Gent Sejko: Albania's economic and financial developments in 2017

Address by Mr Gent Sejko, Governor of the Bank of Albania, presenting the Annual Report 2017 to the Parliamentary Committee on Economy and Finance, Tirana, 10 April 2018.

Central bank speech  | 
04 May 2018
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Honourable Chair,

Honourable Members of the Committee,

Thank you for your invitation!

I have the pleasure of presenting today the work and the achievements of the Bank of Albania over 2017.

I would like to start my presentation emphasising that 2017 was marked by progress in the Albanian economy and the financial system. According to Instat data: the Albanian economy grew by 3.8% in annual terms and created around 79 thousand jobs in the private non-agricultural sector, the unemployment rate and the current account deficit decreased, whereas inflation has been trending up. In parallel to developments in the real sector, interest rates in the financial markets remained low and soundness indicators of the banking system have been improving. In particular, the ratio of non-performing loans fell to 13.2% at the end of the year, down by around 5 percentage points from a year earlier. All these indicators show the cyclical position has improved and provide encouraging signals regarding the outlook on economic growth.

The Bank of Albania provided its contribution to the improvement of the economic and financial landscape. This contribution was materialised through:

  • Implementing an accommodative monetary policy stance, which supported economic growth, increase in employment and wages, and rise in inflation;
  • Prudential supervision and proactive approach to banking regulation, contributing to the improvement of banking sector indicators;
  • Enhancing the banking system security, by establishing specialised structures to administer the necessary interventions and restructuring in banks facing solvency difficulties;
  • Promoting the development and efficient functioning of the payment system;
  • Promoting financial education;
  • Further fostering the institutional capacities of the central bank, through constant investment in enhancing professional skills, independence, accountability and transparency, as well as through cooperation and exchanging information and opinions with Albanian and international partners.

Our activity in 2017 was guided by the Medium-term Development Strategy 2016-2018. In addition, the Bank of Albania has paid particular attention to the implementation of the recommendations left by this Committee in the Resolution "On the assessment of the activity of the Bank of Albania for 2016".

Let me first present an overview of the activity of the Supervisory Council, the highest decision-making body of the Bank of Albania.

1. Activity of the Supervisory Council and strengthening institutional governance

The Supervisory Council has conducted its activity in line with the provisions of the organic law and the procedures established in the internal regulation on its organisation and functioning.

In 2017, the Supervisory Council held 15 meetings and took 82 decisions. In addition, it approved 29 regulations and 1 guideline for general application.

The highest body responsible for the Bank of Albania, the Supervisory Council has paid attention not only to complying with the legal obligations of the Bank, but also to strengthening the institutional governance, as an essential precondition for enhancing its credibility. In 2017, the Medium-term Development Strategy of the Bank of Albania, together with the medium-term budget, was updated.

The Medium-term Development Strategy of the Bank of Albania sets out the main objectives for the 2018-2020 period. It establishes the priorities in the main functions of the Bank of Albania and development of auxiliary services. Thus, the Bank of Albania has adopted the model of a number of banks of the European System of Central Banks, which have a twofold strategic planning system: (i) a major planning process, once in 3-5 years; and (ii) a yearly update. The span of the application ensures adequate planning support for the guiding medium-term budget of the Bank of Albania for 2019 and 2020. For the first time, this year the capital expenditures and the projects included in the budget were preliminary approved by the Capital Expenditure Committee, a body established as a control measure over major expenditure and investments.

With a view to strengthening the internal audit process, the Audit Committee was established in 2015 and is composed of three members of the Supervisory Council. In 2017, this Committee exercised its duties with a view to support the strengthening of internal and external control lines. It met regularly, without the presence of the administrators, with the Inspector General. These meetings enabled the members of the Committee to learn about the internal control systems and risk management procedures. Upon the proposal of the Inspector General, and following consultations at the Audit Committee, the Supervisory Council approved, for the first time, the level of tolerance to the operational risk at the Bank of Albania.

The activity of the Supervisory Council has been faithfully published in our periodic press releases.

2. Monetary Policy of the Bank of Albania

The monetary policy decision making is based on a comprehensive, consistent and transparent set of macroeconomic analyses and forecasts. They are supported by the whole range of information available at the time of decision making, and the expertise and judgement of the Bank's experts on the trends of economic development and the monetary policy pass-through mechanism.

