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Address by Ms Ana Mitreska, Vice Governor of the National Bank of the Republic of North Macedonia, at the celebrating the World Savings Day, organised by the Macedonian Banking Association, Skopje, 29 October 2021.
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Ana Mitreska: Address – celebrating the World Savings Day Address by Ms Ana Mitreska, Vice Governor of the National Bank of the Republic of North Macedonia, at the celebrating the World Savings Day, organised by the Macedonian Banking Association, Skopje, 29 October 2021. *** Dear Minister of Finance, Mr. Fatmir Besimi, dear Director of the Deposit Insurance Fund, Mr. Amir Shabani, dear President of the Macedonian Banking Association, Ms. Maja Stevkova Sterieva, Dear colleagues, Thank you for the invitation and the opportunity given on behalf of the central bank to address this event, which marks the World Savings Day. Looking back at the genesis and essence of the celebration of this day, it is interesting to see that the understanding of "savings as a manifestation of the maturity of individuals, but also societies as a whole", is in its basis. Many aspects are founded in this thesis, such as the financial literacy of each individual, the confidence in the institutions, the development of the economy and the capacity to save, the responsibility of those who manage savings and direct them to productive goals to increase the potential of the entire economy. For the second consecutive year, we are celebrating the World Savings Day in pandemic conditions and from there I will address several main issues that are especially relevant due to the prolonged health crisis. First, what are the consequences of the pandemic on the volume of savings and its structure? Second, do the new circumstances change the investment behavior of the population and what consequences may it have on the financial stability? Third, what are the processes that accelerated and surfaced due to the pandemic, and which are also an opportunity for productive use of savings and financial support of sustainable projects by the financial sector? Unlike other crisis episodes, the pandemic has actually increased savings and this process is a global phenomenon. In the developed countries, the estimated excess savings in 2020 was nearly 7% of GDP, showing that savings were higher in the pandemic, than in normal circumstances. In the region of the Western Balkans, the rates of domestic savings measured as the difference between the generated income and the total private sector and government consumption registered a slight decrease of around 3 percentage points of GDP, but in conditions of a strong fiscal consumption for support of the economies. This means that private sector savings, despite the great recession, it is very likely that they remained relatively stable or grew. There are three reasons that contribute to this phenomenon. First, despite the recession, disposable income did not decrease, partially due to the fiscal impulse for support of wages and 1/3 BIS - Central bankers' speeches jobs. Furthermore, given the nature of the crisis, the restrictive measures and the movement limitation, part of the population faced a forced reduction of the consumption, primarily the consumption of different services, which is characteristic for persons with higher income and with greater capacity and propensity to save. Third, given that all future economic flows are determined by the extremely uncertain epidemiological curve, in such an environment, the precaution motive has a great role in the depositors' behavior. The European Commission surveys for both our country and for the countries of the Western Balkans also show that the respondents' perceptions in 2020 and in 2021 are in favor of the view that due to the economic situation in this period, savings are more favorable decision, compared to recent years. At the same time, the surveys of our Statistical Office show a decrease in the utilization of savings as a source of income during 2020. What has been happening to the savings in the banking system in our country from the beginning of the pandemic onwards? The deposit potential is increasing with a relatively solid intensity of over 8% on an annual basis, whereby the dynamics of increase is very similar to that of the period 2018 - 2019. Such dynamics does not resemble a bit the developments during the global financial crisis, when in a short time the deposit growth slowed down, which from around 20%, reduced to around 7% on an annual level. These trends show that the propensity to save and retain the funds in the banking system remains high. Household savings are growing dynamically, within the historical trends. However, the unique character of the crisis has implications on its structure. Given the unpredictability, the propensity for long-term savings is decreasing, while the share of these deposits in the total household deposits from April last year until now reduced by five percentage points. On the other hand, in the corporate sector, the growth rates are significantly above the historical average, with restraint from investment activity and growth of assets. The past crisis episodes were characterized by a reduction in corporate deposits, which shows that the corona-crisis prompts different behavior. The pandemic increases the propensity to hold liquidity and save, in conditions of pronounced and prolonged unpredictability. Besides the growth of savings in banks, in conditions of a pandemic, there is an increasing propensity of households to invest in real estate. Actually, in conditions of low interest rates, relatively stable disposable income, reduced possibilities and needs for consumption, change in the models of work, globally there is an increase in the demand for real estate and in the real estate prices. Unlike most economic indicators, which collapsed during the pandemic, real estate prices are increasing. In the EU countries, in the first half of this year, real estate prices registered an average growth of nearly 7%, compared with the growth of around 4% in the past few years. In our country, the price growth is more moderate of about 4.4% during this year, but with signs of acceleration. In the entire region and in our country, housing lending is accelerating and the growth rates are more dynamic compared to the growth of consumer loans. It appears that currently in our country the real estate market developments are in accordance with the shifts in the supply and demand, and the price pressure exists, but it is not that pronounced, as it is in the European Union countries. However, this "pandemic syndrome" should be carefully monitored, given that the exposure of the banking system to the real estate market is increasing more and more. Hence, there is a need for enhanced monitoring also of this part of the portfolio and keeping of the banks' capacity to deal with the possible future shocks. 2/3 BIS - Central bankers' speeches The banking systems in both the region and in our country are passing the test imposed by the pandemic crisis well, and the challenge for maintaining the capacity for credit support and also maintaining stability will remain in the next period. The indicators of solvency, liquidity, profitability of banks and the quality of the credit portfolio remain stable, and some of them further improved. But, the crisis is getting a prolonged dimension and may have lasting consequences and impose a need for restructuring in some of the sectors of the economy. At the moment, the disruption of the global value chains globally and the growth of costs are creating interruptions in certain industries and are one of the major risks to the expected economic recovery. Hence, timely monitoring of all risks and their timely identification is a current priority, in order to reduce the burden on the banks' balance sheets. According to the latest EIB survey, some of the banks in the wider CESEE region expect a certain increase in nonperforming loans in the period ahead. Upward shifts are also possible in our country, but for the time being the stress tests show sufficient resilience of the banking system, in conditions of a strong regulatory framework, cautious behavior of banks and signs of economic recovery. The central bank's policy is currently relaxed, thereby contributing to favorable conditions of financing and economic recovery, in circumstances when we have enough comfort in the foreign reserves to respond to possible shocks. Of course, given the uncertain environment, we constantly and carefully follow the trends of all indicators, relevant to the monetary policy. At the moment, almost in all countries, the growth of savings increases the sources of funding for banks and their capacity to support the economy, especially at the points that will meet the new post-pandemic requirements and will increase the growth potential. The transition to a green economy is undoubtedly one of the issues that with the pandemic has moved from the margins to the core of priorities. The preferences of both consumers and investors are changing globally and the "appetite" for the so-called green technologies and business models is growing. Amid such fundamental, global structural changes, our competitiveness as an economy will also depend on the ability for rapid transition to infrastructure that will provide "green stamp" products. On the contrary, the possibility to be competitive in both the product markets and in the access to financing will be small, and the costs high. The financial support from the banking system can significantly accelerate this transition and help in increasing the competitiveness of the domestic economy. Probably faster than expected, the world found itself at crossroads when it should accelerate the structural changes, accelerate the transition to a digital and green economy, enable sustainable, post-pandemic global recovery. The role of the financial sector in this respect is great, since the capacity of the entire economy to deal with the new challenges will largely depend on its stability and readiness for financial support. Finally, on behalf of the National Bank, allow me to congratulate the Savings Day, and to send special congratulations to this year's plaque winners - recognitions for achieved special results in the performance of the work tasks. Thank you! 3/3 BIS - Central bankers' speeches
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Welcoming remarks by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, for the Vienna Initiative Full Forum, Skopje, 22 March 2023.
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Anita Angelovska Bezhoska: Welcoming remarks - Vienna Initiative Full Forum Welcoming remarks by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, for the Vienna Initiative Full Forum, Skopje, 22-24 March 2023. *** Your excellences ambassadors, minister of finance, dear governors, chair of the Vienna initiative, distinguished representatives of European and International institutions Dear Ladies and Gentlemen, It is my great honor and pleasure to welcome you at the Annual Full Forum meeting of the Vienna Initiative. As Helen Keller said - "Alone we can do so little, together we can do so much." This saying lies in the essence of the Vienna Initiative – partnership among international institutions, public and private stakeholders whose common objective is safeguarding financial stability of CESEE region. Established at the height of the GFC to prevent nation-based uncoordinated policies that could led to systemic banking crisis, we have come a long way, expanding activities and fostering financial stability in the region. This initiative is particularly relevant for countries that still do not belong to the European Union family, do not have access to EU backstop facilities and as such are even more vulnerable to exogenous shocks. Collaboration and coordination is key in times of crisis. Unfortunately, in the last three years we are in the mode of "Perpetual crisis". Severe global shocks of unprecedented nature are hitting the world economy and unfolding into the "great return" of inflation and cost of living crisis. These implies abrupt change of the environment in which central banks operate. From more than a decade of extremely accommodative monetary policy to deal with the "low prices" puzzle, all of the sudden we had to shift gears to deal with multi-decade high inflation. Last year world inflation accelerated close to 9%, which is more than twice as high as the average from the previous two decades (3.9%). CESEE economies are not an exception. Last year inflation abruptly accelerated reaching 13.3%. Even more so, we are not dealing with a conventional demand shock that drives the surge of prices, but rather with multiple shocks. Although some empirical studies are emerging, precise disentangling of supply versus demand, external versus domestic, transitory versus permanent drivers at least at this point seems challenging. However, what seems clear is that we are seeing faster and stronger passthrough of these shocks into prices. In the past, pass-through of producer to consumer prices typically took about two years, while now, according to an ECB study, it is much faster (around half a year) and more intense, as firms maintain and in some sectors even increase their profit margins1. 1/4 BIS - Central bankers' speeches Upward inflationary risks are amplified by the structural forces in play – such as geopolitical tensions and risks of economic fragmentation. A BlackRock study on 68-risk events since 1962 indicates that geopolitical tensions typically have had shortlived impact on markets and economies2. But this time it seems different. Current developments pose one of the greatest stress tests to the globalization that in the last 4 decades through trade, financial and technological integration, brought many benefits, including marked decline in global inflation. The costs of de-globalized world can be severe - lower efficiency, higher costs and stronger and more persistent inflationary effects. Against this background, central banks need to be more humble. They cannot prevent the first-round effects of many of these shocks, but containing second round effects and anchoring inflation expectations has to be their focal point. This context prompted central banks to embark on the most synchronized and rapid monetary tightening in the last 50 years3. As interest rates hikes are taking hold, with easing supply pressures and stabilizing commodities prices, forecasts indicate that inflation will soften this year, both in advanced and developing economies. And indeed we already see signs of slowdown, but it is too early to claim victory over inflation. Core inflation in many countries remains persistent, with tight labor markets keeping pressures on wages. Nominal wage growth in the region last year was the highest following the GFCat 8.6% notably exceeding productivity gains (2.3%) thus contributing to rise in core inflation, which reached 7.4%. If this wide wage-productivity gap persists it can slow down inflation stabilization process and require longer ad stronger monetary policy reaction. On the other hand, the monetary tightening, i.e., the transition towards an environment of higher interest rates could certainly expose some vulnerabilities of the financial systems, and again test their resilience, as the pandemics did. The pace of the financial tightening matters in particular, as history shows that the effects are better manageable if tightening is gradual, well guided. The last year financial market turmoil in the UK and recent developments in the USA and EU clearly underline the need for vigilance. This nexus opens the debate on the so-called "financial dominance", the possible tradeoff between rising costs to curb inflation and effects for financial stability. Against this background, one of the key questions is how well are financial systems prepared to rise to the challenge of rising interest rates. The answer to great extent boils down to the health of the balance sheet of households, companies and banks, i.e., their capacity to absorb shocks. What is very important is that banking systems in the region weathered the pandemics shock well and in many countries, including in NM, emerged with even stronger capacity, which can be observed by higher capital and liquidity buffers and better quality of credit portfolio. Although according to the recent EIB Surveys banks expected deterioration of credit quality, NPL ratios have remained low (below 4%). Still, given the elevated debt levels of the private sector that hovers around 80% of GDP, increase in real estate prices, which in CESEE reached 15.5% - the highest growth since the GFC, as well as 2/4 BIS - Central bankers' speeches expected further tightening of the credit conditions, it is not time for complacency. One of the key lessons learnt from the COVID 19 crisis is the resilience and it must remain the name of the game for the banking sector going forward. In the current context when the interplay between monetary policy and financial stability is more complex, and trade-offs are larger, macro – prudential management plays an important role. A recent BIS paper finds that prudential policy tightening, ahead or during the monetary policy tightening, reduces the likelihood of financial stress and provides more headroom for monetary policy. Following the pandemics, countercyclical or systemic risk capital buffers were actively deployed across the region. Financial regulators in seven countries, including in our case, intervened with the countercyclical capital buffer4, in six countries (Bulgaria, Croatia, Romania, Slovenia, Serbia and Montenegro) have continued to apply or introduced the systemic risk buffer and in five countries implemented borrower-based measures5, which more directly affect the quality of credit demand and contain risks. Keeping banking sector sound and in good capacity to lend is important in the light of the urgently needed structural reforms in the region. As we are lagging behind advanced Europe in terms of income and productivity, sustaining banks' financing can contribute in narrowing those gaps. At the same time, climate change and technological innovation continue to accelerate, pressing on our societies to transform towards greener and digital future. Banks can have a crucial role in financing the twin transition. To sum up, as policy makers we do face a difficult conundrum. After long time of economic moderation, all of the sudden we have to deal with major global shocks that impose tectonic shifts in the economic order, modify conventional macroeconomic paradigms, and accentuate the tradeoffs in policymaking. In this current context, it is crucial to preserve stability- stability of prices, as our primary objective and contribute to stability of the financial system. We all recall how profound consequences and scars instability causes, which is why we have to remain determined, focused and clear. It is the only way to preserve public trust, and as Brunnermeier said "the public is the ultimate source of central banks power and independence". Thank you and looking forward to the insightful debate! 1 Cited from "Monetary Policy in a High Inflation environment: Commitment and Clarity ", Lecture by Christine Lagarde, November 2022. 2 Geopolitical risk dashboard, Black Rock, December 6, 2022 3 "Front-loading" monetary tightening: pros and cons", BIS Bulletin 63, December 2022. 4 Three have increased the rate (Slovakia, Bulgaria and Czech Republic) while other four introduced the buffer for the first time (Croatia, Romania, Hungary and North Macedonia). 3/4 BIS - Central bankers' speeches 5 BBM are implemented in Romania, Czech Republic, Slovakia, Hungary, Poland, Slovenia. 4/4 BIS - Central bankers' speeches
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Opening speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the 9th Research Conference, Skopje, 29 September 2023.
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Anita Angelovska Bezhoska: Opening speech – 9th Research conference Opening speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the 9th Research Conference, Skopje, 29 September 2023. *** Honorable President Pendarovski, dear governors and speakers, Mr. Uzan, your excellences, representatives of the academia and media, ladies and gentlemen, It is my great pleasure to welcome you to our traditional Annual Research Conference, this time organized in cooperation with the Reinventing Bretton Woods Committee. Recent series of shocks have been one of the greatest stress tests that our economic and financial systems, as well as our societies, have faced with in recent history. Therefore, the conference aims to shed some light on the short and long-term macroeconomic implications. This also includes challenges in adequately calibrating or even redesigning macroeconomic policies that might have to deal with permanently changing economic relationships, implying that we might be entering a new world rather than returning to the old one. The pandemic, energy shock, war in Ukraine have all yielded in an extremely complex and uncertain macroeconomic environment. We are facing with decelerating growth and probably long-term growth potential, on the one hand, and surging inflation, on the other, which although on a downward trajectory, is projected to remain above target in about 90% of the economies with inflation targeting even next year1. Concerning forecasts, however, given the size of the upward revisions of inflation, it seems that forecasting models are not well equipped to capture these changing realities and unprecedented level of uncertainty, although we are aware that, as the famous economist Galbraith said "economics is not an exact science-the greatest error in economics is in seeing the economy as a stable, immutable structure". Central banks' response to this swift transition from low to high inflationary environment was a swift transition from accommodative to restrictive monetary policy. We have observed the most synchronized and the most aggressive global monetary policy tightening in the last 5 decades. No doubt, this tends to adversely affect the already slow post-pandemic recovery and expose some vulnerabilities in the financial systems. Still, we should not forget the key lessons from the 70s and 80s that moving too slowly and too softly entails much more costly subsequent tightening and higher sacrifice ratio – higher foregone economic output to re-anchor inflationary expectations and bring down inflation. So, beyond the shadow of any doubt, stabilizing inflation is a priority, but what is the optimal policy mix to deal with it without significantly amplifying the already visible costs for the real economy and without undermining financial stability? This, in particular, when complex set of factors, including accelerated wage pressures, shape inflationary developments. 1/4 BIS - Central bankers' speeches It appears that so far global output loss has been large. Global GDP in the last 4 years was lower by 3.5 p.p. in comparison with pre-pandemic forecasts, and in emerging market economies, including Western Balkan the loss is even bigger (5 p.p. and 4 p.p. of GDP, respectively). And that is not all, as medium-term forecasts point to a further slowing down of the growth dynamics, which is expected to remain well below the historical average of the two decades preceding the pandemic (3.8%). Furthermore, these scenarios do not reflect the profound effects that deglobalisation and climate risks may have. While estimates of the cost of fragmentation vary, in some scenarios it can reduce the global real imports by 30%2, with more pronounced effects in the small emerging economies as they tend to be more dependent on external trade and finance, and have a higher technological and knowledge gaps. These concerns are more than relevant for Western Balkan economies where globalization has acted as an engine of income convergence, which has doubled in the last two decades, but remains low at 40% of the EU income level. This clearly underlines the need for accelerated rather than decelerated global integration underpinned by strengthened implementation of structural reforms. Now let me reflect in more details on the implications of the new rising interest rate environment on the financial systems. Swift monetary policy changes, although warranted, if not managed properly can increase risks on the financial stability front. Historically, global interest rate hiking cycles often coincided with financial distress. Empirically speaking, a recent study3 indicates that 1 p.p. policy rate hike increases the probability of a financial crisis by 2 p. p. In the current context, this risk is certainly relevant as tightening is taking place after a protracted period of low interest rates conducive to higher risk taking in the bank and even more so in the non-bank financial segment. In fact, recent banking stress in the US and Switzerland is a powerful reminder that monetary tightening can have significant implications on financial stability, in particular if it is unexpected, rapid, follows a long period of accommodative monetary policy, and if combined with weaker risk management, prudential regulation and supervisory oversight. This certainly raises the issue of possible tradeoff between price and financial stability, or so-called "financial dominance" phenomenon where financial stability concerns limit the monetary policy headroom. Avoiding financial dominance requires two important prerequisites. The first one is having a strong banking system balance sheet, well prepared to manage the rise of interest rates. The second prerequisite relates to the availability of effective financial stability instruments, both macroprudential instruments aimed at preventing excessive risk taking, and resolution instruments designed to resolve banks in trouble without undermining financial stability. On the capacity of the banking system in the CESEE, to absorb possible losses, it seems that so far risks are well contained. Banks have faced the recent multiple crisis context with strong capital and liquidity buffers that were broadly maintained and in some cases even increased. The latest data reveal a capital adequacy ratio of 20% on average across the region, while the liquidity ratio stands at nearly 27%. Despite the weaker economic activity, the quality of the credit portfolios remains strong, with NPL 2/4 BIS - Central bankers' speeches ratios remaining below 4%, better off compared to the pre-pandemic levels. Still, there is no room for complacency as transition to higher-for-longer interest rate environment could certainly expose some vulnerabilities of the financial systems, and test their resilience again down the road. Rising interest rates is a two-edged sword for the banks. On the one hand, it may help improve their earnings (as usually interest rate pass-through on deposits is weaker than on loans) and thus strengthen capital positions. On the other hand, it increases the banks' exposure to so-called "hidden losses" stemming from long-term debt securities held to maturity- as was the case with the Silicon Valley Bank (where half of its assets were placed in such securities). In addition, interest rate risk may translate into credit risk leading to accumulation of NPLs and lowering of earnings. Whether the banks will be net beneficiaries in short and, even more importantly, in a medium term will depend on the overall macro-financial context. And the current macro context is complex, as interest rate hikes come at times of lost growth momentum, and lingering inflationary pressures that are weighing on household and corporate income and their capacity for debt repayment, when debt levels are elevated. While household debt in the region, at about 28% of GDP, remains below some of the vulnerability thresholds, a deep dive into more granular data points to a vigilance as the share of vulnerable households has increased. Interest rate risk may be even more relevant for companies as they mostly borrow at a relatively short maturity and with floating interest rates. IMF analysis4 shows that in emerging economies, the debt at risk (debt of companies with interest coverage ratio <4) has increased to 50% for the large firms and 70-80% for the SMEs. It is clear that insolvency risk is heightened, which is visible through the rising trend in bankruptcy declarations, which in the EU-CESEE region rose by 21%. This may in part reflect normalization from the low levels hit during the pandemic, but also the fact that companies face difficulties to withstand the consequences of the triple shock – high energy, labor and interest rate costs. This brings us to the second prerequisite for avoiding financial dominance, which is having effective macro-prudential and resolution tools. A BIS paper5 that looks into 157 monetary tightening episodes finds that macro prudential policy tightening – whether ahead of or during a monetary tightening, helps to reduce the likelihood of financial stress, thus increasing the room for maneuver of central banks in the fight against inflation. Did the regulators in the region follow this guidance? The answer is affirmative. We have witnessed continued enhancing of macro-prudential frameworks, including active use of countercyclical and systemic risk capital buffers, as well as borrower-based measures. Although prevention is the main objective of macro-prudential tools, we also have to be equipped with adequate resolution instruments in case risks materialize and threaten financial stability. Following the GFC, one of the key areas of the regulatory reforms was the resolution, with main objective of introducing bail-in 3/4 BIS - Central bankers' speeches instead of bailout concept, i.e., using private money (senior debt issued by banks) instead of public money to resolve banks. However, this presupposes that banks have such instruments in place or can provide them at capital markets, which seems challenging in economies with underdeveloped domestic markets. Tapping external financial markets is also a challenge especially now when global financial markets have tightened, and even disproportionally more for emerging economies as visible through the rising interest rate spread. More broadly, the effectiveness of the resolution framework is influenced not only by its design, but also by the environment within which it operates, including the legal, judiciary system and quality of institutions. Needless to say, the scores of emerging economies in these areas do need to significantly improve. To sum up, the fight against inflation is a priority, but we should be mindful that financial stability is also a precondition for price stability. Despite the crisis episodes, financial systems have continued to significantly grow, especially in emerging economies, thus playing an increasingly important role for income convergence. And given the new risks on the horizon such as geo-economics fragmentation and climate change, I believe their role will become even more vital. To avoid the risk of financial dominance (tradeoff between price and financial stability) in this environment of growing role, but also growing risks in the financial systems, the key way forward is further strengthening of their resilience. As writer, Alain de Botton said "A good half of the art of living is (building) resilience". I believe this quote quite illustratively explains the central bankers' past, as well as future efforts that are crucial in this uncertain and shock-prone world. Thank you, 1 World Economic Outlook Update, July 2023. 2 Attinasi, M.-G., Boeckelmann, L. and Meunier, B. 2023. "The economic costs of supply chain decoupling", Working Paper Series, No 2839, ECB. 3 Schularick, M., Steege, L. T., and Ward, F. 2021. "Leaning against the Wind and Crisis Risk." American Economic Review: Insights, 3 (2): 199-214. 4 IMF GFSR, April 2023. 5 Boissay F., Borio C., Leonte C., and Shim I. 2023. "Prudential policy and financial dominance: exploring the link." BIS Quarterly Review, March 2023. 4/4 BIS - Central bankers' speeches
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Remarks by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the Green for Growth Fund dinner, Skopje, 14 September 2023.
