PRESS RELEASE Albanian economy facing the recent challenges
Lecture by Ardian Fullani, Governor of the Bank of Albania, At the conference on ''The global financial crisis and future developments'', organised by ''Our Lady of Good Counsel'' University and Bologna University, 27 March 2009

Dear participants,

It is a special pleasure for me to be among you in this conference syntonized with the sharpest recent problems and share with you some opinions about the Albanian economy performance and its confrontation with the international financial crisis. Though the origin of the global crisis is the same, its impact varies across countries, as the nature of problems and measures taken for solution to the crisis also vary.

Fortunately, the Albanian economy is in a more convenient position to face the crisis, compared with many countries of the region or with co-transition countries. I say fortunately, not to define the casual nature of the favourable economic and financial position we are in, but to highlight that the consolidated macroeconomic equilibrium of the country makes us less vulnerable and gives some more space for dealing with it. In reality, there is nothing casual in our headway towards sustainable economic development at home. In drafting and implementing the economic policies, the Bank of Albania, as one of the main stakeholders, has constantly paid attention towards achievement of this target. Our efforts in this direction have been associated with a sound framework for coordinating the macroeconomic policies, with a significant role being played by the IMF assistance and its financial support.

All these premises have made the Albanian economy grow at satisfactory rates during the last decade, recording an average GDP growth of 5-6 percent. Nominal income per capita has almost tripled during last eight years and due to low inflation this growth has been directly translated into increased standard of living. On the other hand, fiscal policy has been relatively prudent. Its features have been shaped by the need to maintain fiscal discipline, which is reflected in the prudence for controlling the budget deficit, the public debt and the government's impact on domestic financial markets. Like many other developing countries, our economic growth has been associated with high trade deficit levels, which have been financed from steady capital inflows in the form of remittances or foreign direct investments.

However, the economy's performance in the last quarter of 2008 and first months of 2009 is indicating an ever larger impact of the global financial crisis on the country's economy. In few words, this impact is illustrated with reduced flows of remittances and imports, reduced liquidity and tightening of credit market, as well as uncertainty of economic agents. All these developments have encouraged a public debate on appropriate measures to cope with them and have highlighted the need for coordination of efforts of all economic stakeholders at home.

The financial system has been an important factor in sustaining the high economic growth of the country. It has reflected a constant growth of its activity, particularly over the latest years. This development has been supported by ongoing reforms, aiming to enhance competition and constantly improve the regulatory and supervisory infrastructure. The whole banking sector is currently dominated by private capital and most of banks are owned by well-known European banking groups. Over last 5 years, the annual growth of banking sector assets is 15 - 20 percent, amounting to 87 per cent of GDP as at end 2008. As a result, for four last years credit to the economy has increased on average 7 percentage of GDP, reaching around 37 percent of GDP.

The regulatory and supervisory Infrastructure of the financial system has also improved. In the framework of regulatory and supervisory role of the banking activity, the Bank of Albania has aimed at implementing best international standards, so that the banking activity and banks perform in a balanced way, with identified and controlled risks. To this end, the Bank of Albania has concluded that any developments, generally perceived as positive for the banking activity and for the economy in general are likely to be associated with numerous risks in terms of the financial stability of the system. Our objective is to be in the vanguard of identifying and taking appropriate measures to precede the materialization of such risks in the future. In more concrete terms I am referring to rapid credit growth by the banking system. We had to do with a positive performance, supportive to economic development of the country, but the Bank of Albania could in no case ignore the other side of the coin, i.e., the portfolio quality. The same holds even as concerns the loan portfolio composition by currencies. Domination of loans in foreign currency makes the loan portfolio sensitive to exchange rate performance of the national currency against the main foreign currencies. To ensure a better management of these risks by the banking sector, the Bank of Albania has recently undertaken different regulatory actions to better discipline the rapid credit growth and to better balance the loan portfolio composition by currencies.

