PRESS RELEASE
Opening remarks by Gent Sejko, Governor of the Bank of Albania, at the Presentation of the EBRD Transition Report 2015-16

Dear representatives of the EBRD,

Dear friends and colleagues,

I would like to first welcome you to the Bank of Albania premises. We are here today for the presentation of EBRD's Transition Report 2015-16. I am certain that an open discussion of this report will provide a new perspective on the actual problems facing the country and possible solutions.

In my brief address, I will focus on three key moments. First, as the host of this activity, I would like to say a few words on the importance of the Transition Report and its highlights. Second, as the Governor of the Bank of Albania, I think that a preliminary assessment of their applicability for Albania is suitable. Third, it is also necessary to make a very brief summary of EBRD's crucial contribution in the transition process.

1.Transition Report and highlights for the current year

The Transition Report ranks high in the list of professional analysis for the economies of our region and beyond. This annual report is more than just a summary statement of the current economic and financial situation. It is a coherent guideline for formatting the development agenda for transition countries, highlighting the structural growth issues and the macro and microeconomic weaknesses for these countries.

To illustrate my point, I would like to bring again to your attention that the Transition Report over the past years has focused on topics such as: the impact of the global financial crisis on the region (in 2011); challenges arising from the integration in global economy networks (in 2012); reasons for a prolonged transition (2013); and problems arising from technological and financial innovation in emerging economies. All these topics have fully resonated with the past and current challenges facing Albania.

This year's main topic in the Report relates to the need for creating a new financing model in transition countries. This conclusion comes naturally from the context of economic and financial dynamics in them. Seven years on since the start of the crisis, economies in transition continue to see sluggish growth. The experience has shown that economic recovery is hampered by cyclical weaknesses and structural problems in the real sector. In contrast to previous crisis, economic recovery after the last financial crisis has been and continues to be constrained by the weak performance of bank lending and lack of alternative financing options.

To sum up, the Report points out that the level of development and diversification of our financial systems does not correspond to the quality and quantity of the needs for investment. For a number of reasons, the divergence has been increasing in the post-crisis period and, unless tackled with priority, it may become a serious obstacle in our development path. The Report puts forward concrete proposals for overcoming the obstacles. The proposals refer both to the expansion and the qualitative improvement of the functioning of the financial system.

The Bank of Albania has been constantly paying attention to credit-related problems. In our last annual conference, we discussed extensively on the deficiencies in the current financing model of the Albanian economy. I would not wish to claim or say that the Bank of Albania has all the answers and all the tools to solve such issues. But, I may say that the Bank of Albania has made a good diagnosis of the situation and is making maximum efforts to boost credit and ensure sustainable development of the financial system.

Let me now summarise in brief Albania's position vis-à-vis the main challenges highlighted in this year's Transition Report.

2. Challenges to the development of the financial system in Albania

· The report suggests that transition countries have seen a significant fall in the rate of investment. This fall is not justified by cyclical or fundamental factors and affects the long-term growth of these economies.

The Bank of Albania has constantly pointed out that the global economic and financial crisis took a toll on the country's development. One of the most evident effects was the decline in investments, from 36% of GDP in the pre-crisis period, on average, to around 28% of GDP, on average, in the following years. In part, it owes to the decline in investments in residential buildings, which is a natural adjustment of the swift growth that this segment experienced in the pre-crisis period. In parallel, it owes to the decline in investments in machineries, equipment and infrastructure, which contributes negatively to the development potential of the country. According to some estimates, the level of the per capita capital stock in Albania accounts for around 40% of the average level of this indicator in the euro area. This capital level is certainly insufficient to support the convergence with the living standards in these countries. Therefore, we should keep promoting investments and expanding potential growth as a constant priority in our work.

