Albania suffering from poor domestic consumption, investments

By Vittorio Umberto Grilli*

TIRANA, April 24 – Economic growth decelerated during the past year in Albania, as both external and internal demand slowed down. In 2012 GDP grew by 1.6 percent. Growth was reflected in higher value added from the services and agriculture sectors while construction and industrial production performed poorly. Unfavorable economic and financial conditions in its main trading partners have weighed down export growth and have decreased the risk appetite among external investors. In spite of these difficulties, foreign demand and higher exports were the main drivers of economic growth. At the same time, domestic demand has suffered from higher uncertainty, tighter financing conditions and a lack of fiscal stimulus. As a result, domestic consumption and investment added little to growth in 2012. The weak cyclical position of the economy, combined with low imported inflation and stable inflationary expectations, were reflected in an average inflation of 2 percent throughout the year, within the Bank of Albania targeted level.
Fiscal policy remained cautious overall, as the budget deficit was reduced by 0.3 GDP percentage points during 2012, reaching 3.4 percent of GDP. Public debt exceeded 60 percent of GDP by the end of last year but the authorities remain committed to preserve stable public finances in the medium to long run.
Given the lack of inflationary pressures, monetary policy has taken an ever increasing expansionary stance. The Bank of Albania lowered three times its policy rate in 2012 and once in January 2013, bringing it to an all-time low of 3.75 percent. In spite of some deleveraging observed throughout the first half of the year, overall financial conditions have improved. Interest rates have decreased across the board and liquidity risk premia have decreased. These improvements have reflected both the accommodative monetary policy and higher liquidity injections from the Bank of Albania.
The banking system remained profitable, despite increased provisioning costs coming from the deterioration of banks’ loan portfolio. The capital and liquidity ratios have increased during 2012, remaining well above the regulatory requirements of the Bank of Albania. In spite of healthy bank balance sheets, credit growth has remained weak, partly reflecting low credit demand and partly a more prudent behavior of banks. Reviving credit growth will remain crucial for the overall development of the Albanian economy, as recognized by the authorities.
External imbalances improved during 2012 while the financial sector remained stable. Higher domestic savings and positive growth in exports brought a narrowing of the current account deficit by 13.8 percent. Though inflows in the capital and financial account dropped, the overall balance of payments was positive and the official Bank of Albania reserves increased. The exchange rate has been largely stable, reflecting balanced supply and demand for foreign currency and stable risk premia. A lower structural deficit of the current account appears to be one of the policy goals of Albanian authorities, supported by both prudent macroeconomic policies and structural measures to improve competitiveness.

(Statement by Mr. Vittorio Umberto Grilli, Minister of Economy and Finance, Italy, speaking on behalf of Albania, Greece, Italy, Malta, Portugal, San Marino at the International Monetary and Financial Committee, Washington, April 20, 2013)