Since Sept. 2011, the Bank of Albania has lowered the key interest rate by 1 percentage point in four consecutive interventions, but the moves have been hardly reflected in the domestic market where lending rates remain high and T-bill yields have been on the rise
By Ervin Lisaku
TIRANA, March 28 – Poor economic performance in early 2012 has forced Albania’s central bank to make another cut to the key interest rate, the second for this year, in an effort to stimulate the ailing economy through lending in the national currency, lek, and lower T-bill yields, on a rising trend since late 2011. The decision to lower the key interest rate by another 0.25 percent to 4.25 percent, a historical record low, was taken at a time when inflation rate during the first two months of this year was at a record low, reflecting low consumer demand, with experts worried over deflation risks.
Speaking at a press conference on Wednesday, Bank of Albania governor Ardian Fullani said the latest cut would create more appropriate monetary conditions to meet inflation targets in the mid-term and stimulate demand in the private sector. Warning of increased risks because of unfavorable developments in global markets, Fullani said 2012 would be a year of challenge for Albania because of unresolved crisis problems in the region. Since 2009, when the Albanian economy was one of the few to register positive growth, GDP has stuck under moderate 3 percent annual growth rates, compared to an average of 6 percent in the 2000-2008 period.
“2012 is a challenge not only for the Albanian economy, but also the global economy, because Albania operates under conditions of a regional market of unresolved problems with trade, business, but also the Greek crisis,” said Fullani, adding that the 2012 growth will be determined by developments in consumption and private investments. Since Sept. 2011, the Bank of Albania has lowered the key interest rate by 1 percentage point in four consecutive interventions, but the moves have been hardly reflected in the domestic market where lending rates remain high and T-bill rates have been on the rise.
Experts explain the situation with the sharp rise in bad loans, currently at 19 percent, and public debt at the legal limit of around 60 percent which is making investors perceive increased risk in investing in government securities.
Zef Preci, the director of the Albanian Institute for Economic Studies says the Albanian economy has stagnated after the 2008 global crisis. “The public debt is so high that government can no longer raise it. There is a curb of aggregate internal demand which means businesses are finding difficulty in keeping their staff, selling their products and as a result make a profit. This situation has put fiscal authorities into difficulty to collect taxes and as result ensure revenues for the state budget,” Preci tells reporters.
With inflation rates during the first two months of this year at a record low in the past decade, Albania is heading into a deflation unveiling the wounds of the Albanian economy as consumer demand remains low and the economy fails to recover. Latest INSTAT data show inflation rate in Feb. 2012 dropped to 0.6 percent, standing far below the central bank’s target of 3 percent which has been set as the ideal rate positively contributing to the country’s economy’s growth.
The key interest rate cut is expected to also have an impact on lowering high lending rates for lek. In a recent financial intermediation analysis, the Bank of Albania says intermediation costs, which involves transforming deposits from one set of customers into loans for another, for the national currency lek rose to 6.8 percent in Oct.-Nov. 2011 up from 6.3 percent in the third quarter of 2011.
Average interest rates for loans in lek in Jan. 2011 stood at 11.32 percent, compared to 11.07 percent on Sept. 2011 and 12.17 percent in Nov. 2011 unveiling a poor reflection by banks of the BoA intervention, according to BoA data.
Lending prospects for 2012 seem grim as both businesses and individuals have cut down on investments and consumption, pessimistic about the country’s economic prospects as the global crisis impacts become more and more obvious with lower retail sales, remittances, FDI and travel revenues.
Bank of Albania data show new loans rose by 58.4 billion lek (Euro 410 million) to 531 billion lek in 2011, recording a 13 percent increase, the highest annual growth rate since 2008 when lending grew by 35 percent.
T-bill yields remain high
Treasury bill yields showed no signs of improvement in the latest auction BoA held this week, continuing their upward trend since mid-November 2011 despite the central bank having lowered the key interest rate since then. In the latest Bank of Albania auction, 12-month T-bill yields slightly dropped by 0.01 percent to 7.33 percent while 3-month T-bill yields climbed from 5.27 percent, to 5.3 percent in the previous auction. Albania’s central bank auctioned 13.3 billion lek in this week’s auction, of which 10 billion lek in 12-month T-bills.
The Bank of Albania organizes 3-month and 6-month T-bill auctions every month and 12-Month T-Bill auctions every two weeks. T-bills are issued and guaranteed by the Ministry of Finance on behalf of the Albanian government.
