BANK OF ALBANIA
Q&A during the press conference on monetary policy decision-making of the Supervisory Council of the Bank of Albania, 24 November 2010
Publication date: 01.12.2010
Question: The Government forecasts the economy to grow 4.1% in 2010 and 5.5% in 2011. Do these figures match your estimates?
Question: Do you think the 2011 draft budget introduced by the Government is a realistic one?
Governor: We do not yet have a baseline scenario for economic growth. The proper balancing of domestic and foreign demand, domestic and external balances and economic growth potential, against a background of prudent revenue projection, is essential to ensure an appropriate level of economic growth at home.
Concerning your second question, I would like to go back to the Statement I delivered earlier. I think it is worth being reiterated because it is in the context of prudence, which has been at the centre of the Bank of Albania's philosophy. A challenging year is lying ahead of all the world economy and Albania as an emerging market economy. Upon the issuance of the Eurobond we made Albania transparent in the market, hence preserving budget and debt parameters becomes highly essential. Revenue projections must be made on a prudent basis and they should consider the potential risk factors and the global developments, which is essential to have a well-balanced budget. Obviously, the latter won't provide the previous stimulus to the Albanian economy, but it will allow this stimulus to transfer to the private sector. The latter must be prudent and optimistic in order to provide the required economic stimulus and reach the economic potential.
Question: What is your opinion on the depreciation of the Lek against the hard currencies, mostly against the Euro?
Governor: I think the exchange rate is balanced and this is the Bank of Albania's view. It is based on sound macroeconomic grounds and there are no indications that there may be any disproportions between supply and demand. The Bank of Albania does not set a price for the Lek; it is rather interested in and ensures that demand in economy is adequate. The Bank of Albania is very cautious and monitors the current situation in order to create the preconditions for an appropriate supply and demand balance. We think that the flexible exchange rate regime, the total liberalization of the capital and current account and the measures taken to open the Albanian economy allow for balanced foreign currency inflows against a background of sound macroeconomic grounds. Even in cases of temporary exchange rate fluctuations, our judgment takes priority since it is based on medium and long-term projections. This judgment is based on an analysis of exchange rate models and of the new situation our country is going through - the visa liberalisation. We have based our analysis on the experience of other countries facing similar circumstances and we have made our projections based on empirical models, internal and external analyses and the business and consumer confidence indices. We think that the exchange rate will be balanced and that no short-term pressure will create any exchange rate imbalances. The Bank of Albania will be cautious and it won't allow any speculations in the forex market.
Question: I am very much interested to know your comment on the deposit-to-loan ratio in the Albanian banking system. In its previous meeting, the Supervisory Council requested from banks to evidence default borrowers. What is the current loan-to-deposit ratio? What is the situation with non-performing loans and why haven't banks responded to BoA's and Government's appeals for more lending to the economy?
Governor: Foreign literature states that no appeals, requests or even obedience work unless they are associated with economic and administrative measures and overall public awareness. We have enabled this combination through relevant legal regulations and market, market agents and public awareness. There can be no other way. As stated in my earlier Statement, the Albanian market has ample liquidity to lend to the economy. By doing so, the economy will have the right incentives to reach its potential from the current rates to 6% and beyond. Hence, there is liquidity and there is supply. In addition, the Bank of Albania made, before and during the crisis, the necessary administrative adjustments in order to boost lending in Lek by increasing the provisions to 150% for lending in foreign currency, hence stimulating the growth of deposits and the presence of foreign currency in Albania, and increasing banks' required capital and causing their capital to augment by their parent banks. The situation has now changed; there is excess in liquidity and this makes a better balancing of inflows and outflows in the financial system at large, and the banking system in particular.
The global experience nowadays, beginning from the USA and Europe as the two most important columns with regard to the post-crisis economic developments and challenges, shows that lending to small and medium-sized borrowers is going through hard times. The rationale behind this finding is that banks are more prudent in lending than before and there are additional documents required from the borrower. Thus, a lot needs to be done in this regard. In the meantime, lending to large borrowers is going through hard times due to the inefficient management of lending prior to the crisis. Banks are willing to make loans, but large borrowers are not willing to borrow. Said otherwise: 'You can lead a horse to water, but you can't make it drink'. Hence, the problem of the balance between supply and demand now weighs more on demand. This is why I drew the attention today that despite the increase in lending during the recent months, mainly for consumer goods, the Albanian business should increase the demand for loans. This can be made through proper projects that absorb foreign strategic investors. Hence, on the one hand, there are banks which must be more aggressive and more prudent at the same time, since we reflect the global conjuncture with banks being real actors in the European and global market. They can obviously be more active but this will largely depend on the optimism, realism and the initiative based on real private sector projects. This has to happen since the Bank of Albania has created the proper macrofinancial conditions for a stable exchange rate, stable inflation and ample liquidity in the market.
In the meantime, fiscal policy and the considerable cuts, which must be the basic feature of 2011 budget (in order to keep fiscal consolidation going in the medium and long run), provide room for the private sector to play a greater role in the country's economic development.