TIRANA, Oct 14ؔhe slow growth rate of credit to the economy may push Albania into a “vicious circle” in the mid term. Slow credit growth might result in a slow economic growth rate, which in return will cause people to save less and diminish credit demand. The latest warning was given in a meeting of Albanian banks by Bank of Albania Governor, Ardian Fullani, who suggested that the country needs “optimism” in order to overcome the effects of the global financial and economic crisis. The governors asked the private banks to show more responsibility in their role of contributors to economic growth of the country.
Not exactly a competitive economy
Albania has enjoyed an annual average growth of 5.5% in the last decade. However, it remains the 2nd poorest country in Europe, ahead of only Kosovo. Experts have often warned that Albania is not subject only to short term crisis effects, which will reduce economic growth in 2009 to below 1% from the 6% growth rate enjoyed in 2008. Currently, Albanian is faced with rapidly diminishing remittances, an increasing public debt due to uncontrolled government spending, high interest rates, and a rapid devaluation of the national currency which makes the country highly susceptible to fluctuating exchange rates.
Macro-economic insecurity might keep investors, foreign or domestic, away from long term investments, especially for those concerned with increased production capacity, which would leave the country in a stagnated production level. Even though the drop in remittances might not significantly affect the financial income of the country, Albania is still struggling to raise its export levels with a trade deficit wide open. A general lack of product quality leaves the country’s economy unprotected from competition.
FDI’s and anti-cyclic interventionism
Commenting on the crisis effects, former governor of the central bank, Shkelqim Cani, warned that, “Albania might be forced to concept a new macro-economic strategy, including here the mid-term program regarding the level of its public debt.” However, any changes in macro-economic planning will come solely from the government, this being a first time after Albania ended the close relationship with the IMF and its program in Albania. One of the IMF’s duties was assist and monitor Albania in drafting and implementing its macro-economic strategies.
One the other hand, Fullani has suggested that the best solution to cope with long effects of the crisis is to attract more foreign direct investment and the application of “anti-cyclic intervention” practices.
According to Fullani, anti-cyclic interventionism consists in the financing of economy through alternative channels (usually through loans or by restricting spending of government operators) in order to increase public savings that could be used toward investments.
However, such interventionism would require a high degree of effectiveness in political and financial decision making, this accompanied with scientific capacity for situational analysis, which the country seems to lack for the time being. Warnings and advices made by the central bank have fallen onto deaf government ears, which has continued a policy of high spending, this fueled by high levels of public borrowing. Experts blame such policies as the main culprit behind the devaluation of the national currency with more than 12% in 2009. For a country that imports 90% of the products it consumes, a further devaluation of its currency would be a devastating blow to its economy.
The only positive note so far has come from foreign direct investments. Despite the global crisis, Albania has enjoyed a high level of foreign direct investments in 2009, ranking first in the world for the year among emerging markets. The country remains an attractive market with a favorable business environment and many sectors of high potential such as energy and tourism. Albania becomes even more attractive when considered in the context of a regional market (the Western Balkans make a regional market of 20 million people in a slow process of integration) where Albania stands as a gateway to commercial strategic routes to other countries in the region.
Yet, the country remains behind its Balkan peers in terms of annual average FDI’s received during the last years.
New regulations to guarantee banking stability
Fullani considers the banking system as a key player to boosting economic activity and growth in the future. Thanks to an intensive job from the central bank with measures and regulations to preserve the country’s financial stability, the banking system has been the highlight of the little Albanian miracle that survived the short-term effects of the global crisis relatively unscathed. However, the banking performance came with a cost when banks adopted a more conservative approach then Fullani would have liked by tightening credit to such a high degree. The conservative approach of the banks almost backfired to cause an artificially created economic crisis in a time when the country’s economy had also to deal with the crisis effects being transmitted in the country through the channels of the real global economy.
Intensive central bank conversations with private banks have resulted in the latter’s increase of their financing for the economy, even though Fullani wishes credit would be eased at a faster pace. At the same time, Albanian’s trust in the banking system has improved considerably resulting with deposit levels in the last couple of months reaching those of the pre-crisis months in 2008.
The rapid devaluation of Lek have made banks more susceptible to bad loans (70% of bank’s credit is given in foreign currencies, while incomes are paid in Lek, which means that Albanians have to pay more of their incomes for their loans in foreign currencies), which have doubled since 2008 to 9%. The Central bank has introduced new regulations to help 2nd tier banks to cope with bad loans and at the same time improve their credit lending in the economy, especially toward investments key to long term economic growth.
In addition, Fullani has presented the banks with a new risk monitoring regulation, which aims to establish specific monitoring rules based on each bank’s profile. According to the new regulation, some banks are more important to the stability of the system; therefore they require more specific risk surveillance.
The government policy
Despite the superb performance from the central bank in preserving financial stability, the real burden for economic growth and macroeconomic stability remains on the government. The PM, fresh off a new mandate, has promised the opening of 160 thousand new jobs (10% of the current Albania’s workforce) and an economic policy to stimulate “made in Albania” productivity and exports. However, the record of the last year leaves a lot to desire in terms of strategy effectiveness. While it is true that the last two years has seen enormous levels of investments in many economic sectors, it is true that most of it has involved infrastructure projects which have no direct relation to production capacities of the country, at least not in the short and midterm future. At the same time, the spending is done through high levels of borrowing and a high lack of regard toward financial revenues that would help pay for the public debt. The results have been a highly devalued national currency, high interest rates that have increased credit costs, and a stagnated manufacturing sector. Persistent in its spending craze, the government approved a budget increase for the remaining of 2009, despite several warnings from the central bank and other financial experts.
It seems as the government is involved in a blind race with time. A race where Albanians are required to fasten their seat belts, cross their fingers, and drive ahead at full speed without knowing the destination; every moment about to fall into an economic precipice.
