“The shrink in consumption is accompanied with a drop in domestic demand leading to a slowdown in economic growth and a decrease in household income at a next stage,” warns governor Ardian Fullani
TIRANA, Sept. 26 – Undertaking supporting policies to increase foreign direct investments and closer cooperation between banks and businesses to boost lending are two of the measures government should target to increase domestic consumption, whose poor performance in 2012 is severely affecting Albania’s economic growth. The comments were made by central bank governor Ardian Fullani in a press conference on Wednesday when he announced the Bank of Albania Supervisory Council had decided to keep the key interest rate unchanged at 4 percent, the lowest ever historical level.
“The curb of consumption as a reaction to the country’s future economic insecurity could turn into a spiral of reciprocal impacts among macro-economic indicators in Albania. The shrink in consumption is accompanied with a drop in domestic demand leading to a slowdown in economic growth and a decrease in household income at a next stage,” said Fullani.
The low level of consumption is also indirectly identified by the performance of the value added tax. The value added tax, which accounts for around 38 percent of total tax revenues, and indirectly measures consumption, grew by only 2.7 percent in Jan-Aug 2012 but was down around 5 billion lek compared to the target government has set. The excise tax imposed on the so-called luxury goods was down by 6.1 percent compared to the first eight months of 2011, revealing that Albanian have cut down on fuel, tobacco, coffee and beer consumption in these times of crisis, Finance Ministry data show.
According to Fullani, the low levels of private investments and lending will continue keeping the economy at low growth rates. Imports of “machinery and equipment” which measure investments continue remaining at negative growth rates, while credit to the private sector grew by only 5.5 percent year-on-year in July 2012 reflecting poor demand by businesses and tight lending standards as bad loans stand at a record 21 percent.
The central bank expects economic activity to remain at low levels conditioned by the poor performance of consumption and private investments and small space for fiscal stimulus.
Key interest rate
Governor Fullani said the bank had decided to keep the key interest rate unchanged at 4 percent, describing the monetary conditions as appropriate to achieve the 2 to 4 percent inflation target and stimulate demand. Last August, inflation rate slightly accelerated to 2.8 percent, remaining 1.2 percent below the Bank of Albania ceiling. For the first eight months of 2012, inflation rate rose by 1.8 percent year-on-year.
Albania’s central bank itself estimates that by preserving the inflation rate at around the 3 percent rate, the monetary policy will continue having positive contribution to the development of the Albanian economy. Low inflation pressures, on a downward trend since the second half of 2011, have allowed the Bank of Albania to cut the key interest rate by 1.25 percentage point to a historical record low of 4 percent since Sept. 2011 in an effort to stimulate the economy but the moves have been hardly reflected in lower loan interest rates and an increase in investments.
The latest central bank move of lowering the key interest rate by 0.25 percent to a record low of 4 percent is having its first positive impacts on Treasury-bill yields. Central bank data show 12-month T-bill yields dropped to an average of 6.97 percent in the latest auction, down from 7.02 percent in the previous auction and a record 7.5 percent last March.
But while T-bill yields have entered on a downward trend, interest rate for lek-denominated loans have seen no progress. Average lek-denominated interest loans in July 2012 remained unchanged at 11.39 percent, the same to the beginning of the year when the key interest rate was higher at 4.5 percent, showing the poor reflection of the central bank monetary policy.
In late July 2012, Albania’s central bank cut the key interest rate by another 0.25 percent to 4 percent, the lowest ever historical rate, after previous consecutive cuts failed to either boost lending or lower T-bill yields.
Challenging environment
Challenging internal and external environment characterized by high insecurity preventing consumption and investments and very careful behaviour by the banking system in financing productive activities will continue affecting the Albanian economy even in the mid-term, the central bank says. In the latest monetary policy report, the Bank of Albania says that after the slight shrink in the first quarter of this year, the Albanian economy will register positive growth rates in the next three quarters but external demand will have minor impact on the GDP as key trade partners Italy and Greece face recession.
The reorientation of consumption toward domestic production, apart from helping the economic growth would lower premium risks for the economy and help the inflow of foreign capital, says the report. Internal demand is expected to continue being influenced by some persistent factors related to saving trend and insecurity about investments, factors which cannot change in the short-term. For the second half of 2012, the Bank of Albania expects financial conditions to ease and the monetary policy to transmit its impacts on the real sector which will create a more stimulating environment to increase consumption and investments in the country.
Poor performance in early 2012 when the economy officially shrank by 0.2 percent and top sectors such as industry and crisis-hit construction dropping by double-digits of around 20 percent proves the difficult situation.
The International Monetary Fund and the European Bank for Reconstruction and Development expect the Albanian economy to grow by 0.5 percent to 1.2 percent while the World Bank has made a 1.6 percent forecast, citing high public debt levels and spillover impacts from the crisis in Greece and Italy. Meanwhile, government has lowered its growth expectations for 2012 to 3 percent, down from 4.3 percent earlier.
Public debt at around the legal ceiling of 60 percent of the GDP and bad loans at a record 21 percent pose a key threat to the Albanian economy.
“Albania’s strong trade, investment and remittance ties to Greece and Italy are likely to continue to constrain growth in the coming year, while public debt is close to the statutory limit of 60 per cent of GDP, limiting the room for fiscal manoeuvre,” says the EBRD in its latest report.
