By Vittorio Umberto Grilli*
In 2012, the Albanian economy has continued to develop against a highly unfavorable international background. The intensification of the global economic and financial crises has been reflected in increasing uncertainty and higher risk premia in the domestic market as well as a fragile external balance. Yet, the Albanian economy has managed to preserve its strong macroeconomic balances due to the sound indicators of the financial system as well as the adequate policy responses.
Overall, economic growth this year has been driven by foreign demand, while private consumption and investments have remained weak. Credit growth has slowed down, reflecting a reduced demand for medium and long-term loans and a higher propensity to save. Additionally, increasing non-performing loan ratios and sector-related developments have led to credit tightening and stronger prudential measures from banks. The first quarter of 2012 has registered a negative growth rate of 0.2 percent, down from a positive 3.0 percent growth in 2011. Preliminary information suggests a recovery of economic growth in the second quarter 2012, driven mostly by net exports. Higher commodity prices have encouraged exports from low-cost countries, including Albania, contributing to the improvement of the current account deficit (-10.5 percent of GDP in the first half of 2012, from -12.4 percent of GDP in 2011). Nevertheless, the high current account deficit combined with the reluctance of foreign investors to invest in the region, pose potential risks to external balances and point to the need for further structural reforms in this area. The contribution of public demand to economic growth has decreased due to the tight fiscal control on debt indicators. The government’s commitment to contain the budget deficit and public debt within the formal legal thresholds has led to the pursuance of consolidating policies and controlled expenditures. Although restrictive in the short term, these policies are expected to have a positive effect in the medium term in reducing the country’s risk premia and in creating future buffers.
Given the persistence of a negative output gap, inflationary pressures in the economy have been weak. After reaching a minimum of 0.6 percent in February, inflation increased gradually to 2.8 percent in August, mostly due to higher foreign prices. Inflation expectations have remained well anchored in the absence of pressures from the labor market. Bank of Albania’s projections suggest that inflation will move below but close to the 3.0 percent target in the medium term.
The aforementioned developments have provided room for monetary stimulus during 2012.
Since September 2011, the policy rate has been reduced in five consecutive steps (the last one in July) by a cumulative 125 basis points, to a minimum of 4.00 percent. Additionally, the Bank of Albania has continued to provide liquidity in the open market operations in order to minimize fluctuations of interest rates. These measures have aimed to stimulate private demand and to lower risk premia, with a combined effect of cushioning the negative impact of the crises on the economy. Private consumption and investment are expected to recover in response to the easier monetary stance and sound financial conditions of banking system.
Nevertheless, we believe that solutions to the economic and financial crises in European countries, particularly our trading partners, will have a major say in the performance of the Albanian economy.
(Italian Minister of Economy and Finance speaking on behalf of Albania at the 26th meeting of International Monetary and Financial Committee, October 13, 2012, Tokyo)
