High Risks For The Albanian Economy

The Supervisory Board of the Bank of Albania examined and approved the latest report on the economic situation and development during the first quarter of 2008. After the meeting, the Governor of the Bank of Albania, Ardian Fullani, summarised some of the most important points in the report. According to the report, the first quarter was characterised by complex developments in the world economy. Some of the developed countries experienced reduced growth rates, increasing the fears of a global economic slowdown. The increased prices of oil, food, and raw materials are affecting every national economy, and raising fears about even higher inflation. The financial markets went through a volatile period, caused by the credit crisis generated from the USA. The respective central banks are trying to balance the negative effects of the credit crunch by pumping more money into the money markets. The situation forced the Federal Reserve to decrease the interest rate, flowed by the Bank of England. The European Central Bank and the Bank of Japan are keeping their interest rates unchanged.
The Albanian economy felt the blow of the increasing fuel and food prices. In April, inflation yoy arrived at 4.4 percent, slightly above the targeted upper limit of 4 percent. A quick look at the effect on different goods and services shows that inflation rose mainly because of the increase of food prices, and especially processed food prices. Another factor that influenced inflation levels was the increase of controlled prices, i.e. the increase of the electricity prices in March 2008. Without the increase of electricity prices, the inflation rate yoy was going to be reported at 3.7 percent. Other indicators used to measure inflation, such as core inflation and inflation of non-tradable goods, are still low. The Bank of Albania considers these indicators very important for its monetary policy. Also, The Bank of Albania thinks that inflation may rise again because of pressures from the aggregate supply side.
There is very little statistical information about economic activity for the first quarter of 2008. Therefore, it is difficult to conduct a thorough economic analysis of each sector of the economy. Data shows that the agricultural sector grew only 1.5 percent during 2007, compared to 4.3 percent growth experienced in 2006. It is critical to increase the size of arable land and productivity, said Fullani, regarding the agricultural sector. The agricultural sector needs massive and deep structural reforms of land rights, fast property rights, and improvements in infrastructure.
The situation in the construction sector still remains unclear. The growth rate of the sector decreased during the last year. The Bank of Albania called upon the government to pay attention to the construction sector because of its importance for the Albanian economy.
Abundant rainfalls during the first quarter of 2008 have improved the capacities to generate power form power stations located mostly in the northern part of Albania. The domestic production has increased, imports are reduced, and the financial situation of KESH has improved. Fullani declared that energy remains a crucial sector for the development of Albania’s economy and the improvement of the financial situation of KESH is necessary for its successful privatisation. The rapid privatisation of the Power Distribution Operator remains a priority and, therefore, the reduction of losses and increased payments is vital for the future of KESH.
During the first quarter of 2008, the increase of exports, compared to the last quarter of 2007 and the first quarter of 2007 continued, respectively at 4 percent and 13 percent. The imports, although they fell considerably compared to the last quarter of 2007, were still 17 percent higher than in the first quarter of 2007. The trade deficit for the first quarter 2008 was 17 percent higher compared to the same period last year reflecting, also, the increased prices of oil, food, and raw materials.
Fullani praised the Albanian government for a mature fiscal policy that has resulted in a budget surplus above the predicted level. The government has increased its revenues and reduced, at the same time, its capital investments compared to the same period last year.
During the last year, the Bank of Albania intervened three times in the money market, increasing the interest rate from 5.5 percent to 6.25 percent. The increase of the interest rates by the Bank of Albania was accompanied by an increase of short-term interest for loans and deposits. The interest rate remained unchanged for the first quarter of 2008. The interest rates for new loans in Albanian Lek have fallen considerably, narrowing the differences between the price of loans in Albanian Lek and foreign currencies, because of increased competition between commercial banks.
Bank of Albania believes that inflation is going to remain above the 4 percent upper limit during the coming months. It is expected that inflation will fall below 4 percent only by the end of this year. However, the Bank of Albania warned that the pressures for the foreign and domestic supply side are still present in the form of increase prices for raw materials, fuels, and food. The pressures on the supply side are going to increase the cost of production and, consequently, consumer prices.
The domestic agriculture sector can play an important role in reducing the effects of increased food prices in the world market. The inflation in April was 0.4 percent lower than in March, reflecting the decrease in prices of food and beverages. Historically, the summer months are characterised by lower prices for unprocessed food and, consequently, lower supply driven inflation. However, the agriculture sector remains vulnerable to weather conditions and the increase of fuel and fertiliser prices.
Bank of Albania thinks that risks remain high for the Albanian economy. Especially because the latest data show that inflation is going to increase again. Fullani said that uncontrollable expansion of loans, and the instability of exchange rates, are potential risks for the Albanian economy. Further, the credit crunch in Europe, a general slowdown of the major developed countries and our trade partners, may hurt the Albanian economy and should be monitored very carefully.
In the end, Fullani praised the activity of the Bank of Albania. According to Fullani, the monetary policy of the Bank of Albania has enabled a satisfactory control over the level of consumer prices. The decisions of the Bank of Albania in the past had a positive effect on stimulating the economic growth and guaranteeing, at the same time, the financial stability of the banking system.