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Anita Angelovska Bezhoska: International cooperation for a green and sustainable economy Remarks by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the Green for Growth Fund dinner, Skopje, 14 September 2023. *** Introduction Distinguished guests, ladies and gentlemen, good evening. First, let me express my deep appreciation to the management of the Green for Growth Fund for inviting me to join this gathering enriched with the presence of different stakeholders - public and private, European and domestic, which nicely symbolizes inclusive and joint national and international efforts needed to tackle one of the most critical global priorities – climate change. According to the latest World Economic Forum Survey1, climate change is one of the top two global risks, both in the medium and long run, alongside geopolitical fragmentation. It does not come as a surprise, given the estimates that climate change reduces global economic growth by 0.4 p.p., with a more pronounced effect in emerging economies (0.7 p.p.), and perhaps even more importantly, losses are estimated to further increase. This, in particular, is increasingly important for less developed economies that tend to be highly vulnerable to climate risks, but are short of adequate fiscal and more broadly financial resources to mitigate these risks. Climate change affects all regions around the world. Polar ice shields are melting and the sea is rising. In some regions, extreme weather events and rainfall are becoming more common while others are experiencing more extreme heat waves and droughts. This summer, we have witnessed record-breaking droughts, heatwaves, and floods that caused suffering and huge losses across every continent. Data show that July 2023 was the hottest month on record globally2. Given the severe toll that climate change is already taking, it would not be an overstatement to say that the time for action is long past due. Along those lines, at the recent G-20 Summit in India, global leaders committed to urgently accelerate the actions recognizing that physical and transitional policy risks have also a profound short, medium, and long-term macroeconomic impact, including on inflation and financial systems3. Central banks have recently significantly increased their attention to climate risks, due to the large impact on their mandates in achieving price and financial stability. Recent surveys point to a rising awareness and actions by the central banking community. According to Invesco Survey, conducted in 2021, more than two-thirds of the central banks consider climate action as part of their mandates, up from less than half a year ago4. 1/3 BIS - Central bankers' speeches Focusing on the priorities Recognizing the importance of climate risks, the National Bank has so far undertaken multiple activities in the area, to increase awareness and stress the importance of active contribution of all stakeholders to set a road to green and sustainable economy. Our activities relate to inclusion of sustainable finance as a separate objective in our Strategic plan, active participation in the international network of central banks and regulators, publishing regular green finance data, as well as adjusting monetary policy instruments to foster sustainable finance. Very recently, (September 2023) we have adopted our first Medium-term Plan of activities in the area of climate-related risks, as a way to set a comprehensive and consistent framework for all activities that we plan to undertake. It aims to improve the current regulatory framework, to set Guidelines for managing climate-related risks by banks and further strengthen the supervisory approach, by incorporating the climaterelated risks in the banks` overall risk assessment. The Plan also emphasizes the importance of coordinated activities in the country and the need for cooperation with other relevant stakeholders, given that climate issues require a coordinated national approach. The Strategy also provide a first, preliminary overview of the exposure of the Republic of North Macedonia's banking sector towards climate-related risks and shows that more than half of total credit exposure of banks to corporates is to sectors that are sensitive to climate policies. It can therefore be expected that climate-related policies could have significant effects on these sectors and consequently on banks, though further analysis is needed to assess the relevance and materiality of the transition risks. The Plan was informed by the survey that we conducted to map the green finance ecosystem and assess the banks' practices in managing climate risks. The Survey showed that almost 90% of the respondents consider that climate change is an important source of financial stability risk. Yet, as assessed by the majority of the respondents, climate risk management is still in its early stage. The lack of standards and tools, adequate regulatory framework, the lack of adequate data, as well as limited internal resources and policies were pointed as the main barriers. To address some of these challenges, we have already drafted guidelines for banks (which are currently being discussed with the banking industry). Transition towards a green and sustainable economy The Republic of North Macedonia is sensitive to the risks associated with climate change. This is related to the geographical and climatic profile of the country, which exposes the country to the risks of natural disasters and extreme weather events (such as droughts, torrential rains, floods, and heat waves), which, driven by climate change, may further intensify in the next period. An additional factor is the prevailing economic model, which includes high-energy intensity and reliance on climate-sensitive natural resources. The domestic economy has a high consumption of energy, which, measured per unit of product, is three times higher compared to the European average, although it is slightly lower compared to the average of the Western Balkan countries. Electricity production is predominantly by fossil fuels (about 74% of total gross production in 2022) with the energy sector causing most of the country's greenhouse gas emissions. The share of renewable sources in the gross final consumption of energy in 2021 is 17.3%, while in the European Union, it is 21.8% on average. Such conditions point to the 2/3 BIS - Central bankers' speeches exposure of the country to the risk of transition in the restructuring of the economy towards the model of sustainable development. Green transition is costly. According to some estimates, it will take from 3 to 5 trillion US dollars per year to finance the transition towards a sustainable economy5. Therefore, the support of these endeavors by the banking systems is of key importance. Our green finance statistics show rising financial support, but also a need to strive further. Banks' green loans, more than doubled for the last four years, and their share in the overall portfolio increased to 4.1% in June this year. Banks' green lending is mainly channeled to the corporates that comprise 93% of total green loans extended. We need to acknowledge that these favorable developments are also a reflection of the support – both financial and technical - provided by international and European institutions and funds, which we deeply appreciate. One of the contributing institutions is certainly the Green for Growth Fund6, which has been present in our country ever since its inception, investing more than EUR 50 million so far, alongside 26 dedicated technical assistance projects for local financial institutions. Our impression is that things are changing rapidly and that we need to act, promptly. Undoubtedly, the transition towards a green and sustainable economy has been and will continue to be a challenging journey, especially for emerging economies that tend to have higher investment needs, but lower domestic savings. In this vein, successful arrival at the final destination of our journey will, to a great extent, depend on the support of the abovementioned institutions. On that note, I wish you a lively exchange of ideas and a pleasant evening. Thank you. 1 World Economic Forum, The Global Risk Report, 2023 2 ERA5 data from the Copernicus Climate Change Service (C3S*) 3 G20 New Delhi Leaders' Declaration, New Delhi, India, 9-10 September 2023 4 Global Sovereign Asset Management Study, 2021. 5 McKinsey & Company, "The net-zero transition: What it would cost, what it could bring," January 2022. 6 Set as an impact investment fund of public-private partnership, GGF is an early and successful example of blended finance in action. The fund channels dedicated financing to businesses and households through local financial institutions, and through direct investments to eligible projects and companies. The GGF operates in 19 countries across Southeast Europe, including Turkey, the European Eastern Neighborhood Region, and the Middle East and North Africa. 3/3 BIS - Central bankers' speeches
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Speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the 15th Conference on Payments and Market Infrastructures, Ohrid, 29-30 June 2023.
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Anita Angelovska Bezhoska: Shaping payments innovation Speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the 15th Conference on Payments and Market Infrastructures, Ohrid, 29-30 June 2023. *** Your Excellences, Dear Ms. van Dijk, distinguished speakers, Ladies and gentlemen, It is always a privilege and a pleasure to address you at our traditional Conference on Payments and Market Infrastructures. An event, organized in collaboration with the Dutch central bank, a successful partnership that lasts for fifteen years. Therefore, this year we mark an important anniversary. And I have no doubts that celebrating this occasion, while contemplating on the cutting-edge payment innovations, will be much more memorable in the surrounding of the iconic beauty of Ohrid, a city whose breathtaking architecture speaks of creativity and innovations of past civilizations. As the Dutch writer, a friend of the city of Ohrid said, "In fact, it is worth going from Paris to the Balkans just to see Ohrid. What a magnificent location on that steep hill! And the town, an extraordinary mixture of customs and centuries...". Creativity or using original ideas to create something new, and innovations, which is introducing new things, are more than ever features of our societies. The ongoing fast wave of digitalization is having wide-ranging effects on many segments of our lives. It has been transforming public and private services, making them more accessible and convenient to consumers, contributing to higher inclusion. More broadly, it means improving the wellbeing of economies as finance, knowledge and data become more widely available. Particularly rapid are technological innovations in financial services, with the payment industry being at the forefront. Current and future trends in payments innovations and implications for central banks will be the focal point of my address. Innovations in payments rest on three main pillars (World Bank, 2022). The first one relates to the changes of the links between payments and accounts. For example, for a long time, access to payment services was dependent on access to bank account. The so-called pre-paid concept (e-money) broke the exclusive link between payments and bank accounts. The second pillar rests on the changes in the way payments are processed (payment systems) – we observe proliferation of fast payments, distributed ledger technologies, QR codes, digital IDs etc. And the third pillar relates to the changes in the way consumers interact with payments with growing accumulation of customers data and tools for analysis. Innovations along these three pillars are redefining business models of payment providers with far reaching effects on the very structure of the payments market. This means, entrance of non–banking providers, stronger competition, costs reduction and real time payments as a new "must have" feature in payment services. Seems that banks as incumbents have also benefited from competition pressures, modernizing and sophisticating their payment infrastructure. In fact, digitalization of banking is not a new phenomenon. It has been here for more than 30 years, although this last wave is of unprecedented scale. Yet, the market is transforming, which is also visible through the 1/4 BIS - Central bankers' speeches change in the revenues sources of banks. According to McKinsey Global Payments Report, payments revenues of banks are declining, as standardization, technology and regulatory pressure for open banking allows for new entrants and pressures on profit margins. The consequence of this payments overhaul is shift from cash, checks and paperbased credit transfers to digital payments, especially contactless and fast payments whose value and volume reached historically highest levels. According to Red Book statistics, in the last decade the annual average number of digital payments per person increased from 179 (2012) to 332 (in 2021). In a similar vein, the Global World Bank Findex Database, points that the percentage of adults who made/received digital payments increased from 44% in 2014 to 64% in 2021. These trends are evident in the Macedonian economy as digital payments per person more than tripled during the last seven years. In addition to more convenient, cheaper and faster payment services, digitalization has been conducive to rising financial inclusion. In 2021 compared to a decade ago, the percentage of adults holding a bank account increased globally from 51% to 76%. In the Macedonian case, this indicator is set above the global average at 85%, compared to 74% ten years ago. Apparently, we do see fast and profound changes in the financial industry that inevitably affect central banks in many ways. On the one hand, we operate, regulate, supervise and oversee payment systems that are important for the overall financial stability, the transmission of monetary policy, and for the confidence in the currency, eventually. As innovation in finance does not only bring benefits but risks as well, central banks must ensure that risks are contained and do not impair financial resilience and traditional mandates of central banks. On the other hand, we have to keep pace, incentivize and support financial innovations. So how is the central banking community grappling with the new and innovative payment eco-system? According to the Central Banking Fintech Benchmarks Survey (2023), over 80% of central banks pointed to payment innovations and central bank digital currencies (CBDCs) as top research priorities. About two thirds of the central banks have created innovation hubs, although more in advanced than in developing economies, and half of the central banks use machine learning technologies or artificial intelligence. Regulatory and legislative changes are taking place intensively. According to IMF – WBG Fintech Survey, 73% of surveyed jurisdictions review and amend their policy frameworks with a view on encouraging fintech investments, innovation and adoption. The oversight and supervisory profile of central banks is changing as well. As we have to supervise non-bank payment institutions, we deal with entities with different risk profiles and put greater focus on issues such as transparency, pricing, market conduct, consumer protection. The flourishing of new technologies requires increased focus on cybersecurity. Overall, changes in the financial scenery require regulatory, organizational and operational redesign in central bank perimeter. One of the most explicit responses of central banks to the digitalized and modern uptakes in the payment industry is the idea of launching CBDCs. Currently, central bank 2/4 BIS - Central bankers' speeches money for retail is available only in physical form - cash, but the rapid digitalization is underlining the risks of diminished use of cash and its role as a monetary anchor. To make sure that money supply remains in the hands of central banks, CBDCs are increasingly gaining prominence, in particular retail CBDC. According to the latest data 114 countries, representing over 95 percent of global GDP, are exploring a CBDC. Three years ago, only 35 countries were considering a CBDC. Eleven countries have fully launched a digital currency. In the G20 countries, 18 are now in the advanced stage of CBDC development. ECB plans to complete investigation phase by the end of this year. Motivations for the issuance of CBDCs go beyond maintaining monetary sovereignty. It is also about strengthening monetary policy pass-through in digital era, combating the illicit use of money, strengthening competition for e-money payment providers, improving payments efficiency and safety, and promoting financial inclusion for underbanked citizens. Of course, it does not come without risk and challenges. The most prominent risk is the risk of disintermediation if the issuance of digital currency results in deposits flowing from commercial banks to central bank accounts with adverse implications for lending activity and consequently, real economy. In particular, in case of financial systems distress, it can intensify the run risk and amplify the shocks. The need to balance between integrity and the privacy of money also comes to the fore. Elevated cyber risk is also inevitable, given the technologies deployed for digital currencies. All this indicates that central banks have "fulltime job" in devising the most appropriate CBDC design that will minimize these risks and maximize benefits. Our national efforts more or less resemble global trends and initiatives. As a central bank, we strive towards encouraging innovation in finance, as visible through the establishment of our Innovation Hub. We map the ecosystem, via fintech surveys to better understand its current state and act towards eliminating barriers, while containing risks. The recently adopted Fintech Strategy is providing a platform for coordinated and streamlined efforts by all stakeholders in the regulatory area. A recent Central Banking Survey revealed that only 54% of surveyed central banks do have a strategy that underscores our visionary approach towards the fintech area. We have already created a stimulating legislative background, with the new Law on payment services and payment systems that entered into force this year, Furthermore, we have recently embarked on exploring the possibilities for introduction of digital Denar. Last but not least, propelling efficient and harmonized cross border payments is key to support and stimulate cross border integration. This is particularly the case for small-size economies, such as ours, with growth model based on international trade and finance. Our regional efforts to comply with European standards, fulfill SEPA requirements, and integrate into the Target Instant Payment System-TIPS of Euro system is a step in a right direction. Looking forward, it is always challenging to foresee the future, but it is highly probable that the pace of financial transformation is set to continue, if not to accelerate. Few years ago, a study denoted ten avenues that will shape the future of payments, and some of them are already taking place. Issuance of digital currencies, more active role of regulators, data – based payments value chains, a consensus on data privacy, biometrical ID, and strong collaboration between new entrants and traditional players. These are now all already existing dimensions of the finance matrix. I would add that ESG concerns are one of the key feature of the future of payment industry as well. In 3/4 BIS - Central bankers' speeches that new world of finance, the only way to minimize the risk of being left behind is to be agile and fast adapting institution. At the end, let me conclude that the world of finance is moving ahead. Keeping the pace, anticipating and addressing risks, while encouraging innovative solution must be central banks focus.. Let me refer again to A. den Doolaard, who ones said, "We lived among miracles, but we never understood them". Now, in the world of finance more than ever we face new miracles, innovations and novelties that we need to understand, and be prepared and competent to support and protect. Thank you. 4/4 BIS - Central bankers' speeches
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Speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the celebration marking the World Savings Day "Building Trust - a Foundation for Stronger Savings", Skopje, 30 October 2023.
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Anita Angelovska Bezhoska: Building trust - a foundation for stronger savings Speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the celebration marking the World Savings Day "Building Trust - a Foundation for Stronger Savings", Skopje, 30 October 2023. *** Dear attendees, Ladies and gentlemen, It is my pleasure to address today's event marking the World Savings Day, which this year is celebrated under the motto "Conquer your Tomorrow through savings", which clearly highlights the importance of savings, both for the personal well-being of each individual and for the overall economy. Undoubtedly, saving is one of the key "engines" of economic growth, and an important driver of income convergence in the developing countries. The higher the domestic savings, the higher the opportunities for investment and increasing the volume of physical capital, which currently in our country (similar to the entire Western Balkans) amounts to merely about 30% of the average EU capital, clearly highlighting the need for intensifying the investment cycle. Usually, however, the level of domestic savings in less developed economies (like ours) is lower than the investment needs, and the gap is bridged over through the import of foreign savings, including in the form of foreign loans. This, in turn, implies growth of external borrowing and an increase in vulnerability of economies. In particular, in the current context of tight international financial markets as a result of the most synchronized and intensive monetary policy tightening in the past 50 years. Hence, our efforts must be aimed at encouraging domestic savings, but also channeling it through the financial system. Some surveys show that in the Western Balkans there is a significant amount kept in cash, outside the financial system and therefore cannot be seen as a contributor to the economic growth. Thus, it is estimated that the household foreign currency savings in cash in the region average about Euro 246 per capita, while, in the Macedonian economy, this amount is higher, amounting to about Euro 403 per capita in 20211. The level of savings in an economy is conditioned by several fundamental factors , such as income and consumption levels, demographic factors, the setting of tax system, the health and pension system, macroeconomic and political stability in the country, etc. Yet, it is often determined by certain specific factors. Such an exceptional episode was the pandemic, when in most of the countries household savings increased to unusually high levels, compared to some previous crisis episodes. Analyses2 of the euro area and the US economy, for example, show that in the period 2020-2022, the accumulated excess saving increased to 11.3% and 13.2%, respectively, of the trend value of the gross disposable income. In fact, spending of these savings in the subsequent period has been considered one of the factors that 1/3 BIS - Central bankers' speeches contributed to acceleration of inflation, more so in the United States than in the euro area, where the excess savings were lower, a dominant part was directed to investments in real estate, stocks and bonds, and less to the most liquid assets, and where the largest part of the excess was concentrated among the wealthiest 10% of the population, whose marginal propensity to consume is lower. How does the dynamics of savings in the Macedonian economy look like? Similar to other countries, the pandemic led to accumulation of additional excess savings. Thus, the financial assets of the households increased by 7 pp. of GDP recording the fastest growth in the past two decades. At the same time, most of the excess savings were placed in the form of deposits, whose share in GDP in 2020 increased by 3.3 pp, which is three times higher than the average increase in the previous few years. However, in the past few years, the growth of deposits in GDP has decreased, indicating a gradual depletion of these excesses. This also corresponds with the developments in the real estate market, amid increased channeling of the deposits into real estate, which is actually a global post-pandemic phenomenon. This is also seen in the increase in real estate sales, which according to the available data is by about 35% higher on average in the three years since the pandemic, compared to the prepandemic period (2017-2019). The overall amount of household deposits in the banks has increased by more than 20% in the years since the pandemic. Households, as traditionally the largest depositors in our banks, have currently entrusted the banks with Denar 340 billion, composing about 62% of the households' total financial assets. The remaining portion of about 22% are investments in private pension funds, while investment in securities, shares and life insurance policies accounts for only 8% of financial assets. It is worth noting, however, that in recent period, household savings has undergone favorable structural changes, both in terms of currency and maturity structure of the deposits. The pandemic outbreak and the subsequent shocks interrupted the multi-year trend of permanent denarization of deposits in banks, but since the second half of 2022, the share of denars in total household deposits has been following an upward trajectory, currently amounting to about 48%. Amidst growing yields and stable expectations, long-term household deposits are also growing, after a long period of reduction, so that at the end of September 2023 their annual rate reached almost 24% - a record high in the last ten years. In fact, the National Bank has taken several measures aimed at such structural changes, mainly through the reserve requirement instrument that stimulates banks to offer more attractive interest rates on deposits in local currency. The fact that deposits at banks and savings banks are still growing even amid high uncertainty and significant accumulation of external shocks, which perhaps occurred only once in the last hundred years, is an acknowledgement of the high confidence of the population in the banking system. This is not surprising, considering that the system has remained safe, sound, highly capitalized and liquid throughout the entire period, showing capacity to cope with shocks. A survey by the Austrian Central Bank3, lists our economy among the countries with the highest trust in the banking system from the CESEE region. According to the latest measurements, the trust of the population has increased to 40.5% as of 2021 (35.5% on average in CESEE). According to the latest National Bank survey on the assessment of risks to 2/3 BIS - Central bankers' speeches financial stability (from 2023), which surveys the opinion of financial institutions and economic analysts, all respondents have expressed confidence in the financial system, most of which (61%), high confidence. The National Bank is committed to strengthening the safety and soundness of the banking sector, which has been and remains our top priority and stake in supporting savings. Thus, in the past few crisis years, we have continued to strengthen the banking system resilience, by increasing capital requirements, including through the first introduction of a countercyclical capital buffer. We have also introduced borrower-based macroprudential measures for the first time, with the purpose to prevent any excessive household debt amid hiking inflation and growing interest rates. Important systemic solutions for further strengthening of financial stability include the recently adopted Law on Financial Stability and Law on Bank Resolution, which strengthen the mechanisms for prevention as well resolving banks that face serious challenges, without disrupting financial stability. Also, the implementation of the first National Bank's Medium-Term Climate Risk Management Plan is expected to contribute to a better understanding and capacity building both of the central bank and of the banks to manage one of the most important modern challenges – the climate risks, and improving the banking system capacity to support the transition of economy towards green and sustainable development. The results of these efforts are visible - in the past five years, the banking system capital has doubled, the capital adequacy ratio has hit a record high in the past 15 years, the capital quality is the highest, and the share of non-performing loans is historically the lowest. Dear all, We are living in uncertain times, when crises have become a commonplace, and uncertainty is the "new normal". This new reality emphasizes even more the need for a long-term rather than a short-term standing, as well as strengthening the resilience to potential future shocks, including the strengthening of the domestic savings for a better and secure future. As Aesop said, "It is thrifty to prepare today for wants of tomorrow". I wish you a Happy World Savings Day! Thank you! 1 Source: OeNB Euro Survey. 2 The consumption impulse from pandemic savings – does the composition matter?, ECB Economic Bulletin , Issue 4/2023. 3 OeNB Euro Survey. 3/3 BIS - Central bankers' speeches
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Speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the Workshop on Technical and Legal Aspects of Joining SEPA Payment Schemes, Skopje, 29 January 2025.
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Anita Angelovska Bezhoska: Technical and legal aspects of joining SEPA payment schemes Speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the Workshop on Technical and Legal Aspects of Joining SEPA Payment Schemes, Skopje, 29 January 2025. *** Mr. Paolucci, World Bank team, speakers at the workshop, representatives of financial institutions, distinguished guests, It is a true honor and privilege to kick off this important event on payment systems, a topic that touches nearly every aspect of our daily lives and drives economies forward. In today's rapidly evolving landscape, payment systems are at the core of how businesses, governments, and consumers interact, and in making sure that transactions are seamless, secure and efficient. In this vein, enhancing cross-border payments has been a priority both for advanced and emerging economies. For instance, in late 2020, the G20 leaders endorsed the roadmap for enhancing cross-border payments, thus bringing benefits through lower costs, faster speed, higher transparency and improved access in the payments area. To monitor the progress, BIS launched a monitoring survey among central banks in 2023, covering three main areas: 1) payment system interoperability and extension, 2) data exchange and message standards, and 3) legal, regulatory and supervisory frameworks. The findings of the survey1 reveal that enhancements of the cross-border payments have been underway, as 71% of RTGS systems and 91% of fast payment systems (FPS) have completed or are planning to complete at least two of the priority actions2. Yet, vast room for improvements remains, including in the area of harmonizing or bringing closer legal, regulatory and supervisory frameworks that are indispensable for smooth and efficient cross-border payments. Enhancing cross-border payments is of vital importance for the Western Balkans economies, as well. This region comprises of relatively small and open economies, with their international trade to GDP averaging close to 100%. Most of them are already highly exposed to EU in terms of trade and financial linkages (close to 60% of their overall export goes to the EU), while intraregional trade needs further deepening. In fact, the latter – enhancement of regional economic integration is the second pillar of the Growth Plan for the Western Balkans. Stronger regional economic integration is considered one of the driving forces for faster real convergence, as "small and fragmented markets are unable to exploit economies of scale, and suffer from limited attractiveness to investors-3 " . Hence, there are no doubts that intraregional economic cooperation can serve as a catalyst for lifting the growth potential of the region. According to some estimates, it can potentially add up to 10% to the WB6 economies4. The common regional market is also a critical stepping-stone to the EU's Single Market. 1/4 BIS - Central bankers' speeches Stronger trade and financial integration must be underpinned by efficient payments system. Lowering the time and costs of payment transactions can lift trade volumes, enhance financial flows and support foreign direct inflows that are inevitable for addressing the structural bottlenecks in the region. Although it is acknowledged that the WB region has made immense progress in the payments system area, yet gaps remain and need to be closed. To address these gaps, the World Bank, in collaboration with the Regional Cooperation Council and Central European Free Trade Agreement Secretariat, embarked on Western Balkans Payments Modernization Project, sponsored by the European Commission. Two main pillars of the project are SEPA accession and integration of the region with the ECB's TARGET Instant Payment Settlement (TIPS) system. Let me now elaborate more on the expected benefits from joining SEPA. The accession to the single payment area holds immense significance for all stakeholders in our economy. For financial institutions, joining SEPA before becoming EU member, means indirect access to European payment systems, eliminating the need for complex and costly correspondent banking arrangements. This simplification will lead to more efficient, cost-effective, and faster cross-border payments. For businesses, SEPA provides a gateway to improved access to the EU market. With standardized and streamlined payment processes, companies can engage in cross-border trade with greater ease, fostering economic growth and regional integration. The World Bank analysis for the costs of euro cross-border payments for micro, small, and medium-sized enterprises in the Western Balkans reveals that it costs approximately 12 times more to transfer €5,000 and 15 times more to transfer €20,000 from the EU to the WB6 than among the EU countries. For citizens, SEPA membership translates to a more affordable, convenient, and secure method for conducting euro transactions. Individuals will benefit from reduced fees on cross-border payments, including for remittances. "It has the potential to reduce the cost of remittances to the Western Balkan economies, which currently amount to 6.71 percent of the total transaction, significantly exceeding the global Sustainable Development Goal target of 3 percent. By meeting this target, the economies could save approximately half a billion euros according to World Bank calculations."5 Furthermore, SEPA membership will accelerate the digital transformation of our financial sector. By reducing reliance on cash transactions and promoting digital payment methods, it will support the development of a more modern, secure, resilient and inclusive financial ecosystem. Recognizing the benefits of joining SEPA, countries in the region have invested tremendous amount of time and resources, while being extensively supported by all stakeholders within the Western Balkans Payments Modernization Project, especially the World Bank. These efforts brought us all either already into SEPA, or very close to a positive decision on joining it. Related to this, let me elaborate more on our position. We submitted our application for SEPA membership on 10th of July last year. This historic step was the culmination of years of dedicated work, legislative overhaul, inter-institutional collaboration, and support from international and European organizations. Completion of the formal assessment of our application and our readiness to join SEPA by the European Payments Council is expected soon. This will confirm our compliance with 2/4 BIS - Central bankers' speeches the European legal and regulatory requirements in critical areas, including payment services, anti-money laundering measures, free movement of capital, and data protection. These foundational elements ensure that our country is well prepared to meet SEPA's technical and legal requirements. Having said that, an effective accession will be possible only if domestic payment service providers prepare their systems to meet SEPA's technical and operational requirements. Therefore, while the benefits of SEPA accession are clear, we must also acknowledge the challenges that lie ahead. Compliance with SEPA's regulatory and operational requirements demands investment in infrastructure, staff training, and system upgrades. The banking sector is expected to work diligently to ensure full readiness for integration with SEPA payment systems by October 2025, determined as SEPA first possible entrance date for payment service providers from the Western Balkan countries being SEPA members. Of course, the successful implementation of SEPA adherence will require close cooperation between regulators, financial institutions, and all other relevant stakeholders. The National Bank is committed to facilitating this transition. We will continue to provide guidance, technical support, and regulatory oversight to ensure a smooth and efficient integration process. Additionally, we will work closely with the international partners that are genuinely committed to address any challenges. The strong commitment and support has recently led to the formation of a Steering group composed of representatives from relevant EU institutions, who play a key role in the integration process and implementation of SEPA, alongside Governors from the central banks of the region and the World Bank. At the end, let me use this opportunity to thank our international and European partners for their continuous support, as well as to all the domestic stakeholders, as I have no doubts that we all fully understand the benefits of this project for spurring growth and supporting the overall wellbeing in the economy. I encourage each of you to take full advantage of the sessions, networking opportunities, and discussions ahead. It is through collaboration and exchange of diverse perspectives that we truly grow and make lasting impact. Thank you. 1 "Steady as we go: results of the 2023 CPMI cross-border payments monitoring survey", CPMI Brief No5, BIS, June 2024. 2 Refers to the following priorities: Extension of operating hours, allowed access to supervised non-bank providers, implementing at least one cross border link, and processing or planning to introduce ISO 20022 messages. 3 Common Regional Market Action Plan, 2025-2028. 3/4 BIS - Central bankers' speeches 4 "Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the regions New growth plan for the Western Balkans", European Commission, November 2023. 5 "Driving economic integration through payments modernization in the Western Balkans", World Bank Driving-Economic-Integration-Through-Payments-Modernizationin-the-Western-Balkans.pdf 4/4 BIS - Central bankers' speeches
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Discussion by Mr Shkëlqim Cani, Governor of the Bank of Albania, in the Parliamentary Commission of Economy, Finance and Privatizations, Tirana, 15 December 2003.
