Albania has one of the region’s lowest rates of attracting FDI, currently at less than 10 percent of the GDP
TIRANA, August 9 – The drop in immigrant remittances, one of the main sources of foreign financing, and the low rate of foreign direct investment (FDI) need efficient measures to attract foreign capital, said the Bank of Albania (BoA) in its monetary policy report for the second quarter of 2010.
The central bank suggests establishing competitive advantages as a sustainable source of foreign financing. Comparative analysis shows Albania has one of the lowest rates of attracting FDI in region, currently at less than 10 percent of the GDP.
Foreign direct investment registered a 25.6 percent growth in the first quarter of 2010, after a sharp drop in 2009. FDI in the first three months of this year was mainly used to finance investments in the telecommunication and oil sectors. FDI reached 154 million euros in the January-March period, increasing by 34 million euros year-on-year, according to central bank data.
The privatization wave government has launched on the remaining public assets is expected to bring between 100 to 150 million euros by 2011 and is seen as an important process to increase government revenues and FDI.
Meanwhile, remittances fell by 6.7 percent during the first quarter of 2010 compared to the same period last year mainly as a result of the crisis in Greece and Italy where more than one million Albanian immigrants live and work. Immigrant remittances in the first quarter of this year registered 170 million euros, 13 million euros less than the same period last year.
The central bank report says the public sector will continue being characterized by careful government spending which will affect public investments and fiscal stimulus. Government has recently cut spending by 39 billion lek (390 million dollars) for the rest of this year in an effort to keep public debt levels at 59.5 percent of the GDP and reduce budget deficit to 3.1 percent by the end of the year, down from a record 7 percent last year.
The report says the performance of financial and monetary markets is expected to be influenced by government’s demand for money in the domestic market.
Earlier this year, government abandoned plans to issue its first ever 400 million euro denominated bond in international markets because of rising yields triggered by the Greek debt crisis.
Meanwhole, macroeconomic developments in the first six months of 2010 were characterized by low domestic demand because of limited financial resources and perceptions of high insecurity for future economic developments.
Domestic demand remained at low levels causing a slowdown in consumption and private and public investments because of conservative lending policies and a drop in foreign financing, said the quarterly monetary policy report
Lack of funds made individuals and businesses hesitant to make long-term investments because of the unsafe economic developments in the short-term period.
The economic growth, which in the first quarter of this year, registered a 2 percent year-on-year growth, remains far below its potential considering the low use of businesses’ capacities, said the report. The Albania economy returned to growth in the first quarter of 2010 after contracting by 0.8 percent in the last quarter of 2010. However, the 2 percent growth registered in the first three months of 2010 was far below the historical average of 6 percent.
The service sector was the main contributor to the growth while the performance of the industry sector was overshadowed by the crisis in the construction sector.
The slow progress of the economy is confirmed even by the performance of budget revenues, and credit to private sector. The business and consumer confidence index at the end of last March was below its historical average. The consumer confidence index fell by 2.4 percentage points during the first three months of 2010. This is part of a continued decline of this indicator’s trend since the third quarter of 2009.
The European Bank for Reconstruction and Development (EBRD) says Albanian GDP will grow by 1.4 percent this year while the IMF expects 2.3 percent in 2010 and 3.2 in 2011. Meanwhile, government expects a 4.1 percent growth after budget cuts.
Lending expected to increase
The central bank expects credit to the private sector to grow during the second half of this year after the budget review and the cut of the key interest rate by 0.25 percentage points two weeks ago.
Credit to the private sector continued growing at low rates even in the first half of this year despite improved liquidity and a significant increase in the number of deposits which was followed by declining interest rates.
The average year-on-year growth of credit to the private sector during the second quarter of 2010 was 9 percent, said the bank. Meanwhile, the IMF expects the private credit growth to drop to 8.6 percent of the GDP this year, down from 10.3 percent in 2009 and 32.1 percent in 2008 when the global crisis started.
The lending market continued to suffer from fluctuation of interest rates and tight lending standards in the April-June period, said the central bank in its monetary policy report.
Despite a drop in treasury bills yields and in interest rates for deposits in the national currency, lek, loan interest rates did not display a clear falling trend.
The Bank of Albania expects the lending standards to ease in the coming months following government decision to lower budget deficit.
The first half of 2010 also registered an end to the confidence crisis in the banking system, after the massive deposit withdrawals at the end of 2008.
Private investments
Private investments continued having a negative impact on the total demand. Import of capital goods dropped by 6.2 percent in the second quarter of 2010 compared to 28.5 percent in the first three months of 2010.
Meanwhile, public investments also fell by 33.5 percent in the first six months compared to the same period in the electoral year of 2009.
The decision to make new investments was affected by the low domestic demand, capacity utilization rates as well as businesses’ low confidence. The economy’s capacity utilization rate at the end of the first quarter was 66 percent, some 6.3 percentage points below its historical average.
IMF: Monetary policy must be cautious
In its latest report on Albania, the IMF Mission said monetary policy should remain cautious. Compared to many regional central banks and a simple Taylor rule, the BoA has adopted a relatively tight stance. IMF staff encouraged the Bank of Albania to continue with this cautious stance, with the emphasis on anchoring inflation expectations. However, while interest rate decisions should be guided by the inflation target, policy makers must keep an eye on financial stability considerations and macroprudential needs, suggested IMF. Staff advised against administrative measures to boost credit to the private sector, pointing out that a viable resumption of credit flows will depend upon fiscal consolidation.
