TIRANA, July 3- According to Albanian Institute of Statistics (INSTAT) data the economic growth was 2.2 percent in the first quarter of the year, almost halving from the 2018 average rate of 4.06 percent. Governor of the Bank of Albania (BoA) Gent Sejko, announced today in a media conference after a Supervisory Council meeting that the economic growth will be similar in the second quarter of 2019.
He said the slowdown of the growth rate came mainly as a result of contraction of electricity generation and export. The indirect data available suggests that the Albanian economy has a similar performance so far. In terms of aggregate demand, economic growth continues to be supported by consumption and investment, while the foreign trade deficit is expanding and fiscal policy continues to maintain a consolidating one. The economic growth of 2019 is expected to be slower than that of the previous year, reflecting the shock of the supply of electricity generation.
“The new information taken into consideration has been at the bottom of our expectations,” Sejko said.
He said inflation continues to remain under target, mainly as a result of the deterrent effect that continues to provide a rapid strengthening of the exchange rate over the past year. On the other hand the monetary conditions are stimulating and the lending activity has shown signs of recovery. The BoA’s forecasts for the future have not undergone significant changes, although the downside risks have increased. In these circumstances, the Supervisory Council judged that the current stimulus stance of monetary policy remains adequate to guarantee the return of inflation to the target level over a medium-term timeframe.
From a macroeconomic point of view, the below-target inflation level continues to reflect the continuing slow growth in wages and production costs in the economy, and also the low inflation in Albania’s trading partners, and the backward effect due to the exchange rate depreciation. Based on observed trends, the Supervisory Council considers that domestic and imported inflationary pressures will gradually return in line with the Bank’s inflation target over the next two years.Despite the slowdown in growth rates, employment and wages have increased in the first quarter. According to INSTAT data, the unemployment rate dropped to 12.1 percent, while the average wage recorded an annual growth of 4.9 percent. This performance creates grounds for a faster growth of domestic inflation to bring it to the 3 percent target.
The easing monetary policy has been aligned with fiscal consolidation and has created a financial environment characterized by low interest rates, ample liquidity, and falling premiums. The monetary stimulus has reduced private sector financing costs, has supported the growth of lending, consumption and investment, and has created premises for a smooth exchange rate performance. The latter has followed a slight overestimating trend during the second quarter, in line with its seasonal behavior. However, foreign trade data and the smooth functioning of the foreign exchange market suggest that the duration and intensity of the exchange rate strength will remain limited. Consequently, its inhibitory effect on inflation will come towards a reduction.
Favorable lending conditions have been translated into stable credit growth for the private sector. Adjusted for off-balance-sheet loans and exchange rate, the private sector credit increased by 6.7 percent in April and May. The extension of the loan portfolio has been more balanced, both in terms of the currency structure and its destination, recording the expansion of the portfolio both in loans to individuals and businesses. Although moderate, credit growth for businesses is a positive signal for improving demand and supply for loans. The recovery of the non-performing loan-to-GDP ratio, as illustrated by its decline to 11.37 percent in May, provides encouraging signals for the further improvement of the credit environment and banking sector balances.
Judging by the current trends of development and their determining factors, the Bank of Albania estimates that the aggregate demand will increase over the medium term. Expanding the economic activity will enable full utilization of production capacities and is expected to generate an employment and faster wage growth, and production costs. Inflation is projected to return to the target in the first half of 2021.
Downhill risks remain predominant and are further strengthened. They relate to the external environment, the exchange rate performance and its impact on inflation, the ability that the loan offer will have to respond to the expected improvement in demand, and ultimately the political situation in the country. The lengthening of political disputes in the country will be reflected in the business climate and can affect economic activity. Given these considerations, the Supervisory Council estimates that the monetary policy will continue to be stimulating in the medium term. At this meeting it also decided to keep the key interest rate unchanged at 1.0 percent.
