TIRANA, April 10 – High levels of euroisation, commercial banks’ unwillingness to expand credit and the poor development of Albania’s financial markets are the three main factors that have held back the efficient pass-through of Albania’s central bank easier monetary policy almost a decade after the outbreak of the global financial crisis, says central bank governor Gent Sejko.
Albania’s central bank has cut its key rate by a cumulative 5 percentage points since early 2009 to a current historic low of 1.25 percent in an easier policy that has significantly cut national currency-denominated loan rates and the government’s internal borrowing costs, but yet accompanied with sluggish credit due to non-performing loans triggering tight lending standards and poor demand by both businesses and households as the country’s economic growth ranged between 1 to 3 percent, down from a pre-crisis decade of 6 percent annually.
The reduction of the key interest rates by a total of 5 percentage points since early 2009 has been accompanied by the cumulative decline in interest rates for lek-denominated loans, 12-month T-bills and deposits by 6.9, 4.5 and 6.6 percentage points respectively, stimulating demand for new loans and reducing servicing costs for existing loans, says Albania’s central bank.
The Bank of Albania estimates its easier monetary policy has contributed between 0.2 percent to 0.7 percentage points to economic growth in the past three years when Albania’s GDP growth recovered from 2.2 percent in 2015 to about 3.8 percent in 2017.
“The first barrier involves the relatively high use of Europe’s single currency in the Albanian financial markets and the economy. High levels of euroisation hinder the monetary policy’s transmission, reducing its scope of action and exposes private stakeholders and the financial system toward currency exchange fluctuations,” central bank governor Gent Sejko told MPs this week introducing the Bank of Albania annual report at the parliamentary economy and finance committee.
Earlier this year, Albania’s central bank adopted a de-euroisation campaign in a bid to discourage current high levels of borrowing and saving in Europe’s single currency. The package that will be in force by next June also targets improving the pass-through of the central bank’s easier monetary policy and protect borrowers and savers from unfavorable exchange rate fluctuations considering that credit and deposits in Europe’s single currency account for more than half of the total.
“The second barrier involves banks’ ongoing poor willingness to expand credit. This behavior continues to reflect the effects of two factors, firstly the risk aversion policies toward regional countries, including Albania, by EU-based parent banks, and secondly, the credit risk perception in the country,” says Sejko.
“Although the balance sheets of banks operating in Albania have improved and credit risk has dropped, policies on reducing exposure toward non-EU countries remain conservative. These policies reflect new supervisory rules established by the European Banking Authority on reducing the exposure of European banking groups toward Central and Southeast European countries,” he added.
The third barrier involves the current poor stage of the financial markets development in Albania and the narrow base of financial instruments.
Albania’s central bank says it has explored options on the development of a secondary securities market in order to improve the operation of the primary market by increasing the investor base and enabling a better pass-through of the monetary policy in Albania’s financial markets.
In late February 2018, the Albanian Securities Exchange launched its operations as the country’s first privately-owned stock exchange, initially trading only Albanian government securities before also turning to corporate bonds a year later.
The central bank says the country’s banking system, whose assets are estimated at 92.5 percent of the country’s GDP, remained liquid, well-capitalized and profitable in 2017 although credit to the private sector is estimated to have increased by only 3.3 percent affected by declining by still high levels of non-performing loans which dropped to 13.2 percent, down from a record 25 percent in mid-2014.
National currency’s strengthening
Commenting on the national currency’s strengthening during the past couple of years, central bank governor Gent Sejko said the appreciation of lek will not have negative consequences on the Albanian economy as long as it reflects the effect of stable economic and financial factors.
Albania’s national currency currently trades at a 9-year high of about 130 lek against the euro, with the central bank attributing the strengthening which negatively affects the country’s exports and savings in Europe’s single currency to the free-floating exchange rate regime determined by demand and supply and higher GDP growth fuelled by an increase in Euro-denominated FDI and tourism revenue.
However, some experts argue the euro inflows from the hike in cannabis cultivation and trafficking in 2015-2016 and ongoing drug trafficking have also had an impact.
“Our analysis shows that the appreciating trend of the exchange rate reflects the improvement of fundamental factors such as the narrowing of trade and current account gaps, the high levels of foreign currency inflows in the form of foreign direct investment and stronger confidence toward the national currency in the internal financial market. However, its effects are reflected as reduced inflationary pressures in the internal Albanian market,” said Sejko.
The strengthening of lek, which makes imports cheaper, is estimated to have reduced the 2017 inflation rate by up to 0.3 percentage points.
Albania’s inflation rate hit a five-year high of 2 percent in 2017, but continued remaining below the central bank’s 3 percent target estimated to have a positive impact on consumption and the economy as a whole.
The national currency, lek, has been on a gradual upward trend that began in mid-2015 as the euro’s five-year reign of about 140 lek came to an end, negatively affecting Albania’s poorly diversified exports, two-thirds of which are destined to Eurozone countries.