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Shkëlqim Cani: The monetary programme of 2004 - its cohabitation with the fiscal policy Discussion by Mr Shkëlqim Cani, Governor of the Bank of Albania, in the Parliamentary Commission of Economy, Finance and Privatizations, Tirana, 15 December 2003. * 1. * * 2003 in figures The Albanian economy during 2003 seems to have returned to its potential growth rates, leaving behind the deceleration of 2002. Various indicators generally point out that the economic growth forecast for 2003 - of about 6 percent - is a real opportunity. Developments such as: stability in the agricultural production, the positive performance in the branches of services, industry and transport, the increase of the trade transactions volume verified in the first 6 months of the year, the greater number of tourists, the stable and favourable energy situation, stability of remittances and other factors, are reliable arguments in achieving the economy growth objective. 2003 is believed to mark another year of the consumption price stability. As in the 3-4 previous months, the Bank of Albania’s expectations speak about an annual inflation rate within the target interval of 2-4 percent. According to the latest data, the 12-month difference of consumption price index by the end of November 2003, marked the figure of 3.4 percent, while the annual inflation, calculated as the average of the last twelve months, reached the level of 2.24 percent, reinforcing thus its clear downward trend. The Bank of Albania - in its recent analyses - has been underlining the fact that its monetary policy has been a careful, financial, budgetary policy, where special emphasis has been given to the budget expenditures control versus the realized revenues ratio. Consequently, the government’s liquidity needs, up to the present moment, have been completely covered by the banking system, and therefore, the Bank of Albania financing was unnecessary. Under these circumstances the fiscal pressures on the monetary policy are weak. Following this reasoning, it could be concluded that the move of both policies (monetary and fiscal) has been in harmony and in conformity with the general economic-financial development program of the country. Domestic budget deficit financing from the banking system during 2003 is estimated to be almost at the same level as the one of 2002, being about 2.2 percent of the GDP. The stable level of the internal government borrowing, facing the rapid increase of Lek deposits, was another factor, which influenced the immediate reduction of treasury bills interest rates. The monetary policy of 2003 has continued to be careful, characterized by smoothing tendencies. This is reflected in the reduction of interest rates three times throughout the year. Watching attentively the inflation performance and the liquidity indicators in the banking system, the Bank of Albania reduced, all in all, the Repos rate by 1.5 percentage points during 2003, bring it by the end of October at the pre-crisis liquidity level of the previous year. The real interest rates in positive terms have not changed the attitude of households and agencies in depositing their savings in the banking system. This helped keeping up the liquidity ratios in the system. Monetary developments show that the deposits hemorrhage of spring 2002 has been completely overcome, which is reflected in a liquidity surplus of the banking system, fluctuating round the level of Lek 5.3 billion during 2003. Worth underlining is the fact that, the surplus liquidity brought about the reduction of financial intermediation costs, expressed in the reduction of the difference between the treasury bills and Lek deposits interest rates. Also, considering the appreciating tendencies of Lek during 2003, the Bank of Albania has been present in the foreign exchange market. The foreign exchange activity of the Bank of Albania resulted in the injection of Lek 3.9 liquidity billion, in the market. However, considering the surplus liquidity performance in banks, the Bank of Albania sterilized the foreign exchange purchasing effect. It performed outright selling of treasury bills from its portfolio, at a value of Lek 4.07 billion. The rest of the surplus liquidity was withdrawn through the repurchase agreements. In support of the economy growth, this year seems to have marked a greater support towards the economy crediting. Banks’ credit portfolio for the private sector of the economy increased by Lek 10.1 billion during the first 10 months of the year. During this period, a new credit of Lek 70.6 billion (USD 660 million) was extended to the economy, or 45 percent more than the same period in the previous year. Based on the developments noticed during the first ten months, on the current developments of the banking system liquidity, etc., it could be summarized that monetary developments of 2003 will be a greater contribution to the consolidation of the overall macroeconomic equilibrium of the country. In order to have a clearer view of the expected economic situation by end of 2003, following is given a table showing the general indicators of the country’s economic development, including here the monetary ones as well. Table 1: General economic indicators 2003* Real growth of the GDP (in %) 9.1 -10.3 12.7 8.9 7.7 6.8 4.7 6.0 Number of employees (in thousand) 1,116 1,107 1,085 1,065 1,068 920.5 Unemployment percentage 12.4 14.9 17.8 18.2 16.8 16.4 15.8 15.2 17.4 42.1 8.7 -1 4.2 3.5 2.1 3.0 M3 aggregate growth 9.5 M3 aggregate velocity 1.82 1.72 1.92 1.73 1.64 1.51 1.58 1.66 MoB growth -6 -3.3 New credit to the economy (Lek billion) 7.4 3.98 5.8 40.6 62.6 70.6 Inflation percentage (y-o-y) Lek deposits (Lek million) 72,831 89,495 130,940 158,326 165,261 186,211 193,886 223,500 Budget deficit (in % of the GDP) -11.4 -13.2 -11.3 -11.9 -9.1 -8.3 -6.2 -4.6 Domestic debt (in % of the GDP) 30.7 36.18 35.12 36.31 41.01 39.42 38.49 39.1 Current account (in % of the GDP) -11.5 -12.03 -6.12 -7.34 -7.1 -6.1 -8.9 -8.5 Internal debt (in % of the GDP) 29.2 33.2 31.8 29.1 30.2 28.2 24.9 23.7 Average exchange rate lek/usd 104.5 148.9 150.6 137.7 143.7 143.48 140.15 123.1** 146.9 132.58 128.5 132.4 137.9** Average exchange rate lek/euro Note:* The GDP calculation is made by INSTAT with a different methodology, only for 1996-2000. ** 2003 average until November 2003. * Almost all the 2003 data are forecasts. Source: INSTAT, Ministry of Finances, Bank of Albania and IMF estimations. *** As a conclusion, I would like to underline once again that the Bank of Albania does not make its policy decisions separately, but following carefully all the developments of the economy, and this is really important for the public to understand. As it is now a tradition, the monetary policy of the Bank of Albania is part of the general economic development program of the country. As such, it can’t be but a range of decisions and measures, which in good harmony with the other policies, the fiscal one, etc., aim at economy growth and reduction of the poverty in the country. The coordination of monetary and fiscal policies could be achieved in the mid-term development program of the country, a program covering a three-year time span. The extensive logic of this program gives a crucial importance to keeping up macroeconomic stability. Keeping up macroeconomic stability serves as a bridging gap between the monetary policy and the fiscal one. Hence, the monetary policy is committed in keeping up price stability, whereas the fiscal one controls the budget deficit. These macroeconomic indicators are strongly related to one another: fulfilling each of them requires, as a basic condition, the observance of the other objectives. Following this idea and backing it up in figures, please allow me to shortly through a glance back in the past. The soundness of the Albanian state in these last years, the economic growth and amelioration of the tax and customs entities performance, enabled the reduction of the budget deficit. This deficit fell from 11.4 percent of the GDP in 1998 to 6.9 percent in 2002. In 2003, it is expected to fall at the level of 5.8 percent of the GDP, whereas the draft-budget for 2004 has an even more ambitious objective: the reduction of the general budget deficit at the level of 4.8 percent of the GDP. This fiscal discipline has given its own results. It influenced the reduction of treasury bills interest rates, bringing about an overall reduction of interest rates in economy. The reduction of interest rates and the government’s demand for funds gave a greater respiration to economy crediting. It has extended more funds - at lower interest rates - to be used by the public sector. According to the data provided by the Bank of Albania, economy crediting increased at an average of 90 percent per year during 1999-2002. On the other side, the reduction of the Bank of Albania’s financing to state budget, gave positive impacts on the liquidity indicators in the system. Now the long-term monetary assets gave a straightforward contribution on keeping inflation at low levels. Inflation fell from 8.7 percent in 1998 to 2.1 percent in 2002. In these last three years, it was within the interval of 2-4 percent, as targeted by the Bank of Albania. 2. Monetary program of 2004 Pursuant to drafting and implementing the monetary policy, the Bank of Albania designs each year the monetary program, which is a financial plan aiming at disciplining the funds circulation in economy, in conformity with the development objectives of the country. The main objective is meeting the needs of the economy for monetary assets, without influencing the balance of demand-supply for monetary assets, generating thus inflation or shrinking the economy. The monetary program of 2004 has also been set up on the same premises. Its not a secret the fact that in the coming year as well, as in the previous ones, the two main decision-making institutions of the country in the field of economics and finances, the Albanian Government and the Bank of Albania, have agreed upon the general objectives of the country’s development, including also the so called harmonized cohabitation between the fiscal and monetary policies. This process, albeit all, was part of a constructive consultation with institutions such as IFM and the WB, enabling thus a new financial agreement between these two institutions for 2004. Table 2. Main macroeconomic indicators1 Real economy indicators (in point percentage) GDP growth 7.8 6.5 4.5 - 5 6.0 6.0 Annual CPI (average) 0.0 3.1 5.2 2.3 3.0 Nominal GDP (Lek billion) 539.2 590.2 -8.2 -6.9 -5.8 -4.8 10.6 Fiscal indicators (in percentage versus the GDP) Fiscal deficit -8.9 Monetary indicators (in percentage point) M 3 Growth 19.9 7.0 9.5 3m TB Interest rate 7.8 8.0 10.6 7.6 2.1 Inflation and monetary policy in 2004 The monetary policy of the Bank of Albania during 2003 was characterized by easing trends of the monetary conditions, in compliance with the lessening the inflationary pressures and improving the monetary indicators. The Bank of Albania took up the implementation of an easing monetary policy since April 2003 reducing the core interest rate by 0.5 percentage point. In July and October 2003, there were two other reductions by 0.5 percentage point each, bringing the core interest rate at the level it was at the beginning of the previous year. At the end of November 2003, the core interest rate was 7.0 percent; the annual inflation rate for that month was 3.4 percent, whereas the average annual inflation by the end of October was just 2.24 percent. The Bank of Albania has been present in the foreign exchange market throughout 2003 by buying foreign exchange. The foreign exchange activity of the Bank of Albania helped in injecting liquidity in the market and it has smoothed the Lek appreciating tendencies during the year. The forecasts for the main trends and inflation for 2004, suggest that the Bank of Albania should apply a similar policy in 2004, too. Developments in the consumption prices are characterized by low inflationary pressures. Our forecasts show that the inflation target of the Bank of Albania will be met during 2003. In case no shock phenomena emerge, inflation will be under control also for 2004. Besides, the expectations on the economy seem to speak about an inflation level sticking to the present one. Liquidity ratios and structures seem to be near their historic levels, whereas interests rates were characterized by downward trends during 2003. Therefore, the Bank of Albania might reconsider the possibility of a further reduction of interest rates, a possibility consisting in the future performance of the monetary and inflationary indicators. This will be in support of the economic activity or inflation target. Judging from the analysis of actual trends, we could say that interest rates during 2004 will be generally stable or in downward trend. The analysis of monetary indicators for 2004 shows that the Bank of Albania is going to be present in the foreign exchange market so as to impede the further appreciation of Lek. Judging from the monetary indicators of these recent years, we notice that Lek supply (M2 growth) in the internal market has been declining due to the lack of government’s privatization incomes, which the Bank of Albania converted in Lek by injecting liquidity in the market. The reduced Lek supplies, together with its increased demand (due to the high interests rates of financial assets in Lek during 2003), have been exercising pressures on the Lek appreciation during 2003. Foreign sector forecasts belong to June 2003. 3. Main suppositions of the monetary program of the Bank of Albania for 2004 In designing the monetary program for 2004 particular attention was given to the Bank of Albania’s target, that is keeping up the annual inflation rate within the limits of 2-4 percent. In hitting this target, the monetary program aims the control of money supply growth so that the level of real monetary assets responds to the real needs of the economy for a 6 percent economic growth. The economy demand forecast does still rely on the quasi-constant velocity forecast of money circulation. This forecast, judging from the nominal GDP level, is the bridging gap between inflation and money supply growth (intermediate objective). The monetary program guarantees the observance of quantitative objectives set by the Bank of Albania, the level of NDA and NIR of the Bank of Albania within the limits and the control of government’s domestic borrowing at the level of 2.7 of the GDP. 3.1 Money supply and its constituents Money velocity is forecasted to be relatively stable during 2004. This assumption is based on keeping up the monetary developments trends of 2003 even for 2004. Thus: • Inflation is expected to be within the target of the Bank of Albania • Interests rates are expected to be stable or in downward trend • The government demand, which is also the main source of requiring funds, is expected to be at the same level, 2.7 percent of the GDP • The growth rate demand for the economy is expected to be almost the same as the 2003 one. Based on these considerations, the M3 circulation velocity - as to trimesters - is presented as follows: Table 3. Money circulation velocity in 2004. (GDP as to trimesters*100 / M3) Dec '02 March June 42.9 43.9 43.9 September Dec '03 42.9 42.9 March June 44.1 43.3 September Dec '04 43.2 43.1 Based on this forecast, the money supply is expected to grow by 10.6 percent or by Lek 47.4 billion. 3.1.1 Money supply constituents The ratio of money outside banks versus the money supply noticed during 2003 is not expected to undergo significant changes during the coming year. However, an upward trend of the foreign currency deposits ratio versus M3 is expected, bringing about a decrease of the Lek deposits weight versus money supply. Foreign currency deposits are expected to have a considerable annual increase, of about 18.2 percent, or Lek 17.7 billion, by the end of 2004. Table 4. Money supply growth as to trimesters (in Lek billion) T1 T2 T3 T4 Money supply 10.9 11.0 11.5 14.0 47.4 Money outside banks 1.7 3.1 3.2 6.9 14.9 Lek deposits 4.1 3.6 3.7 3.4 14.8 Foreign currency deposits 5.1 4.3 4.5 3.7 17.7 Generally, the M2 aggregate growth will follow the performance of the economy demand for monetary assets. This demand is expected to higher in the first trimester of the next year. Table 5. M2 and monetary assets demand growth (in Lek billion). T1 T2 T3 T4 Deficit financing 7.2 4.2 3.6 5.0 20.0 Credit to the economy in Lek 0.5 0.5 0.5 0.5 2.0 Foreign currency reserve growth 1.8 2.4 1.2 5.4 Sum 7.7 6.5 6.5 6.7 27.4 M2 growth 5.8 6.7 7.0 10.2 29.7 Achieving equilibriums of monetary indicators and the reduction of the core interest rate down to the levels of early 2002, are expected to provide the normal growth of the M1 aggregate. Demand deposits in Lek are forecasted to be slightly higher in the coming year. However, the strongest impact on the M1 aggregate growth will be the growth of money outside banks. Money outside banks is forecasted to increase by Lek 14.9 billion in the next year. Money outside banks ratio versus money supply is assumed to be round the level of 28.0 percent. Such a forecast is based on the fact that this ratio has generally appeared as an equilibrium level in the Albanian economy. Also, the forecast for a stability (or fall) of interest rates, gives a greater back up to this assumption. However, considering the historic trends, this ratio is expected to have an upward trend in the last trimester of the year. Money outside banks performance according to the monetary program will also enable the observance of NDA objective of the Bank of Albania. Taking it for granted that the NIR performance of the Bank of Albania will stick to the program, the forecasted NDA realization would be as follows: Table 6. Net Domestic Assets Objective (in Lek billion). December '03 March '04 June '04 September '04 Objective 93.1 80.1 82.1 84.1 Forecast 77.0 78.7 82.5 84.7 Difference -16.1 -1.4 -0.4 -0.6 The annual increase of Lek deposits is forecasted to help meeting the economy demands for domestic monetary assets from commercial banks. The Lek deposits increase in the next year is forecasted to be Lek 14.8 billion, while the demand for monetary assets in Lek of the government and that of the private sector is forecasted to be Lek 14.5 billion. This will provide a stable situation of liquidity in the banking system during 2004. The banking system is forecasted to meet completely the needs of the private sector for loans in Lek as well as the demand of the government for deficit financing up to 62.5 percent of the total financing of Lek 20.0 billion. The Bank of Albania might finance up to 5 percent of the average government revenues in these three last years, or nearly Lek 7.5 billion. As a result, borrowing or investment of free funds of second-tier banks at the Bank of Albania will ease the misbalance effects between the demand and supply for domestic monetary assets on the liquidity performance during the year. Forecasts on the NDA and NIR objective growth during 2004 are based on the growth of gross foreign currency reserve by USD 45 million and the growth of the reserve money by nearly Lek 17.9 billion until the end 2004. Table 7. Liquidity performance during 2004 (in Lek billion). T1 T2 T3 T4 M2 growth 5.8 6.7 7.0 10.2 29.7 Money outside banks 1.7 3.1 3.2 6.9 14.9 Lek deposits 4.1 3.6 3.8 3.3 14.8 Deficit financing from the Bank of Albania 1.9 1.9 1.9 1.9 7.5 Deficit financing from banks 5.3 2.3 1.7 3.1 12.5 Credit to the economy 0.5 0.5 0.5 0.5 2.0 Borrowing from the Bank of Albania3 1.9 -0.8 -1.4 0.3 -/- 3.2 The demand of the economy for monetary assets 3.2.1 Currency position of the banking system Net foreign currency assets of the banking system for the next year are forecasted to increase by nearly Lek 8.6 billion or 5.1 percent from the previous year. The increase of NFCA of the banking system will mainly come due to the increase of net foreign currency assets of the Bank of Albania, which will increase by Lek 7.1 billion. This is a 7.2 percent increase of the NFCA as compared to the 2.2 percent increase forecasted for 2003. The forecasted increase of foreign currency reserves of the Bank of Albania during 2004 at the level of Lek 5.4 billion will be the main source of the NFCA increase. Denominated in foreign currency, this increase is USD 45 million. Most part of this increase is expected to be the outcome of the foreign currency purchase from the Bank of Albania. Table 8. The difference as to trimesters of the gross foreign currency reserve of the Bank of Albania. (USD million) December 2003 T1 T2 T3 T4 December 2004 973.8 1018.8 The remaining part of Lek 1.7 billion is expected to come from the increase of the commercial banks reserves at the Bank of Albania. Net foreign currency assets of commercial banks will increase by Lek 1.5 billion, or 2.2 percent. The NFCA increase of commercial banks is forecasted to be at a low level, despite the annual increase by Lek 17.7 billion of deposits in foreign currency. From this sum, nearly Lek 14.5 billion are expected to be used in financing the private sector borrowing, while the remaining part will raise the commercial banks reserves at the Bank of Albania. 3.2.2 Credit to the government During 2004, the internal borrowing of the government in covering the budget deficit is forecasted to be Lek 22.6 billion, while privatization is expected to cover nearly Lek 2.8 billion. Participation from Borrowing from the Bank of Albania is presented in a positive sign; investment of free funds by the Bank of Albania is presented in negative. institutions and households in the treasury bills market has demonstrated upward trends in the last two years. In the coming year, their deficit financing is expected to reach the value of Lek 2.6 billion. Budget deficit financing from the banking system in 2004 is forecasted to be Lek 20 billion or 2.3 percent of the GDP. The law provided the Bank of Albania to finance the budget deficit up to the level of 5 percent of the average budgetary government revenues during these three last years. In absolute value, this limit is estimated to be Lek 7.7 billion. The monetary program for 2004 forecasts that the Bank of Albania financing of the budget deficit will be Lek 7.5 billion. This financing by the Bank of Albania is necessary in covering the budget deficit, considering a small growth of the M2 and Lek deposits. The monetary program forecasts that the increase of Lek deposits during 2004 will be sufficient in covering the other part of Lek 12.5 billion of the deficit financing from the banking system. The following table shows the allocation as to trimesters of the budget deficit financing for the banking system. Table 9. Allocation of the budget deficit financing (Lek billion). T1 T2 T3 T4 Banking system financing 7.2 4.2 3.6 5.0 20.0 - Bank of Albania 1.9 1.9 1.9 1.9 7.5 - Commercial banks 5.3 2.3 1.7 3.1 12.5 The Bank of Albania financing is assumed to be the same throughout the four trimesters, providing thus the financing performance from commercial banks according to the demand forecasted by the government. However, the allocation of the Bank of Albania financing may undergo potential changes depending on the liquidity performance of the banking system from one trimester to the other. 3.2.3 Credit to the economy The business needs for borrowing to support their businesses have been growing in these recent years. The same tendency is expected for 2004, too. Credit to the economy for the next year is forecasted to increase by Lek 16.5 billion. Compared to the credit balance increase in 2003, this one is nearly Lek 3.6 billion, or 28 percent higher. The credit to the economy forecast is based on its performance during the last nine months. Albeit the high-level of liquidity during this year, the credit balance increase was lower than in the previous years. In the next year, the credit balance increase in Lek is expected to keep the same rates, marking an annual increase of Lek 2 billion in absolute value. Foreign currency credit increase is expected to be nearly Lek 14.5 billion, or 88 percent of the total increase of the credit to the economy. The difference between the credit interest rates in Lek and those in foreign currency is assumed to be one of main reasons of the slow increase of credit in Lek. Moreover, the high level of the banking system liquidity during 2003 does not seem to have influenced the increase of the credit balance in Lek. The higher increase of the credit balance to the economy forecasted for 2004 is based on the upward tendency of private sector financing needs. Meanwhile, the forecast for a small increase of Lek 2 billion, or 12 percent of the Lek crediting, is based on higher interest rates of Lek rather than foreign currency crediting. The assumption to approach the crediting interests rates in Lek and in foreign currency, would also alter the forecasts on the credit balance increase, for the respective currencies in the future.
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bank of albania
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Statement by Dr Shkëlqim Cani, Governor of the Bank of Albania, for Euromoney Yearbooks, Global banking and financial policy review, Tirana, 9 August 2004.
