PRESS RELEASE
Interview with Gent Sejko, Governor of the Bank of Albania, Klan Plus TV

Question: Mr Sejko, first thank you for the interview. The World Bank and the International Monetary Fund have revised down their forecasts for economic growth in the next two years. What is the Bank of Albania’s forecast for growth?

Governor: From the available information, economic growth in the first half of the year was around 4%. We expect the end of 2017 to register an economic growth rate around this level, maybe with a slight downward revision from 3.9% to 4%. This growth rate is driven by domestic investments, growth of consumption and foreign direct investments, as well as improvement of the balance of trade with abroad, which means growth in exports, mainly in services and tourism. For the next two years, we expect that this economic growth trend will continue. According to the Bank of Albania’s models and forecasts, the economy will return to equilibrium in the next 2-3 years horizon, more concretely in 2019. Also, inflation will return to target in the same year. This means that there will be more premises for the decrease of unemployment, increase of employment and development of the economy.

Of course, this is just a forecast. It does not mean that the Bank of Albania takes it for granted that this will happen, since the Albanian economy will face many challenges, the same as the economies of the other countries of the region and the euro area. We must be ready and prepared to continue with structural reforms, not only the Bank of Albania, but all the stakeholders that have an impact on the economic development. Emphasis must be placed and discussions must focus on economic issues, instead of political ones, in order for all the stakeholders to be oriented toward the economic development of Albania. The Bank of Albania will continue the accommodative monetary policy, in order to boost economic growth. In parallel, we will continue our micro and macro-prudential policies for safeguarding financial stability in Albania.

Question: Will the EUR 1 billion project fill in the vacuum created by TAP and Devolli HPP, as they are ending?

Governor: These two projects, the two main foreign investments, have their plan and cycle during the investment phase. We must keep in mind that the generated income will not end with the end of the projects, but will continue after the completion of the construction and investment cycle. These projects will generate income in energy and export. Naturally, we see foreign direct investments connected with these two projects as complementary; hence their completion does not mean that the Albanian economy will halt the engines. The Albanian economy will continue to grow, mainly driven by the increase of consumption and foreign and domestic investments. Surely, foreign investments remain one of the main challenges for Albania and the region. The constant appeal we have made for undertaking structural reforms and continuing those that have already started for improving the overall economic environment in Albania and the business climate will contribute to improving the expectations and attracting more foreign investments in Albania. We expect that the Albanian economy will continue to perform, irrespective of the investment and construction cycles of these two projects.

Question: What is the assessed amount of currency in circulation outside banks, if you have any figures, and what risk does this represent?

Governor: Currency outside banks is assessed at 20% of the overall currency in circulation, or around ALL 255 billion. First, I want to underline that the Bank of Albania measures the currency in circulation, both inside and outside banks, mainly the domestic currency. We have no information regarding foreign currency, mainly euro, but also dollars, that circulate outside banks. 

Question: Domestic currency outside banks is around 20%. What risk does this represent?

Governor: The Albanian economy has an amount of money outside banks, which has decreased year after year. The challenge of the central bank and of the banking system has been to bring the currency inside the banking system, thus decreasing the cash in circulation outside it. There are many reasons for this. First, this is a symptom we are trying to fight. This symptom of the Albanian society is similar to that of developing countries, since it has to do with the low level of financial culture and infrastructure.

Regarding the cultural level we are working on improving financial literacy, so that the Albanian citizens are more familiar and connected with banks and keep their money inside the banking system. Regarding the infrastructure, the Payment Systems Committee, established at the Bank of Albania has undertaken many initiatives and steps to decrease the amount of cash outside the banking system. However, the citizens need to understand that this is a lost opportunity, since if the currency is kept outside the banking system, rather than in a bank account, brings no profit. Second, there is also a risk related to the security for the holder of this money, since they are not secure outside the banking system. Despite this, there is also a broader risk for the economy, since the currency outside the banking system leaves no tracks, and becomes a cause of illegal activities, like informal activities, fiscal evasion, and other activities. We have taken and will continue to take many measures for increasing the level of currency inside the banking system.

Question: Do you think that the Bank should be careful with regard to loans in the context of the EUR 1 billion project, and the seriousness of these projects? Do you think that there is a risk of creating a new amount of non-performing loans?

Governor: Banks in the Republic of Albania are mainly subsidies of banks based in the euro area countries. This means that in addition to our regulatory acts and requirements regarding risk analysis, these banks have to also comply with the regulatory requirement from their parent companies. In all the cases of large loans, like for public-private partnership projects, or other projects, the banks will assess the project according to their risk analysis criteria.

