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IBNA Analysis/The economic situation at the focus of the Governor of the Bank of Albania

IBNA Analysis/The economic situation at the focus of the Governor of the Bank of Albania
Tirana, 4 August 2016/Independent Balkan News Agency

By Edison Kurani

The Supervisory Council of the Bank of Albania decided to leave the base interest rate unchanged at 1.25%.

Additionally, the Supervisory Council decided to not alter the interest rate corridor in the interbank market, assigned at 0.25% for the overnight deposit interest rate and at 2.25% for the overnight lending rate.

In the analysis below, Governor of the Bank of Albania, Gent Sejko analyzes the progress of the economy and Albanian financial markets, saying that it has been in line with the expectations of the Bank of Albania.

Inflation

Mr. Sejko says that economic activity saw an expansion in the first half of 2016. Inflation saw a rising tendency during the second quarter, while the stimulating direction of the monetary policy has enabled the creation of a liquid financial environment with low interest rates.

Under these circumstances, our medium term forecasts have not changed and the current stance of the monetary policy is considered to be suitable in meeting our target for the stability of prices in a medium term period.

Stopping on inflation, Mr. Sejko says that it saw a progressive growth during the second quarter. At the end of June, annual inflation was 1,2%. The growth came as a result of the increase of the price of food products and rent.

In macroeconomic terms, Mr. Sejko says, the return of inflation to an increasing trajectory was also impacted by the drop in foreign disinflationary pressure and the  strengthening of domestic pressure. This tendency, he adds, confirms BoA’s evaluation for the temporary nature of the supply blows that led to the drop of this indicator during the first quarter. It also reflects the improvement of the economic activity in the country.

Economic growth

The economic growth of the first quarter was in line with the expectations of BoA. According to INSTAT, Albanian economy marked a 2,96% annual growth during the first quarter of the year.

For Mr. Sejko, this growth reflects the improvement of the activity in the service and construction sector, while the industrial and the agricultural sector continued to mark a fall. He says that forecasts are once again optimistic: “Indirect indicators that we have suggest similar rates of growth in the second quarter too”.

Economic growth in the first half of the year reflected the combined effects of the stimulating monetary policy and consolidated fiscal policy followed in Albania. Thus, the expansion of the economic activity came as a result of the growth of consumption and domestic private investments.

Analyzing this fact, Mr. Sejko says that their growth reflects the improvement of the financial situation in businesses and households, the positive developments in the labor market, the improvement of security and the unblocking of the construction market.

On the other hand, foreign trade exchanges and the activity of the public sector have not favored the economic growth.

Mr. Sejko ezplains: “Our exports continue to suffer from the unfavorable prices of goods in international markets, but this factor has been somehow compensated by the improvement of tourism”.

On the other hand, fiscal policy continues to preserve a consolidating nature, stronger than what was predicted.

Lending

Lending saw an improvement in the second quarter of 2016. Improved by the effect of erasing nonperformance loans from the financial statements, the lending bank portfolio saw an annual average growth of 3%.

For Mr. Sejko, this progress is mostly due to the annual expansion with 6,4% of lending in lek. Meanwhile, the lending portfolio in currency has remained almost unchanged compared to a year ago.

However, its annual growth remains low. The slow increase in lending continues to reflect the low demand and the low supply for this product. Bank of Albania says that the boosting of demand and further improvement of supply remains one of the necessary conditions for a medium term and long term growth in the country.

For this reason, the full implementation of the measure for the handling of nonperformance loans has a primary importance, Mr. Sejko says.

At the conclusion of his analysis, Mr. Sejko says that he is expecting the economic activity to improve in a progressive way, reflecting the favorable financing conditions. The Albanian economy is expected to reach equilibrium in the second half of 2017 and this will offer good premises for inflation to return to target in the second half of 2018, is the prediction suggested by Mr. Sejko. /balkaneu.com/

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