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Shkëlqim Cani: Review of the Albanian economy Statement by Dr Shkëlqim Cani, Governor of the Bank of Albania, for Euromoney Yearbooks, Global banking and financial policy review, Tirana, 9 August 2004. * * * The Albanian economy experienced a recovered pulse of economic growth over the year 2003. Positive developments are marked in respect of consolidating the country’s macroeconomic stability, economic growth and a sound development of the financial system. A recovery in economic activity and 6% growth of Gross Domestic Product in real terms was proved by all sectors of the economy, but was particularly evident in the construction, transport and services sectors, which are the most dynamic sectors of Albanian economy. The year 2003 was characterised by a low inflation rate, within 2%-4% of the targeted range. The inflation rate as of December was 3.3%, meeting the Bank of Albania (BoA) target. Despite the various factors this low rate emerged from a diligent management of the domestic demand as an outcome of appropriate fiscal and monetary policies. BoA’s monetary policy has been a moderate one throughout 2003. Such a trend will continue during 2004 and was recently reflected by the reduction of the core interest rate in the economy. Since April 2003 the REPO rate has been lowered by 2.5%. The 6% REPO rate, decided on May 12, 2004, is the lowest ever in the Albanian economy. The policy aims to reduce borrowing costs in the economy and maintain price and financial stability. At the end of 2003 the foreign reserves of BoA reached US$1.03bn covering 4.7 months of imports. BoA continues to maintain its view of a free exchange rate regime. This was reflected in the fewer episodes of BoA’s intervention in the foreign exchange market during the first half of 2003, when the purchase of foreign currency was almost four times that of the second half of the year. Nonetheless, this did not hold back the domestic currency from appreciating against the euro and the US dollar, with a stronger appreciating trend in place in the second half of the year. The appreciation of the domestic currency was one of the factors behind BoA’s 2.0% interest rate cut during year 2003. Monetary indicators have generally been performed in compliance with the forecasts set out in the Bank’s monetary programme. The annual growth rate of lek deposits was 19.1% by the end of the year, which is significantly higher than the annual rates of the pervious years. The credit balance rose by L11.9bn or 30.9%. The new credit increased by 50% meanwhile 76% is in foreign currency. The loans/GDP ratio is still low, at about 7%. The banking system experienced important developments during 2003 and in the beginning of 2004. The entry of two new banks of Albanian capital was soon followed by the successful privatisation of the Savings Bank from the Raiffeisen Zentralbank (RZB) Austria. Now, all in all there are 16 banks in the Albanian Banking system. The BoA has progressed in reforming the banking system towards international standards, with the aim of the developing and refining the country’s banking infrastructure. AIPS, inaugurated in early March 2004, can be considered as the backbone of the whole banking system infrastructure. The BoA wishes to bring its central bank closer to that of the European Central Bank. Therefore, changes and amendments of the Bank’s regulations are aimed towards achieving this goal.
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bank of albania
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Speech by Mr Ardian Fullani Governor of the Bank of Albania at the meeting organised by the Bank of Albania in cooperation with the business community of the country Tirana 13 December 2004
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Ardian Fullani: Bank-business relationships - a new chapter Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the meeting organised by the Bank of Albania in cooperation with the business community of the country, Tirana, 13 December 2004. * * * Honored participants! I regard today’s meeting as a special opportunity to both communities, the banking one and the business one, to open a new communication and cooperation, a new relationship based on reciprocal trust and benefit. From a naïve viewpoint, it seems that our final goal, price stability and country’s financial stability would appear different from your goal, the maximization of profit from the activity you exercise. However, going into more details, we would notice that both communities represented in this hall with their decisions and achievements make the work of each other easier, towards the indisputable idea that no economic growth could exist without economic-financial stability. It is easier for you to make important decisions for growing your business in a stabilized economic environment where inflation rate is low. Otherwise, you would feel insecure, especially concerning the perspective of your business. Also, in the case of the country’s financial stability and presence of a consolidated banking sector, you would feel more convenient and naturally the flow of free financial funds would be addressed to qualitative growth of your businesses. On the other hand, a fragile financial system, with insecure unsupervised segments would increase the potential for powerful shocks, which in one way or another would affect not only the business but also the overall savings. Below I will treat some complicated theoretical issues. Simultaneously, I would not like to offer an apology or to make propagandistic declarations. Along with the purpose I have to introduce some recent initiatives of the Bank of Albania in the viewpoint of its new vision, I will briefly treat the awareness of your community to enhance the cooperation with the banking system, including the Bank of Albania, the institution I govern. I hope you have recently had the chance to hear and debate about cash reduction in economy, about the acute need the banking system has for the creation of some important information registers, as I also hope you share the same opinion with me that the banking system has made obvious progress recently. I take advantage of the opportunity to declare right from the beginning that it has not to do with propagandistic campaigns but with concrete projects, which will make the banking business more useful, naturally not only for you but for the overall population at large. Protection of the value of your savings is our constant commitment. Allow me to briefly treat some issues I mentioned above: 1. Lending to economy Last week I had a meeting with the banking sector directors, where we discussed about developments and perspectives of lending to economy. It was agreed by all that there is much space in this direction, while banks requested more specific information in terms of economy sectors, where investment is made and is projected to be made. Of course, this information would assist banks in the process of dealing with the requirements and at the same time would assist them even in projecting the future of their business. Viewed from the above context, I would strongly encourage you to address banks more and more so to absorb their financial funds. But, at the same time, more transparency, more clarity is needed in the relationships you have and will have with the banking business for being successful. 1/3 2. Credit information bureau The establishment of credit information bureau is a program initiated by Albanian bank association, for the accomplishment of which much work and institutional coordination is needed between actors of interest, such as business, banks, public institutions and the Bank of Albania. The credit information bureau is expected to facilitate not only the information problems existing between banks and businesses, but also the interbank information that is so much important from the viewpoint of using the scale economies. The Bank of Albania will facilitate the conditions for the accomplishment of this project. 3. Automated Electronic Clearing House system After the successful implementation of the Real Time Gross Settlement system, the Bank of Albania has recently inaugurated the initiation for implementing a very important project related to the Automated Electronic Clearing House system. The operation of this new system will lead to a significant acceleration of payments for the banks’ customers, and due to the absence of this element businesses remained away from banks. I would like to use this opportunity to make businesses aware of the advantages the operation of this system provides, since both the systems will contribute, among others, in reaching international standards of ATM and POS per number of population. The challenge for the banking system and businesses, as well as for the Bank of Albania, remains the public encouragement in using them. 4. Cash reduction in the economy Some of the above-mentioned steps imply and contribute directly and indirectly in the reduction of cash economy. But the Bank of Albania plans to undertake further steps in this respect, in collaboration with other important institutions like the Ministry of Finance, Ministry of Economy. In this context, first step has been the channelling of wages payment to a part of the public institutions through bank accounts. I hope that this process will know further intensive developments in 2005, to be extended not only to the central institutions but also to the local ones. But the banking system attitude won’t be passive. On the contrary, its role will be active, that is banks will tend to address to households and businesses with clear and ready products, with quick and efficient services. I estimate that in 2005 the banking system will be more attractive, given the estimations on the latest developments of the banking system either in terms of the increasing number of branches or the additional banking services provided to the customers. I think that optimistic signs of the current year will be followed by vigorous actions of the banking system on the payment operations through electronic cards, and I would like to express in this spirit that solutions of the banking system should be in the favour of a unified card. Evidently, steps in this direction will be more complex and naturally some of them require an interinstitutional cooperation. The Bank of Albania is preparing now the path towards a massive use of electronic cards in Albania. Credit card service will contribute not only in reducing cash in the economy but its final goal remains the reduction of the informal economy. 5. The need to get more information The good orientation for the right decision-making, for an institution such as the Bank of Albania, requires an overall information, inter alia, on the production performance, employment situation, expectations and ambitions that businesses have for the future and for a range of other indicators that relate to the economic activity on a national scale. I think that it is not a secret to anyone of us to state that this information is rather rare, causing that many times our decision-making be not effective enough and not in conformity with the Bank of Albania capabilities. This is the reason why we deem that you may be a valuable window of information that would help us a lot in reaching more accurate conclusions on the current and expected developments of the country. Considering that your business potential is considerable and global, there will be a possibility to have a clearer picture on the performance of the country’s economic activity, not only in the metropolis but also all over the country. For this purpose we are designing a new strategy for its branches in the districts. These branches will reflect a clear picture of the Bank of Albania and will serve not only for 2/3 the collecting and depositing of cash but also as stations for the gathering of information on the economic and financial activity of the district, preceding the analyses and studies that will serve not only to the design of a clear macroeconomic policy but also to the modernization of elements for the transmission of this policy from the higher authority to the lower authority and vice versa. On the other hand, do not forget that you will have in exchange the opportunity to conduct professional analyses regarding the branch where you perform your activity, with accurate expectations about markets, businesses and consumer demand. Therefore, even with your credit provider, the banking business will be more confident in making decisions and finding potential clients. I would like to emphasize that the invitation I address to you today is very sincere, real, away from propagandistic clishés. To sum up, I would like to confirm that these communication relations which I appeal for today would resist the time only if they would rely on sincerity, confidence and reciprocity. I do guarantee that. 3/3
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bank of albania
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Greeting speech by Mr Ardian Fullani Governor of the Bank of Albania at the workshop organised by the Bank of Albania in cooperation with the GTZ Tirana 8 December 2004
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Ardian Fullani: Monetary policy challenges in the framework of approximating the Bank of Albania to the European Central Bank Greeting speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the workshop organised by the Bank of Albania in cooperation with the GTZ, Tirana, 8 December 2004. * * * Honorable participants, I would like to express my pleasure for participating in this meeting, whose topic has been of great interest to me, and not accidentally I expressed in my first public pronouncement the approximation of the Bank of Albania to ESCB pattern as one of my essential challenges. I had the possibility to discuss this issue even with the Vice President of the ECB, Mr. Papademos, at a meeting in Frankfurt, where I launched the idea to be assisted by the ECB and member banks of the ESCB on approximating our system with the European one. Trying to spare the time for other discussions of interest in this meeting, I would like to briefly mention some of the main steps to be undertaken by the BoA in the integration process with the European System of Central Banks, a process that requires not only time, but also dedication, lobbying, financial resources and above all, capable human resources. 1. Reviewing the legal and regulatory framework of the Bank of Albania and of the financial system in Albania In integration process, the reviewing of laws and by-laws is of priority, particularly in the context of the prerequisites that a country aspiring for membership has to meet in the central banks area, in financial and banking system and even broader. In spite of the so-far achievements, much work has to be done. Therefore, the identification of our needs and priorities in this direction would serve as the first step. The Bank of Albania is not the sole authority in supervising the financial operations licensed in Albania. In this sense, the reviewing of laws and bylaws, involving not only the banking system but also the financial one, would open the way to more effective supervision of the overall financial system. This process would serve not only to further develop the financial system but also to assist in increasing the institutional cooperation between the banking and financial system, thus leading the cooperation between these systems to a higher level. 2. Reviewing the organizational and institutional system It is natural that the pattern to be pursued is that of the ECB and ESCB. In this issue, much importance will be given to the institutional development of the Bank of Albania over the mid-term period, which will be based, above all, on meeting without conditions of a very important requirement of any aspiring country, which has to do with the central bank independence. The institutional and documentary approximation to practices on which the ECB is based and operates will be the main principles of the BoA agenda. 3. Improving the monetary policy and operational framework From the viewpoint of operational monetary policy framework, the Bank of Albania is a relatively advanced institution, but the same consideration may not be valid concerning its transmission mechanism. Significant improvements are required for the development of banking and financial markets. So, we may mention: the development of lending to economy, especially in Lek, thus creating a better extension of operations according to demand, and reducing the transactions in cash. 1/2 In the function of market development, positive tendencies are expected in the future, in terms of increasing competition and banking intermediation efficiency. Concerning cash reduction in economy (money outside banks), the BoA is not going to work in campaigns but will be led by a more active philosophy in terms of encouraging banking products, completion of clearing systems, use of credit cards not only for payments but also for general services and particularly for utilitarian ones. The identification of factors impacting on inflation and the magnitude of this impact remains an important element, thus creating possibilities for a more accurate inflation forecasting. An important role in this direction will be played by improvement of research and information abilities and the system of statistics within the bank, which will also be subject of discussion by the BoA representatives in this meeting. We may mention here the establishment of an Institute of Scientific Research of the Bank of Albania, with a regional dimension, that will impact significantly on raising the standards. Concerning price stability, the necessary institutional framework of the Bank of Albania, the independence, credibility, accountability and transparency should be ensured and strengthened. Dear participants, The above issues constitute some main pillars, which will create a real approximation of the Bank of Albania to European System of Central Banks. On the other hand, I am convinced that today’s meeting will be a concrete step in this direction. Wishing the successful continuation of this workshop, I express once more my determination to lead the integration process of the BoA towards ESCB. 2/2
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Article from Mr Ardian Fullani, Governor of the Bank of Albania, published in the Ekonomia newspaper, 21 January 2005.
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Ardian Fullani: Monitoring of the economy to be conducted not only in the metropolis but in the regions as well Article from Mr Ardian Fullani, Governor of the Bank of Albania, published in the Ekonomia newspaper, 21 January 2005. * * * Our economy has long ago been integrated in a continuous process of quality and quantity development, including an increasingly wider geographical expansion. Both Communities, bank and business, need to cooperate more closely with each other. In order that this cooperation becomes more efficient, we deem, as Bank of Albania, to play our active role not only through establishing a safe macroeconomic environment, but also by providing a range of other operations that will encourage lending activity of the banking system from one side and impact a more correct tendency of business toward more reliable projects and investments, on the other side. To this end, we estimate in our short-term and medium-term programs to give our regional branches spread throughout the country a different role from the one they played till now. We deem appropriate it’s time now for our branches not to be simply cash storerooms and distributors. Also, we shall try to renounce some operations of non-central banking nature, which gradually shall be absorbed by commercial banks. Our goal is these branches be changed into an advanced model of the Bank of Albania presence throughout various regions of the country. They will become genuine stations of information gathering about the economic and financial activity of the region, being preceded by further analyses and studies. This research work will serve not only to a more explicit monetary programming but also to the modernization of transmission elements of this policy from the higher authority to the lower authority and vice versa. I estimate that this initiative of the Bank of Albania to monitor the economic activity not only in the metropolis but also in other regions of the country would be of particular interest for all the interested groups. Further, I would like to add some other comments on the latest developments of the banking system, which I deem have created good premises for a real expansion of this business, an expansion that will positively impact on the performance of business activities. After completion of the Real Time Gross Settlement (RTGS) system, the Bank of Albania inaugurated some times ago the initiation of a very important project on the Automated Electronic Clearing House (AECH). The operation of this new system will considerably increase the payment speed for the customers, knowing that the lack of this element has maintained businesses far from banks. I take this opportunity to make businesses aware of the advantages of the operation of this system, as both systems together will help reach the international standards of ATM and AIPS (automatic and electronic payment equipments), per population number. The challenge to the banking system and businesses, but also to the Bank of Albania, still remains the public encouragement to use them. So, to put this into practice, I shall stimulate the banking system to become more active, that is banks should provide to the households and businesses clear and ready products, quick and efficient services. Given the latest developments in the banking system and the increasing number of the branches as well as the increasing banking services, I advocate the banking system will be more attractive in 2005. I consider the optimistic signals of the previous year will be followed by more vigorous operations of the banking system related to the business of electronic card payments. In this spirit I would say that banking system solutions properly consist in issuing a unified card. Evidently, steps to be taken in this direction will be more complex, and naturally some of them imply inter-institutional cooperation. Bank of Albania is already paving the way toward wider use of cards in Albania. Credit cards service shall not only contribute to cash reduction in the economy, but also provide a positive impact on the reduction of informal economy. However, I deem as important encouraging and stimulating the banking system in order the service level be uniformly present all over the Albanian territory where banks conduct their activity. Only in this manner electronic payment advantages and all other facilities will be equal to you and to all the public in general throughout the territory of the Republic of Albania. I believe, in the spirit of this reasoning, we shall establish real opportunities for a harmonised geographical progress, providing a concrete contribution to the growth of country’s welfare.
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Statement by Mr Ardian Fullani, Governor of the Bank of Albania, Tirana, 28 January 2005
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Ardian Fullani: Economic developments during the second semester of 2004 and expectations for year 2005 Statement by Mr Ardian Fullani, Governor of the Bank of Albania, Tirana, 28 January 2005. * * * The second part of 2004 has generated a larger economic activity, marking a certain general impulse, especially after a relatively quiet start of the year. The acceleration of production growth is reflected almost in all the economy sectors, while the major objectives of the economy have been achieved in conformity with the overall programme of the country's economic and financial development. At international level, this semester coincided with an acceleration of the confirmed tendencies in the first part of the year, especially with regard to US dollar performance and oil price rise. The Fed monetary policy has changed the monetary policy tendency, during this period, through some successive increases of the core interest rate, in attempting to prevent the inflationary pressures in the economy. On the other side, the European Central Bank, considering the inflation performance and the strong pressure against the Euro has deemed unreasonable to change the core interest rate, keeping it at the level of 2 percent for almost a year and half. Annual inflation in December resulted 2.2 percent, while the average annual inflation was only 2.9 percent. The maintenance of inflation within the targeted range was mainly attributed to the stable macroeconomic situation, the control of domestic demand of the economy and monetary indicators stability. Year 2004 was characterized by the achievement of fiscal objectives in terms of budget expenditures and budget deficit, and also by a more uniform allocation of fiscal expenditures. Government demand for loans has been distinguished by a rising level during the second semester, however remaining within the projected levels. Also, the annual rate of the change of current budget expenditures was stable. The implementation of a prudential fiscal policy has provided the appropriate conditions to better control inflation rate. During the second half of 2004, the Bank of Albania monetary policy has kept an easing tendency, aiming above all at reducing the borrowing cost in the economy. Bank of Albania has twice cut the core interest rate, in July and November, by 0.25 percentage points. These cuts have brought the core interest rate to the lowest historical rate, by 5.25 percent. The banking system was characterized by an accelerated lending activity to the economy during 2004. The credit balance increased by LEK 9.2 billion during June-November 2004, being 51 percent higher than the balance growth in the first semester of the year. Lending to the economy is given an everincreasing importance in the assets structure of the banking system, constituting a considerable source of the demand for monetary assets. The credit/deposit ratio increases on a continuous basis, an indication that positively introduces the function of the intermediation role of the banking system in supporting the economic development. The balance credit rise marked during the eleven-month period of the year the value of LEK 15.3 billion, reflecting a rise of 30 percent relative to the yearend of 2003. The easing monetary policy of the Bank of Albania has helped smooth the appreciation pressure of the Lek exchange rate. The differences between interest rates in foreign currency and those in domestic currency incurred a decline during 2004. However, the rising foreign currency inflows on one hand, and the reduction of imports volume on the other one, have created a temporary difference between the foreign currency supply and demand during the summer period. This misbalance has exerted a significant pressure on the appreciation of the Lek exchange rate, fostering the foreign market volatility. The exchange rate volatility through this temporary rise of foreign currency supply has imposed the necessity of the Bank of Albania intermediation to the foreign market during the summer period, towards purchasing the foreign currency. Though trade deficit increased, the current deficit in the third quarter has been lower than in the previous quarters, thanks to increased and positive balances of income, services, and particularly current transfers. The current transfers balance is estimated at USD 295 million, being higher than the 1/2 one of the first two quarters, and nearly 44 percent higher than the one of the third quarter of the previous year. Overall, the balance of payments performance during 2004 was positive. The gross foreign reserve level, at the end of this period, was estimated at USD 1 billion and 244 million, adequate to cover 5.1 months of imports of goods and services. Based on the aforementioned developments, we may conclude that year 2004 contributed generally in further consolidating the country's macroeconomic equilibrium. Although full data for the yearend of 2004 are not yet available, there is a crystallization of the idea that the primary targets projected in the medium-term plan on the country's development have been met satisfactorily. According to the latest estimations, the Albanian economy grew by 6 percent under the conditions of a low inflation rate, far closer to the bottom level of the targeted band. The structural reforms, through their problematic concerns, have progressed during 2004. All this consolidating process has created the premises for a better stability in the future. The development program of the country for year 2005 already exists, part of which are the primary targets of monetary policy. The primary target of monetary policy for 2005, projected in the monetary program, remains the maintenance of the annual inflation rate within the two-to-four percent targeted range. This target is supposed to be met through the control of the monetary supply growth at an approximate level with the nominal growth of GDP, presuming that the velocity of currency circulation in the economy is stable. In this light, the annual growth rate of money supply for year 2005, projected in the monetary program, is 9.4 percent. This rate is in compliance with the provided demand of the economy for money, coming from its real growth by 6 percent. The Bank of Albania monetary program is designed in line with other policies of the economy, where its harmonisation with the government fiscal policy is highlighted. The Bank of Albania estimates that like in the past years, even in 2005, the country's economic development will be in conformity with the overall development program objectives. The last developments of the banking system consolidate the optimism that it will fulfil to the best of its knowledge the role of financial intermediation in the economy. We deem that its consolidation will continue with accelerated rhythms throughout this year, providing to the large public more credits, more services and more security in the savings conduct. 2/2
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Greeting address by Mr Ardian Fullani, Governor of the Bank of Albania, at the First Congress of Accountants and Financiers, Tirana, 10 January 2005.
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Ardian Fullani: Brief presentation on accounting developments in Albania Greeting address by Mr Ardian Fullani, Governor of the Bank of Albania, at the First Congress of Accountants and Financiers, Tirana, 10 January 2005. * * * Dear friends and colleges, greetings to you all! Honestly I feel well being invited to take part in the first event of such magnitude of Albanian accountants. Moreover, I feel well being among lots of my colleges and friends, noticing also many newcomers among you. Along the past years, we have frequently had the chance to debate about issues on accounting evidences. Along the planned economy collapse at end of 80’s and along two or three first years of the subsequent decade, besides other things, created a kind of stagnation even in terms of financial accounting. The large economic transformation, rapid emergence of private enterprises, new concept of asset management and public enterprises, yet-unconsolidated state, lack of international experiences and numerous other causes created a confusion, which, I think, in spite of the years passing by, continues to accompany us even nowadays. From my present position, I feel well to emphasize that banking business was among the first one to invest and was rapidly updated to international practices of this direction. Therefore, the accounting balance sheets and financial statements of these institutions are almost unified in advanced international patterns, making their accountability, transparency and reliability gain contemporary magnitude. On the other hand, various decision-making circles, groups of economic opinion, national or international monitoring institutions have the idea that current accounting evidence in various segments of economy leaves much to be desired. Furthermore, frequently it serves as a leverage to materialize the endeavors for fiscal evasion, why not even for other illegal activities. I understand that, above all, we have to do with an ethical professional problem, an intentional deformation which creates the premises to keep alive and increase informal economy endlessly. I think that today’s initiative is a positive development of major size, which above all will serve for a better evaluation of the accountant’s figure. We should all accept now, without exception that for a higher responsibility and ethics of accounting expert, investment is needed. It is true that more support is needed to accounting expert and also more investments are needed in terms of training and qualification. More attention should be shown to introduction of new up-dated literature on accounting and financial analysis techniques in general. I am convinced that investment in knowledge on accounting experts will bring about a fast and safe return of your role in economy. To sum up this brief presentation, I take advantage of the opportunity to appeal that it’s the time now to have a unified standard of accounting evidence in economy, completely in compliance with International Financial Reports Standard (IFRS). Our financial statements should be accurate, fair, and easily comparable. Our accounting balance sheets should reflect genuinely the accounting position at end of the accounting period. It would be much easier for the banking system to set up its lending policies if the balance sheets and financial reports were true, standardized and publicly known. Also, the equity market, we have largely dwelt with, would have a real development stage. A business may be capitalized only when it is fair and open, implying ethics and professionalism on your side. You should think that your product constitutes basic documents from which the much desired statistical information will spring to make further generalizations and nourish the country’s macroeconomic statistics. On the other hand, fair balance sheets would better assist relevant authorities to control the information, evasion and undeserved profits. I strongly believe that you will take more advantage out of this. Therefore, I do not hesitate to once more congratulate you on this initiative and ensure that you will always find an open window of communication and mutual cooperation at the Bank of Albania. Finally, I would suggest to all of you that have chosen this fair profession to make the slogan “fair authenticity” as your own. Thank you!
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Conclusions by Mr Ardian Fullani, Governor of the Bank of Albania, at the Fifth Conference of the Bank of Albania on ¿Central Banking in the Time of Integration¿, Tirana, 25 March 2005.