I will elaborate on the underlying reasons of our decision making to maintain the accommodative monetary policy stance in 2017 and the assessment of its effects on the economy in the following.

2.1 Economic developments and monetary policy in 2017

The Albanian economy performed positively throughout 2017. The volume of economic activity trended upward, spare capacities in the labour market reduced, while the main indicators of economic and financial stability improved. Following are presented a few figures to illustrate it.

  • According to Instat statistics, the volume of economic activity grew 3.8% in 2017, registering a positive dynamics compared to 2.2% and 3.4% growth in 2015 and 2016. The economic activity expanded on a broad base. From the aggregate demand, it was driven by the growth in consumption, investments and exports. The services, industry and construction sectors mainly benefited from this expansion of aggregate demand. A notable development in 2017 was the positive performance in tourism, which provided a positive impetus to economic growth. Together with the high levels of foreign direct investments, it contributed also to the increase in foreign currency inflows in the Albanian economy.
  • Employment increased by 3.3% in 2017, driven largely by the increase in the services sector. In parallel to the increase in employment, the unemployment rate fell, from 14.2% at the end of 2016, to 13.4% at the end of 2017.
  • The decrease in the current account deficit averaged 6.9% of the GDP in 2017, against the 7.6% registered in the previous year. Its improvement reflected the increase in tourism and other services of the business.
  • Fiscal indicators marked consolidation, reflecting a low level of budget deficit and the maintained control over the public debt.
  • From the financial aspect, the Albanian banking system maintained good indicators of liquidity, profitability and capitalisation. The financial situation of enterprises has been improving, as illustrated by their high liquidity levels and the progressive decline in the non-performing loans ratio.
  • Lastly, inflation has been upward, averaging 2.0% from 1.3% in the previous year. The upward inflation reflected the improvement of economic activity, but its undershooting continues to reflect the operation of the economy below the potential, the low level of inflation in trading partner countries, as well as the strong exchange rate.

I would like to focus on the last item - the exchange rate. The appreciation of the Albanian lek over the last two years has been at the focus of the Bank of Albania, as a result of a comprehensive impact of this factor on the overall economic and financial indicators, including inflation. Our analyses show that the appreciation trend of the exchange rate reflects the improvement of fundamental factors, such as narrowing of the trade deficit and of the current account deficit, high levels of foreign currency inflows in the form of foreign direct investments, and the improved confidence in the national currency in the domestic financial market. For as long as such appreciation reflects the effect of stable economic and financial factors, it does not lead to harmful consequences for the Albanian economy. However, its effects appear in the form of reduced inflationary pressures in the domestic market. The appreciation of the Albanian lek is estimated to have reduced the inflation rate for 2017 by 0.2-0.3 percentage point.

In the context of the not-yet-complete utilisation of production capacities and of low inflationary pressures, the Bank of Albania maintained the direction and intensity of the monetary stimulus unchanged over 2017. The policy rate maintained the low historical level at 1.25%, creating thus the conditions for the reduction of the costs of financing for the real sector. Liquidity injection in the interbank market increased in terms of average volume and duration, enabling thus a normal functioning of the financial markets.

The accommodative monetary policy was successful in boosting domestic demand, which was the main driver of economic growth. The effects of the monetary policy on the economy were present in several aspects:

  • First, lower costs for financing consumption and investments. The cumulative reduction of the policy rate by 5.0 percentage points since the beginning of 2009, has been accompanied by the cumulative drop in interest rates on loans, 12-month Treasury bills, and deposits in lek, by 6.9, 4.5 and 6.6 percentage points, respectively. Low interest rates have increased demand for new loans, and decreased the cost of servicing the existing loans. In response to them:
  • The volume of lek credit to the private sector increased by 7.2% in 2017, being the main contributor to total credit growth. The growth rate of the latter was only 3.3%, in response to the still sluggish credit demand and still conservative lending policies applied by banks.
  • The cost of servicing the existing loans was reduced. This financial saving creates scope for increasing consumption and investments, through the use of own funds.
  • Second, reduction of uncertainties among economic agents. The forward guidance on the monetary policy stance has guaranteed the private sector that the monetary stimulus will remain present in the quarters ahead, promoting their orientation toward