We do not think that this will increase non-performing loans. We will supervise, and it is our duty to supervise banks, so as to look at their performance in relation to all the projects, not only PPPs, but also at other projects, for the application of their risk criteria. I take this opportunity to emphasize that the banking system has made a very good progress in decreasing the level of non-performing loans, from 25%, now towards 14%. We will be careful to see that this level does not increase, regarding any loans by commercial banks. Public-private partnership projects will be assessed in this context as well.

Question: There are hypotheses that the drug money put in circulation may affect balances. How real do you think this is?

Governor: Drugs in the first place affect the social equilibrium of a society. This is an imported phenomenon in the Albanian society, taking into account that other European countries have experienced it before us. Unfortunately, this phenomenon has also been transferred to the Albanian reality together with social developments and changes.

We do not have data, as a central bank, to measure exactly the amount of money from activities outside the banking system, mainly in foreign currency. Regarding the macroeconomic indicators, like economic growth and other parameters, it results that growth has been driven by the improvement of the trade balance with abroad - exports, energy, tourism and services - the increase of foreign investments, remittances and income from tourism during the first half of 2017. These are concrete figures from official sources.

These incomes have brought sufficient inflows of foreign currency that has also led to an appreciation of the domestic currency. Lek has appreciated against the euro, mainly during the summer. It continues to remain appreciated, and such appreciation is within the parameters of the central bank. Based on our models, we have not judged and assessed as necessary to intervene towards a depreciation of the domestic currency. This is because the fluctuations have been within parameters and we have not had macroeconomic unbalances from the impact of drug money so far. Social unbalances, which are equally dangerous, must be monitored and kept under control.

The Bank of Albania, in collaboration and cooperation with all the other stakeholders, is exercising all our legal authority and instruments to supervise the banking system, because the banking system is subject to the central bank’s supervision and regulation. Another reason is to coordinate with other bodies like the General Directorate for the Prevention of Money Laundering, the intelligence services, the Albanian Prosecutor's Office etc. who are responsible and have legal obligations to monitor whether any of these institutions exercises illegal activities.

Question: Talking about crediting, do you think that the actual level of crediting is sufficient to serve the economic growth?

Governor: Crediting during these years has had a moderate growth. On average, it has grown at around 3%, mainly attributable the growth in the domestic currency, thanks to the accommodative monetary policy of the Bank of Albania. So our monetary policy has been transmitted to the market. This is not a bad growth rate, keeping in mind the impact from the financial crisis and the level of risks that exist in the Albanian economy, the region and beyond.

We would like to see a level of credit higher than 3%, we would also not insist in much higher levels. A credit growth above 10% would also not be desirable, not only for the impact it could have on the Albanian economy, but also because of the risks that it may bring regarding the level of non-performing loans. So, we do not have a precise figure as a target, but a credit growth between 5 and 10% annually would be acceptable for us.

However, the current growth of around 3% is normal. The Albanian economy has not suffered or stopped its growth level as a consequence of credit, since there have also been many other risk factors. The credit is oxygen for the economy, one of the instruments that we normally strive to stimulate through our monetary policy. We expect that in this year and in the coming years we will have relatively higher and healthier credit growth, as a consequence of not only our macro-prudential measures, but also of the structural reforms in the economy undertaken by all stakeholders. The central bank will continue the accommodative monetary policy until the end of 2018, maybe even a little further, to stimulate credit growth, consumption and investments in the Albanian economy.

Question: You have raised the concern about the lack of funding from non-bank financial institutions. Why this shortage and who should stimulate their lending? What benefits would bring the presence of these institutions?

Governor: I have recently pointed out at the conference organised by the Bank of Albania, but also before, that the financial system in the Republic of Albania is dominated at 92-93% by banks. This is a feature that characterises all the countries of the region. If we look at the other countries around us, they have the same percentages. The banking system dominates. It is time for other institutions like non-bank financial institutions, insurance companies, pension funds, companies specialised in financial assets management, to have a broader place in the Albanian financial system. This surely would be secured through the re-activation of the Albanian stock exchange. Recently, we have a new private stock exchange in the Albanian reality, which is trying to re-activate the capital market, which has been almost non-existent in Albania, or has been conducted informally through other channels and not through the stock exchange. Of course, these are alternative sources, which would activate more long-term alternative sources and the capital market would be more active. At the same time, Albanian investors would tap into other alternatives in addition to bank credit. We are working in cooperation with the Albanian Financial Supervision Authority and other authorities so that the capital markets in Albania develop and grow gradually. This is also in the framework of the war against informality.