Also during the last year the banking system performance was generally positive. The banking sector was well-capitalised and liquid. The capital adequacy ratio stood at 17.2 percent, whereas liquid assets to total assets, was at around 43 percent. However, due to international crisis developments over the last quarter of the year, the banking system was faced with an unstable situation of the public deposit performance, which during the last year increased only 2 percent. Low growth paces dictated a slowdown of the banking system asset annual growth to 12.3 percent, as well as a slowdown of the annual credit growth of around 35 per cent. The financial result of the banking sector for 2008 was positive but lower than in the previous year, due to a slowdown in profit-making activities and increased operation costs. The banking sector profit for 2008 was ALL 7.3 billion.

Under these conditions, the Bank of Albania took some measures, aiming to professionally and explicitly clarify to the public the international crisis effects, through its presence in the media and increased number of various publications; strengthening the banking activity surveillance through extended requirements in the framework of reporting of banks and on-site examinations, strengthening the dialogue with the banking industry; strengthening the cooperation with other supervisory authorities at home and in the region; improving the regulatory framework in certain aspects of the banking activity; preparing measures for maintaining public confidence in the banking sector; including the proposal for increasing the deposits insurance value.

The Bank of Albania, assessing its role objectively, has contributed to keeping liquidity at optimal levels, mainly through an effective combination of available operational instruments. The Bank of Albania has successfully alternated liquidity injection in interbank market, through weekly reverse repurchase agreements, at fixed price and longer-term injection options, including outright operations.

Year 2009 is expected to be harder for the banking activity growth. The banking sector will be stable, in terms of maintaining adequate capitalization and liquidity level. The Bank of Albania has requested from representatives of the banking industry maximum prudence and commitment to monitoring and coping with the developments over this year. We have required strengthened audits of leading structures of banks over the activity of their institutions. This should be done in accordance with the need for adapting to additional requirements of the Bank of Albania for timely information on banking activity performance. More specifically, the Bank of Albania has requested from banks' stockholders to be willing to, if necessary, increase their capital and maintain financing lines for their subsidiaries operating in Albania. Within the parameters of a sound banking activity and in accordance with the regulatory and supervisory framework, the banking sector should utilize the existing possibilities to carry out its important role in the financial intermediation and in the sustaining of economic growth of the country.

Let me annunciate some packages, which orient the analysis and decision-making of the Bank of Albania in the current situation.

As it is clear for every researcher of economics, the development of every cell of the economic activity should be known and confronted with its budget deficit. It's valid not only for corporate and household budget, but also for the whole economy. Challenges ahead have to do precisely with reduced possibilities for financing the economic activity. Due to problems deriving from abroad, the banking system financing possibilities are tighter than a year ago. Bank balance sheets, though sound and well-capitalised, are characterised by a lower liquidity level. Also, it is understandable that the banking system prudence for the loan portfolio quality has increased significantly, bringing about further drop of bank loan extension. In absence of foreign financial resources, it is normal for the Albanian economy to be aware of and accept these financial restrictions in the short run. Albanian business and consumers should be more cautious in using the banking system funds. This is not an appeal for contracting the banking borrowing, but a signal for enhancing the efficiency in available funds utilization. This concern should be recognized and well understood by all economic, public and private agents.

The economic development is a constant confrontation of the desires for stimulating credit in support of consumption, investment and economic growth, with the needs for stability of macroeconomic balances. The latter condition the economy growth rate in the long-run. Strong stimulating policies may purchase an economic growth for a short period of time. But this strategy would damage long-term price stability, undermining the purchasing power of the economy and loosing confidence in the national currency and in financial institutions. Also, these measures may result to a balance of payments deficit, causing strong second-round economic contractions. Obviously such an economic strategy would turn out negative. All this explication supports the Bank of Albania's opinion that the maintaining of macroeconomic stability, reflected in low inflation, sound public and private balance sheets, stability of the fiscal debt and of the foreign currency external position of the economy and low volatility of the financial markets, is the proper key to orient and develop our economic policies.