Interview with Gent Sejko, Governor of the Bank of Albania. TopStory, Top Channel TV, 1 March 2016

TCH/Sokol Balla: This is the first year of your term in office as the Governor of the Bank of Albania, what changes have taken place in a year?

Governor Sejko: Many things have changed, especially regarding the governance.  The Bank of Albania was established soon after the fall of communism; following a transitional period, it got consolidated and strengthened. The theft at the cash processing centre shocked the foundations of confidence, but I was privileged to be the governor of the Bank of Albania in the period following that event.  Issues related to cash handling, the improvement of governance, and the internal audit needed to be tackled. I want to emphasize that the Bank of Albania has been constantly improving its key functions.

TCH: The scandal that involved the Bank of Albania was the biggest or among the biggest in Albania. Now, let us turn to September 2014, the arrest of the former Governor. What did you feel at those moments, as a banker, and did you expect to become the next Governor?

Governor Sejko: I did not think to have that position. I felt shocked as the Bank of Albania is the bank of banks in Albania and bankers are sensitive to any event related to the financial system.

TCH: Did this event affect the banking system?

Governor Sejko: De facto, no, but it had a psychological impact on the whole financial system.

TCH: Now, eventually the court found Fullani not guilty and he has requested compensation for removal from the post Do you think he is doing the right thing and what is his responsibility so far?

Governor Sejko: The process ended and was assessed by the relevant investigation bodies and the courts. It is the right of every citizen to request their legitimate right, whether a moral or material one.

TCH: Until the moment of the decree for your appointment, you were unknown.  You were known among bankers as senior official of a commercial bank. But, how did your name pass from banks to the political table, or directly to the President?

Governor Sejko: It passed directly through my application. The discussion on the appointment of the new governor arose after the removal of Fullani. There was a statement by the Prime Minister Rama, that the new Governor would be elected from the banking and financial system.  As far I remember, many experienced bankers, including myself, replied to the invitation by the President of the Republic. I felt honoured and privileged when I was decree. The support by all parties increased the responsibility and the desire to continue the work at BoA.

TCH: Nevertheless, it was not your first time in BoA.

Governor Sejko: I started my career in that building in 1992 as the Head of the Credit Division at the National Commercial Bank.

TCH: You are lucky to inaugurate the renovated building, and Fullani has a merit in this regard...

Governor Sejko: Fullani has the merit of the initiative of the project on the new building. The discussions on the renovation of the building have taken place over many years, since ‘93-’94. The premises were deteriorated to the point that it had become difficult to work inside them.  The selection of the project was one the best things.

TCH: Was it a difficult decision not to invite Fullani at the inauguration ceremony?

Governor Sejko: I was abroad on an official trip for two weeks and I did not have detailed information about the protocol matters; but to be correct, the former Governor had not been pronounced not guilty yet, and he himself was focused on working in this regard.

TCH: BoA is the institution that everybody looks up to. You took office while it was covered by a heavy corruption shadow, and subject to financial abuses and thievery. Was it reflected in the first day of your job?

Governor Sejko: Yes, it was. The Bank of Albania went through an extremely difficult situation and its image was heavily marred during that time. We saw the media and public opinion protesting rightly on what has happened.  When I started, I found a heavy psychological situation. The Bank needed to breath and strengthen the self-confidence. Many things have changed. The Governor is appointed and the membership of the Supervisory Council is completed.  We have been constantly trying to restore the image of BoA.

TCH: What are the measures taken in order for these events not occur again?

Governor Sejko: Many measures are taken. It should be emphasised that it was not only the internal audit that failed in this case. Other institutions also failed in verifying the figure of that person, as he held a certificate of security, and had passed through many filters. In this history, the internal audit system failed, and there was a lack of vigilance.

TCH: Who gives this certificate?

Governor Sejko: These are standard certificates. The background check of the person is subject to a filtering procedure, since the high school and of many attestations.  The Institutions are AIS, Ministry of Interior, etc.  Thefts have occurred also in other countries, for example, in France, England. But, in our case the situation has continued for a long time. Nevertheless, I am not an investigative authority.

TCH: I think that you have conducted an audit. How is the situation?

Governor Sejko: We have conducted more than one audit. We have accomplished fundamental changes. Since the beginning of 2015, we have tried to improve the internal audit system, to carry out radical changes in all the monitoring and prevention aspects.  We have taken the experience of the Bank of France.  When the Bank of France saw our security elements, they assessed that in some of them we were even more advanced than them. This shows that the human factor is crucial.

