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

Question: This month, the Bank of Albania used it’s the monetary policy instrument again, reducing lek interest rates to the historic minimum.  If we take account of the 2.1% inflation rate as well, then the interest rate on deposits for the first time posts at a negative value.  What are the implications for Albania and depositors, and the public debt of the Albanian Government? To what extent is the monetary policy combined with the fiscal one?

Governor: Thank you! As we said in our last statement, on 4 November 2015, the Supervisory Council of the Bank of Albania decided to lower the key interest rate to 1.75%. Following this reduction, the rate now stands at the historical minimum, in line with the stimulating monetary policy that the Bank of Albania has been implementing for some time now, and is affected by the economic background in Albania, in the region and beyond.  The Bank of Albania lowered the key rate in the light of its primary objective: maintaining price stability. At the same time, this reduction aims at boosting lending and economic growth.  

The reduction of the key interest rate, aimed at reducing the cost of funds in the economy, is a monetary policy instrument broadly employed by the central banks, initially, by the Federal Reserve, the Central Bank of the United States. This policy has provided its effects.  Also, the European Central Bank has lowered the interest rates to negative levels. The Bank of Albania has done the same thing. Similar to other central banks, the Bank of Albania tries to encourage lending by lowering the funds’ costs, that is, the cost of credit price. 

It should be said, that price and interest rate are not the only elements that impact lending, as in that case, there would be a simple correlation: the lower the interest rate is reduced, the higher lending would be.  As we have previously emphasised, the risk perception considerably affects the stance of financial institutions.  Now, this is about the supply and demand.  As a central bank, we try to affect the supply side, in order for the latter to be rather attractive to the market and the customers. On the other hand, banks themselves see a high risk level, while businesses are reluctant to invest.

We are simultaneously working with banks, to consider also other possibilities, in addition to the key interest rate instrument. First, the Supervisory Council is analysing all the elements and other factors that may be used in the future to simulate lending, as, judging from the figures, lending has not increased at the expected levels.

On the other hand, deposits are certainly affected by the decrease of interest rate. This is done exactly for the people, households and businesses, to undertake higher investment initiatives, to increase consumption and investments. A low interest rate on deposits drives the customers of banks and large financial institutions to look for alternative investment opportunities. As I stated at the beginning, other central banks have even lowered the interest rate even further. Currently, the European Central Bank has shifted to negative interest rates.

Currently, the average inflation rate stands at 1.8%, compared to our 2% projection for the year. It does not mean that this level is too below the expected level of inflation. It is true that the currently implemented interest rate is low, but this rate remains higher than interest rates in other countries.

Summarising, I would say that the central bank employs the interest rate as the main instrument to boost lending, economic growth and welfare; it also promotes initiatives and investments in the economy. 

Question: You mentioned that the Bank of Albania is discussing with banks on other instruments to boost lending, also an inter-institutional plan is in place, where the Bank of Albania is one of the key institutions, for the write off of loss loans, also non-performing loans.  At what stage is this action plan? And what is your opinion, is it a matter of willingness or of possibilities?

Governor: To be realistic and coherent with the economic situation, it is not only a matter of willingness, but also of possibilities. Businesses, particularly larger businesses in Albania, have been going through a difficult process related to the macroeconomic situation in Albanian and in the region. We know that the Government was in arrears, which are already paid to the businesses. But, that was insufficient to provide an impetus to businesses to pursue the same trend in their investing initiatives in projects.  On the other hand, the economy has encountered difficulties in terms of imports and exports. Exports have fallen due to the economic difficulties in the main trading partners of Albania, such as Greece and Italy.  Absolutely, this has affected the turnover level of companies and the level of foreign direct investments. For example, re-exporting companies have re-directed their products to other markets, moving away from Greece and Italy, in search of other markets such as Germany or other countries that have a demand for these products. 

Businesses have had their difficulties, some of which have been in place for a while. In parallel, commercial banks have adopted a more conservative approach, which is also due to parent bank policies. The parent banks, which operate in the European Union countries, are regulated and monitored by the European Central Bank. Amid a regional crisis situation, these banks are not as "aggressive" as they used to be. Surely, this fact affects their lending policies, as they perceive higher risk rates not only in Albania but also in the region. 