· According to the Report, the growth of investments in transition countries continues to be constrained from a lack of funding sources. Particularly, bank credit supply appears to have faced constrains, due to structural changes in the European banking sector and the legacy of problems in the financial systems of transition countries. <

Overall, the banking sector dominates the financial systems in our region's economies. This financial structure has helped channelling foreign savings into local loans, but this process was accompanied by high euroisation in the pre-crisis period and a rapid growth of non-performing loans in the period that followed it. Credit supply contracted significantly in the post-crisis period. European banking groups faced financial difficulties and withdrew funds from many transition countries. At the same time, the new regulatory environment in the European Union, the high euroisation level and the rapid growth of non-performing loans weighed on the balance sheets of the real and financial sectors of the economy.

A number of parallels may be drawn between the performance of the financial system in Albania and in the countries of our region. The banking sector dominates the financial system, accounting for around 90% of total financial assets. Bank credit saw a sharp increase over 2004-2008, from 8% to 35% of GDP. In the following period, the credit growth rate slowed down evidently, currently standing at around 36% of GDP. Moreover, the euroisation of credit in Albania was very high in the pre-crisis period, with approximately three out of four credits denominated in a foreign currency. However, this trend has shown evident improvement in the following period, with the ratio of domestic currency credit to foreign currency credit standing at around 40%. The trajectory of non-performing loans has performed similarly to that in the countries of the region. In the post-crisis period, these loans increased rapidly; their ratio to total loans peaked to around 25% in 2014 to later pursue a clearly downward trend.

On the other hand, the financial system in Albania has its own specific characteristics. A positive feature is the fact that the banking sector activity in Albania relies on domestic sources of funding. Currently, the ratio of credit to deposits is around 50% and the banking sector is characterised by high liquidity, especially in foreign currency. This feature has served as a buffer for the Albanian market against global market volatility . . Unlike many countries in the region, bank withdrawals in Albania were sporadic and relatively limited. Likewise, the high level of investments in Albania was sustained by considerably high level of FDIs. In the post crisis period, these investments were around 8% of GDP and served as a substantial cushion to bank credit slowdown.

· Lastly, the Transitional Report presents some concrete suggestions on the further restructuring and development of the financial system. Among others, this system should be further diversified in terms of its segments and products and rely mostly on domestic savings. Also, the banking sector and businesses should appear more rational in the financing strategies.

Naturally, these suggestions are among the most important contributions of this Report. I would like to also emphasise that Albania has taken a series of important steps to increase domestic savings, such as: pension's system reform, energy sector reform accompanied with the lowering of its fiscal subsidising, and the return of public debt to a downward trajectory. Also, the Bank of Albania, in the capacity of the monetary, as well as the supervisory and regulatory authority of the banking system has taken concrete steps to boost credit demand and supply. These measures have aimed at lowering the financing cost, tackling non-performing loans, introducing more prudential rates against foreign currency credit and encouraging credit restructuring. Also, we have urged banks and businesses to design more rational and visionary business strategies.

On the other hand, capital market segments remain unexplored. The development of this segment, at both, local and regional level, continued to be constrained by the lack of expertise and of financial literacy, the inadequate standards of transparency and good governance of businesses. Capital markets may provide an alternative platform for the financing of businesses, moreover so, if these markets would succeed to draw the interest of big players of the global financial markets.

I would like to close my opening remarks with a few words about unique role of the EBRD in the transition process in Albania.

3. EBRD and Albanian transition

Beyond the advisory function, the EBRD has provided an important contribution and concrete support through financial investments in crucial areas of the economy. Recent data show that the EBRD has invested in both the private and public sector, around EUR 940 million in the Albanian economy through 70 projects, in areas such as: infrastructure (around 34%); energy (around 28%); development of financial infrastructure (around 23%) and various projects in the field of industry, trade and agro-business (around 15%).

In particular, I would like to highlight that the guarantee line the EBRD has provided to the Albanian Insurance Deposit Agency is an additional safety net to our entire financial system and has considerably contributed to its normal functioning.

Thank you!