TCH: Now, one year and half has passed, can we trust BoA again?

Governor Sejko: Absolutely, BoA may be trusted again, for many reasons. I mentioned the undertaken measures to guard the cash in our vaults, but BoA is a broader concept and with many other elements. It is one of the best institutions in Albania. This is reported by the international financial institutions and international companies, such as the IMF and the World Bank. BoA is the most highly regarded institution as a result of the wok of its experts and all the staff of the Bank of Albania.

TCH: You have lowered the interest rates twice and this is not a good sign for the economy...

Governor Sejko: We have exercised our role to boost economic growth and the welfare of the citizens. This is an instrument that is used everywhere. We have tried through our monetary policy to lower the interest rates on credit. The important thing is that the monetary policy has had its impact since we have seen an increase of lending in lek against lending in foreign currency. Currently, 43% of the credit portfolio is in lek. The monetary policy aims to promote lending, investments and consumption.

TCH: You are moving towards negative interest rates, the aim being for commercial banks to take the money and increase the chances that this money is lent to enterprises and households. How much of an impact do you think these measures will have?

Governor Sejko: Interest rates were lowered to standardise these rates with those of the European Central Bank and the objective was not just to stimulate lending in euro. Of course, this will also affect the reorientation of deposits in euro, but our main objective with an accommodative monetary policy is to promote lending for investments in lek, as well as in euro. As a result of the lowering of the interest rates, lending in the domestic currency has increased.

TCH: The lending trend in lek has a symbolic value. Strengthening the image?

Governor Sejko: This is just one aspect. Historically, the lek has been a stable currency if we look at the exchange rate over the years. Many colleagues are astonished by this. There was an occasion in 2008 when we had a depreciation as result of the beginning of the crisis, but afterwards it has preserved its stability.

TCH: It seems that Albanians prefer the euro, why should we try to borrow in lek?

Governor Sejko: If the income is in lek, you avoid losing from the exchange rate and meanwhile the credit interest rates are equated equalized. Remittances made possible for the lek to maintain its stability; this because of the large supply of foreign currency as well. But remittances have decreased, hence the Albanian economy should reorient itself towards output and exports.

TCH: We see the economic growth from 2005 to 2015, with the surplus peak in 2007-2008 due to the fight against informality and the introduction of the flat tax. The curb afterwards is falling, reaching in 2013 its trough, while over the years it has increased, to reach 2.7% last year. If we look at the figures on deposits, there has been an increase of EUR 130 million, but this increase does not indicate a good economy, since this money is not spent...

Governor Sejko: Of course it is not a good sign and does not show the desirable consumption. There is a propensity to save. The word crisis can be heavy, but economic stagnation and uncertainty are additional dangerous things. When the level of consumption falls, people are reluctant to spend. If consumption falls, demand for various goods falls, production drops as well, and thus the economic downturn begins. BoA has one of the instruments it can use, the policy rate, while the overall economic environment has an impact as well.

TCH: The global economic crisis has been one of the longest ones. Should we expect the recovery to be long too?

Governor Sejko: Other crises have been deep too, but the recovery has been faster. This crisis is the first happening in a period of peace, without a war before or after it. Crises have their specific natures, the latter ones are a consequence of the cold war in some aspects, but no a consequence of an armed war. Many structural reforms have been undertaken in the euro area, showing the first elements of recovery, contrary to the USA, where signs came sooner.

TCH: We have had a higher growth than the region and the entire Mediterranean.

Governor Sejko: Yes, we have had a growth from the construction sector and those related to it, to around 8%. Not being fully integrated with the international markets, we thought that our economy would not be affected. In many conferences, specialists and experts told us that the impacts will be felt much later than in the developed countries. The crisis certainly hit us, but Albania was fortunate enough not fall into recession. We survived the crisis. The lowest economic growth level has been 1.1% in 2013, followed by a gradual growth. In the current year, 2016, we forecast that we will have a higher growth than last year’s 2.7%. Also, the growth trend is important because it gives indications on which direction we are heading. However, the right direction is not easy.

TCH: You are sounding like Secretary Kerry...

Governor Sejko: Such growth rates are not easy; we need the support of continuous structural reforms. They should not remain just as slogans but they should be seriously carried out. We will try to return the economy to equilibrium.

TCH: We have had an increase of non-performing loans, or those that have been taken and are not repaid. We have had a number of collaterals collected by the banks. How much should the level of these loans by so that the economy may breathe freely?

