TIRANA, June 27 – Poor demand from crisis-hit EU partners and lack of fiscal stimulus is expected to have a negative impact on Albania’s economic growth this year which will depend on the performance of domestic demand, central bank governor Ardian Fullani said this week. “At a time when there is no space for real fiscal stimulus, the performance of internal demand will be mainly determined by consumption and private investments which up to now have given poor signals of reinvigoration,” Fullani told a press conference on Wednesday.
Data on the performance of the Albanian economy for the first five months of this year show slow progress of economic activity. “Estimates based on indirect data show a poor performance of the production sector in the first quarter of this year while the services sector performed better compared to the last quarter of 2011, said Fullani.
While foreign demand has moderated, internal demand remains feeble dictated by the poor performance of expenditure and investments in the private sector as well as the low fiscal stimulus during this period.
Fullani said that electricity exports had affected exports 4 percent drop in the first four months of 2012. However, what’s more concerning credit to the private sector has considerably decelerated due to low demand by both businesses and households. In April 2012 credit to the private sector was up 8.1 percent y-o-y.
Individuals demand for consumer and mortgage loans remains poor due to their saving trend. Businesses’ demand for new loans is also on a downward trend due to low capacity utilization rate and uncertainties on the future performance of demand. Tighter lending standards as one in five loans is now officially considered non-performing and poor demand by both consumers and businesses have also affected credit growth. In the 2009-2011 period, lending grew at moderate rates of 10 to 13 percent annually compared to the pre-crisis levels of 30 to 50 percent.
Key interest rate unchanged
Governor Fullani announced the BoA Supervisory Council has decided to keep the key interest rate unchanged at 4.25 percent, considering the monetary conditions as appropriate to meet the inflation rate target in the mid-term, and offering the necessary stimulus to support aggregate demand.
Inflation rate slightly accelerated to 1.9 percent in May 2012, after recording levels as low as 0.6 percent earlier this year, according to state statistical institute, INSTAT. In May 2011, inflation rate was at 4.2 percent, exceeding the central bank’s target by 0.2 percent. For the first five months of this year, average inflation rate has been at 1.34 percent, far below the central bank’s target of 3 percent reflecting the poor consumer demand as also shown by the performance of government revenues.
Fullani said the central bank could further review the monetary policy following government’s reconfirmation to continue the fiscal consolidation with the expected mid-year budget cuts.
Central Bank Governor Ardian Fullani has admitted the key interest rate cuts have failed to provide lower interest rates for lek-denominated loans or T-bills yields. “Interest rates for lek-denominated loans have not fully reacted to facilitating signals, reflecting an increase in premium risks for credit to special branches of the economy,” said Fullani earlier, adding that T-bill yields have also stayed at the same levels while interest rates on lek deposits have lowered.
Although having lowered the key interest rate by 1 percentage point to a historical record low of 4.25 percent since Sept 2011, the Bank of Albania interventions in the monetary policy have not been poorly reflected in lowering interest rates for loans in the domestic currency lek, and T-bill yields.
Interest rates for lek-denominated loans registered a slight decrease in April 2012, reflecting the first positive signs of the consecutive key interest cuts the Bank of Albania has made since Sept. 2011. Latest Bank of Albania data show average interest rates for lek loans dropped to 11.1 percent in April 2012, down from 12 percent last March and when the Bank of Albania lowered the key interest rate to 4.25 percent, the lowest historical level. However, in April 2012, interest rates for loans in lek stood at exactly the same levels compared to Sept. 2011 when the key interest rate was lowered from 5.25 percent to 5 percent.
Interest rates for 12-month lek-denominated deposits also slightly dropped to 5.6 percent in April 2012 down from 5.7 in March 2012 and 5.9 percent in Sept. 2011.
Meanwhile, 12-month T-bill yields have also been on upward trend since Dec. 2011 climbing from 6.95 percent to 7.34 percent in March 2012.
