Has the Albanian economy been affected by deflation?

Has the Albanian economy been affected by deflation?

Tirana, 14 March 2016/Independent Balkan News Agency

By Edison Kurani

Governor of the Bank of Albania, Gent Sejko doesn’t see any imminent risks for a deflationist situation. Sejko points out that the drop in prices relates to international markets, but the Albanian economy will not be affected by deflation.

But Mr. Sejko’s declaration comes a few days after INSTAT reported a drop in CPI of 2%, the lowest level in the last decade in Albania.

The main reason for this relates to the drop of the price of oil, initially in international markets and recently in local markets. This has generated a dropping effect on inflation at an interval of 0,5 to 1%.

Another reason relates to the inflation of food prices, which in Albania’s trade partners, it fluctuates very little.

Inflation for food prices in the month of January in the four main trade partners of Albania was 0.25%, as opposed to an average rate of 3,1% in the period January-February in Albania.

Through the commercial activity with these countries, this low inflation has a tendency to spread in the Albanian economy too.

Governor Sejko refers to the analysis of BoA, which suggest that the drop in inflation has come as a result of the blows on the supply, which mainly comes from the developments in the international markets.

Beyond the data from INSTAT, Bank of Albania says that the statistics on prices are not a sufficient indicator and that “official data on the domestic economic activity do not contain such signals in this direction”.

“Although the analyses so far indicate that the drop of inflation doesn’t seem to have come from unexpected drops of demand and consumption in this period, it is clear that the level of economic growth and aggregate demand remain under their potential levels and continue to prevent inflation from returning to objective”, the BoA explanatory materials says.

As far as deflation is concerned, BoA says that “the current developments of inflation do not consist of a deflationist situation and do not signal any threats for such situation in the future”.

On the other hand, the opposition is convinced that the country is suffering deflation. The democrat leader, Lulzim Basha blames the government for this situation. “Unemployment, the increase in prices, bills, taxes, the economic crisis which from last month has become official according to BoA, deflation, are a product of bad governance and corruption”, Mr. Basha says.

The opposition leader says that the Democratic Party  is ready to bring “the big change that Albanians are expecting”, through policies that will affect the economic development and employment, where money that is collected through taxes go for investments and not in the pockets of the people in power”.

“We are ready to lead a great change, a change which in essence will aim at returning this money to the Albanian citizens. By reducing taxes, by not robbing the citizens. By taking a number of measures that help the most damaged classes of society, such as reduction of the price of power supply and pardoning of late payment interest charges. With the money that we collect, we must create new jobs for Albanians and better salaries for them. We will invest this money for construction sites, because there’s a need for roads, bridges, water supply systems or new schools”, says the Albanian leader of opposition.

The economy expert, Arjan Kadare believes that the country is facing deflation, admitting that this has a negative impact on businesses and government.

“Businesses receive less money from their sales, because prices fall, while the government has difficulties in offering the tax stimulus that was hoping to offer”.

Pointing out that deflationist factors are worsening, former head of the Oversight Committee of the Bank of Albania suggests the implementation of economic policies to come out of this negative economic spiral.

According to him, “the government may come up with a temporary short term tax stimulus in order not to allow the economy enter a deflationist cycle”.

Kadare is against the change of VAT which remains at 20%, “because if VAT is changed, then the biggest source of government incomes is at risk”. Meanwhile, as far as other taxes are concerned, which are not as important as VAT, Kadare says that they may be changed, as the economic situation requires economic boosts.

Kadare suggests that the monetary policy has room for intervention. As far as this possibility is concerned, BoA says that depending on the diversions identified from the previous forecasts, they can become subject to reaction of monetary policy.

The Bank of Albania says that the inflation tendency in the medium term remains a falling tendency. According to it, the expected improvement of the economic activity and the positive signals against disinflations pressure from foreign markets, will help inflation to go back to its objective.

The base rate has dropped twice during 2015, dropping at 1,75% at the end of the year, as opposed to 2,25% at the beginning of it. To strengthen the effect of monetary boost, the Bank of Albania has increased the injection of cash. During 2015, the injected cash has been on average 29,5 billion ALL, 5 billion ALL more than a year ago and around 11 billion ALL more than the period 2011-2013.

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In spite of the declarations of BoA that there are no threats for deflation in Albania, many people think differently.

An opinion poll conducted by IBNA shows that merchants are not satisfied with sales. In the shops of the capital, Tirana, sales are at minimum levels. Many shop owners admit that they are obliged to make big cuts in prices in order to boost sales.

Albert D is manager in an electrical appliance shop. He says that almost all customers want to benefit from price cuts and do not buy products which are sold at standard prices. “The purchasing power has dropped significantly. In the New Year, expectations were great, but disappointment even greater. In the first months of the year, sales are very small. We often make price cuts, but people only want to benefit from the low prices. But our scope is to make cuts and encourage people to buy other products, as you may know that profit on products with price cuts is minimum”, the manager said.

On the other hand, the citizens say that their incomes have fallen. Some blame remittances, as their relatives who live mainly in Greece and Italy, have not sent the same amount of money as previous years.

Elena is a 36 year old woman who lives with her mother and father in Tirana. She has lost her job due investment cuts by an international company. Elena has now been jobless for several months. “I have two brothers abroad, one in Greece and one in Italy. They used to send us money before, but not it’s not the case. The eldest has created a family, while the youngest who works in Greece, is facing difficulties due to the crisis”.

Elena says that with the incomes that they have, they are obliged to make maximum savings in order to make their ends meet. “With my parents’ pension, it is impossible to live. Our savings are going fast and I am not finding another job. Therefore I am trying to avoid any unnecessary purchase”, says the 36 year old who had been working for years for a big international company which moved its branch into another country of the region. /ibna/