TIRANA, Oct 28ؔhe governor of Albania’s central bank (BoA), Ardian Fullani, declared in a press conference that BoA has decided to lower the base interest rate by 0.5%, from 5.75% to 5.2%. The last time the central bank lowered its base interest rate was in earlier this January when interest was lowered by 0.5% from the 6.25% it was in 2008. As the global crisis was reaching its peak, BoA lowered the interest rate to precede the crisis’ effects by boosting credit to the economy.
“Inflation is relatively low and we can proceed with lower interest rates,” Fullani stated
“BoA’s supervisory council has concluded that the third quarter has been a turning point for the public trust in the banking system.” He added that the central bank had identified an increasing trend in bank deposits during the month of August.
Speaking about the economic indicators in Albania, the governor stated the economic growth in Albania, compared to economic performance worldwide, has been a positive one. Despite the fact that Albania’s economy has been affected by the global crisis, it has maintained a positive performance thanks to the production sectors that have boosted the country’s gross domestic product (GDP).
However, according to Fullani, economic growth regarding the macroeconomic aspect has slowed down compared to last year. Investments in Albanian products and their exports have dropped during the last months and the positive trends of Albania’s economy remain fragile
BoA rings the alarm as budget deficit increases by 23%
According to Fullani, the Albanian government has increased its budget deficit beyond the country’s production capacities. The budget deficit in the last months has increased by 23% thanks to overspending by the government, despite revenues from several privatization deals.
“Budget expenses have increased by 23%, mostly reflecting a fast increase in capital expenses. These expenses have been financed through privatization revenues and high levels of public debtƴhe efficiency of our decision will depend on the government demand for debts,” Fullani declared, warning the government to be more careful with its spending spree.
Albania will run a deficit of 6.5 per cent of GDP this year and has projected a further 15 per cent increase in budget revenues and expenditures for next year, a forecast considered unrealistic by the Central Bank and IMF.
The consequences of the state’s high levels of borrowing might leave the private sector short of financing alternatives, therefore impacting the future development of the country’s economy. Indeed, when BoA cut its main interest rate in January, the interest on bonds denominated in Lek continued their upward trend due to strong demand from the government and scarce liquidity available to buy the country’s public debt.
The latest economic results that reveal a general drop in economic activity, lower rates of lending to the economy, and less demand for Albanian exports, have pushed the central bank to finally lower the interest rate, despite its previous declaration on a weekly basis that there was no need for this step.
Bank lending to the economy
According to the governor, another important challenge to Albania’s economy remains credit to the private sector. Despite the return of the public trust and higher deposit levels, commercial banks continue to apply tightened requirements for credit.
Bankers, experts and media have continuously demanded lower interest rates during the year.
“Interest rates should have been cut since December,” former BoA Governor Shkelqim Cani, told to local press last week.
Leading bankers urged lower basic interest rates early this month. “We have seen reduction in industrial production, job loses and lower remittances,” Oliver Whittle, CEO of Raiffeisen Bank said. “I would welcome a reduction on interest rates,” he added.
The increased public trust and bank deposits might be the reason for slashing down the base interest rate in order to boost such a momentum and increasing credit at lower costs. Unlike January, BoA’s move might work for the fact that banks have already shifted toward more lending in Lek rather than in foreign currencies, the latter making borrowers more susceptible to the Lek’s recent devaluation resulting in higher borrowing costs.
However, with the devaluation of Lek (Albanian currency) and uncompetitive Albanian products resulting in fewer exports, the move might backfire.
Additionally, BoA’s move could also boost what it is trying to stop: government borrowing and spending. A lower interest rate will lower the interest on bonds denominated in Lek, and therefore encourage the government to keep borrowing at high levels. So far, the private sector has lost the race with the government to secure liquidity funds from commercial banks. And that is just the wrong result for the perspective of Albania’s economic growth.
