Private consumption has marked low levels and this has reflected low consumer trust and a slowdown in the growth of incomes. Low levels of inflation have helped to preserve the value of savings. Nevertheless, Albanian households continue to manifest a cautious behavior toward consumption
By Ardian Fullani
Governor of the Bank of Albania
2013 was a difficult year for the Albanian economy. Aggregate demand and economic growth were low, inflation was within the lower boundaries of the Bank of Albania, while budget deficit and public debt marked significant increases.
This was conditioned by an unfavorable economic climate, in both the domestic context and in the foreign one. Moreover, general elections held in June offered another moment of insecurity for the economy and financial markets.
Consumption and investments continue to suffer a low level of trust and stringent lending criteria. Fiscal policy is also facing a high level of public debt, which has restricted its possibilities for macro-economic stimulus.
On the other hand, foreign climate has been characterized by the continuation of problems in the Eurozone, something that restricts our exports, but also imposes financial markets to follow conservative policies of lending toward developing countries.
Nevertheless, 2013 was also marked by positive developments. Financial markets were characterized by the improvement of liquidity and falling tendency of interest rates, in response to the facilitating monetary policy of the Bank of Albania.
This year, the introduction of new instruments and new financial agents has further consolidated markets. Banking system continues to be solid and well capitalized, in spite of the growth of problematic loans.
Deficit in the current account marked a fall, creating better premises for the stability of the foreign positioning of the economy and exchange rate. These developments have helped in preserving macro-economic stability.
Analyzing the specific developments of the second half, official figures indicate a further slowdown of the economic activity and for a strengthening of falling tendency of inflation in this period.
Average annual inflation resulted to be 1.5% in the fourth quarter of the year, remaining unchanged compared to the third quarter. Inflation rate grew by 1.9% in the month of December. Its performance was almost entirely determined by food prices and especially, unprocessed food. Prices of other articles of the basket have generally been stable and their impact on the inflation has been low.
In the macro-economic aspect, low inflation was determined by a weak performance of aggregate demand, by the fall in imported inflation and controlled expectations for inflation.
Gross Domestic Product fell by 2.3% in the third quarter. This fall was mostly determined by short term blows caused by the full withdrawal of fiscal stimulus and post-electoral insecurity, which is believed to have negatively impacted consumption, investments and tourism in this period. With the exemption of the agricultural sector, other sectors of the economy marked an annual fall.
All components of aggregate demand saw a weak performance in the second half of the year. Private consumption has marked low levels and this has reflected low consumer trust and a slowdown in the growth of incomes. Low levels of inflation have helped to preserve the value of savings. Nevertheless, Albanian households continue to manifest a cautious behavior toward consumption
Private investments also marked a falling tendency in the second half of the year. The performance of this component has reflected the fall of the final demand, high insecurity and the stringent funding criteria adopted by the banking system. Periodical observations report that the financial situation of businesses remains difficult and further prevents their ability to carry out investments.
Low level of consumption and investments and conservative policies applied by banks in lending, have had an impact in this slowdown of monetary indicators. The increase of money offer has fallen an average of 2.5% in the month of October and November, dictated by the fall of demand from the private sector for finance. Lending for the economy has continued to shrink and in November, it resulted to be 2.4% lower than a year ago.
This economic and monetary dynamic has led to low inflationary pressures. The low aggregate demand has generated the expansion of the negative gap of production. Pressures from the labor market resulted to be more contained in the face of an unchanged unemployment rate, of the moderate increase of payments and partial exploitation of capacities. These developments have had an impact in the control of production costs and profit margins and they have been reflected through the low inflation figures which has characterized this period.
The base scenario of the Bank of Albania foresees a slight improvement of the economy in the years to come. Aggregate demand will continue to be supported by the growth of exports and by a good performance of consumption and investments.
Monetary policy will also support domestic demand, by preserving macroeconomic stability and injection of monetary stimulus in the economy. Also, the payment of arrears will improve the financial situation of companies and of the private sector and is expected to improve the ability of the business to attract funding. /ibna/