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Ardian Fullani: Central banking in the time of integration Conclusions by Mr Ardian Fullani, Governor of the Bank of Albania, at the Fifth Conference of the Bank of Albania on “Central Banking in the Time of Integration”, Tirana, 25 March 2005. * * * Dear friends! During two days of the Fifth Conference of the Bank of Albania on “Central Banking in time of integration”, having guests from the country and international institutions, personalities of academic and banking area, too many important ideas and suggestions emerged. The tight agenda did not allow detailed discussion on them; however, I hope that they will serve as starting points for further debates and analyses to sort out central bank challenges in the time of integration. It is somewhat difficult to make a concise summary of numerous papers presented in this conference. I would categorize the main conclusion into two large groups according to the main pillars of the central bank, that is the price stability and the financial sector stability. Concerning the first pillar, that of price stability, the discussions were focused mainly on the monetary policy effectiveness and central bank independence. To maintain stability is more difficult than to achieve it. Prof. Bolle indicated in a very excellent way that current price stability should be considered as fragile, which requires constant efforts, either by the BoA or by other institutions. Therefore, in his discussion, Mr. Ibrahimi emphasized that the Bank of Albania is prudentially analyzing the risks that we may be faced with in the future on maintaining price stability. He came out with the proposal of adopting a new inflation targeting regime that may be better adjusted to the new reality that the Bank of Albania and the Albanian Economy will encounter. However, simply the mechanic implementation of this new regime is not a sufficient condition for price stability. A number of other criteria must be met to increase the chances of its success, without adding pressure at the Bank’s reputation. A lot of such challenges were treated in details in other presentations at the conference. Among the most important ones, I would mention: Issues on central bank independence, which were referred to by most presenters, but I would point out here those presented by Mr. S. Rossi and Mr. L. Papi. The significant role of independence, not only on monetary policy, but also, particularly on the second pillar, that of financial sector stability and development came out clearly in these presentations. The clarity of Monetary Policy channels and enhancement of the effectiveness of its instruments is another important issue that requires particular attention, notwithstanding the current regime applied. The presentations on this issue by Ms. M. Peeters yesterday and by the experiences of various countries during today’s panel of the conference were very useful. Fiscal domination remains a constant risk to price stability, as it came out of the experience presented here by Mr. Baschi (Turkey). We hope that the commitment of the government for developing a better coordination of monetary and fiscal policies will continue in the future, as the Minister of Finance, Mr. Malaj stated in his speech. This idea was further elaborated on in the presentation authored by Mr. Hida and Mr. Haderi. Dollarisation or FX may constitute another obstacle that places financial stability and monetary policy independence at risk, as argued by Mr. Driessen. Therefore, it is a problem that needs attention. What inflation rate should be targeted remains a subject of debate. This concern was presented by Mr. Olters. The Bank of Albania is closely addressing this issue in a very prudential manner, so that it does not become an obstacle for economic growth. In light of the above difficulties for passing to a new regime, as stressed by Mr. Mayes, it is important to implement a robust strategy so as to avoid large mistakes. Price stability, as stressed some times during the conference, helps economic growth. On the other hand, the second pillar of the Bank of Albania, the financial stability, is likely to play a more important role for economic extension. But, as Mr. Blejer stressed in his speech, stability should not be turned into an end in itself. A good regulated but undeveloped financial sector may be as ineffective as a deregulated sector. In order to make the basic policies in economy more harmonized and effective, I would emphasize that the banking system and the other financial institutions of the country should be more effective, open and supervised. In the final analysis, it is very important to create a real financial market, where all actors know the rules of game and obey them fairly, as it came out in the presentations of Mr. Niedermayer, Mr. Danielson, Mr. Pencapligil and Mr. Bunda. In conclusion, I would underline that the challenges ahead of us, on our way to development and integration, become easier when a spirit of cooperation exists not only within the country but also in the regional framework and broader. Thanking you for your participation in this Conference, I declare it closed.
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Address by Mr Ardian Fullani, Governor of the Bank of Albania, at a meeting with the Minister of Finance and representatives of all banks in Albania, Tirana, 8 April 2005.
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Ardian Fullani: Opening, extension and modernisation of the primary and secondary treasury bill market Address by Mr Ardian Fullani, Governor of the Bank of Albania, at a meeting with the Minister of Finance and representatives of all banks in Albania, Tirana, 8 April 2005. * * * Honored ladies and gentlemen! First of all I have the pleasure to thank you for your willingness in finding the time to take part in this work meeting. I would also thank your technical staff for the devotion shown in dealing with this issue, which constitutes one of our priorities at the Bank of Albania. At the Bank of Albania conference on “Central banking in the time of integration” I launched, interalia, the idea of the need for qualitative developments in the banking and financial system and this as closely connected with the need for further increasing the intermediation role of this system in the economy. It is understandable that the implementation of this idea would simultaneously require the giving of more possibilities to the banking system, so that this system carries out its role better and more actively. The topic we are discussing today is in this line. I am strongly convinced that the treatment of this issue did not appear as something unexpected, but it is a logical result of the positive developments taking place so far and the banking system awareness to be more active in its role for raising public confidence in the system. In the line of this logic, the raising of confidence would bring about its positive effects even on increasing their banking activity, which will be in compliance with their objective to be in the market with as much dignity as possible. In this discussion I will not focus on the technical aspect of cause explanation and process implementation, which I consider as exhausted by discussions made between respective technical staff, but I will focus on what we intend to reach and on the shortest and safest way to complete this process successfully. Also, I would like to clarify that the individuals will continue to participate in the primary market of securities and this market will continue to be organized by the Bank of Albania. What we intend to reach through this process is: 1. The realization of a smooth transition process, at the smallest cost possible, in terms of maintaining the participation of individuals in the primary market. 2. The reduction of the time which is needed for the realization of treasury bill primary market auction. 3. The increasing possibilities to apply into practice the principle “Delivery versus payment” for operations that will be performed in the secondary and retail Treasury bill market. Here I take into account either the facilitating of procedures or the increased safety for using these securities as collateral and for encouraging the interbank and lending market. 4. The last but not the least is to increase the possibility of commercial banks to be more present into the market, making it more liquid and solvent. How we think this process will be realized: 1. The Ministry of Finance and the Bank of Albania must review the regulatory basis that covers the part of treasury bills issuance and more concretely the Agreement concluded by them “On issuance of treasury bills in the form of registration”. 2. The Bank of Albania must review the Regulation “On the secondary and retail treasury bill market in Albania”. 3. The Commission of Securities must review that part of the regulatory basis which is related to the licensing process of the securities register. 4. The commercial banks should proceed with the Commission of Securities, with the purpose to ensure the licence for maintaining the register of individual’s securities. 5. The Bank of Albania will prepare, after the completion of this process, the strategic plan of the movement of individuals from its windows to the windows of commercial banks. The time available to the Bank of Albania will also be used for testing the stance of “individual” investors in advance. In this framework, we would also like to inform you that the Bank of Albania is working for considering, at the shortest time possible, the possibility of increasing the participation amount of individuals, through the Bank of Albania, in the primary treasury bill market, as well as the application of a commission on new operations they will carry out with it. The new level and commission will affect only the individuals that would like to use the Bank of Albania to participate in the primary market. Thanking you again for your attention, I would like to pass on to the discussions about the steps we deem to make. At the end of this meeting, I propose we come out with a concrete plan of actions for a successful implementation of this process.
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Opening remarks by Mr Ardian Fullani, Governor of the Bank of Albania, at the ¿Stress-Testing¿ workshop, Tirana, 5 April 2005.
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Ardian Fullani: Stress-testing workshop Opening remarks by Mr Ardian Fullani, Governor of the Bank of Albania, at the “Stress-Testing” workshop, Tirana, 5 April 2005. * * * Dear participants and guests, I accepted with pleasure the invitation to open this workshop “On Stress-Testing”, having also in mind that the topic you are going to discuss in these three days, is an important issue in enriching the tools of the supervisory institution on identifying in advance areas or developments of potential fragility, and acting in accordance to prevent adverse situations for the licensed institutions. Life has shown us that risk is everywhere. Certain things are not sure of happening at all, some others that will happen for sure are not known when or where. The activity of individual people, of entire families, of businesses, of the government, are affected considerably by what is really going to happen in a moment, tomorrow, the day after tomorrow and so on. Is there any way of completely avoiding any risk, in our life, in our activity, etc.? The answer to this question is one of the few risk-free statements: no, there isn’t any. It is then unavoidable to live with risk, to understand and to accept it, to manage it. Banking is a business activity, where risk is Inherent. This is obvious when you think of a normal bank balance sheet composition, or when you try certain ratios when assessing their liquidity position. Banks intermediate among entities that avail their liquidities for a certain period of time and others that need liquidity to continue to perform their life, services and activities. These groups have different risk attitude, that is formed as part of their previous experience. They express their risk attitude by choosing a certain bank, a certain product, a certain maturity structure, a certain currency, or by keeping out of the banks at all. It is rather a consequence of a limited choice, and in many cases, of limited knowledge. As such, it means less risk awareness capabilities by clients, and as a consequence, less stimulus for banks themselves to carefully monitor their risks. Hence, it is important that banks (and other financial institutions), set up their systems to identify, measure, monitor and manage risks. Systems here, first of all mean people and procedures that are an indication of how well the bank management, including its board of directors, understand the risks associated with its business nature and size. Certainly, this work becomes more efficient if supported by information technology, at the scale that is sufficient for the size and the complexity of the bank business. From a practical point of view, in those financial systems where the size of certain financial institutions is of a systemic importance, the development of a risk management program is paramount. Besides the bank management, whose responsibility, I repeat, is of primary nature, the supervisory authority has a clear interest and responsibility in making sure that individual banks (and other financial institutions) understand what they are doing. This interest stems not only from their legal obligation, but also is an instrument in ensuring the public that the financial institutions are managed in a sound and safe manner. In the end, all this gives a remarkable contribution toward the goal of reaching and maintaining financial stability. History and practice have shown that having a good supervision function is very important, but not enough. It is the market that could very well and in a timely way, discover behaviours that indicate imprudent risk taking by financial institutions. In a market that functions under normal conditions, competitive factors force its players to look at each other to identify what can be done better. This is much stronger if complemented by greater transparency and accountability. Under a deep and developed market, the work of the supervisors, from the viewpoint of identifying in time imprudent risks that financial institutions are taking, becomes easier. On the other hand, open and developed markets, usually mean more complex products with more complex risk features that require more complex systems to support and monitor them. This requires greater and more skilful supervision. While the market well-functioning and transparency, are elements that help supervision, these elements do not substitute it. Firstly, while developed markets mean more capacities to analyse past and future events, the risk is that they still may miss the global picture, as individual institutions do not have the data and most of the times, the need, to analyse the financial stability of the system as a whole. Secondly, what individual financial institutions analyse and expect from the future developments, is frequently what they want. One should also remember that financial institutions of a certain important size that expect similar events, have the power to move the market in one direction. Based on specific elements of any national or regional market, this does not necessarily show a reduction in the level of risk. Moreover, the systemic risk in this case, is still very high. It is then important to provide the supervisor with the necessary analytic tools, to use the global data of their supervised financial institutions, for setting up models that will provide for a global analysis. By what we do and who we are, we are more concerned with what will happen if something extreme occurs. What if the exchange rate moves adversely? How is that affecting the credit portfolio of X bank, that is lending mostly in foreign currency? How big is this issue for the banking system as a whole? What are the developments in the interest rate that could negatively impact the balance sheet of one financial institution and of the entire system? What about the combination between the interest rate risk and the concentration risk, and its impact in one institution that holds most of the treasury bills in circulation? All these questions are important in the case of Albania. The financial market is developing, but there is a long way to go. Banking sector is the most important part, with its assets counting for around 90 percent of the financial system. Looking at the size of the banks, the system continues to be asymmetric. However, when you look at products and services that banks offer to the public, the picture is more balanced. Lending is still low compared to other countries in the region, but is increasing quickly. Around 80 percent of the lending portfolio is in foreign currency. Investments of liquidity in securities is increasing. As of the end of 2004, return on equity stood at 21.1 percent, while return on assets was 1.28 percent. Capital adequacy ratio stood at 21.6 percent. As of the beginning of 2004, state is no longer controlling any bank capital. Even though the Albanian economy is a small one, the potentials for expansion are real as the economy is very much opened and the region is more and more integrating into the European Union economic area. As such we expect more positive developments in the financial sector and the banking sector in particular. While the situation for the system as a whole is satisfactory, there are certain challenges out there, that need greater awareness among the industry and a careful monitoring from the Bank of Albania. Hence, due to the structure of the banking system and the expected tightening competition environment, individual small banks are expected to experience difficult times ahead. We expect to see a lowering of their profit margins, which may hamper their attempts to position themselves better in the marketplace. On the other side, they will be forced to find new ways of increasing their financing and their incomes. From its side, Bank of Albania will pay particular attention to these banks, as in such difficult times, the procedures and the controls in the high earning bank activities (like lending) tend to relax. At the same time, as a central bank we believe that there are possibilities for consolidation taking place in the banking system. We believe that through this process, higher profile international banks could enter the growing Albanian market or existing small and middle sized banks could position themselves better in the marketplace. Bank of Albania wants to see a higher intermediation level of the banking system and a greater impact in the economic development of the country. We will encourage the banking system to lend more to sound businesses and to those areas of the economy that appeal to them with solid and continuous progress. However, in every instance, we shall insist that banks maintain strong loan underwriting and administration processes, in order to ensure a balanced and solid growth of the activity. Due to the currency composition of the loan portfolio, it is important that banks pay particular attention to the cash-flow of their borrowers, as this may not be denominated in the same currency of the loan. Any unexpected adverse change in the exchange rate could mean problems, if not prepared in advance to cope with that. On the other side, Bank of Albania wants to see higher levels of lending in domestic currency. This, along with other information, will improve its ability to forecast better the developments in the transmission mechanism and in performing its monetary policy. Looking at a broader macrofinancial picture, Bank of Albania has contributed to that goal by reducing its Repo rate to historic low levels and closing the lending interest rate differential between domestic and foreign currency. New developments of the banking and financial system, pose new challenges. It is important that these challenges are well identified, well understood and well acted upon. We want to do this in cooperation with the banking system. Opening communication lines and transparent and fruitful discussion of the new developments will help each side to understand the problems better and to act quickly to amend the situation, within the regulatory framework. We will continue to improve our supervisory processes, with the aim of making the supervision completely risk-oriented and proactive. We will invest considerable time and money in upgrading the quality of our staff. We intend to make our regulatory framework compliant with the best international standards as much as possible under our specific local conditions. Dear participants, I believe that this workshop is going to help us in expanding our knowledge about risk in the financial and the banking sector, and in promoting stress-testing as one of the techniques. Stress-testing, used separately and together with other techniques, is a valuable tool in verifying the endurance of our financial institutions and financial system. In the Bank of Albania, we have a lot of interest in knowing your experiences. Hence I would encourage you to provide this workshop with your real examples. I believe you will also enjoy Tirana, a city that is changing quickly, even for those who live here. You will understand a little more about this country and its people, and this could prove as interesting as to make you wish to come back again. Last but not least, I would like to thank the International Monetary Fund, Mr Driessen and his colleagues, for supporting and developing this joint workshop in Tirana and for providing their valuable theoretical and practical expertise. Thank you and enjoy.
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bank of albania
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, while presenting the 2004 Annual Report to the Albanian Parliament Audience, Tirana, 9 April 2005.
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Ardian Fullani: Recent financial and economic developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, while presenting the 2004 Annual Report to the Albanian Parliament Audience, Tirana, 9 April 2005. * * * Honored deputies, I am here with you presenting my first address as Governor of the Bank of Albania, to share with you the Bank of Albania estimations on the economic developments of year 2004, to present our viewpoints on the Albanian economy perspective for the years to come, and to present some other important aspects of the Bank of Albania activity during this period. Bank of Albania is an institution that plays a crucial role in the decision-making of economic and financial policies and for establishing and maintaining the financial stability of the country. For this purpose, on behalf of the institution I govern, I would welcome any opinion, comment or suggestion relating to the past, the present and the future of the institutional development, of monetary policy and banking supervision. Albanian economy during 2004 According to the Bank of Albania estimates, the development of the Albanian economy over 2004 was in line with the objectives of the strategy on the economic development of the country. Based on the latest estimates, it results that Albanian economy grew by 6.0 percent in real terms, keeping the average development rate of the last five years. The economic growth rate of Albania has been throughout this period higher than the one of other Southeastern European countries or even the one of the countries being recently members of the European Union. The activity conducted by the Albanian economy, as a relatively open economy, was fuelled by the invigoration on a world-wide scale of the economic activity throughout 2004. A slow but a safe growth of the European economy experienced over 2004 has been a positive factor for the Albanian economy, fostering the demand for our exports and sustaining the rise of remittances inflow in foreign currency from emigrants. The average inflation rate of the euro area has been around 2.4 percent over this year, without exerting any influence on the rise of the imported inflation rate in Albania. Simultaneously, the impact of shocks on the world economy during 2004 resulted to be smoother in the Albanian economy. Oil price rise in the international market was amortised partially due to Lek appreciation and partially due to the rising competitiveness and the emerging of a certain flexibility of demand for this product. The impact of oil price rise on the inflation rate in the country has been restricted. Also, its impact on the Albanian economy, though hard to be measured, is believed to have been rather a smooth one according to the estimations on the performance of the most exposed sectors to oil price, the transport and industry. Exchange rates have been fluctuating over 2004. The American dollar was appreciated in the first part of the year, as a consequence of expectations for a tightening of the United States monetary policy. But, during the second part of the year, the attention of financial markets mainly focused on the structural problems of the American economy, that of the budget deficit and current account deficit. These concerns brought about a quick decrease in the American dollar value, reaching the minimum levels against the common European currency. In face of these developments, both monetary policy and fiscal policy of larger economies maintained expansionist features. Notwithstanding the rise of US dollar interest rates, they remained at low historical levels while Euro interest rates remained unchanged. The fiscal policy has impacted the growth of domestic demand, either in the euro area or in the United States. The progressive integration of the Albanian economy in the international markets of products and capitals makes that this economy benefits from these incentive policies, in the form of lower interest rates for foreign currency and in the form of higher demand for its exports. Placed in this positive background, the Albanian economy growth continues to be generated from the dynamic development of the private sector, while maintenance of the macroeconomic stability and economic growth support through investments in the priority development fields: infrastructure, education and health, have been a priority to the public sector. During 2004, investments in the economy marked the same level as during 2003, representing nearly 25.4 percent of GDP. These investments are mainly represented by the private investments, which count for about 80 percent of total investments. The financial sector has given an ever-stronger support to this development, through the increase of lending activity and the range of services provided. Thus, credit to the economy increased by an average of 34 percent during the last two years, being at the same time accompanied by a prolongation of maturity term. The sectoral development of the Albanian economy has been a dynamic development over the last years. Sectors that have provided a major contribution to the annual growth rate are considered to be: “Trade, hotels, restaurants”, “Construction”, “Transport” and “Other services”. These sectors have contributed about 75 percent of the economic growth over 2004. This development is accompanied by a redistribution of the relative contribution of economy sectors to GDP, and also by a redistribution of the production factors, the labour forces and capital support. The large demand for the infrastructure development, for increasing and expanding the productive capacities as well as for housing made that construction sector be characterized by high development rates. It contributed by an average of 17 percent to the economic growth of the last three years, although the added value in this sector represented only 10 percent of GDP in 2004. Sales of the “Trade, hotels, restaurants” sector increased by 6.2 percent over the nine-month period of 2004, in comparison with the same period of the previous year. This sector performed nearly 44 percent of total sales for this period. A positive development of year 2004 was also the agricultural production, which increased by 4.9 percent. The industry sector performance has been characterized by a mixed performance. Sub-branches of the processing industry like foodstuff industry, manufacturing of mineral products and metallurgy, performed higher sales during the nine-month period of 2004, while sales of the textile industry and processing leather industry marked rather low levels. The energetic sector experienced a positive performance during 2004. The electric energy production marked an annual growth of 12 percent, being expressed in the rise of exports by 20 percent and the decline of energy imports by 30 percent. Sales of the transport sector increased by 5 percent over the nine-month period of the year. An important aspect of the Albanian economy over the last years is the fact that the economic growth did not generate macroeconomic imbalances. On the contrary, it is accompanied by the ongoing consolidation of this stability, being expressed in the low and stable inflation rates, in the reduction of budget deficit and public debt, in the improvement of the balance of payments position and in the overall stability of monetary indicators. Some indicators of the economy over the years Real growth of GDP (in %)1 PBB (with current prices, in millions of Lek2) PBB (with current prices, in millions of USD) PBB (in USD per capita)3 Number of the employed (in thousands) Unemployment rate (in %) 8.9 7.7 6.5 4.7 6.0 6.0 3548.4 3694.5 4102.4 4496.8 5702.2 7,581 1052.0 1086.3 1329.0 1460.0 1833.5 2,434 1081.0 1068.0 1065.0 921.0 928.0 917.0 18.0 16.9 14.6 15.8 15.0 14.6 Data on GDP and its real growth for the period 1999-2000 are originated from INSTAT. For the rest data are estimates from Ministry of Finance, IMF and also data from Bank of Albania. The table is being constructed based on the reviewed nominal GDP. Nominal GDP converted at the average rate of the period. Inflation rate (year/year) – in % -1.0 4.2 3.5 2.1 3.3 2.2 Budget deficit (with grants, as a percentage of GDP) -12.1 -8.2 -7.9 -6.6 -4.9 -4.9 Public debt (as percentage of GDP) a 69.7 71.3 66.8 65.1 60.7 55.3 External debt (as percentage of GDP)4 a -32.3 29.4 25.8 23.4 20.7 17.8 Current account (without government transfers, as a percentage of GDP) -8.5 -7.0 -6.1 -10.2 -8.2 -6.2 Average exchange Lek/USD rate, 137.7 143.7 143.5 140.1 121.9 102.8 Average exchange Lek/EUR rate, 147.0 132.6 128.5 132.4 137.5 127.7 Source: INSTAT, Ministry of Finance, Bank of Albania and the IMF estimates. The 2004 data suggest a gradual easing of unemployment rate. Although the demographic changes over the last years make difficult the statistical disclosure of labour forces displacement, according to official data the unemployment rate is estimated to have decreased from 15 percent to 14.6 percent throughout 2004. Fiscal indicators Based on the developments of fiscal indicators, it results that the fiscal policy followed during 2004 has been a prudential policy, which relied upon the Medium-term Budget Program for the period 2004-2006. Expressed in terms of GDP, the budget indicators are presented at approximate levels as those of year 2003, where one can distinguish the unchanged figure of budget deficit, of 4.9 percent. State budget income grew by 10.4 percent over 2004, reaching 23.7 percent of GDP. Also, budget expenses recorded an annual growth rate of 10.7 percent, reaching 28.6 percent of GDP. These indicators remained, however, below the projected levels in the 2004 budget, imposing the necessity for a more cautious follow-up of the budget in its two principal phases: the design and implementation. Also, performance of capital expenses still remains a problem, which deserves more attention in the future, given the particular importance it has for the development of infrastructure capacities of the country. External sector of the economy The favourable economic situation in the country was also reflected in the field of foreign transactions. The current deficit marked a significant decline over 2004, reaching 5.3 percent of GDP and marking a significant decrease compared to the last two years. This development resulted to be a consequence of trade deficit improvement, which lowered to 21 percent of GDP in 2004, from 23.4 percent of GDP it was in 2003. Exports of goods marked a higher growth rate than imports, while the positive balance of current transfers increased in parallel with trade deficit, thus impeding the deepening of current deficit. The coverage of imports by exports of goods reached 27.5 percent, marking rather an improvement relative to year 2003 when this ratio was 25 percent. During 2004, Albania’s balance of payments recorded a flow of financial assets and capitals of about 1.5 times higher than the previous year. The rise of inflows in the financial account and the non-deepening of current deficit brought about the increase of foreign reserves by about USD 290 million over 2004. Albania’s foreign reserve is sufficient to cover about 5.2 months of imports of goods and services. Government debt including other sectors debt guaranteed by Government. Notwithstanding the positive developments of the recent years, the economic growth and the macroeconomic stability of the country are two parameters, which, according to our consideration, cannot and should be considered as issues already accomplished. The high trade deficit requires the ability to find stable long-term coverage resources, especially to promote foreign direct investments, which will raise the productive capacities of the Albanian economy. A major interest should be given particularly to the sectors such as agriculture and tourism. Fiscal policy must continue to conserve its positive contribution in the consolidation of the macroeconomic stability, a contribution being expressed in the reduction of budget deficit, in the increase of income and in the establishment of priorities according to the National Strategy for the Socio-economic Development, in the performance of budget expenses. We deem that financial sector development should be balanced in all its segments, and this requires the successful completion of the privatisation process and the harmonization of the regulatory and supervisory legislation, in accordance with the best practices of the developed countries. These issues require a continuous attention and cooperative contribution. On this opportunity, I deem appropriate to highlight that Bank of Albania shall be a prompt and open partner, assuming the responsibilities belonging to it, and collaborating with all the actors interested in the economic and financial development of the country. Inflation and monetary policy developments The primary objective of the Bank of Albania, provided in the Law “On the Bank of Albania” is maintaining the price stability. This objective is expressed in the achieving of a low and stable inflation rate, measured as an annual change of Consumer Price Index. For year 2004 inflation rate, according to the Monetary Policy Document, was fixed to be within the two-to-four percent targeted range. According to the actual developments, Bank of Albania has achieved its objective on the inflation control within the two-to-four percent targeted range. The annual inflation rate resulted 2.2 percent by the end of 2004, while the average annual inflation rate was 2.9 percent. Inflation rate remained about 3 percent during the first half of the year and, later on, marked a downward trend during the second half, approximating to the lower limit of the targeted band. The main role in creating the inflation rate during 2004 has been played by the “Rent, water, fuels, energy” group, unlike the past years when this role was played by the “Foodstuffs and non-alcoholics” group. The price index of the “Rent, water, fuels and energy” group marked high annual growth rates over 2004. Despite the increase of the energy price by 31.2 percent in February of this year, this group recorded a rise even in the price of rent and imputed rent. The annual inflation rate of the “Foodstuffs and non-alcoholics” group has been a negative one during May-November, due to the growth of domestic agricultural production, including the production of greenhouses. The positive inflation performance during the last two years was facilitated by the absence of shocks, the positive developments of productive capacities and the consolidation of macroeconomic and macrofinancial indicators. The concern that oil price rise in the international markets would have caused a consumer price rise even in Albania, has not become a reality. The appreciation of exchange rate in Lek against US dollar during 2004 has eased the effect of oil price rise in the international markets. Also, the inflation value of the two main partner countries, Italy and Greece, has been low, compared to inflation rates in Albania. As a consequence, imported inflationary pressures did not accompany Albania’s trade activity. The favourable macroeconomic developments during 2004 have provided an appropriate environment for the inflation control. Two basic macroeconomic policies, monetary policy and fiscal policy, have contributed toward the economic activity stabilization, without exerting increasing pressures on the inflation rate. The budget expenses during 2004 have been relatively uniform throughout the year, without jeopardizing the rise of inflationary pressures in the economy in given periods. The domestic borrowing of Government has been 2.0 percent of GDP over 2004, compared to 2.9 percent in 2003. Monetary policy The monetary policy followed during 2004 maintained the easing trend of the policy being followed during 2003. Bank of Albania has cut 5 times the core interest rate over 2004, with a total effect of 1.25 percentage points. The core interest rate reached new minimum historical levels through every cut occurred during 2004, remaining by the end of the year 5.25 percent. The easing monetary policy has been in compliance with the inflation developments during 2004 and the positive expectations on this indicator in the future. These developments seem to have been perceived by the public, who is increasingly anchoring the inflationary expectations to the inflation target announced by the Bank of Albania. This is reflected in the increase of public interest in depositing their savings in Lek, generating also appreciation pressures on the exchange rate in Lek. The appreciation of exchange rate in Lek, accompanied by stable inflation values in the largest trade partners of Albania, has impacted the decrease of inflation value imported during 2004. The easing of monetary conditions in the economy aimed at fostering the economic activity and creating more spaces to crediting to the economy, without infringing the long-term perspective of the inflation target. This monetary policy resulted to be a right one. Bank of Albania has been successful in achieving its objective on inflation, easing simultaneously the appreciation pressures on the domestic currency. Notwithstanding the easing