Question: In your opinion, what is the role of the judiciary system, according to discussions with commercial banks?

Governor: In this context, the Bank of Albania, together with the Government and other actors, has drafted a plan of measures to tackle the non-performing loans, which in Albania are higher than in the region, around 25%. Owing to the measures laid down in this coordinated plan with the Government and other players, the level of non-performing loans is reduced from 25% to 20%. This plan of measures consists in legal, regulatory and administrative measures to facilitate the relationship of banks with customers and the repayment of credit granted from commercial banks. This plan aims at clearly dividing those businesses, which have positive projections and may continue their activity, from those businesses which do not have positive projections and may go bankrupt. Naturally this plan is drafted in view of some laws, such as the law on bankruptcy, law on securing charges and other laws, which aim at facilitating the relationship with the court. It is rather important in practice to see the execution of collaterals reflected in the work of commercial banks.

The execution of collateral is very important. This process is detailed in the respective laws, but given that the non-performing loans are at a problematic level, as we have emphasised, it may be considered as a national issue as well, as it affects lending and economic recovery. Under these conditions, this issue should be given more attention and be addressed with priority.

In simpler words, when collateral is not executed in time by banks, they are not able to recuperate the necessary liquidity to recover their financial situation. This affects the situation of banks, and in addition, their optimism to continue lending. For this reason, we aim to correct these elements, in order for banks to return to lending, that is, to normality and optimism for lending.

Notwithstanding this plan of measures, it is important to emphasise that in case lending will not continue, albeit the measures taken to reduce the level of non-performing loans, their percentage will remain high, as, at the end of the day, non-performing loans is a ratio to total loan.

The aim of this plan of measures is to encourage lending to boost economy, but it should be said that businesses have their difficulties. We aim at increasing optimism, investing initiatives and consumption. Our expectations for the future are that consumption and investments will increase. This will come in parallel developments: the structural reforms by the Government, the financial reforms of the Bank of Albania and the macro economic development of the of Albania’s trading partners. 

Question: The Parliament is discussing these days on the new budget for 2016 and the fiscal package.  According to the Bank of Albania, how much do the new budget and fiscal package encourage the economy for 2016? And a forecast and expectation of the Bank of Albania for the economy, how much will it grow in 2016?

Governor: I will answer starting from the last question. Related to the economic growth, as it was emphasised in the last press conference, Bank of Albania revised down the forecast for the economic growth, from 3% to the range between 2.5 and 2.7% for this year, while in the next year the projections range between 3 and 3.4%. Projections become more precise over time, however this is our projection. The revisions are made because of the elements that we have already explained.

Economic growth was not at the expected levels, but growth still continued. Albania was never in recession. The economic growth trend is important. We are waiting for the end of year data. If we perform according to the forecast, that is the recent 2.5% growth forecast  and if score an economic growth higher than 3%,  very prudently, I would estimate it positively as the performance and trend would continue positively. These are only projections. 

Related to the budget, the Bank of Albania is always focused on the main basic parameters. It is important to lower the budget deficit, that is, to keep it under control and monitor budget deficit through a fiscal consolidating policy. We have coordinated and harmonised our monetary policy with the consolidated fiscal one, always with regard to lowering the budget deficit.

The last issue of the Eurobond is another element, which affects what I said previously, creating free funds to simulate economy.   In other words, turning to external debt has freed liquidities for bank lending to businesses and the Albanian economy.

This budget, as far as we have seen, aims at continuing the consolidated fiscal policy. This is in line with our advice on lowering the budget deficit and continuing the consolidated fiscal policy.

Regarding the fiscal package, the Ministry of Finance and the Government have conducted their analyses. As I said, the Central Bank' goal is to preserve the macroeconomic parameters.  The taxes and fiscal package discussed by the Government are in line with the policies that are implemented in view of the structural reforms, also for the purposes of the Albanian Government's policies. The relevant expertise and analysis are carried out by the Ministry of Finance. The Bank of Albania has provided the respective advice and opinions related to the budget, always for the purposes of maintaining the main macroeconomic parameters, to continue the consolidated fiscal policy and lower budget deficit. This is our goal. As long as we see that these parameters are under control, perform in the right direction and upheld, it is the right of the Government to decide the fiscal and tax policies to be implemented by various levels. This is a right of the Albanian Government.