PRESS RELEASE
Questions and answers at the press conference on 02.09.2015

Question: The Government of Albania has announced this week the start of a broad-scale operation to fight informality and fiscal evasion. In your view, what will be the impact of this operation on the real economy for the remainder of the year? More specifically, what will be its impact on the relationship between taxpayers and financial institutions?

Governor: Related to the fight against informality, in the previous days, you have been informed clearly on the programme and platform of the Government for this action. The stance of the Bank of Albania is that any initiative, operation and action against informality are undoubtedly positive. Informality is a phenomenon that has been exaggeratedly present in the Republic of Albania, even vis-a-vis other countries in the region, where informality is also present. In the last two decades, the income to GDP ratio in Albania has been slightly higher than 20%, against 30-40% in other countries of the region. That is to say, informality stands higher in Albania than in our neighbours. Of course this initiative, action, operation or any other campaign against informality would contribute positively towards fair competition, fight against corruption and a number of other positive elements across various aspects of the economy.

From the perspective of the central bank, as the regulator of the financial system, we see the fight against informality having positive effects mainly in two directions, in addition to the above-stated and other aspects.
First, fight against informality would avoid the application of double standards in financial statements and balance sheets by companies. This would help these companies to enhance their chances to apply for and receive loans from commercial banks. We have been discussing and speaking, for some time now, about the sluggish credit demand, and the conservative lending standards applied by banks. One of the main reasons related to such comments is in fact informality. When businesses do not declare their real profit in the balance sheets and financial statements, banks face serious difficulties to estimate businesses' future financial performance, and make projections. Of course, this provides its share of contribution when it comes to making the decision on lending. If large, medium-sized and small enterprises, as well as households report their financial situation in real terms, commercial banks will be able to lend more; therefore, formalising this segment too.

On the other hand, formalisation would contribute to the development of capital markets. We have been commenting for a long time on the absence of a capital market in Albania - the stock exchange closed down. One of the main factors contributing to the non-development of markets is the high informality. If companies and businesses, mainly large businesses, had certified balance sheets by renowned international audit companies, to reflect their real situation, then capital markets and alternative resources, both for investment and financing purposes, would be an additional opportunity to support the development and growth of the economy.

On the second question, about the relationship between the taxpayers and the financial sector, I would rather not be a defence attorney for the banks or the financial sector. However, it is a known fact that not only banks and other non-bank financial institutions licenced by the Bank of Albania, but also other actors in the financial system have been the most formalised and regulated sector or industry with regard to financial statements. Banks and other financial institutions have generally worked with one balance sheet. They have not hidden the profit and have been adequately transparent. As a result, they have not been exposed to these dimensions of informality. Thus, we do not see the financial sector facing potentially concrete problems, because banks have always declared their profit.

In conclusion to all the above, I would like to say that any operation against informality is a positive development, especially in relation to the financial sector and banking sector, as it would contribute to the growth of lending to the economy.

Question: Why, according to the Bank of Albania's assessment, the balance of risks has shifted to the down side? Could you specify which risks you imply and which are the indicators standing below your expectations?

Governor: We have said that the balance of risks is on the down side, because there are elements in our projections, which may drive inflation below the trajectory of our target. As you heard in the Supervisory Council's statement on monetary policy, the situation of growth not at the expected levels has resulted from the presence of actual risks in the economy, perceived by both international and local actors.

Actually, foreign and domestic investments in the Albanian economy are not at the expected level; this situation is reflected by many elements and factors, similar to the situation in the region. The aim of the central bank, through the accommodative monetary policy, is to provide for financing conditions that stimulate investments. Also, the structural reforms, whether by the government or other actors, contribute to the growth of investment. In in turn, they contribute to the rise in employment, consumption and economic growth. For this reason the Supervisory Council sees the balance of risks on the down side. Our assessments for economic growth, ranging 2.5 - 3% (as we have stated we expect higher economic growth than in the previous year), are conditioned by the risks facing the economy. This corroborates our statement that we see the balance of risks on the down side. 

Projections for the next two years, based on the analyses and discussions of the Supervisory Council point to a higher progressive growth of both the economy and financing during 2016 and 2017. Also, Bank of Albania expects that inflation will reach the 3% target by the end of 2017. Yet, forecasts are forecasts - fortunately, the Bank of Albania turned out to be in line with its forecasts; however, we may not expect forecasts to turn out 100% accurate.

I would like to point out that the application of the plan of measures for reducing non-performing loans will provide a positive effect in the financing conditions by commercial banks. I also mentioned it in the previous press conference. We have seen a fall in the stock of non-performing loans and this trend has remained positive in the last month. The ratio of non-performing loans to total loans is approaching 20%, as a result of the plan of measures, loan write offs from the balance sheets, loan restructuring, and new loans.

We would like to reiterate that the loan portfolio is growing slowly and gradually, yet it is growth and not contraction. It is a known fact that the credit portfolio gets amortised. If new credit were not generated, the credit portfolio would contract. Our accommodative monetary policy stance aims to boost lending, which would provide, in turn, higher contribution to the economy. I would also like to underline that the accommodative monetary policy stance of the Bank of Albania, to keep the key interest rate to historic minimum levels, presently at 2.0%, has yielded its effects. The credit portfolio in the Albanian lek has increased, versus the foreign currency credit portfolio. This growth is progressive and the trend remains. In other words, growth is not fluctuating, it persists. The ratio of the domestic currency to foreign currency loans stands at 40 to 60%. This means loans denominated in the domestic currency account for 40% of total loans. This is a growing trend, compared to the 20 to 80% ratio in previous periods. Thanks to the accommodative monetary policy of the Bank of Albania, the lek lending portfolio has increased. This contributes to the performance of lending in successive periods, because lending in the domestic currency to those whose income is in the domestic currency prevents the exchange rate risk with regard to credit repayment, making contributing positively to the future performance of the credit portfolio. The Bank of Albania has no direct role in the foreign currency portfolio, which consists mainly in euro. It is the European Central Bank that sets the Euribor rate and the credit price/level is determined by the Euribor rate and the spread.

Overall, I would like to underline once again that we expect a gradual growth of lending in the second half of 2015 and a progressive growth of financing the economy and of lending for 2016 and 2017.

Speech by Gent Sejko, Governor of the Bank of Albania, on the monetary policy decision of the Supervisory Council, 2 September 2015