monetary policy, Bank of Albania has kept under control the growth rate of monetary aggregates. The weak inflationary pressures from the fiscal policy, the good-management of money supply, as well as Lek appreciation, have provided appropriate conditions for a moderate rise of consumer price over 2004. In general terms, Bank of Albania believes that this favourable situation will continue to prevail even during the current year. It will be supported by the favourable monetary conditions of the economy and by the controlled development of domestic demand. Based on the available information and in absence of shocks, the consumer price rise for year 2005 is expected to be within the two-tofour percent targeted range of the Bank of Albania. Monetary indicators performance To achieve its primary objective, that is maintenance of price stability, Bank of Albania relies on the monetary aggregates control as an intermediate instrument. Expectations on monetary indicators performance are provided in detail in the annual monetary program, which serves to orient the Bank of Albania monetary policy. Based on this strategy, the objective of increasing money supply for 2004 was fixed to be 12.4 percent. This increase is believed to have been adequate to supply the demand of the economy for money under the conditions of an economic growth of 6 percent and of an inflation rate within the two-to-four percent targeted range. Money supply and the closest money aggregate (M1) have known faster growth rates during 2004 compared to year 2003. This is a consequence of a rising demand of the economy for monetary assets, reflected even in the invigoration process of lending to the economy throughout the year. Also, the controlled inflation level has rendered possible the maintenance of a real interest rate in positive terms, despite the ongoing reduction of nominal interest rates. The real positive interest rate has maintained the tendency of households to deposit their savings in the banking system, bringing about further reductions of the relative level of currency outside banks that circulates in the economy. The rising demand for monetary assets has been shaped mainly as the demand for monetary balances in Lek. The demand for Lek has been particularly evident in the summer time, being partially supplied even by means of liquidity injection through the Bank of Albania intermediations in the foreign exchange market. The annual growth rate of deposits in Lek was 12.9 percent, being a satisfactory growth compared to the average historical rate. It was adequate to cover Government demand for the financing of deficit and the economy demand for credits in Lek. Meanwhile, deposits in foreign currency grew by 17.1 percent during 2004. The main source of the high growth rate of deposits in foreign currency continues to be the large inflows of remittances in foreign currency from emigrants. Under these conditions, credit to the economy increased by Lek 19.4 billion during 2004, from Lek 16.5 billion being projected in the monetary program. This implies an increase of credit to the economy by an average of Lek 1.6 billion monthly compared to year 2003. Credit to the economy constituted 8.4 percent of GDP, marking an increase of 1.6 percentage points compared to year 2003. Also, credit/deposit ratio reached 19 percent at the end of 2004, from 15.7 percent being in 2003. Banking system financing was done through purchasing Treasury bills and two-year bonds and constituted the largest weight of domestic financing during the year. Commercial banks and households increased the Treasury bills portfolios in comparison to the previous year, respectively by Lek 6.5 and 6.2 billion. Meanwhile, revenues from the Savings Bank’s privatization constituted a significant financing source, particularly during the second half of the year. Exchange rate 2004 was associated with appreciating pressures for the Lek, impacted by country’s macroeconomic stability, rise of confidence in domestic currency and largest influence of seasonal effects. Compared to the previous year, the Lek was appreciated on average by 7.2 percent versus the euro and by 15.7 percent versus the dollar. The Lek appreciation is not a tendency observed only in 2004. According to assessments made by the Bank of Albania, there exist some long-term factors whose operation has influenced on appreciating the Lek’s value: • Constant consolidation of the country’s economic stability. • Interest rate spread between the Lek and the foreign currencies. • Consolidation of public finances and budget deficit, dictating a low government demand for monetary assets. • Stable remittances by Albanian emigrants working abroad. In the meantime, during 2004 the exchange rate performance was also impacted by specific factors of the year. Specific factors relate to starting of tourism earlier than in the previous years, rise of agricultural produce and decline of demand for agricultural merchandise imports, impacting on the supply and demand for foreign currency in terms of the Lek appreciation. Also, the international foreign exchange market developments are reflected in our foreign exchange market. The euro appreciation versus the dollar over more than a year is reflected in the reduction of the dollar’s value even in our country, though no strengthening of the euro is observed. During 2004, the dollar was depreciated by 7.5 percent against the euro in the international market. During 2004, the Bank of Albania intervened in the foreign exchange market in terms of purchasing foreign currency, in an effort to prevent large exchange rate fluctuations reflected mainly during the summer and end-year period. Financial markets Growth of deposits in Lek, in the presence of a low government demand for monetary assets, created premises for increasing banks’ liquidity and extending interbank market activity. Low inflation rates made real interest rates rest close to historical levels, regardless of nominal interest rate cut. This has impacted on maintaining high annual growth rates for time deposits in Lek. The main features of money market over 2004 were the market activity intensification and interest rate cut. 2004 recorded rise of weekly and monthly interbank transactions. Under the impact of easing monetary policy, the interest rates in all markets continued the downward trend of the previous year, reaching the minimum historical levels at end of 2004. Besides the easing monetary policy of the Bank of Albania, these trends have also reflected the enhancement of competition in the banking system, due to the Savings Bank’s privatization. The banks’ supply to invest in government Treasury bills has been larger than the amount issued in the primary market, being reflected in pressures for constant yield cut. Therefore, the Treasury bills yield gradually dropped during 2004, reaching the lowest historical levels at end of the year. 2004 testified a strengthening of banking system interest in investing in longer-term securities, such as two-year bonds. The weight of two-year bonds in the securities portfolio of the banking system rose to 6.1 percent over 2004, from 2.4 percent at end of 2003; whereas that of quarterly Treasury bills dropped from 9.2 to 2.8 percent. Albanian authorities aim at capitalizing this positive development of financial market in terms of further increasing the maturity term and structure of domestic public debt. Interest rates of foreign currency deposits demonstrated adverse tendency to that of Lek deposits during 2004. This market was impacted by rise of LIBOR and EURIBOR interests in international markets. The Bank of Albania has successfully managed the banking system liquidity, using its framework of monetary policy instruments. Aiming at improving its operational framework and easing the functioning of Albania Interbank Payment System (AIPS), the Bank of Albania approved the Regulation “On intraday credit” on March 2004. The use of this credit, which started in May, has assisted in meeting the needs for effecting commercial banks’ intraday payments. Banking system performance Financial position of the banking system at end of 2004 is presented as good. Main profitability indicators have generally had a steady performance, reflecting the prudential overall banking system growth and the activity extension of most banks through more products and larger presence in the market. The banking system evidenced positive net income over 2004, about Lek 5.11 billion or about 0.66 billion more than in the previous year. This figure constitutes 0.66 percent of GDP accrued for 2004. Good position of the banking system is reflected even in the main profitability indicators, RoA and RoE. These indicators have rested in high levels; furthermore, they have undergone a slight growth in comparison to the previous years. This indicates that the net result growth was not only due to banking system assets growth but also due to productivity growth of assets and capital. During 2004 the banking system assets were raised by Lek 52.8 billion (or 14.1 percent), about Lek 18.5 billion more than the growth of assets evidenced over 2003. Year 2004 underwent a significant rise in lending activity, with a growth rate of 38 percent (or Lek 19.3 billion) at end of 2004, compared to 30.5 percent at end of 2003. Therefore, lending rose to 16.4 percent of total assets of the system at end of 2004, from 13.5 percent in the same period of 2003. Lending quality indicator (problem loans to credit balance ratio) is estimated at 4.2 percent, from 4.6 percent at end of 2003. The lowest level of this indicator highlights improvement in lending quality and limited banking system exposure to credit risk. Downward trend of capital adequacy ratio during 2004 was due to a better exploitation of banks’ capacities in terms of extending in riskier investments. During 2004 the supervision process, trying to be proactive and continuous, had on its focus the risk assessment of banks’ activity. Following up the requirements of Supervision Development Plan, the document on “Operative Supervision Policy” was drafted and approved, prescribing banks’ supervision principles. In view of this policy, the supervision cycle for banks that present less concern to supervision is lengthened from 12 months to 18 months, whereas for problematic banks it is reduced to 6 months. Licensing and regulatory framework During 2004 the banking system in Albania was characterized by dynamic developments, either in terms of increasing the number of banks operating in the market or in terms of extending the banking network in various areas of the country. At end of 2004 the number of banks in Albania was 16, from which 2 banks are totally with domestic capital and 14 other banks have foreign capital. On April 2004 the banking system was further consolidated with the approval on the ownership transfer of 100 percent of the Savings Banks’ stock to Raiffeisen Zentralbank, as a crowning of the privatization process of this bank. Also, the Popular Bank Jnt. Stk., the second bank with totally Albanian capital entered into Albanian market. An application for establishing a new bank with wholly Albanian capital was also submitted. This application has recently received the preliminary approval for licence, pursuant to requirements of the Law “On Banking System in the Republic of Albania”. Parallel to development and extension of the banking system and the products it offers, further improvements and amendments have taken place in the regulatory packet of banking supervision. During 2004, the Guideline “On bank regulatory capital, the Regulation “On capital adequacy”, the Regulation “On credit risk management” were revised, and the Regulation “On money laundering prevention” was adopted. Also, during 2004 work was done for making improvements in the existing Law “On Banking System in the Republic of Albania”, with the goal to realize its adoption by the Albanian Parliament within 2005. These improvements were dictated by the need to adjust to and implement the European directives in this are, and the Basel principles for an effective supervision. Other activities of the Bank of Albania During 2004 the legal status of the Bank of Albania remained unchanged. Meanwhile, the revising of the Law “On Banking System in the Republic of Albania” started with the purpose to further perfect the legal framework of commercial banks’ activity in accordance with the aspirations of our country for membership in the European Union. Also, during the last autumn the Bank of Albania regenerated most of its Supervisory Council (7 members) and new administrators of the institution were elected. This process did not impact on normal flowing of the Bank’s activity, indicating the consolidation of this institution. During 2004 the inter-institutional cooperation was another feature characterizing the Bank of Albania performance. In this aspect, we have been open and ready to design and implement the country’s development programs, to advise the Albanian executive on various economic issues and we have participated actively in all tables of negotiations with the international factor. In view of meeting the objectives and obligations deriving from the agreements between Albanian authorities and international institutions, during 2004 the Bank of Albania closely cooperated with the latter ones. In the framework of consultations on assessing the fulfilment of obligations deriving from the agreement between Albanian authorities and the IMF, Albania was visited by three monitoring missions of the IMF. In general, the accomplishments of the Bank of Albania were assessed in the framework of the Memorandum of Economic and Financial Policies signed between the Bank of Albania, Ministry of Finance and this institution. Particularly, they evaluated the maintaining of inflation within the Bank of Albania targeted band (2-4 percent), the maintaining of a relatively stable exchange rate and the efforts for modernizing the banking system. At the same time, the missions expressed their support and encouraged the mid-term plan on cash reduction in economy. Rising the lending, developing the real sector and amending the regulatory framework of banking supervision were other topics discussed in these meetings and in the contacts of the members of the mission with the Bank of Albania experts. The Bank of Albania was visited by the Mission of Technical Assistance of the IMF, which was focused on banking supervision area, implementation of international accounting and payment standards, application of monetary statistics standards and integration of the Bank of Albania into the European Monetary System. The Bank of Albania required assistance in inflation targeting area. The so-far assistance by the IMF to the Bank of Albania is regarded as a stable and fruitful one, impacting significantly on the accomplishment of up date central banking standards. Also, in the framework of cooperation with the World Bank and its financial support, the Bank of Albania has initiated the Automated Electronic Clearing House Project, which will serve the further modernization of payment system and its approximation to international standards. The work for implementation of this project was inaugurated on November 2004, with the participation of senior managers of the World Bank. During 2004, the Bank of Albania, together with the banking system and the Ministry of Finance designed a number of operations, which were intended to reduce cash in economy. In view of meeting these commitments during 2004, a number of concrete steps were taken, among which I would highlight the following: completion on January 2004 of the interbank payment system, initiation of the big project for building the Automated Electronic Clearing House and the transfer of wages of public administration personnel through a bank account. Both above projects are regarded as an essential infrastructure, connecting almost the whole banking system. The implementation of the systems is done in accordance with best international standards and principles, based on modern and up date technology. On the other hand, I would emphasize that we have also organized meetings with various groups and representatives of economic interest, who not only have helped us to better understand our weak points, but have also served for clarifying mutual benefits to the participants. We are determined to continue our efforts in this direction even during 2005. Therefore, we are working to complete the project on small-size payments in time, to start cooperation with the World Bank for creating a credit information register. On the other hand, we are constantly holding the banking system under pressure not only for its further geographical extension, but also for raising its quality and inventory of payment instruments. The establishment of an ever update payment infrastructure, side skipping investments in technology or out-dated solutions, will be a clear orientation of the Bank of Albania. In this sense, there is room for further increasing the use of electronic credit cards, on which I have observed that certain banks have been very active. In the quality of the central bank, we welcome any rationalism in terms of simplifying and unifying the use of various cards issued by the banking system. ******* Further to my speech, allow me to make a summary of the financial activity of the Bank of Albania over 2004: Meeting the objective of price stability and financial sustainability of the country has dictated the need for a more active policy by the Bank of Albania. Also, the developments of two main foreign currencies, Euro and US dollar, have had significant effects on the financial indicators and the Bank of Albania balance sheet. During 2004, the total assets of the Bank of Albania were increased by 4.8 percent, reflecting growth of foreign assets by 14.7 percent. The growth of the latter ones was due to two factors: the Bank of Albania intervention in foreign exchange market by purchases, and the converting of foreign currency government income. In absolute value, the total foreign assets were raised by Lek 17.2 billion. Contribution to foreign assets growth was also given by foreign reserve investment in foreign markets. However, the appreciation of domestic currency versus two main currencies, Euro and US dollar, has negatively impacted on existing foreign assets value by about Lek 8.5 billion, expressed in the reduction of Revaluation Reserve, on which the Ministry of Finance has projected the issuing of securities, in compliance with the Law “On the Bank of Albania” and the Law “On State Budget for 2005”. Also, the Bank of Albania, in implementation of its monetary policy, has used the instrument of outright Treasury bills sales. This has brought about the reduction of portfolio of domestic assets of the Bank of Albania by 10.5 percent or Lek 8.0 billion. On the other hand, the easing policy has impacted on the decrease of Treasury bills yield through interest rate cut. The combination of both factors has impacted on the level of income from investment in securities portfolio of Albanian Government for Lek 2.3 billion or 30 percent less in comparison to the plan. This reduction constitutes 100 percent of the dropping of total income from operations. Under the conditions of almost the same level of operative expenses, compared to the previous year, the net profit of the Bank of Albania over 2004 resulted to Lek 5.5 billion or Lek 2.4 billion less than in 2003. ******* Honored deputies! Allow me to emphasize once more the willingness of the institution I govern for meeting all the obligations deriving from the Constitution of the Republic of Albania and from the Law “On the Bank of Albania”. This will be achieved through further perfecting the framework of monetary policy and monetary operations and simultaneously through deepening our knowledge in terms of functioning and causative inter-dependence characterizing the Albanian economy. I believe that year 2005 will be a successful year in terms of research, particularly in increasing the forecasting power on inflationary developments and in improving the Bank of Albania governance. I would like to cite that adaptation of inflation targeting regime remains our political aspiration, a fact that makes us be seriously committed to prudentially follow the relevant pre-conditions. For this purpose, we will continue the relevant theses we need for finding understanding and proper support of the Assembly and other state institutions. I would like to ensure the Assembly of Albania that our recent steps and expected ones take into account even our national aspiration for a faster integration into the European Union. We have already understood that no genuine integration can exist without financial integration. The country needs more income, more political stability, more social and cultural integration, but as much important is the financial integration as well. From this viewpoint, I think that the role of the institution I govern, the role of the banking system and of the financial sector is primary and we have many challenges ahead of us. Strengthening of the country’s financial stability, enhancement of effectiveness of monetary policy and other economic policies, financial market flexibility, increase of geographical coverage of the country with banking business and financial intermediation rise are indispensable conditions for a real integration of the country with the developed part of the European Continent.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Inter Balkan Forum of Banking Associations, Durrës, 20 May 2005.
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Ardian Fullani: Important issues for the future of the Albanian banking system Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Inter Balkan Forum of Banking Associations, Durrës, 20 May 2005. * * * Ladies and Gentlemen, It’s a great pleasure to participate in this prestigious event of the banking system of Balkan region. My pleasure is great due also to another reason, because I had for years and years governed the Albanian Association of Banks and in addition I had given my personal contribution in initiating and organising this meeting in Albania. I would like to thank you again for having accepted today my invitation already proposed last year for organising this meeting in Albania. Of course, my delight is great but also my responsibility today to present myself as Governor of the Bank of Albania; therefore please consider me as being yours. In this spirit, I would like sincerely to begin my speech with the wishes: successful and fruitful proceedings of the meeting. Allow me first to tackle an important issue, which within the context of this meeting, I believe, is of paramount importance. I mean by that the regional co-operation, an initiative that has been completely supported by the European Central Bank. We have already taken the first steps in this regard through establishing bilateral relationships in banking supervision with National Bank of Macedonia, Central Bank of Montenegro and Banking and Payment Authority of Kosovo. Meanwhile, we are in the process of negotiating with National Bank of Bosnia and Herzegovina, National Bank of Serbia, etc. I estimate that regional co-operation is an important forerunner of the integration process of the region with the rest of Europe; therefore I will not stop working to encourage a regional co-operation of high standards among the financial systems of Balkan countries. I hope that you share the same opinion with me, because only in this way, our region will be more credible and efficient to have its European dream. On the other hand, a developed and financially integrated region will be more attractive for foreign strategic investors, opening up the path toward regional development projects, particularly infrastructure ones where region’s banks might be the financing and co-financing ones. Further on I would like to give you an overview on some different issues of importance for the future of the Albanian banking system. In diverse meetings organised by the Bank of Albania with the banking community and other actors on relevant opportunities, a range of problems were highlighted and evidenced of which I think there is still room for a joint commitment, of both the Bank of Albania and, of course, the banking system. In my capacity of Governor of the Bank of Albania I would like to ensure the banking community that the institution I govern is open for an institutionalised co-operation with the banking system by channeling it through the Albanian Association of Banks. We have a great consideration on this Association and we hope that its role will further be enhanced in the future, particularly on the principled topics that will characterize the development of the banking system and that of the financial system in general in the years to come. Honored bankers, I hope you share the same opinion with me that we become recently witnesses of a qualitative development of the Albanian banking system. I use the opportunity to express that positive assessments on the banking system have been given also in the report prepared by the World Bank and International Monetary Fund after the completion of their assessment made on the Albanian financial system (FSAP-Financial System Assessment Program). Of course, this is good news. Conclusions of FSAP, of this important international passport, are an indication of our earliest conclusions that the Albanian financial system is characterized by a supervised and effective banking system and by other segments that are still in the first development stages where regulation and supervision remain a priority. Regardless of what I mentioned above, sincerely feeling myself as a part of the banking system I would envisage that it needs better and faster motivation to reach higher contemporary standards in all the aspects of the banking activity. The banking system has experienced remarkable developments recently. After the licensing of Popular Bank, with Albanian capital, the number of banks increased from 15 to 16, and a preliminary license is granted to Union Bank (Albanian capital), which is expected to raise the number of banks to 17 over 2005. The system assets have further increased by 14 percent while there was an increase of banking products and an expansion of their network. During this year there will be sold the public shares of both the Italian Albanian Bank and United Bank of Albania, which will lead to an increase of effectiveness and banking competition, paving the way to the processes of selling, merging and acquisitions towards a new consolidation of the banking system. The lending activity increased by 38 percent where one can distinguish, inter alia, the significant growth of medium-term and long-term loans compared to short-term loans. The map of coverage of the country with the banking system has further expanded, including new areas ever covered before. At the end of 2004, the total number of branches reached 88, or 11 branches more that the end of the previous year, while the number of agencies recorded for the first time a full three-digit number, 100 and the number of the employed people increased by 26 percent. The high increase of the number of branches relative to that of agencies shows that banks are not interested only in providing the service of collecting deposits but also in providing other products like crediting to the economy. These developments, besides their positive contribution in enhancing the financial intermediation, speak for a better perception of investing potential from banks in Albania. An outstanding development is mainly related to the client service, which is accompanied through electronic terminals by the increasing number of electronic cards in circulation. Banks offer already debit and credit cards in co-operation with international companies such as Visa and MasterCard. Six banks provide the ATM service and the number of ATMs reached 108 by the end of February 2005. The banking system results to have a profit level, which has been increasing to Lek 5.1 billion. Return on equity (ROE) was estimated at 21 percent while credit quality is only 4.2 percent from 4.6 percent in the previous year. In any case, we must say that credits are still new and do not have adequate history to show their performance. However, problems and challenges, which the system is facing, are still enormous and in this context the role of the association of banks, I think, will be important to overcome them. Credit to the economy and credit register Credit to the economy has recently known a great development. High growth rates impose us to be prudent in the other direction, that is portfolio quality. Enhancing competitiveness and consequently, enhancing the credit level is bringing about a rising trend of weighted risk assets and some banks are already close to the minimum level of 12 percent. The client’s identification on receiving and using the credit and other obligations he/she has to the banking market is vague, incomplete without giving the opportunity the banking system to have a history on the client’s activity. That’s why I believe that a centralized register, which unlike the previous years became now a necessity, is needed. I would like to highlight that Bank of Albania has included the project of establishing the credit register in its short-term plans and we are deeply committed to execute it within the next year. I use the opportunity to emphasize that this register will be under the administration of Bank of Albania and the participation of banks member of the system will be compulsory. Only in this way, evasion in the statistical information will be avoided, its integrity will be ensured and at the same time available for each bank member of the system. On the other hand, we are aware of the fact that issues dealing with credit are more complex. They have to do with many other obstacles that arise from lack of collateral register, inaccuracy of mortgage, lack of knowledge and the non-functioning on a correct basis of the judiciary system and law, particularly with regard to technical problems that relate to the knowledge and execution of collateral. For this purpose, we shall take the initiative to set up an ongoing communication with the judiciary system, with the intent to organise an open conference in autumn of the current year. The main objective remains enforcing legal initiatives that would bring about the modification of legal and sub-legal basis. Modification of regulatory basis of Bank of Albania I have stated even previously that Bank of Albania aims at reviewing its regulatory basis with the sole intent to simplify it and to ease its implementation. For this purpose I have insisted on a continuous basis that the first contacts among mutual technical staffs to raise the banking system concerns on the regulatory framework enforcement should be established. After several discussions we come to the conclusion that the group of the following regulations should be subject of necessary modifications, and I would ensure you that work at the Bank of Albania has already started for this purpose. Methodical guideline on “foreign exchange risks” Observations: inclusion in the calculation of the open position of off-balance guarantees which include as unused credit limit, the financing commitments made and received, and registering of collateral estimated in foreign currency and received for guaranteeing the credit (all banks in the matrix). These are commitments that remain in force and for which, according to the current regulatory framework interpreting, the bank is required to create a real position (within the balance). It is proposed: to reformulate the methodical guideline, excluding the guarantees. Guideline “on bank regulatory capital” Observations: To make clearer systemization for the items being deducted from the additional capital, explaining that on which size deductions are to be calculated. To make clearer in the regulation even the inclusion of yearend profit in the regulatory capital only after confirmation from the certified public accountant and by approval from the Audit Committee. It is proposed: to take into consideration both observations and submit a draft-decision for changing the regulation. Regulation “on capital adequacy” Observations: Classification of countries where reference is made to OECD member countries is a bit confused and another time, a list of 29 members is presented, while collateral in cash is not taken into consideration as a deductive element in the calculation of weighted risk assets. Concept of mortgaged credits that are weighted by 50 percent is very restrained and subject of confusion. It is proposed: to take into consideration the observations and submit a draft-decision for changing the regulation. Regulation “on market risk” It is proposed: to review it in the framework of new recommendations of Basel II. Focusing again on the problem of banking supervision I would like to underline that we, Bank of Albania as a supervisory institution, are determined to have at a possible maximum level a simple and easy supervision for being implemented, associated with a significant improvement of the on-site inspection. We shall intend that expectation and prevention power of our supervision gains new dimension. To this end we are in a process of finalising the negotiations with European partner institutions for launching a twinning project for the further consolidation of supervisory capacities of the Bank of Albania. Anti cash campaign Recent developments have impacted cash reduction in the economy. On the other hand, we have carried out an intensive public activity, of clarifying and promoting nature where meetings of another nature were held too, in which we, all of us as a banking system, have been concretely engaged. Allow me to remind you the meetings we have organized with business and utility services business and also that on the primary market of Treasury bills. Using this opportunity I would like to bring again to your kind attention the problems raised even beforehand. I hope that now, on the eve of finalising the Automated Electronic Clearing House project, each bank separately and the Association itself are seriously thinking to raise the profit level from this facility that Bank of Albania offers in this moment. I would appreciate if from the Association will have some comments or potential reactions on the system preparations and the possible assistance and co-operation of Bank of Albania in this direction. After the completion of this project, I deem that we must think more seriously about the numerical and qualitative addition of electronic payments. For this purpose I would envisage to start thinking from now about future projects in the payment infrastructure. I personally will insist that even in this direction all of us as a banking system look forward to the European Union directives, in order that each future step is oriented toward the country integration in the European Union. Few times ago, I have been informed about a new EU initiative, which requires to set up, within a certain period of time, among others a unified payment system within the euro area, including payments with cards. Presently, small and medium businesses in the euro area have not the same payment opportunities as they have in their respective countries on a national scale. Such a case includes credit cards, which cannot be employed equally across the borders. For this purpose I would suggest that respective experts from the Association and Bank of Albania be as soon as possible informed about this project, making the relevant suggestions in this direction. I personally remain consistent in my position that in Albania we have to adopt the most advanced solutions in all the infrastructure projects that we are going to implement. I believe that we do not need to examine old-fashioned models, which, in addition to the initial cost, will continuously require other funds for maintenance and modification. Besides the developments in the field of payments I would welcome from you a broader commitment even in other directions. I think that the system must further expand its geographical coverage, aiming at including also areas, which, though having at first sight the appearance of being inactive, have large financial potentials in the form of threasurised savings outside the system. Also, the service level should be further improved. Now the public administration has become a client of the system and I think that there are real opportunities to resolve the utility services payments through the banking system. Also, I hope that the system will be aggressive and will keep promises to the public to put its windows at the service of selling Treasury bills directly to the interested public. We, as Bank of Albania, have kept our promises and very soon we will introduce as a first step a commission that is presumed to cover the transaction cost while we will accompany this move by the ban of cash flows receipt at the windows of Bank of Albania. We shall request the individuals that their participation in the auctions, through windows of Bank of Albania, will become possible only upon presentation of a banking document, which certifies that the client has deposited a certain amount as a guarantee in one of the banks pertaining to the system. Another direction on which banks must further focus relates to an aggressivity of broader propaganda and clarification. I think that still the majority of common people show a certain hesitation to refer to banks. I believe that they have a feeling of non-confidence that the bank shall not resolve their problems. Many individuals, though in an absurd way, are still in search of a “friend” to negotiate with the bank. As mentioned above, I understand that above all the reason behind might be our poor tradition in addition to the high degree of informality and a lot of other objective and subjective reasons. However, I think that the cause might be even the lack of detailed clarifications, and lack of informative publications, and lack of the propaganda in the public environment as well as in media. I think that in the propaganda spaces in the media more space should be given to the clarifications of special products, while launching of new products should be accompanied by standard advertising campaigns. Dear participants, Allow me that before closing my speech to express again my high appreciation on the Albanian Association of Banks, ensuring that Governor of Bank of Albania will always be its decent partner in the long path of institutional co-operation. I sincerely hope that this meeting of banking associations is an important step towards establishing a fruitful regional co-operation. I am personally committed, in future contacts with my colleagues of the region’s countries, to dedicate a special room to this co-operation, hoping that I will find on them a well-understanding and full support. I again wish you successful and fruitful proceedings of this meeting. Thank you.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the EBRD 2005 Annual Meeting and Business Forum, Belgrade, 22 May 2005.
