IBNA Analysis/Governor of the Bank of Albania, Ardian Fullani talks about the monetary policy decision making of the Oversight Committee of the Bank of Albania. Why did the interest rate remain unchanged and how is the economic situation in the country. What are the forecasts for the upcoming period
Tirana, July 31, 2014/Independent Balkan News Agency
By Edison Kurani
Yesterday Oversight Committee of the Bank of Albania decided to keep the base interest rate unchanged at 2.50%. According to the Committee, inflationist pressures from the real and financial sector are and will continue to remain low. Under these circumstances, the monetary policy will continue to stimulate for the upcoming period, creating suitable monetary conditions for the return of targeted inflation in the medium term.
The Committee predicts that the intensity of monetary stimulus may strengthen in case the economic and monetary developments will remove the balance of risks over inflation on the downside.
Nevertheless, Bank of Albania remains committed in respecting medium term objective for inflation and assures that it’s ready to use all of its instruments to achieve this objective.
Governor of the Bank of Albania, Ardian Fullani says that the Albanian economy has seen an improvement in the first half of 2014. According to him, economic growth has been in positive territory and it seems that there are progressive signs of revival, economic and financial stability in the country remain solid, while domestic and external financial conditions have a tendency of improvement.
“Expansion of economic activity has come as a result of the growth in consumption and private investments and it has been backed by a stimulating mix of macro-economic policies. Economic performance of the first half has in general been in line with our forecasts, but inflation has been weaker than expected, as a result of deflationist pressures coming from the external environment and other supply blows”.
Even for the second half of 2014, Bank of Albania expects the tendency of the first half to continue. The same goes for 2015.
Stopping on macro-economic policies, governor of the Bank of Albania says that they will continue to be stimulating for as long as the Albanian economy will not continue to operate at full capacity and inflation or inflationist expectations are not close to the objective of the Bank of Albania.
Expected developments contain 4 risks: sources of growth are not yet sustainable, Albanian economy is very sensitive to supply blows; forecasts are conditioned by the planned macro-economic policies, which must continue to be cautious in establishing a balance between short term stimulus and medium term and long term balances and economic performance will depend on the acceleration of the structural reform, both on a macro and micro economic level.
Low inflation and under the objective
Rate of inflation in the first half of the year has resulted to be low and under the objective. Average inflation resulted to be 1.6% in the second quarter of 2014, marking a drop compared to the previous quarter. Annual inflation went down to 1.5% in the month of June. Its performance continues to be determined by the dynamic of the process for unprocessed food products, while other groups of the basket have had a small contribution on inflation.
Analyzing this situation, Fullani says that in the macro-economic aspect, the low rate of inflation has reflected the incomplete exploitation of production capacities, low inflation rates in partner countries and short term expectations for a fall in inflation. According to INSTAT data, Albanian economy grew by 1.65% during the first quarter of the year.
Fullani says that this growth rate was on the top part of the Bank of Albania’s forecasts.
Based on preliminary data, economic growth is expected to strengthen in the second quarter of the year.
For this growth, Fullani says that a positive effect was made by the production sector and service sector, offering a more diversified basis of contributors compared to last year.
In terms of aggregate demand, economic growth is believed to have been mostly impacted by the growth of consumption and private investments, improvement of the confidence in economy, growth of direct foreign investments and more favorable financial conditions.
“Indirect indicators show that private investments have had the main impact, while the final consumption of the population has seen a growth, but it’s still fragile”, says Fullani.
Meanwhile, expansion of the net export deficit and the demand of public sector had a negative contribution.
“The expansion of net export deficit came as a result of the growth of imports in the first quarter of the year, where the biggest impact was made by the intensification of the import of investment goods. Albanian exports continued to mark a growth, but data for foreign trade of goods indicate a cumulative annual expansion of trade deficit in the period from January to May 2014 of about 6.7%”, says the governor.
Growth of lending continues to be in negative territory
The second quarter has generated signals for a growth of demand for lending. But, Bank of Albania says that the growth of lending still remains in negative territory. In the month of May, lending surplus for the private sector resulted to be 1.8% lower than a year ago.
“Albanian reality and world experience suggests that the recovery of lending will remain conditioned by the sustainable improvement of economic activity in the country, reduction of risk in given sectors of economy and by a more positive dynamic in the labor market”, says Fullani.
The performance of the energy production, the performance of the agricultural sector, of the price of fuel, raw materials and readymade products from international markets, also have a big impact in the economic activity and level of inflation in Albania.
Several advices for the government
Governor Fullani also gives several advices for the government. “Macro economic policies must preserve their stimulating mix and the composure and intensity of this mix. Consistent policies would help in a general improvement of confidence in the country and reduction of risk”, says Fullani.
He adds: “Fiscal policies must comply with the engagements for the consolidation of fiscal indicators and the payment of financial obligations toward the private sector”.
The governor also suggests that the Albanian economy needs structural reforms, which increases our competition in international markets and expand our production potential. “Without structural reforms, macro-economic policies cannot generate long term growth in the country. Our country must meet all its engagements toward the European Union after it became a candidate member. The public sector must have more integrated and long term development plans, while the private sector must do more in order to increase efficiency and to find new markets. This is the only way that we can secure a sustainable growth and rapid convergence with the European Union countries”, says Fullani. /ibna/