Governor Sejko: Non-performing loans should be zero, but this is utopia. The lower they are the better it is. Together with Serbia, we are the two countries with the highest level. We have been able to decrease them from 22.7% to 18.2% in December 2015. We hope to reach 15% at the end of this year. This will boost commercial banks’ optimism to lend.

TCH: Banks have ample liquidity available to increase loans, but they invest in foreign funds.

Governor Sejko: First, we have a weak demand and a lack of serious creditworthy projects. They are somewhat more pessimistic in lending when they see such a high level of non-performing loans. But, lending also depends on the strategy of parent banks of those banks that operate in Albania, which have preferred deleveraging to expansion.

TCH: This decrease of lending has been due to loans to households or enterprises? Or both?

Governor Sejko: Households have repaid more regularly. Large enterprises have been hit harder by the crisis and, consequently, are facing more difficulties. So, the impact of large enterprises on the non-performing loans has been higher. In addition, our efforts to improve the situation of several large companies have contributed to the decrease of non-performing loans.

TCH: Regarding financial soundness, non-performing loans and delays in the repayment of big loans remain issues of concern. But non-performing loans may decrease even further by restructuring them. Meaning, to give enterprises more time to repay their loans and with lower interest. However, the government has a role to play as well, apart from you, in reaching an agreement on debt restructuring.

Governor Sejko: It is very clear, but at the same time, complicated. Yet, the essence is exactly what we seek to achieve in collaboration with commercial banks. We want to identify clients with difficulties who have a prospective to recover. Your chart showed the situation of the financial stability in Albania. We have adequate capital and ample liquidity surplus, which means that banks are well capitalised and secure. They also have liquidity to lend to households and/or enterprises. The money is in the banking system and the challenge is how to turn it into lending for the interested parties. Through our macroeconomic policy, we want to stimulate lending. We want to have non-conservative, but productive, loan growth and incentives. On the other hand, we want to have a sound deposits’ situation, most of which are from households. It is exactly this money that is lent to enterprises. As for your question on what we have done to coordinate between banks and enterprises, this week I called on a meeting between banks and the largest business companies, to share concerns and issues more openly and transparently. We have worked a lot during 2015. After the appointment as Governor, I had a meeting with banks and Mr Cani and Mr Ahmetaj, where we discussed the issues and how to solve them.

TCH: The bankruptcy law is considered by the government and enterprises as part of structural reforms in this regard, what is its impact and why is it delaying?

Governor Sejko: The law affects the relationship between credit institutions and their clients. There have been failures to comply with contracts, also banks need to be revitalized and steer away from lending stagnation, leading toward bankruptcy those enterprises with no future. The law is one of the fundamental laws that sets the rules of the game. Enterprises have demands for banks; but, at the same time, enterprises must respect their obligations.

TCH: Is it true that there is a high number of enterprises that would close down if the law on bankruptcy came into force?

Governor Sejko: No, not entirely. Not all enterprises would go bankrupt and close down. Some of them do generate income. The majority of enterprises in our country rely on other business activities; they generate income from one activity and use them for another activity. This should not continue any more, but we must rely on the crediting-borrowing system. In most cases, the courts have ruled on the borrowers’ side, and as a result banks have not been able to execute the collateral, thus increasing their pessimism. This must end and clear rules must be set. Each party must fulfil all its duties and obligations. We do not tend to support banks against enterprises but all parties must be supported professionally, as banks are also business consultants. We need to safeguard financial stability and steer them toward a healthy lending.

TCH: The bank stated that you are considering the possibility of putting more money into circulation in the market?

Governor Sejko: We will not put more money into the market. Although the currency issue is one of BoA’s main tasks, we are not planning to do so. We can re-print banknotes to replace the damaged ones, to increase their quality, but not the monetary mass, in order to increase inflation. Inflation is below 3%. We cannot achieve BoA’s inflation target, and we cannot push inflation up through this element. The money we have in our pockets has become really worn out. Perhaps the time has come to study the forms of new issues.

TCH: I am asking because when discussing about the trust in the Bank of Albania, we would like this to be as far from the influence of the government as possible. We know that through just a phone call additional money has been put in circulation in the market, such as the case in 1997. The relationship politics - banks has been very strong, although it has been weakening. Does an increase of money in the market means this is a government request?