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Ardian Fullani: A short overview on the latest Albanian banking system achievements Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the EBRD 2005 Annual Meeting and Business Forum, Belgrade, 22 May 2005. * * * Ladies and Gentlemen, It is a great pleasure to participate in this prestigious event of the EBRD Annual Meeting and Business Forum. For this purpose, I would like to thank the organisers of this meeting who provided us such an opportunity to present our achievements and ambitions for the future. Allow me first to tackle an important issue, which within the context of this meeting, I believe, is of paramount importance. I mean by that the regional co-operation, an initiative that has been completely supported by the European Central Bank. We have already taken the first steps in this regard through establishing bilateral relationships in banking supervision with National Bank of Macedonia, Central Bank of Montenegro and Banking and Payment Authority of Kosovo. Meanwhile, we are in the process of negotiating with National Bank of Bosnia and Herzegovina, National Bank of Serbia etc... I estimate that regional co-operation is an important forerunner of the integration process of the region with the rest of Europe; therefore I will not stop working to encourage a regional co-operation of high standards among the financial systems of Balkan countries. I hope that you share the same opinion with me, because only in this way, our region will be more credible and efficient to have its European dream. On the other hand, a developed and financially integrated region will be more attractive for foreign strategic investors, opening up the path toward regional development projects, particularly infrastructure ones where region’s banks might be directed in financing and investment. Further on I would like to give to you a short overview on the latest Albanian banking system achievements. After many years of difficult transition, in this late spring of 2005 the banking system is growing on a stable basis. Dear participants, I would like to ensure you that recently there are many qualitative developments of the Albanian banking system. I use the opportunity of this event to express that positive assessments on the banking system have been given also in the report prepared by the World Bank and International Monetary Fund after the completion of their assessment made on the Albanian financial system (FSAP-Financial System Assessment Program). Of course, this is good news. Conclusions of FSAP, of this important international passport, are an indication of our earliest conclusions that the Albanian financial system is characterized by a supervised and effective banking system. Regardless of what I mentioned above, sincerely feeling myself as a part of the banking system I would envisage that it needs better and faster motivation to reach higher contemporary standards in all the aspects of the banking activity. The banking system has experienced remarkable developments recently. After the licensing of Popular Bank, with Albanian capital, the number of banks increased from 15 to 16, and a preliminary license is granted to Union Bank (Albanian capital), which is expected to raise the number of banks to 17 over 2005. The system assets have further increased by 14 percent while there was an increase of banking products and an expansion of their network after the successful privatisation of the Savings Bank from Reiffeissen Bank, Austria. During this year there will be sold the public shares of both the Italian Albanian Bank and United Bank of Albania, which will lead to an increase of effectiveness and banking competition, paving the way to the processes of selling, merging and acquisitions towards a new consolidation of the banking system. The lending activity increased by 38 percent where one can distinguish inter alia the significant growth of medium-term and long-term loans compared to short-term loans. The map of coverage of the country with the banking system has further expanded, including new areas ever covered before. At the end of 2004, the total number of branches reached 88, or 11 branches more that the end of the previous year, while the number of agencies recorded for the first time a full three-digit number, 100 and the number of the employed people increased by 26 percent. The high increase of the number of branches relative to agencies shows that banks are not interested only in providing the service of collecting deposits but also in providing other products like crediting to the economy. These developments, besides their positive contribution in enhancing the financial intermediation speak for a better perception of the investing potential from banks, in Albania. An outstanding development is mainly related to the client service, which is accompanied through electronic terminals by the increasing number of electronic cards in circulation. Banks offer already debit and credit cards in co-operation with international companies such as Visa and MasterCard. Six banks provide the ATM service and the number of ATMs reached 108 by the end of February 2005. The banking system results to have a profit level, which has been increasing to Lek 5.1 billion. Return on equity (ROE) was estimated at 21 percent while credit quality is only 4.2 percent, from 4.6 percent in the previous year. These positive developments on the banking system were accompanied by a sound macroeconomic environment. For several years the economy is growing at 6 percent while inflation was kept under control within the two-to-four percent targeted range of the Bank of Albania. The fiscal consolidation has been on track while current trade deficit has been financed mainly by remittances and foreign direct investment inflows. The Bank of Albania has played a crucial role in providing this macroeconomic environment. Since early 2003, we cut several times the core interest rate bringing it at its minimum historical level, 5 percent. In taking any monetary policy decisions we had considered the further invigoration of economic activity, keeping always an eye on inflationary developments and financial stability as well. As I would like to often mention in the IMF premises, Albania is considered as a successful story. The Board of directors have recently declared that Albania is enough mature to sign a new three-year agreement by the end of this year. The new arrangement will be a more flexible one leading Albania to a better access in the international financial market. Of course, what I mentioned above was just a brief resumé regarding the current situation of the banking system and the overall economic performance. There is no doubt that Albania’s attractiveness has further enhanced, and partially this reflects also the increase of confidence in the Albanian banking system. Using the opportunity of this very prestigious forum, I would like to share my voice with that of the Albanian representatives present in this panel, expressing that my country is more open, more consolidated, ready to absorb more ambitious projects and, of course, global projects. I wish you successful and fruitful proceedings of this meeting. Thank you.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Black Sea Business Day, Yerevan, Armenia, 6 June 2005.
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Ardian Fullani: A brief look at the Albanian banking system Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Black Sea Business Day, Yerevan, Armenia, 6 June 2005. * * * Distinguished Ladies and gentlemen, Dear participants, It’s a great pleasure for me having the opportunity to participate in this regional meeting of Black Sea countries. I have always appreciated this initiative as a special opportunity for all the countries being involved in. In my long career, I have realized that the success of this business consists generally in the ability it has to gain public confidence. Nevertheless, the overall economic, political and social environment of the country is playing also an important role. During my career, I have been witness of many events which directly or indirectly have damaged the banking system. The monetary collapse of the banking system at the end of the communist era, the flourishing and degenerating of the fraudulent investment schemes, as well as many other social, political and economic problems that have associated the Albanian transition, made the banking system “suffer” for a long time. However the reputation of the Albanian Banking system is in place recently. It’s enough if I just refer to the latest problematic episode occurred in Albania, in early spring of 2002, when due to the lack of public information and to political speculation with the introduction of the deposit guarantee scheme, the confidence of households was traumatized, leading to a considerable deposit run from the banking system. Having a look at all the statistical indicators, it results that the banking system at that time it was sound and growing continuously. But, all this was insufficient since the memories of year 1997 (the collapse of fraudulent schemes) were still present and households sensitivity to them was very high. Inspite of the recent significant achievements I would like to stress that still there is a high potential of fragility in our economy and the entire region as well. As a consequence, I think that we have to be much more prudent and much more diligent when speaking about the financial stability of the country. This episode suggests, inter alia, the necessity to associate the reforms with concrete preparatory steps and, certainly, combined with back-up plans in the case of failure. For this purpose the market needs to be intensively prepared and elaborated since in early stages of the implementation of reforms. It is imperative that the decisionmakers should themselves know in advance the market behavior and sentiments. Last spring, a joint assessment of the Albanian financial sector conducted from both the International Monetary Fund and World Bank (FSAP) concluded that: the financial sector consists mainly of a regulated and supervised banking system. The Stress-Test indicated that the level of different risk exposure to the banking system is rather low, an argument that supports this conclusion. The banking system has experienced remarkable developments over 2004. After the licensing of Popular Bank, with Albanian capital, the number of banks increased from 15 to 16, and a preliminary license is granted to Union Bank, which is expected to raise the number of banks to 17 over 2005. The system assets have further increased by 14 percent while there was an increase of banking products and an expansion of their network. During this year there will be sold the public shares of both the Italian Albanian Bank and United Bank of Albania, which will lead to an increase of effectiveness and banking competition, paving the way to the processes of selling, merging and acquisitions towards a new consolidation of the banking system. The lending activity increased by 38 percent where one can distinguish inter alia the significant growth of medium-term and long-term loans compared to short-term loans. The map of coverage of the country with the banking system has further expanded, including new areas ever covered before. At the end of 2004, the total number of branches reached 88, or 11 branches more that the end of the previous year, while the number of agencies recorded for the first time a full three-digit number, 100 and the number of the employed people increased by 26 percent. The high increase of the number of branches relative to agencies shows that banks are not interested only in providing the service of collecting deposits but also in providing other products like crediting to the economy. These developments, besides their positive contribution in enhancing the financial intermediation speak for a better perception of the investing potential from banks, in Albania. An outstanding development is mainly related to the client service, which is accompanied through electronic terminals by the increasing number of electronic cards in circulation. Banks offer already debit and credit cards in co-operation with international companies such as Visa and MasterCard. Six banks provide the ATM service and the number of ATMs reached 108 by the end of February 2005. The banking system results to have a profit level, which has been increasing to Lek 5.1 billion. Return on equity (ROE) was estimated at 21 percent while problem credits represent only 4.2 percent, from 4.6 percent in the previous year. On the other hand, for the rest of the financial sector the FSAP reports indicates many problems, which simultaneously contain many themes including essential issues such as their supervision. Although, due to their small dimensions, these problems do not present imminent risks for the time being, they still should be carefully examined and resolved. Returning to the assessments made under FSAP in other countries similar to Albania (I mainly refer here to South East European Countries, SEEC) and to many other financial reports referring to this region, we realize that these problems are similar and these countries suffer more or less similar symptoms. If one has a look back at the history, it realizes that it can not happen differently. The regional tradition is poor, of little inheritance in institutions, market rule and behaviour, and financial intermediation. However, today, about 15 years after the big collapse of the communist regime it seems that South East European Countries (SEEC) have been engaged in an irreversible process of their stabilization and integration with the rest of Europe.
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Luncheon speech by Mr Ardian Fullani, Governor of the Bank of Albania, at an Anti Money Laundering workshop, Tirana, 22 June 2005.
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Ardian Fullani: The fight against money laundering Luncheon speech by Mr Ardian Fullani, Governor of the Bank of Albania, at an Anti Money Laundering workshop, Tirana, 22 June 2005. * * * Dear participants, The subject of today’s workshop is, as you well know, a matter of great concern worldwide. The way we fight money laundering (ML) and counter the financing of terrorism (FT), does not have an impact on us only, but also on our neighbours and any other country with which our citizens and companies perform trade and financial relations. In these last years, to this issue has been devoted considerable time and efforts by you, by Albanian authorities and by international organisations. Besides meeting each other again and exchanging opinions on general issues, I want to use this opportunity to share with you some thoughts about the importance of the existence of a culture against ML in the institutions we represent. I will refer in this case to banks, meaning non-bank financial institutions as well. Following that, any consideration about ML will be valid also for the FT, for which I am convinced that our awareness and that of the public, is complete. With the term “culture” on anti-money laundering (AML), I refer not only to the existence in the bank of structures responsible for AML and its related procedures. I am aiming at the need for the existence in any bank, of a real concern and of a positive pressure to make sure that those structures and procedures are applied to their real meaning, throughout the institution and down to any single employee. At the same time, I mean the real willingness of the bank for a careful and proactive role in the inter-institutional relationships, with the aim of leaving away the formalism and qualitatively improving the process of AML. I will be focusing in more details on these issues, as I proceed. Prior to proceeding with more details, allow me to put myself in each of your’s position. I feel I can do this, since I was one of you, as the executive director a commercial bank and head of the Association of banks. We have shared common concerns about the speed and about the quality with which the legal requirements on AML were approved and implemented in practice. I still believe that a law is good when its requirements are applicable in practice and when they represent affordable costs for its subjects. I must say that the existing law on AML, needs to be revised under these considerations. At the same time, we have often discussed about the concern that the way this process is being implemented is endangering to go in the opposite direction to our major objective of reducing the informal economy and bringing down the cash in circulation. While banks, as regulated, transparent and supervised institutions, play an important role in this objective, they are not the sole institutions. A no less important role play other institutions, especially those of tax collection or other institutions of services. Special attention should be paid to the supervision of market segments out of the banking system but within the scope of law. The terms of executing different payments, on a household or company level, should favour the usage of bank instruments (like electronic cards, wires, etc.) and in some transactions (where involved big amounts) payments in cash should be completely forbidden. There are exactly these transactions that may represent the biggest risk of money that is laundered from illegal activities, including fraud and tax evasion. I believe that the preference of holding cash money is deep in our society’s mentality and is also linked to a relatively low level of the average salary in the country. As a result, one can say with an appropriate level of confidence that most of the money that circulates in cash, is in the hands of many people, hence it represents a relatively low level of ML risk. We have also discussed about costs that are encountered when adopting full compliance with the requirements of the regulatory and the legal framework. An effective system of AML, means advanced systems of information technology, especially on those parts that deal with the database of the clients, the aggregation of the information from any single point in the network, and those that enable the continuous monitoring and filtering of any bank transaction. For our institutions, especially for those that are not branches or subsidiaries of any stronger financial institution, those costs can be substantial and difficult to be absorbed. Furthermore, we have been witnesses of a somehow difficult dialogue with the institutions that implement the law. I must say though that such a problem exists almost in any jurisdiction, including the most developed countries. But their attitude toward the abidance to the law, of constructive discussion of problems and of quick reactions in implementing changes, facilitates the solution of different problems. Dear bank directors, I do like though to consider the issue from what we as bankers, can contribute more in this process, in spite of above-mentioned difficulties. Furthermore, history shows that the cost of dealing with those difficulties, whatever their size in normal times, can be easily exceeded in instances of unusual events that are linked with scandals on ML. Firstly, I want to say that we must be very careful not to allow such difficulties to distract our focus from the heart of the issue, that of being ensured at any time that our banks are clean and that they do not represent a place where dirty money and its creators or benefitors can not enter. If we do not act like this, the negative consequences can be unimaginable. We put in danger the reputation of single financial institutions and of the entire financial system; unwillingly, we have become instrumental of crime in reaching their goal of using the money generated from illegal activities; we have placed the reputation of our sound clients in a very difficult position; we have lost confidence in front of the honest market players and have darkened our positive image in front of our international partners and partners of our clients; we are going to face in the future a higher cost on doing the bank business, represented not only from the loss of clients (which can prove to be fatal), but also from difficulties in expanding our activities; we can also expect to be subjects of penal actions triggered by the regulatory framework. The damage is multifold and exceeds any quantitative advantage in the volume of business we may have had from “outright” acceptance of any business offer. In the end, through rigorous application of AML requirements, we have protected our institution from a potentially very large damage. This is the key element of our duty, the feature of a good banker. By being active in AML, we are simply doing our job. Any negligence on this means we are not up to the requirements of our job. We need to emphasize that the key element in the process, is the strong commitment to understand and implement it. It is very important for such commitment to come from the highest management structures of the bank. If such commitment is missing, this will be immediately shown at the structures of the bank that are directly involved in the AML process, whose functioning will be negligible and full of formalism. Within the institution, this commitment should be shown: in the preparation and approval of the internal procedures on AML (including those of knowing the client), in setting up the proper entities and appointing the responsible persons (on monitoring the AML implementation process) with the proper professional and hierarchical qualities, in rightly defining their rights and responsibilities, in giving them moral and material support, in providing qualitative and continuous training for the staff, especially for those that have direct contact with the client and analyse its ML risk profile and in keeping up a positive pressure in the institution for such process to be implemented and be continuously functioning. In one word, the climate that should exist within the institution for such issue (but not only) should favour in any instance the responsible actions being taken from the bank staff on AML. In an inter-institutional level, the commitment to be active on AML goes beyond full compliance with the regulatory requirements. We must be mindful of the role we have in the mosaic of the institutions that are relevant on implementing the AML program in the society. Furthermore, we should be sensitive and helpful toward such institutions, especially when we know the difficulties they face in performing their functions. More concretely, I do not believe that the banking industry and other nonbank financial institutions, are giving their maximum contribution, if they suffice with fulfilling rigorously some quantitative mandatory requirements of the law, and not focusing also on some non-mandatory but very important requirements. For example, a very low number of suspicious transactions is currently reported at Anti Money Laundering Directorate (FIU), while the number of reports about transactions above the threshold required by law, is huge. In this instance banks are acting in accordance with the law requirements, but are not in compliance with spirit of the law. As we all agree that it is impossible for the banks to totally know and guarantee for the cleanness of each of their clients, then we must accept the fact that the lacking of suspicious transactions reports means that the bank: • has difficulties in setting up its structures to ensure the real analysis of the risk profile of its client; • doesn’t have a good understanding of the problem and has been adopting formalism in fulfilling the law requirements; • is not taking a proactive role, to understand other relevant institutions difficulties and to come forward with reasonable and acceptable solutions, in accordance with the spirit of the law. If a bank has chosen to act in formalism and if this gets a widespread adoption in the entire financial system, I think we really risk that this approach be counterproductive to the financial industry firstly. It would be somehow normal in this instance to think about lowering the minimum threshold required by law, as a possible solution to avoid formalism and to capture potential cases of ML that lie below the current threshold. Hence, we risk imposing on ourselves a development with a much higher cost of compliance and potentially more formalism, when we consider the difficulties that exist in analysing the reported information in AML Directorate. In this context, I would like to highlight that formalism in terms of law implementation is unacceptable and harmful. In this case formalism is based on task performance and makes the control structures become dormant or inhibits their positive progress. So it is crucial that the law itself and regulations be as clear and implementable as possible in order to establish confidentiality and facilities in their implementation process. Passing in the definition of the risk profile of the client, is the only way that would permit the compliance with the spirit of the law. This approach is based on a sound “know your client” policy of the bank, which should be a standard requirement nowadays. This approach has several advantages, where one could mention improved capabilities on tightening the system to prevent or detect cases of ML. Furthermore, it allows better distribution and focus of financial and human resources, resulting in a lowering of compliance costs. At the same time, it allows those institutions responsible for implementing the law and analysing the information, to focus on the full investigation of those transactions that represent higher risk of being ML. Another delicate issue that I would to stress on in my speech is keeping and protecting the confidentiality on giving and managing the information on suspicious transactions. Our practice has shown that problems with this issue are complex. We have had cases of confidential information being public in the press, the next day they were filed. In another case, the employees of a bank that reported a suspicious transaction, were called and probed in the prosecutor office as being those the persons of actually being involved in ML. The reporting subjects and the institutions that implement the law, must define among each other certain procedures that would eliminate the occurrence of such case and that ensure the protection of confidentiality of the persons that have filed the suspicious reports. As long as this element is not totally ensured, any other discussion on the matter risks being a purely theoretical one, without much practical values. In conclusion, as a Governor, I must say that I would encourage a better cooperation among the institutions that are subject or that implement the law on AML. At the same time, Bank of Albania as the supervisory institution of its licensees will promote a stronger contribution by banks in Anti Money Laundering requirements implementation. In exerting our function, we shall not be limited to the verification of the existence and the functioning of the internal structures and procedures, but will deepen further on assessing the support the management structures of the banks, give to the real implementation of the AML internal policies. The position of a central bank is, according to the law, very comfortable, but playing the proactive role of a responsible central bank, showing the concrete implementation of this responsibility, we will intensify our efforts together with the other actors of interest to enable a better implementation of the law on money laundering prevention. Allow me to close this speech, thanking the co-organisers of this workshop, the Tirana office of FSVC and the Albanian Association of Banks. I thank in particular all the specialists of the commercial banks and of the non-bank financial institutions that took part in this seminar, for their valuable contribution on preventing money laundering in their institutions. I thank particularly the foreign experts, Mr. Farrell and Mr. Burnside, that accepted to share with us their valuable experience. I wish this workshop has also been for them an interesting event. Thank you.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, on the occasion of the signing of the Agreement on the field of Banking Supervision between the Bank of Albania and the Banking and Payments Authority of Kosova, Prishtina, 11 July 2005.
