TIRANA, Feb. 2 – Few days after the country’s central bank made a new cut to its key rate, taking it to a historic low of 2 percent, business representatives and economy experts remain skeptical about its expected impact on stimulating consumption and private investments.
They blame the failure of central bank’s easier monetary policy on lack of real competition in the banking system and poor transmission channels.
“The functioning of the banking system under oligopoly conditions or lack of sufficient competition ends up either increasing banks’ profits or benefiting the state budget by reducing the debt costs,” says Gjergj Buxhuku, the head of Konfindustria business association.
Nikolin Jaka, the head of the Tirana Chamber of Commerce, says the frequent cuts to the key rate during the past few years have neither increased demand for loans, nor eased lending standards.
Meanwhile, Ardian Civici, a former member of the Bank of Albania Supervisory Council, says the lower key interest rates have not been reflected on higher lending because the economy continues performing below potential.
“This is a result of two reasons, our financial markets are not developed enough and the channels of the transmission of the key interest rate do not function in the same way as in developed economies,” said Civici.
In its latest country report, the IMF describes the Albanian financial sector as concentrated and dominated by foreign banks.
“Subsidiaries of foreign banks, which include four of the top five banks from Austria, Greece, Italy, and Turkey, represent about 90 percent of total banking sector assets,” says the IMF.
In an unexpected move, Albania’s central bank made a another cut to the key interest rate few days ago slashing it to a new historic low of 2 percent in a bid to accelerate economic growth and prevent deflation risks after inflation rate hit a three-year low of 0.7 last December, sparking deflation concerns.
The central bank has been continuously cutting key rates to promote consumption and private investments by lower interest rates and discouraging deposits, but the moves have mostly served government by securing lower interest rates for its internal borrowing through lower T-bill yields.
Since August 2011 when the key rate was at 5.25 percent, the central bank has made 13 consecutive slashes by 0.25 percentage points.
Lending to the economy grew by 3.75 percent in the first 11 months of 2013 while deposits were up by only 1 percent.
Lending to the economy registered a turning point in July 2014 when it overcame a 12-month moderate decline of around 2 percent as the economy struggled with its poorest growth rate in more than a decade and bad loans stood at around a quarter.
Despite non-performing loans standing at around 25 percent and credit at moderate growth rates of 2 to 3 percent, banks’ profits have registered a sharp increase.
Central bank data shows the 16 overwhelmingly foreign-owned banks operating in Albania posted net profits of 8.7 billion lek (Euro 61 million) in the first three quarters of 2014, up from a negative 1.3 billion lek during the same period the previous year on a sharp reduction on provisioning on non-performing loans and lower spending on interest rates as deposit interest rate stand at a record low