Governor Sejko: Everything is formalized by law, way different compared to the past. Government intervention is much more limited. We have an agreement with the IMF, and such intervention is not easy. Beyond the relationship with the government, this is an element to stimulate the economy and economic growth, because the crisis is accompanied by deflationary situations. An increase of the amount of money in the market would increase consumption, lending. We have seen it being used by the Federal Reserve, by the European Central Bank, but not here in Albania. There is still room for lowering the interest rate. We can still continue with this, even if we see that growth will not go as expected, that the lowering of the interest rate will not have an impact as we would want it to, or that government reforms will not succeed; then, we will take alternative measures, but that does not mean that we will go right away to the extreme. If we are to follow our projections, it will not be necessary to increase the amount of money in the market. We only want to replace old banknotes with new ones.

TCH: We see there is an accordance between what BoA, the Government, IMF, WB and EBRD say regarding the growth trend of the economy, but putting it on a path of sustainable development remains a challenge for all governments and banks. Economic growth rates are negligible, especially with regard to employment. Does the pattern of development and structural reforms you see for the future concur with that of the Government?

Governor Sejko: The Albanian economy needs to be reoriented toward a manufacturing economy. The Albanian economy must be able to compete and export its products. We are in a difficult regional economic environment. If we have a look at the statements of all central banks, they call for serious structural reforms. We have started to change the economic model and if reforms are undertaken seriously, they will have an effect. Some reforms are painful, and have their own effects. There are many elements combined together. Social, financial and other elements, but reforms need to be undertaken. There is no development without a reform and without formalization of the economy. These reforms should be thoroughly studied and in order for them to give effects.

TCH: As regards the justice reform, does the current draft satisfy you?

Governor Sejko: I would like to say that the Bank of Albania sees the impact the reform would have on the relationship between enterprises and banks, to address the issues between banks, enterprises and households.

 In our view, the reform in the justice system is seen for the effect it may have in this regard. I have emphasized to the Parliamentary Committee on the Economy and Finance that non-performing loans have become a national interest for the fact that due to obstacles in [collateral] executions lending has contracted; in turn, shortage of lending has led to the absence of economic growth.

TCH: To what extent do reforms diversify the economy?

Governor Sejko: Structural reforms are much wider and are related to quite critical elements. Health, education and energy fall outside the area of responsibility of the Bank of Albania. Regarding informality, the government considers it an operation, we want to turn it into a reform, a well-studied reform in order to have people pay their taxes.

TCH: The government takes pride in being able to return $ 740 million in debt to enterprises, why did this not have an effect on the investments? It failed to revitalize them.

Governor Sejko: Practically, had the Government not paid the arrears, the problems would have been much bigger. The payment of arrears to enterprises gave a great deal of help to the relevant enterprises. We expected liquidation of the loans, but perhaps non-performing loans were higher and the payment of arrears helped the enterprises considerably.

TCH: We are not talking about loans that business were granted from commercial banks, we are talking about invisible debts, business to business...

Governor Sejko: This would require more study. It has improved the business situation but it has not improved the financial system.

TCH: The government has just received a long-term loan from the IMF; on the other hand, it has announced that for the first time it is decreasing its debt, don’t you find these to be contradictory?

Governor Sejko: They are not contradictory. The government has an agreement with the IMF. The government is heading towards fiscal consolidation and we support it. Debt is at alarming levels and this is accompanied by problems; high debt decreases the competitiveness of the Albanian economy in comparison to others. We expect debt to reach 60% in 2019. The fact is that the trend is heading towards fiscal consolidation and serious work has to be done to reduce debt. We support debt reduction, but we must be careful with public investments.

TCH: Everyone suggests the government that, in order to have economic growth, there must be public investments...

Governor Sejko: We seek foreign direct investment and public investments to remain within the framework of debt. The investments would increase only in the event of a better collection of revenues.

TCH: Does it make any difference for you when the government replaces the direct interlocutor with you, the Minister of Finance?

Governor Sejko: We, as the central bank, have an institutional relationship and this relationship has been correct. We have had a very good spirit of cooperation. We see no issue in changing the ministers. There could be a problem if the Finance Minister weren’t a specialist of the relevant field, as it would take us a long time to get him updated.

TCH: Should the government do something to fix the business atmosphere?

Governor Sejko: We are a financial regulatory institution. We advise on structural financial reforms.

TCH: If you were to grade the performance of the Government, what is your evaluation for its fiscal policies and economic model?

Governor Sejko: I would grade the desire of the government to fight informality with a high score, because at some point it had to start. However, this is a very complex process and the evaluation test continues; therefore, we cannot give a grade at this point. Albania is a country with very high informality, which also hampers the capital market (stock market). I consider the fight against informality as a positive step and I hope that this will continue at the right pace.