Economic growth in Albania is expected to be weak

Economic growth in Albania is expected to be weak

IBNA Op-Ed/Inflationist pressures in Albania will remain weak during the coming period. Economic growth is expected to remain weak and not generate inflationist pressures. This forecast reflects the preventing correcting fiscal effect expected for next year. Important inflation is also expected to be low.

 

By Ardian Fullani

Governor of the Bank of Albania

Annual inflation in Albania resulted to be 1.7% in the month of October, remaining at the same level as a year ago. After a quick drop in the month of July and August, inflation marked a growth in the two following months, confirming the temporary nature of the strong drop of inflation during the summer months, but remaining in line with the general evaluation for low inflationist pressure.

Inflation fluctuations during 2013 have been mainly due to the performance of the prices for food products-their contribution is the basis of almost the entire value of total inflation. On the other hand, prices of other goods and services of consumer basket have been mainly stable and have given a very low impact on inflation.

In a macro-economic point of view, the low inflation profile continues to be defined by the weak inflationist pressures, both from demand and supply. The information of the recent months confirms our assessment for a growth under potential of the Albanian economy.

The presence of unexploited capacities of production is accompanied by slow employment, slow increase of wages and production costs, thus further reflecting the low levels of base inflation.

Along with this, the fall of inflation in our trade partner countries and the stability of the exchange rates have had an impact on the slowdown of imported inflationist pressures. Recently, the expectations on inflation have been in line with the stability of prices.

Macro economic data show a small economic growth during the third quarter of the year and a slight improvement during the fourth quarter. The fluctuations of the growth rates last year have been mainly attributed to the pace of the collection of budgetary revenues.

On the other hand, foreign demand has given a low positive impact on economic growth, while consumption and private investments remained weak.

Consumption and private investments continued to slowdown as a result of the high insecurity and stringent lending. The constant facilities offered through monetary policies have not been reflected in the expected growth of consumption and investments in the country. Like we have stressed before, Albanian consumers and businesses hesitate in taking long term decisions for investments. Bank of Albania believes that the drop of insecurities and the facilitation of financing criteria would provide the necessary conditions for a good performance of these two important components of aggregate supply.

Fiscal stimulus significantly dropped in the third quarter. After a rapid growth in the first half of the year, budget expenses slowed down in the third quarter. Fiscal stimulus of the first nine months of the year has been reflected in a budgetary deficit around 1.2 times higher than the same period a year ago.

The expected growth of expenses and budget deficit in the fourth quarter moved once again into positive territory the contribution of the fiscal stimulus for the economic growth. Nonetheless, high level public debts restrict the effect of fiscal policy to support economic activity in the future. Bank of Albania believes that fiscal correction next year is necessary to bring public debt into sustainable parameters. The expected fiscal correction for 2014 and onwards will have its impact on the economic activity.

Meanwhile, the reduction of public debt in domestic financial markets will offer more opportunities to expand funding for private sector.

Data on foreign trade indicate a positive contribution of foreign demand in the growth of economic activity in the third quarter. During this period, trade deficit shrank by 17.7% in annual terms, reflecting the good performance of exports and fall of imports. Exports saw an annual growth of 13.6% in the third quarter of the year, while imports fell by 5.2%.

The period in question has been characterized by a falling performance of interest rates in financial markets. Treasury bonds yields have fallen as a result of the falling borrowing of the government in this period. The performance of yields and interest rates in the banking market are in line with the facilitating cycle of the monetary policy. On the other hand, interest rates on deposits and loans have reacted more slowly, as a result of the high premiums of risk included in the cost of the loan. The banking system has adapted a conservative approach toward crediting, in response to the stringent policies imposed by mother banks and the growth of problematic loans in their balance sheets. This approach has been reflected in more stringent conditions and in interest rates, which have not followed the course of the monetary policy. As a result of a low demand for loans, lending has fallen in the recent months. At the end of September, crediting for the private sector resulted to be 2.6% lower than a year ago.

High lending premiums of risk and the low consumer and business reaction toward interest rates have not made the transmission of the monetary stimulus in the economy efficient. The sudden return of these two indicators in normal parameters will strengthen the transmission of monetary stimulus and will offer the necessary conditions for the recovery of domestic demand in the economy. This forecast reflects the preventing correcting fiscal effect expected for next year. Important inflation is also expected to be low. /ibna/