Average interest rates on lek-denominated loans have remained almost unchanged during the past two years, reflecting the failure of the central bank’s consecutive cuts to the key interest rate in the past two years.
By Ervin Lisaku
TIRANA, Oct. 30 – Lending continued remaining at negative growth rates even in September 2013, while the deposit growth rate slowed down to 2.7 percent, unveiling the critical situation both households and businesses are facing as bad loans have reached a record 25 percent, and domestic consumption and private investments remain sluggish. Apart from poor demand for new loans, tight lending standards applied by banks and high interest rates have also influenced on lending which registered negative growth rates for the third month in a row, in a situation which is unprecedented in the past 15 years.
After growing by 30 to 50 percent annually in the pre-crisis years, lending grew by an average of 10 percent from 2009 to 2011 but sharply decelerated to 2.36 percent in 2012 as bad loans hit more than 22 percent. In the first nine months of this year lending shrank by 1.8 percent, after striving to remain at positive growth rates in the year’s first half, according to central bank data.
High interest rates remain a barrier to overcome the critical situation with lending, and easier monetary policy followed by the central bank has failed to produce lower interest rates for national currency-denominated loans. Since September 2011, the Bank of Albania has cut the key interest rate by 1.75 percent to 3.5 percent in several consecutive interventions, but the moves have only been reflected on lower T-bill yields and interest rates for lek-denominated deposits.
In September 2013, interest rates on 12-month lek-denominated deposits dropped to 3.41 percent, down from 3.83 percent in August 2013 and 5.19 percent in August 2012. Back in September 2011, when the key interest rate was cut by 0.25 percent to 5 percent, interest rates on 12-month lek-denominated deposits stood at 5.92 percent, and have been on a downward trend since then.
Meanwhile, average interest rates on lek-denominated loans have remained almost unchanged during the past two years, reflecting the failure of the consecutive cuts to the key interest rates in the past two years. Bank of Albania data show average interest rates on lek-denominated loans rose to 10.14 percent in September 2013, up from 9.48 percent last August and 11.1 percent in September 2012. Interest rates on lek-denominated loans in September 2011 stood at 11.07 percent.
In its monetary policy report for the second quarter of 2013, the Bank of Albania says the failure of the monetary policy to lower loan interest rates is a result of low demand for new loans and specific problems of certain sectors of the economy as well as tighter lending standards imposed by parent Eurozone-based banking groups.
The situation with deposits also remains critical as their growth has significantly dropped in the past couple of years. Central bank data show the deposit growth rate slowed down 2.7 percent in the first three quarters of this year. Deposits grew by 6.3 percent in 2012, down from 11.7 percent in 2011, unveiling the downward trend in consumers’ saving trend.
Informal borrowing
Tighter lending standards applied by commercial banks, has increased the levels of informal borrowing. More than half of debtor Albanian households, some 56 percent, borrow informally mainly from friends and relatives and local shops, shows a recent Bank of Albania survey. The findings of the survey reconfirm the critical situation Albanian households are facing during these crisis years and banks being the second choice of households when it comes to borrowing. The central bank survey does not report data on informal borrowing by businesses but representatives of the business community report a sharp increase in the past few years as bad loans have registered a sharp increase and accumulated unpaid government bills to private companies have reached more than Euro 200 million. Local media report construction companies, whom government owes millions of Euros for finished public works, are the most engaged in informal borrowing whose interest rates range up to 5 percent compared to an annual 10 to 12 percent in banks. In crisis since the onset of the global financial crisis and facing liquidity problems the construction sector has been widely using the countertrade practice which involves the exchange of goods or services with other goods or services, rather than with money.
High level of euroisation
The high level of euroisation in the Albanian banking system is a potential source of instability, warns the European Commission in its 2013 progress report in Albania. Foreign, mostly euro-denominated loans stood at 61 percent of total credit outstanding in July 2013, down from 64 percent a year earlier, while the share of foreign currency-denominated deposits in the total deposit stock fell from 49 percent to 47 percent in the same period. “Such high euroisation inhibits monetary policy’s effectiveness and could expose banks to currency mismatches or indirect credit risks; it is therefore a potential source of instability in the financial system,” warns the report.
Meanwhile, the IMF says the transmission of easier monetary policy into faster credit growth remains hampered by increased risk aversion in the economy and higher NPLs in the banking system. Differently from loans, 63 percent of which are issued in foreign currency, mainly in Euro, the situation with deposits appears more balanced with lek deposits accounting for 52 percent of total deposits
Key interest rate unchanged at 3.5%
Albania’s central bank announced this week it has kept the key interest rate unchanged at 3.5 percent, arguing that current monetary conditions allow the fulfillment of the inflation target in the mid-term and provide a stimulus for the reactivation of private sector demand. Speaking in a press conference on Wednesday, central bank governor Ardian Fullani said low inflation pressures in the past few months reflected sluggish demand and production as a result of the country’s sluggish economic growth.
The governor warned Albania’s economic prospects remain grim even for 2014.
“Economic growth is expected to remain poor even next year driven by weakening external demand and lack of fiscal stimulus. Current data available do not give a signal on the reinvigoration of consumption and investments in the near future,” said governor Fullani.
The Albanian economy grew by only 1.35 percent in the first half of this electoral year and is expected to grow at around the same levels of 2012 when at 1.6 percent, Albania registered its lowest annual GDP growth rate since the collapse of the notorious pyramid schemes in 1997, and almost half of the average growth rate during the global crisis year from 2009 to 2011.
