bearing the above issues in mind the BoA retains that a switch to inflation targeting over the medium
term will put us in a better position to strike the right balance between growth and stability.
Accordingly, it has initiated steps to improve its governance structure and strengthen its analytical
capacities, with technical assistance from the Fund. To this end an open forum took place at the end
of last year where most of the issue regarding the implementation of inflation target were discussed by
top experts all around the world. The main motivation for moving to the IT regime is the anchoring of
inflation expectations in the medium to longer term while allowing some room to respond to shocks.
I'm conscious that going to fully fledged Inflation Targeting is a process that requires hard work with
several preconditions in place. Our forum clearly showed that it is not a one-off decision. It should be
more a smooth process. This holds in particular for a transitioning country like Albania. Our country
faces different challenges and virtues compared with developed countries.