Governor Fullani has appealed for political consensus to set a fiscal rule that would preserve the long-term stability of public finances and the confidence of investors in the Albanian economy as public debt has jumped at 62 percent of the GDP.
TIRANA, April 9 – Spillover effects from the Eurozone partners, the need for a clear fiscal rule on public debt, the pension reform, legal changes to accelerate the execution of collateral and long-term growth are the key challenges the Albanian economy faces, central bank governor Ardian Fullani said introducing the annual Bank of Albania report at the parliamentary economy committee this week. “These issues will continue conditioning the Albanian economy and financial markets and therefore special attention and careful solution must be given to them,” Fullani told MPs.
Pointing out that the integration of the Albanian economy into European markets and financial systems accelerates shocks, Fullani urged for more caution toward developments in global markets. “Our structural reforms must target increasing the resistance toward their fluctuations while economic policies must be carefully oriented toward global market trends,” said Fullani.
International financial institutions have constantly warned Albania that spillover effects from the Eurozone crisis, and especially top trade partners Italy and Greece will continue to constrain growth.
Speaking of the public debt, whose 60 percent of the GDP ceiling has been lifted and now hovers at around 62 percent, Fullani appealed for political consensus to set a fiscal rule that would preserve the long-term stability of public finances and the confidence of investors in the Albanian economy. “The preservation of public debt at affordable and not harmful levels to the economy and preserving the confidence of financial markets toward the Albanian public debt must be a key target for the fiscal policy.”
The widening deficit in the pension scheme is another issue for Albania’s long-term stability with the state budget financing around 45 percent of the spending on pensions. The pension scheme deficit continued widening in 2012 when it rose to 40 billion lek (Euro 281 million) compared to 36.4 billion lek in 2011, according to Finance Ministry data.
“The deficits in the social security and health insurance systems are increasing and could infringe fiscal and financial parameters in the future. This reform must pave the way to the development of relatively backward segments in the financial system such as private pension funds and insurance,” said Fullani.
Changes to the Civil Procedures Code, requiring a qualified majority of 3/5 of votes are also considered a key reform by the central bank to help curb bad loans which have reached a record of 23 percent. The changes to the Code are considered crucial for the stability of the banking system, the guarantee of deposits and the revitalization of lending which has dropped to its lowest historic rates.
Governor Fullani also underlined the importance of the country’s long term development appealing for the economic growth model to be based on production.
“On the long run, the structure of the Albanian economy must come closer to that of other European countries. Economic growth must focus more on the productivity of production factors and the Albanian businesses must be more careful in finding and exploring new markets.”
Governor Fullani described 2012, when the GDP grew by 1.6 percent, as a very difficult year for the Albanian economy mainly due to two main blows, the severe weather conditions in the first quarter of the year when the economy registered a slight shrink and the reaction of the Albanian banking system to tougher measures adopted by the European Banking Authority. “The direct impact of this blow to financial markets and especially government securities is estimated at 2 percent of the GDP.
In 2012, the central bank cut the key rate from 4.75 percent to 4 percent but the moves were hardly reflected on lower interest rates for lek-denominated loans and government security yields.
Exports which in 2012 grew by 8 percent were the key contributors to Albania’s growth while internal demand remained poor due to sluggish consumption and investments.
Credit growth in 2012 decelerated to 2.4 percent, the lowest rate since the collapse of the pyramid schemes while deposits grew by a moderate 6 percent, unveiling consumers’ saving trend in the face of rising uncertainties.
In 2012, inflation rate dropped to 2 percent, down from 3.5 percent in 2011, remaining below the Bank of Albania 3 percent target.
Affected by the Eurozone crisis, sluggish domestic consumption and high public debt levels, the Albanian economy registered its worst economic performance in the past 15 years in 2012. Data published by the country’s government controlled Institute of Statistics, INSTAT, show the Albanian economy grew by 1.6 percent year-on-year in 2012, the worst annual rate since the collapse of the notorious pyramid schemes in 1997 when the economy shrank by 11 percent, and almost half of the average 3 percent annual growth from 2009 to 2011.
Albania enjoyed an average annual growth rate of 6 percent from 2003 to 2008 and was one of the few countries to register positive growth of 3.3 percent in 2009 in the outbreak of the global crisis.
Writing off bad loans
In a meeting of the Financial Stability Advisory Group, Bank of Albania representatives stressed the need for banks to write off loans which they consider as lost from their balance sheets.
“We are holding constant negotiations with directors of second-tier banks and the Finance Ministry. I must say there are contradictions on issues related to fiscal aspects and we are also negotiating with the IMF and the World Bank,” says governor Fullani.
According to him, the new measure will free banks, representing more realistic balance sheets and giving a new impetus to lending. The central bank estimates that writing off loss loans whose holders have failed to pay for more than 1 one year clears the banks’ balance sheet from non-performing assets which deform the structure and quality of the balance sheet.
“This is an action which clarifies financial relations between businesses and households with banks on the transparency of the financial situation, urging different restructurings in the market,” said the central bank. Members of Financial Stability Advisory Group stressed the importance of writing-off lost credit from the bank balance sheet in a timely and appropriate way, recommending inter-institutional cooperation to identify problems stemming from the tax treatment that hinder this process and propose ways of solving them in a short time.
Loss loans climbed to 7.7 percent at the end of the 2012, up from 5.7 percent at the end of 2011.
Bank of Albania data show bad loans climbed to 22.76 percent in the final quarter of 2012, up from 22.3 percent in the third quarter and 19 percent at the end of 2011.
In 2012, the highest percentage in the non-performing loan portfolio belonged to sub-standard loans at 9.83 percent whose holders have failed to pay instalments from 61 to 90 days. Second come loss loans at 7.7 percent followed by doubtful loans at 5.23 percent. Under the BoA regulation, loans are considered doubtful when borrowers have not been able to pay for 180 days and lost when the payment has been delayed by more than one year.
Non-performing loans, which account for a total of around 1 billion dollars, representing around 7.6 percent of the GDP, are becoming a drag on economic growth. Experts say they are considered the second major threat to the Albanian economy after the public debt, now beyond the former legal ceiling of 60 percent of the GDP.
