Announcing the Bank of Albania decision to lower the key interest rate by another 0.25 percent, governor Ardian Fullani said the move was aimed at increasing sluggish consumption and investments by easing lending in the national currency
By Ervin Lisaku
TIRANA, Jan. 30 – Albania’s central bank has made a new cut to the key interest rate taking it to a historic low of 3.75 percent in an effort to give a new impetus to the country’s ailing economy suffering crisis impacts from the Eurozone partners, and problems at home with sluggish consumption, high levels of public debt, and a sharp drop in lending as bad loans have reached a record 22 percent. Announcing the Bank of Albania decision to lower the key interest rate by another 0.25 percent, governor Ardian Fullani said in a press conference this week the move was aimed at increasing the sluggish consumption and investments by easing lending in the national currency.
Low inflation pressures have allowed the Bank of Albania to cut the key interest rate by 1.5 percentage points to a historic low of 3.75 percent since Sept. 2011 in an effort to stimulate the economy but the moves have been poorly reflected in lower loan interest rates and an increase in investments. Bad loans at a record 22 percent, tighter lending standards and falling demand for new loans by both businesses and consumers have led to credit growth dropping as low as 4 percent at the end of 2012 compared to record high growth rates of 30 to 40 percent in the pre-crisis period until 2008, and a moderate growth of 10 to 12 percent even from 2009 to 2011.
In its latest report on Albania the IMF suggests that if domestic demand were to weaken further and credit to contract, then the authorities could consider further monetary easing, provided inflation expectations remain well anchored. “However, the effectiveness of such a policy would be limited by sluggish credit demand and bank risk aversion in a weak economy, and could result in exchange market pressures,” warns the report.
Albania’s annual inflation rate dropped to 2 percent in 2012, down from 3.5 percent in 2011, according to international financial institutions. Albania’s central bank itself estimates that by preserving the inflation rate around the 3 percent rate, the monetary policy will continue having positive contribution to the development of the Albanian economy.
The latest cut to the key interest rate by 0.25 percent to 4 percent in July 2012 positively contributed to lower T-bill yields and lek-denominated interest rates. Yields on 12-month T-bills dropped to 6.53 percent in the latest January 29 auction, down from 6.6 percent previously, and a record 7.5 percent in March 2012.
Meanwhile, average interest rates on lek-denominated loans climbed to 10.21 percent in November 2012, up from 9.11 percent in the previous month and 12.17 percent in November 2011. Average interest rates on Euro-denominated loans dropped to 7.3 percent in November 2012, down from 7.38 percent last October and 7.21 percent in November 2011.
Interest rates on 12-month lek-denominated deposits dropped to 5.25 percent in November 2012, down from an average of 5.85 percent a year ago.
The reduction in loan interest rates have been unable to increase lending which rose by only 4 percent during the first ten months of 2012.
Latest central bank data show total credit at the end of October 2012 was at 552 billion lek, up only 4 percent year-on-year. Compared to the end of 2011, total lending during the first ten months of this year has increased by only 10 billion lek or 1.9 percent.
Differently from loans, 63 percent of which are issued in foreign currency, mainly in Euro, the situation with deposits appears more balanced with lek deposits accounting for 52 percent of total deposits.
Pessimism among both businesses and consumers is on the rise while banks are expected to further tighten lending standards, according to quarterly surveys conducted by the Bank of Albania.
Below potential growth
Speaking of Albania’s economic performance, governor Fullani said that despite progress in the second half of the 2012, the Albanian economy remains below potential and sources of growth are unstable. “The increase in production has not been reflected in the reduction of general uncertainties, which curb consumption and private investments as well as influence on the reduction of credit demand and supply. The banking system is healthy and liquid but continues being characterized by increased caution in financing long-term investments. These trends will condition economic developments even in the future,” said Fullani.
The governor said the Bank of Albania expects the economy to grow at the same 2012 levels affected by lower external demand because of unfavourable developments in trade partners and the low level of diversification of Albanian exports.
GDP growth slows down
With an average growth rate of 1.5 percent during the first nine months of 2012, the Albanian economy is reflecting clear signs of crisis from the Euro area partners and developments at home where domestic consumption and exports remains sluggish, and public debt now beyond the previous legal ceiling of 60 percent of the GDP poses a real threat to the country’s macroeconomic stability The third quarter performance proves government’s reviewed GDP growth target at 3 percent for 2012 is an impossible challenge and that more realistic forecasts are needed in the initial budgets. Under a normative act last December, government cut the 2012 budget by 15.8 billion lek (Euro 111 million) to 381 billion because of underperforming revenues.
The growth rates for the first three quarters of 2012 are in line with forecasts by international financial institutions such as the IMF and the World Bank which expect the Albanian economy to grow by 1 percent in 2012 and around 2 percent in 2013, citing impacts from Eurozone crisis and high public debt levels.
The Albanian economy shrank by 0.2 percent in the first quarter of 2012 and grew by 2.1 percent in the second quarter of the year, registering the poorest first-half performance since the collapse of the notorious pyramid schemes in 1997.
Short-term statistics published by INSTAT show that despite top industries registering increases in their turnover indices, almost all of them cut staff, lowered wages or indexed them only to inflation.
“Albania’s economy slowed down significantly in the first half of 2012, but some growth returned in the third quarter, largely as a result of recovery in manufacturing and extractive industries. However, Albania’s strong trade, investment and remittance ties to Greece and Italy, both of which face continued economic gloom, are likely to continue to constrain growth in the coming year, and the high level of public debt, at close to the statutory limit of 60 per cent of GDP, will limit the room for fiscal manoeuvre,” says London-based EBRD in its latest outlook report. The EBRD expects the Albanian economy to grow 1.8 percent in 2012 and 2 percent in 2013.
