TIRANA, Sep. 29 – The Albanian economic activity continues being characterized by gradual improvement but still remains below its potential growth rates, said governor Ardian Fullani in a press conference on Wednesday after the central bank’s Supervisory Council decided to keep the repo rate unchanged at 5 percent.
“The main problem the economy currently faces and will continue to suffer from is the low internal demand levels despite rapid increase of exports which proved insufficient make full use of the country’s production capacities,” said the governor.
This situation has led to low inflationary pressures, a poor situation in employment indicators and a moderate demand for loans.
The economic growth which in the first quarter of this year registered 2 percent after a 0.8 percent shrink in the last quarter of 2009, was mostly based on the reinvigoration of the private sector. The public sector’s contribution to the economy has dropped although it continues having a positive impact thanks to fiscal stimulus, says the central bank.
Private investments and consumption, the latter showing signs of improvement, also had a positive effect on the economic growth.
Industry and services have been the economy’s most dynamic sectors in recent months while construction and agriculture have suffered a slowdown.
Meanwhile, the banks’ balance sheets are sound and liquidity is improving although credit to the private sector continues suffering tighter standards.
Credit to the private sector grew by 10.2 percent year-on-year during the past two months, slightly more than the second quarter average.
Credit accounts for 38 percent of the GDP, 2 percent more than the same period last year.
The central bank’s suggestion to government is that keeping public debt and budget deficit levels under control until the end of this year will help preserve economic stability in the mid-term.
The current account/GDP ratio in the second quarter of this year was reduced by 4 percentage points, dropping to 9.2 percent, says the BoA in a statement. This was mainly a result of the narrowing of the trade gap following rapid increase of exports and constant levels of imports.
The central bank says the country’s external position remains fragile and requires measures to reduce current account deficits and increase foreign currency inflows.
The preservation of the current export rates, which in the first half of this year were boosted by electricity sales, is considered one of the main objectives in the short and long-term.
Interest rates for deposits in the national currency, lek, have recently dropped.
Last summer, government 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 at the end of last year.
Government has also lowered its GDP growth forecast to 4.1 percent, down from an expected 5.5 percent at the beginning of this year, which is still almost twice higher compared to what international institutions such as IMF and the EBRD expect in 2010.
The Albanian economy saw a significant decline in its growth rate in 2009, from 7.9 per cent in 2008 to an estimated 3.3 per cent in 2009, but remained one of the few European economies which did not suffer a recession.
New economic growth strategy
Central bank governor Ardian Fullani says Albania needs to adopt a new economic growth model considering the shortcomings of the current model, based on credit expansion and high consumption rates, and will cooperate with the Oxford University to conduct research on this.
“The future economic growth model requires the drafting of a national strategy on the country’s economic development. The future model should be based on the increased productivity of inputs in all sectors of the economy,” said Fullani at a recent round table meeting with Oxford University experts.
The Bank of Albania and Oxford University experts will conduct a series of studies on the Albanian and the regional political economy which will urge scientific debate on the future economic growth model also based on a regional social, economic and political viewpoint.
Governor Fullani said the country’s macroeconomic stability can be guaranteed only if the central bank’s decisions on monetary policy, the supervisory policy and the financial stability interact and are harmonized with the economic growth, the key objective of economic policies.
According to him, the increase and stability of exports is very important for Albania’s long term sustainable economic reforms, while strategic decisions must be made based on this objective.
Two months ago, Albania’s central bank decided to lower the key interest rate by 0.25 percentage points taking it to 5 percent in another effort to increase lending in lek, the national currency.
However, the reaction by commercial banks after the cut in the repo rate remains to be seen as they have been slow in reflecting the central bank’s cuts in their lending rates in Albanian lek, which accounts for 32 percent of overall lending.
GDP in the second quarter of this year is expected to increase by 2 percent, the same as in the first three months.
