On the meeting of the Supervisory Council of the Bank of Albania on 27 May 2008

Publication date: 27.05.2008


The Supervisory Council of the Bank of Albania, in its meeting on 27 May 2008, reviewed and approved the "Review of the Albanian economy for the first quarter of 2008". After analyzing the economic and financial situation the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged at 6.25%.

Please find below the speech of the Governor of the Bank of Albania.

Governor's Speech

The first quarter of 2008 continued to be characterized by relatively complex worldwide economic developments. The economic activity of some developed countries decelerated raising the concerns for a global slowdown. The price rise prevailed an overwhelming part of developed and developing countries. Hikes in raw materials, oil and food prices affected every economy leading to increasing concerns related to a higher inflation spiral in the future.

On the other side the financial markets were not relaxed reflecting the spread of credit crisis generated by the US economy. A considerable number of financial institutions have been affected by this crisis while the largest central banks have been continuously injecting liquidity into the money markets.

This situation caused the Federal Reserve to cut the key interest rate further, followed by the Bank of England as well. On the other hand the European Central Bank and the Bank of Japan have maintained the same rates. The financial markets display diverse sensations, varying from concerns for further inflation hikes on one hand to financial stability related-concerns on the other.

Given its small size and being relatively open, the Albanian economy cannot escape being affected by these developments. As a result, we have been attesting an accelerated rise in overall consumer prices. As of end April annual inflation marked 4.4%, shifting slightly above the upper level of 4% targeted by the Bank of Albania. After a careful analysis of the influence of various groups on inflation we conclude that the latter has been most overwhelmingly affected by the price rise in foods. Within this group the processed foods prevail.

Another factor to have provided additional effect is the change in the administered prices which consists in the price rise of energy in March 2008. Excluding this effect the annual inflation rate would have marked only 3.7%.

Other important indicators which best describe the inflationary pressures caused by domestic demand in economy, such as that of core inflation and non-tradable goods' inflation, are still low. In addition, the banking system, business and consumer expectations remain within the targeted parameters regardless of the slight upward shift.

The latter remain of prime importance in assessing the role of monetary policy in the future, in particular when the risk factors are significantly related to shocks generated by the performance of aggregate supply.

There are few statistical data on the Albanian economic activity for the first quarter of 2008. Consequently, it is challenging to make a complete and detailed sectoral analysis.

The new data on the agricultural activity for the entire year 2007 confirm the most recent analysis of the Bank of Albania related with this sector's performance. According to the data made available by the Ministry of Agriculture, agriculture grew moderately by 1.5% during 2007 relative to 4.3% the previous year.

In these circumstances the rational use of agricultural land is of prime importance, aiming at increasing the planted areas and the productivity per unit. To this purpose, the Bank of Albania re-highlights the need for deep structural reforms related with land, property, the collection and distribution, as well as with infrastructure.

Construction continues to be characterized by a vague setting in the first quarter of 2008. The slower growth rate of construction relative to the average performance in the last years requires careful attention considering the role and contribution this sector has on domestic economy.

The satisfactory hydric situation provided its impact on the growth of supply with energy, hence improving the energy balance sheet. Domestic production grew at similar rates with year 2006, which led to the decrease of imports of energy and the moderate improvement of the KESH performance. Given the sensibility of this sector, the Bank of Albania deems as reasonable to bring into the public attention the fact that the energy challenge remains open and the soundness of KESH's financial situation is a necessity. The rapid privatization of the distribution network is of priority; consequently, we believe that the drop in losses and the increase of income are crucial.

Exports continued to grow in the first months of 2008 both relative to the last and the first quarter of the previous year by 4% and 13% respectively. Despite the considerable drop relative to end-year 2007 imports are about 17% higher than the same period the previous year. As a result, trade deficit grew by about 17% relative to the same period the previous year. Worth emphasizing is the fact that the numerical developments in foreign trade also reflect the price rise effect of raw materials, energy and foods.

Fiscal developments of the first quarter 2008 provide evidence for a prudent fiscal policy which has resulted in a budget surplus above the projected level. The collection of revenues followed an upward trend while investment expenditure reduced during this period relative to the previous year. Government's borrowing has been represented by domestic borrowing during this period.

In annual terms, broad money grew by 11% as of end the first quarter 2008. In general, the banking system has supplied the economy with monetary assets mainly through the injection of money in the form of credit to the private sector. The performance of the system's net foreign assets and the accumulation of the public sector's monetary balances have offset this effect.

In annual terms, credit to economy grew by 47.3% on average in the first quarter of 2008. Despite the downward rates credit continued to grow in absolute terms as in the previous year by about 22 billion leks. Commercial banks have been active in the lending market deepening further their role as financial intermediators. This fact has also been reflected in the stable growth of intermediation indicators. In March the share of credit to broad money and to the GDP reached 40.9% and 31.4%, respectively.

Key interest rate remained unchanged at 6.25% in the first quarter of 2008. Last year the Bank of Albania raised the key interest rate three times by 25 basis points each in response to the inflationary pressures in economy. These raises were followed by the increase of short-term interest rates in the money market and of lek-denominated deposits' interest rates. In the first months of 2008 the performance of interest rates in the interbank and primary market was stable and their fluctuations were linked to the asymmetrical distribution of liquidity in the market. On the contrary the interest rates of new credit denominated in lek dropped significantly, causing the difference with other interest rates to narrow. This fact shows enhanced competition in the banking market.

For the rest of the year and until the first quarter of the following year the annual growth rates of the overall price level are expected to fluctuate for some time around the current rates and return by the end of the year within the tolerance band targeted by monetary policy. However, the risk that the assumptions made may deviate is still present and in most cases, they are positioned on the internal and external supply-side. The costs deriving from the price rise of raw materials, oil and foods are expected to continue to exert direct pressures on consumer prices and provide indirect impact on producer prices.

Domestic agricultural production is expected to be a determining factor originating from the inside. Presently, the domestic production begins to be traded in the retail market. As of end April 2008 inflation dropped by 0.4% in monthly terms as a result of the reduced contribution of foods and alcoholic beverages. For this reason the performance of this factor will be of great interest in the months to follow. Based on the historical behaviour the following two or three months record the highest downward influence on unprocessed foods prices. However this sector of the economy continues to be highly sensitive to weather conditions and to short-term fluctuations in the costs of raw materials and oil prices.

Making a general assessment of all risk factors and focusing on their possible actualization in economy the Bank of Albania assesses that the balance remains shifted on the upward side. The latest data on inflation expectations which provide evidence for a slight shift to the upper level are additional information in this context.

The entire relatively complex setting of developments and expectations requires prudence in terms of the financial system's stability. The risks are related both with the regional and global environment and with the internal environment considering the rapid growth of credit to economy. Apart from credit and exchange rate risk there are other risks related with external factors. The expansion of credit crisis in Europe, the possible economic slowdown in partner countries and the presence of the same banking institutions in the majority of the regional countries require constant attention.

The analysis of earlier decisions confirms that the policy has been on the right track and with the proper intensity, allowing satisfactory control over the overall level of consumer prices. Past decisions have had a positive impact on the monetary stimulus which boosts the economic activity in the country and the banking system's financial stability.

The Bank of Albania remains vigilant in particular in terms of inflationary developments in economy. To this purpose it will accountably analyze the developments and various risks the future of macroeconomic and financial stability may be faced with, including the inflationary expectations of different agents in economy. The Bank of Albania remains entirely committed in successfully achieving its objective mandated by law. This commitment implies taking sound decisions at the proper time, not excluding here their combination with administrative-related measures.