PRESS RELEASE
Speech by Ardian Fullani, Governor of the Bank of Albania, at the 20th Anniversary of the Joint Vienna Institute

Dear ladies and gentlemen,

It is an honor and privilege for me to address this event marking the 20th jubilee of the Joint Vienna Institute. It is also a great pleasure to have the opportunity to share with you my thoughts on current global developments and their implications for our economies.

Despite certain episodes of disorder and imbalances the major part of the last two decades has been characterized by a general political commitment towards free market and reforms across the SEE region. As a consequence all economies recorded remarkable achievements which have led to a fast and sustainable convergence. These developments were supported by a similar commitment from the EU public and private sectors, especially the financial sector, toward the economies of the Central, East and South East Europe. 

Albania is one of those successful stories so far. For 20 consecutive years the country has gone through substantial reforms with the sole purpose of getting closer with the united European family.

From the painful reforms of broad price liberalization, followed by the introduction of a free floating foreign exchange rate regime and full current and capital account liberalization, to the current more sophisticated reforms, Albania has made significant progress towards establishment of democracy and free market principles.

The economic activity has remained solid throughout most of this period and the main indicators such as inflation, fiscal deficit, foreign exchange rate, unemployment rate, have performed positively, yielding a sound and stable macroeconomic environment. The financial system has become an important factor in supporting the economic activity.

The banking industry, the dominating segment of the financial sector, has contributed substantially to the overall developments by significantly boosting financial intermediation.  The process has been dominated by and reflected the involvement of notable European banking groups operating in Albania as well as in other Balkan countries.

After this brief overview, allow me to make some comments on recent challenges and difficulties which our economies are facing.

Last year and the first part of this year showed that the crisis that began in 2008 has reached its most acute phase, characterized by the inter-connection between sovereign debt and banking system crisis.

I would like to use the title of the memorable movie 'Enemy at the Gates' as an analogy to describe the gravity of the situation in our region, especially in Albania, as a result of the difficult economic situation of our southern neighbor, Greece, as well as the situation in Italy and the rest of Europe. About 80 per cent of our trade and financial activity is exchanged with them.

After several years through the crisis, our economies have shown an impressive resilience. This is not a coincidence. Rather, it is a testament of the careful work done prior and during the crisis. Coordination of monetary and fiscal policy responses across the region and in Albania has been successful in mitigating the adverse impacts of the crisis. In particular, central banks have undertaken unprecedented steps through their monetary, liquidity, and macro prudential policy instruments.

A lot has been done and achieved in terms of providing relief to financial markets, securing the rollover of the sovereign debt, and maintaining macroeconomic stability. However, long term macro financial stability is exposed towards certain potential risks. The South East European region is struggling to maintain the relatively sound economic and financial progress attained in the last 20 years of post communism era.

Currently, economic activity is weak, accompanied by high unemployment, low inflation pressures and increasing NPLs across the region. All economies are performing under their potential, mainly due to anemic credit growth, loss of confidence in domestic economy and weak economic activity in the EU. Last but not least, lost competitiveness and slowdown of structural reforms are acting as barriers to growth in the long term.

In addition to these pressures, since the end of 2011 we have been facing a new problem. More specifically, I am referring to the fast and considerable decrease of foreign banking groups' exposure towards private and public debt, as part of their deleveraging objectives. This process was not justified by the situation in Albania. It was imposed unexpectedly from abroad and it has created substantial difficulties in the financing of the public debt as well as private consumption and investment activities. All these negative implications might, in turn, further undermine financial and fiscal stability.

I believe that the recent set of measures undertaken to strengthen financial stability in the euro area countries have taken a closed economy approach. They have not sufficiently considered or accounted for the significant cross-border implications in the emerging Europe.

In general, the execution of EBA recommendations with regard to the implementation of policies that have resulted in deleveraging at a group level in the euro-area has created substantial problems in subsidiary level in emerging economies. It has thus affected growth perspectives and confidence for both the group and the local economies. My main point is that financial burden of such rules is not shared proportionally among home and host countries and among the countries of the Eurozone and those in the emerging Europe.

This non-proportionality is larger in those transition economies in which financial intermediation has relied almost exclusively on domestic resources. For example, in Albania the overall stock of credit to economy covered only 62 per cent of total deposits, as at the end of 2008.

The stock of foreign currency loans were almost completely financed by total foreign currency deposits, with credit lines from parent banks to their subsidiaries and branches at negligible levels. In principal, financial intermediation has always been funded in domestic markets, did not impose any financial constraints on the parent bank's balance sheet, and yet, we had to carry a burden that feels unjust.

In fact, as a result of the interpretation of EBA's regulation, one of the foreign banks operating in Albania reduced the exposure in Albanian Government debt by 3 percentage points of GDP in a quarter or so. These actions caused liquidity imbalances in the interbank market that were not quick to settle due to structural problems.

They were associated with higher interest rates on government debt and constrained the monetary policy transmission mechanism.

The reduced exposure toward government debt securities is not matched by a similar increase in exposure toward private sector credit, and is therefore contributing to lower credit growth. This is all coming at a time when potential policy buffers (in terms of fiscal space) and public confidence in the economy have decreased, leaving no additional room for additional economic incentives.

On the other hand, certain 'creative' measures to stimulate credit and growth through unconventional monetary policy and more relaxed supervisory requirements are potentially dangerous. Under extreme economic uncertainty, they can stimulate a further deterioration of the banks' balance sheet without having major impact on economic activity. This is the narrative of current economic problems faced by the entire region.

In general, while many of the measures were taken by the European authorities in the last three-years, have been necessary and important, they have given the impression of being taken late, half-heartedly and with hesitation to a 'more Europe' approach, without properly considering the impact on neighboring countries.

More importantly, these measures have not contained the medium term negative impact of the financial crisis in the economic activity, triggering the need for a better balance and timeliness between 'austerity' and 'pro-growth' measures.

Dear ladies and gentlemen,

Integration in our vision represents a journey amongst friend and partners towards a common goal or destiny.

Because our economies are increasingly coming closer together and because our financial systems should be seen as one, we believe that we should be ready and willing to share both the benefits and the costs of this process. We are fully aware of the benefits and we have already enjoyed them.

At the same time, we are becoming aware of the potential costs of this process, which mainly come from asymmetric shocks and uncoordinated policy responses. For these reasons, I avail myself of this opportunity to appeal to all relevant EU policy makers to consider with the same attention the impact of their decisions on the converging economies. We are in the same boat and I believe we should row in the same direction.

Looking at emerging European countries, there is a strong need to associate previous policies that facilitated capital inflows into the region's economies with measures that would ensure the continuity of the necessary liquidity, once these flows change course or stop. The benefit of swap or similar agreements must be extended to our countries in order to enable us to access short term liquidity in foreign currency.

Due to our financial systems interconnections, I think this issue deserves more attention in the future.

Especially, the complex reform and growth agenda that supports the convergence process needs to be encouraged and facilitated by our partners, international development institutions and financial funds. We need to create the right incentives for the policy makers and economic agents in the emerging economies.

Convergence itself is a structural process. For that reason, all the development institutions should maintain and increase their support for growth and stability in the region. We need to learn the right lessons from the crisis: we need to convert the identified vulnerabilities in development priorities and integrate them in our growth agenda for the future.

The obvious question is: which economic model fits the best; which sources will fund their recovery; how are these economies going to converge and provide employment?
Our economies are small when considered individually. However, we should look at the big picture and realize that our region as a whole represents a sizable and a vital market.
I believe, by partnering together, we can make it.