Bank of Albania deems the country’s economic growth trend as positive

Bank of Albania deems the country’s economic growth trend as positive

In his last appearance for the year, the governor of the Bank of Albania, Gent Sejko delivered a press conference today to talk about the country’s economic developments.

According to Sejko “the analysed data suggest that economic activity in Albania trended upward in 2018 H2.  Economic growth is reflected in the better utilisation of production capacities, as shown in the increase in employment, the decrease in the unemployment rate and the build-up in domestic inflationary pressures”.

“This performance has been overall in line with our previous expectations and does not bring about significant changes to our projections. Among others, it evidences the positive impact of the accommodative monetary policy of the Bank of Albania and suggests that the current stance of this policy is adequate for both ensuring economic growth rates in line with the production potential of the country and guaranteeing the convergence of inflation toward the target within 2020.

From the sectorial perspective, the expansion of the economic activity appears to reflect mainly the growth in industrial production and services. Nonetheless, available data show that the growth pace of electricity production has been slowing down in the third quarter, suggesting a slight deceleration of the economic growth rate in 2018 H2.

From the perspective of aggregate demand, the expansion of consumption and private investments and the growth in Albanian exports appeared to have continued to underpin economic growth. On the other hand, the fiscal policy consolidation in the third quarter and most of the fourth quarter has been stronger than expected, driving thus to a slower-than-projected contribution to economic growth by public expenditure.

In balance, the overall context of economic and financial developments in Albania remains positive.

The Albanian economy continued to benefit from the positive performance of our main trading partner, the euro area, from the improving financial balances of households and firms, and from the fiscal consolidation, which has reduced the risk premia in the domestic financial markets.

In parallel to these factors, economic activity expanded, supported by the accommodative monetary policy of the Bank of Albania. The monetary policy has been transmitted through the low policy rate, the continuous injection of liquidity into the domestic financial market, the forward guidance instrument, and selective interventions in the foreign exchange market during the summer period.

Our monetary stimulus has created a liquid financial environment with low interest rates, and has mitigated the effect of appreciation pressures on the exchange rate. The low interest rates have supported the expansion of credit: excluding the effect of the exchange rate and the lost loan write off, credit to the private sector increased by 4.9% and 4.5% in the third quarter and in the first two months of the fourth quarter, respectively. The low interest rates have also helped in restructuring loans, easing the debt servicing costs and improving the financial system stability. The NPL ratio dropped to 12.7% in November, illustrating thus the continuous improvement in the banking sector soundness. Lastly, the temporary intervention in the foreign exchange markets has reduced misbalances in the supply and demand for foreign currency, calming down the foreign exchange market functioning and reducing exchange rate deviations from the levels suggested by fundamental factors.

The growth of credit, the easing of the borrowers’ financial burden, and the reduction of exchange rate volatilities have encouraged consumption, investments, economic growth and employment gains, creating thus premises for the return of inflation to target in the medium-term horizon.

Inflation stood at 1.8% in November, downward from the level registered in the third quarter and in October. In line with our previous expectations, this fall reflects the downward effect from the appreciation of the exchange rate on imported inflation. Our analyses suggest that this effect is expected to be transitory and will not affect the convergence of inflation to the target in medium term.

The update of forecasts in accordance with the baseline scenario confirmed our previous expectations on the return of the economy to equilibrium in the second half of the next year and of inflation to target in 2020. This performance is expected to be supported by the positive performance of the euro area and other trading and financial partners, the stimulating monetary and financial environment in Albania and the calming down of exchange rate appreciation pressures.

In parallel with it, the Supervisory Council deemed that the balance of risks remains skewed to the downside. These risks are related to both potential shocks that may come from the external environment, and the speed of improvement of the business climate and of lending in Albania”, were some of the evaluations made by the head of the Albanian central bank.