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Ardian Fullani: Cooperation in the field of banking supervision in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, on the occasion of the signing of the Agreement on the field of Banking Supervision between the Bank of Albania and the Banking and Payments Authority of Kosova, Prishtina, 11 July 2005. * * * I would like to take the opportunity from this occasion of the signing of the Agreement on the Banking Supervision to say that I really feel excited for being here in Prishtina today. It is my first visit since I took over the position as Governor of the Bank of Albania and I would like to assure you that it will not be the last one. There are many reasons that pushed me to make this commitment today in front of you, and among them, I would like to focus on the necessity that our two institutions, the Banking and Payments Authority of Kosova and the Bank of Albania should raise the level of cooperation and reciprocal assistance. During this last period, I have personally attended meetings not only at the central banks of our region, but I have also met with high representatives of the interested international institutions. I have found everywhere an atmosphere of understanding and support, particularly with regard to the initiative for a greater cooperation between the region’s central banks. I would like to focus a bit more on this point, as I am of the opinion that it represents one of the relevant directions to which we should pay more attention in the future. The agreement that we signed today is a supporting evidence in this direction and based on the conversations I had with Mr. Svetchine, the UNMIC officials and with Mr. Kosumi, I can say that they have shown their goodwill and commitment as regards cooperation in this field. More specifically, we have established contacts with all the central banks of the region, up to the high levels of representation and I have realized that in every case they have expressed their readiness to further intensify the regional cooperation in this context. On the other hand, in the contacts with relevant international organizations such as the European Commission, World Bank, as well as the European Central Bank and many of the members of the European System of Central Banks, I have widely discussed this issue and I have found their total support in relation to the specific problems that characterize the economic and financial development of our region. At present, there exist many opportunities that we should use in a wise manner, since a collective action from our part would greatly improve the image of the region in front of the international community and it would make our final aspiration for EU membership easier to achieve. On the other hand, I think that we should benefit from the work in group for yet another reason. Regardless of the different levels of the countries’ developments and despite many other geopolitical factors, I hold the opinion that in the fields of economy, the banking sector, structural reforms, finance and markets, we show the same symptoms and to a certain degree, priorities converge. This is why I think that foreign assistance will be more effective. This is why I think that the several projects that may be prepared by the foreign donors would be more effective. I think that the region will show more or less the same progress without creating wide contrasts which – according to a long-term perspective – could emerge as serious problems. I hope that the agreement we signed today will only be the first step in the long road towards the comprehensive cooperation between our two institutions. Personally, I consider the fields of payments, research, human resources and statistics as other areas of reciprocal interest. Cooperation should be concrete and should serve to the adoption of better standards, as well as to the exchange of opinions with regard to various matters related to the regulatory framework. As regards the Agreement of Understanding in the field of Banking Supervision, I would like to emphasize the fact that a standard model which is in compliance with the European directives and the Basel Committee has been adopted. This is a concrete and appropriate common commitment with regard to cooperation in the field of supervision. It is worth mentioning that both parties, among other things, will extend their cooperation in the field of organizing common events as well as various training programmes of common interest. 1/2 Personally, I think that the Bank of Albania has already developed its supervisory and analyzing capabilities to a satisfactory level, and as a consequence, I think that our assistance in this field will be useful. At the same time, I think that in the Banking and Payments Authority of Kosova, as a more recent institution, these capabilities are being developed at a satisfactory pace and I believe that its staff holds many practices and findings that they could offer to their colleagues at the Bank of Albania. At the conclusion of this short speech please let me express once more the great pleasure that this visit gives to me. I avail myself of this opportunity to assure my Kosovar friends that they will always find in me and in the Bank of Albania an open window not only for hospitality, but also an infinite opportunity for cooperation, assistance and devotion. Thank you once more. 2/2
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Opening speech by Mr Ardian Fullani, Governor and Chairman of the Bank of Albania, at the workshop Experiences of the Bulgarian National Bank in its road towards the ESCB, organised in cooperation with the Bulgarian National Bank and the GTZ Office, Tirana, 5 September 2005.
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Ardian Fullani: Experiences of the Bulgarian National Bank in its road towards the ESCB Opening speech by Mr Ardian Fullani, Governor and Chairman of the Bank of Albania, at the workshop Experiences of the Bulgarian National Bank in its road towards the ESCB, organised in cooperation with the Bulgarian National Bank and the GTZ Office, Tirana, 5 September 2005. * * * Dear participants, First of all, I would like to say good morning to all of you. Today’s meeting with our Bulgarian friends takes place in the context of several activities that we have recently organised with a clear focus on the future challenges related to the integration process. I am pleased that the fall season of this year starts with this activity and first of all, I avail myself of this opportunity to extend my gratitude to the representatives of the Bulgarian National Bank, the GTZ and to my friend, Professor Bolle. Since the very first days of my appointment to this position, I have publicly declared that Bank of Albania’s institutional preparation in its road towards the ESCB remains our main challenge. Meanwhile, in all the meetings that I have had with the representatives of the regional central banks, as well as with high officials from Brussels and the ECB, I have underlined the idea that the future of the EU will be both more prosperous and unproblematic if the countries on its periphery look not only towards Brussels, but also if they start looking to each other. We – the central banks of the region – should represent an example in this direction. As pioneer institutions of progress, the central banks of the region should cooperate with each other in order to expand the road for a further political, social and economic integration. I believe that the chances for a rapid and secure process of European integration could be accelerated if we will have – among others – a healthy and safe financial and banking system, which should be able to advance the economic development of the country. Nevertheless, in order to materialise the objective for the approximation of their model with that of the EU member states, we hold the opinion that the central banks of the transition countries have more difficult “homeworks” than the classical responsibilities carried out by a central bank. Speaking in more concrete terms, this has to do mainly with the challenges related to the development of markets, with the unification of different norms and standards and with enhancing credibility in the country, thus aiming at the creation of an atmosphere that inspires confidence to foreign investors. Even though they have passed into the consolidation stage, our banking systems still remain fragile, and as such, they require greater commitment and care. Regardless statistical developments, the scale of financial intermediation is relatively low, whereas time after time the shadow of shocks on the economic equilibra shows up itself in different countries. Future changes will not be simple at all, but all of us together, by exchanging experiences and necessities for change, will build a safer environment, which I hope will make future challenges somewhat easier. Granting independence to central banks represents one of the most relevant steps in the financial system reform in the countries of our region, as an important precondition for maintaining inflation under control and becoming an ESCB member. However, our endeavours for the consolidation of the institutional and real independence should be coordinated carefully by taking into consideration the specific features of our economies in transition, and not as a mere implementation of what may seem to be a successful model for the ESCB countries. In this framework, I consider today’s meeting as very important, since the Bulgarian economy and the Bulgarian National Bank have been going through substantial reforms in the context of EU accession. I believe that the challenges that we have faced and those that we will face in the future are more or less the same with those experienced by the Bulgarian authorities, including the Bulgarian National Bank. As a consequence, I think that the bilateral cooperation between our banks carries a high potential, and in the name of my institution, I avail myself of this opportunity to offer maximal guarantees with regard to the fruitful development of these relations. 1/2 Passing into a multilateral framework, I will return once more to the idea that focuses on the institutionalisation of the inter-regional cooperation between central banks. If we look to the meetings organised with some of the regional banking authorities, the initiative on regional cooperation has been welcomed, but I also believe that time has come to carry out concrete measures towards this cooperation. Judging from my personal experience, not as governor but as a banker, I hold the opinion that it would be appropriate to establish a club of regional central banks. The regular meetings of this club would certainly enable the exchange of experiences and the further strengthening of our cooperation. 2/2
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the high level conference organised by the EBRD and sponsored by Switzerland, London, 28 September 2005.
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Ardian Fullani: Key policy issues for remittances in transition economies - a view point from a recipient country Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the high level conference organised by the EBRD and sponsored by Switzerland, London, 28 September 2005. * * * Remittances these days can easily classify as one of the most important sources of finance assisting the convergence of developing nations, to the point of overshadowing conventional funding like bank credit. The flow of remittances worldwide goes beyond 100 billion USD per year, with developing countries being recipients of more than 60 percent of this considerable amount. Remittances’ estimations in these countries often exceed trade inflows, or foreign financing and investment. Therefore, they have become an important device for channelling funds and resources from developed countries toward countries in need. Moreover, remittances, like foreign direct investments (FDI), are regarded as very stable and safe capital flow, helping developing countries to achieve sustainable high growth rates. In recent years, we have seen a growing awareness about emigrants’ remittances as an important financial source for development. This issue was included in the G8 meeting agenda of 2004 and in the spring meeting of IMF and World Bank earlier this year, emphasizing the growing significance of migration, and with it, of migrants’ remittances, calling for intensification of efforts to improve and identify their causes, as well as to establish an environment that could enhance the impact of remittances on development process. Let me briefly give you our (Albanian) experience with remittances and some suggestions to improve their ingress and effectiveness in the economy. During 90s, Albania experienced a massive migration movement abroad, which soon became a crucial financial source for the new market economy. According to some studies (Barjaba, 2004; INSTAT, 2002; Kule et al, 2002, 2002), since 1990, nearly 800,000 Albanians may have left the country either permanently or temporarily. Some more recent estimations show that the number of Albanians living abroad may have reached 1 million. This is a considerable figure for a small country like Albania with just 3 million of inhabitants. As a result, exodus phenomenon has attracted a great deal of attention in political and economic circles. Remittances role in the economy has grown considerably over time. We can appreciate their weight easier if we put them against some main economic indicators. However, before doing that I want to say a few words on data reliability of remittances. It is very difficult to carry out an accurate estimation of remittances in Albania bearing in mind that a large share does not go through formal (official) transferring channels, therefore escaping the official registration of capital flows. The Bank of Albania traces only that part of remittances that goes through the official network, which includes banks and money transfer agencies. Remittances sent unofficially such as, cash brought by emigrants or their friends during their visits to Albania, need to be estimated. Transition experience so far has shown that high trade deficits were not just financed through official capital flows, which undoubtedly have played a key role, but also through remittances that have increased financing opportunities within current account. During the period 1994 – 2004, out of 6.3 billion USD current transfers that entered the country, 5.8 billion is estimated to be contribution of Albanian emigrants. economic developments. Although during the first stage of transition, inflationary and depreciation expectations were high, monetary policy reaction by the Bank of Albania of 1/5 keeping high (Lek) interest rates, ensured a normal inflow of remittances in Albania. Between 1994 and 1996 the attraction of foreign exchange inflow was further boosted by extraordinarily interest rates offered by pyramid schemes, reaching a historical peak level in 1996. A considerable drop in the volume of remittances was recorded during 1997 and 1999, a period characterized by a political and social unrest.1 With the return of serenity remittances inflow picked up again. The Bank of Albania estimations indicate that total workers’ remittances has reached around 1,028 million (one billion) of USD or 13.5 percent of GDP. This is main country export. Furthermore, remittances are estimated to be three times higher than foreign direct investments (FDI) inflow and its value exceeds by far official aid from abroad. I want to concentrate a bit more on the mechanism of transfers and on the ways remittances are used. In the case of Albania, as in many other developing countries, remittances enter the country by either formal or informal means. The most recent surveys show that only 22.6 percent of emigrants prefer to use official means, whereas 77.4 percent turn to unofficial channels – in most cases by themselves. The official network includes the commercial banks and money transfer companies, the activity of which is regulated and supervised by BoA. Money transfer companies (Western Union and Money Gram) have played a significant role in transferring remittances from the beginning of their activity in the 90s. Their wide geographical extension throughout the country covering also many rural areas has complemented adequately the rather slow expansion of the banking sector in facilitating money transfers. Lately, the official network has gained considerable grounds over the informal ways in terms of total transfers carried out. The volume of remittances channelled via official means in 2004 is estimated to have been around 46 percent of the total, as opposed to just 12 percent - the average for the period 1994-1996. It seems the official network has earned Albanian emigrants’ trust for transferring their money. The development of the financial system in Albania it’s a key factor in explaining the movement of transfers toward official means. Thus, only during 2004, there have been 30 new branches and banking agencies opened throughout the country. Nevertheless, the unofficial flows remain still high, accounting for more than half of the total volume. Banks and licensed agencies, despite being safer, are more expensive than the alternative unofficial means to the point of inducing many emigrants to stick to the latter means. In a comparative study of Manuel Orozco, 2003 looking at transfer costs across different countries, show that banks appear to charge less than money transfer companies. These latter tend to be costlier because of higher transfer charges and disadvantageous exchange rates they face. Moreover, some research shows that transaction costs of transferring remittances via money transfer companies in the South-Eastern Europe are higher than the region risk. Banks becoming aware of this comparative advantage, have introduced lower transfer charges while offering at the same time new financial products and services to encourage and attract savings of this segment of clients. However, I retain that although banks have the opportunity to be cheaper than money transfer companies, remain quite bureaucratic and less flexible compared to money transfer agencies, not to mention their inadequate geographical Year 1997 represents a year of chaos for the Albanian economy and society, as a result of the collapse of pyramid schemes and 1999 the year of Kosovar crisis. 2/5 coverage of rural areas where more than 60 percent of population lives. Therefore, despite recent promising developments, banks have not gained much market share of remittances in Albania. The results obtained by a survey2 on remittances carried out recently also show that, the banking system still remains less preferable by Albanian emigrants who send money to their family members or relatives - only 15.2 percent of emigrants show interest for using banking system. Some of the reasons influencing migrants’ decision for (not) choosing banks to transfer their money were: - Geographical proximity of Albania and Greece (Albanians residing in Greece and Italy travel to Albania frequently, on average 2 to 3 times a year, transferring money themselves). - Insufficiency of emigrants’ families to the banking system. Empirical measures have shown that while a considerable number of emigrants have become familiar with banking in the resident country (74.4 percent of them hold their savings in the banks of their country of residence), the corresponding families in Albania appear to be less familiar with the banking system in Albania. Only 45.3% of Albanian families hold a banking account. At this point, some policy implications are evident: improving population awareness of banking services, encouraging expansion of banking throughout the country and facilitating possibilities of money transfers. BoA, is in process of designing a public communication strategy that aims at brining the public closer to banking products and services, including transfers. The flow of remittances may also raise if the fiscal burden of financial transfers is reduced. Enhancing competition by increasing the number of participants in the market would also push transfer commissions down. Here, the government has to incite the establishment of other companies as well as apply the reduced taxes. Another way of amplifying competition in the sector is by pressing on price transparency. Remittances, as mentioned earlier, are also affected by economic and financial situation in beneficiary country. International experience brings many examples to illustrate this point. After a constant growth of remittances in Philippines, as a result of improvements in the investments environment in the early 90s, they became very shaky as the financial crisis affected the Asian countries at the end of the 90s. Likewise, Turkey after experiencing a stable growth of remittances during the 90s, saw a drastic fall as the financial crisis broke out in 1999-2000. However, an interesting observation in these cases is that, the fall of remittances and their volatility were lower than those of private capital flows. Remittances seem to react less to economic ups and downs compared to other capital flows displaying considerable stability over time (Ratha, 2003). In this context, countries with high remittance percentage relative to other capital flows could be more immune to capital drain during crises. Remittances are not simply expression of emigrants’ fondness to assist their families in adverse situations. They also represent an important financial source that augments capital inflows and investments in economy. Remittances may have a positive impact not only on the volume but also on the quality of investments. Migrants and/or their relatives being more familiar with the local economic and social environment could make a better use of the capital brought into the country than foreign investors. Nowadays this is not just a theoretical inference. A growing number of emigrants that fled during 90s, are returning and funds but also a lot of know-how. A survey carried out with the assistance of the International Organization of Migration (IOM) in Albania and CARDS project. The questionnaire period comprises April-June 2005. 3/5 However, there is always another side of the coin. Remittances inflow might have negative effects as well. If the recipient country remains dependant on money transfers, it will encourage further migration of labour by reducing the effectiveness of investments of domestic and foreign investors because of the unstable workforce. What's more important, if remittances go mainly for financing imports, their impact in the development of the domestic economy drops significantly. I fear Albania is one of these cases. Remittances are being mainly used to secure daily family needs and to improve life style, as well as to construct or reconstruct houses, and to finance traditional family ceremonies. Only a small portion goes into banks as saving deposits. In fewer cases, remittances have been invested in real estates, manufacturing or services and agricultural sectors. This distribution of remittances alleviates poverty but does not lead to new job creation via investments, which would prevent new emigration by generating local opportunities. Being utilised little as resources for the economic and social development of the country, remittances may have led to individual, family or local dependency. During the first stage of transition in Albania policies for optimising the administration and utilisation of workers’ remittances for developing purposes have been completely lacking. A few sporadic measures have aimed at driving workers’ remittances into official channels and improving savings and investments incentives of emigrants in the country but have been by and large inadequate. More recently, the Albanian government has taken a more attentive approach toward remittances and their potential contributions in financing the growth and development of the country. With the assistance of the European Union by means of CARDS program, and the support of the International Organization of Migration (IOM), this year the Albanian government has compiled two important documents regarding migration and remittances issues, called: National Strategy of Migration and Action Plan. The main objectives are: (i) the review of remittances flows and (ii) the identification of political constraints and institutional and regulative framework that influence these inflows, in order to: • increase the volume of remittances; • help shifting them into formal channels; and • enhance their use in support of country’s economic growth. Bank of Albania role in achieving these objectives consists primarily in maintaining the macroeconomic and financial stability, which constitute important preconditions for the success of any policy related to workers’ remittances. Migrants will be more willing to send and invest remittances if inflation is kept under control and exchange rate and financial conditions are reasonably stable. Furthermore, the Bank of Albania in cooperation with other governmental and nongovernmental institutions has been considering some more concrete measures in order to enhance the role of remittances in economy. I would like to mention a few of them: First: improvement of statistics on remittances. Reliable data regarding remittances is a key ingredient in designing and assessing policies about enhancing their developing role. The Bank of Albania has continuously stressed the importance of accurate estimation of capital inflows in the form of migrants’ remittances. Assisted by IMF missions, it has been working to bring the methodology closer to the international standards in defining remittances. Also, there is a close cooperation with our main partner countries Greece and Italy, as the main destinations of the Albanian emigrants, to harmonise our methodologies in order to improve the accuracy of remittances’ estimation. Second: Bringing workers’ remittances into formal channels. The high portion of remittances that goes through unofficial channels asks for actions to make official channels 4/5 more appealing in terms of efficiency, safety, cost and anonymity. Although, I mentioned earlier that emigrants seems to have more access to banking that their families back home, their relation with the banks is still difficult due to language problems (most often the forms are in the native language of the resident country) and in many cases excessive document requirements to open a bank account. Regulatory authorities in respective countries could be of help in this respect. Also, Albanian banks may receive Albanian workers’ remittances via “banking correspondent institutions” in the resident country and microcredit and microfinance Albanian organizations which could serve as local agencies to handle this process. Third: Directing workers’ remittances toward country’s development needs. Usually, emigrants are out of the main focus of banking services, since this category of clients is considered to have unstable jobs. Nonetheless, there exists opportunities to offer financial services to emigrants too. Among others I could mention here: linking of workers’ remittances with investments for example by channelling remittances flows toward micro-credit loans or projects; also supporting of migrants’ contribution and migrants societies in the development of the country. Remittances could also help approaching rural areas population to the banks. If the recipient families also decide to keep remittances in their bank accounts this could assist economic development as more funds are available to be lent to private sector. Microcredit programs and qualitative improvements of banking infrastructure, in concert with introduction of new financial instruments that would attract more remittances, are also important. Finally, I would like to express my sincere appreciation to those involved in this conference which provides us a valuable support in our efforts to improve effectiveness of remittances utilization in our economies. I am confident that the distinguished speakers from various institutions, who are present at this conference, would share further helpful ideas and suggestions (we already heard some very interesting ones in the previous discussions), thus ensuring the formulation of sound measures to be incorporated in our policies on remittances. And I strongly hope this exchange of experiences and expertise will continue in the future and contribute producing adequate human, infrastructure, and institutional capacities to transform remittances from potential into real driving forces for the development of our countries. Again, my highest consideration for this activity and Thank you for your attention! 5/5
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the ceremony dedicated to the launch of the autumn 2005 issue of the legal journal, Law in transition, online, published by, EBRD, Rogner Hotel, Tirana, 18 October 2005.
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Ardian Fullani: Recent banking developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the ceremony dedicated to the launch of the autumn 2005 issue of the legal journal, Law in transition, online, published by, EBRD, Rogner Hotel, Tirana, 18 October 2005. * * * Dear participants, It is a great pleasure for me to participate in this ceremony dedicated to the launch of the “Autumn 2005” issue of the legal journal “Law in transition, on-line”. I believe this publication of the European Bank for Reconstruction and Development shall gather the best experts in the area of law and finance in the country, who shall find in it an alternative source of consultation and expertise, for crucial projects interweaving their professions. Banks do represent the main institutions of our financial system. The total volume of their activity constitutes around 50 percent of the Gross Domestic Product (GDP) in the country. Currently, 16 banks are operating, the capital of which is owned by private and institutional, domestic and foreign shareholders. Market competition has overwhelmingly strengthened and the service quality provided to the public has significantly improved. The banking network has extended to the most part of the territory and developments in this respect are still robust. The role of the banking system as a developer to the economy is mainly displayed in the increase of crediting to the economy. Its increasing pace, especially in the last 15 months is remarkable. At the end of June 2005, loans constituted around 21 percent of the total assets in the banking system, compared to 14.5 percent at the end of 2004 and 12.5 percent at the end of 2003. Moreover, the deposits volume in the banking system has increased, representing the main source of growth in the banking system activity. Banks also serve as significant employment institutions. Only during 2004 their personnel increased by 26 percent and this figure is expected to be even higher at the end of 2005. The banking system continues to represent a profitable investment sector. These developments further indicate the vital importance of the banking sector to one’s country economy. It is essential that the banking sector activity be supervised cautiously in order to ensure sound and safe banking practices, transparent and clear set of rules, fair competition and stable and sound institutions. It is our duty, as a supervisory authority in the country, and other governmental institutions, as well, which control part of the banking system activity, to care and provide favourable development conditions. The Bank of Albania is the supervisory authority of the banking system and of some other institutions performing financial activities. The role of the Bank of Albania as a supervisory authority is provided for by the Law No. 8269, dated December 23, 1997. The licensing, organization and functioning approaches of banks, their obligations to the shareholders, the public and the supervisory authority, are broadly stipulated in the Law No. 8365, dated July 07, 1998 “On the Banks in the Republic of Albania”. These two laws were approved during ’97-’98, shortly after the country’s emergence from a crisis with tremendous consequences to the its social and economical life. Accordingly, the established laws aimed at setting up a robust supervisory authority of the banking system, and ensuring the protection of the banking activity from other illegal forms of financial intermediation. Further, other laws of particular significance to the banking system were approved, where I could mention the Law “On Deposit Insurance” (2002), Law “On the Prevention of Money Laundering” (2003) and the Law “On Accounting”. The Law “On the Bank of Albania” and “On Banks in the Republic of Albania” have been followed by a number of regulations and instructions established pursuant to their implementation by the Bank of Albania. These sub-legal acts have aimed at resolving the law principles, mainly in the operational and banking supervision area. In this way, several regulations bearing the same purpose have been established, such as, the Regulation “On the licensing of entities performing banking activities”, “On capital adequacy”, “On regulatory capital”, “On required reserve”, “On bank related persons”, “On credit risk administration”, “On the prevention of money laundering”, “On the approval of bank administrators” etc. We believe that the regulative framework on the whole, has so far satisfactorily provided the progress of banking activity and it serves as a solid foundation to upcoming developments. Let me focus deeper on this issue: 1/3 A regulative framework is considered to be good, provided that it does not contain a static concept of the issues it regulates; that is, a regulative framework established not only as an outcome of the instant needs, but bearing the ability to provide the law entities with the necessary principles for a sustainable and controlled activity development even in the foreseeable future. At the same time, the regulative framework needs to be unambiguous and applicable. This could be attained if its requirements also take into considerations the concerns that its subjects might have, through a wide and formal communication and discussion process. The regulative framework, at any area of the economic activity and beyond, must also consider our country’s objectives relating to the integration into the European family, since in this way the integration process shall be easier, more natural and quicker. With respect to the banking area, the regulative framework must aim at determining and implementing similar requirements as stipulated in the European Directives or in the publications or various organisms operating under the framework of European institutions, relating to principles and standards in this matter. The main laws, which have determined the development of the banking activity, for the time when they were established, have performed their function at their best, but we believe it is the proper time when their revision has become necessary. I could mention here the Law “On Banks in the Republic of Albania”, the revision of which is under process by the Bank of Albania. Currently, the project is in its final phase of clarity and soon discussion with the banking industry and other significant institutions is about to begin. The prepared project uses the requirements basis of the existing law, but at the same time it provides a few changes which aim at addressing some issues emerging from banking and supervisory practice to date, as well as the best approach to the international standards in the banking area. More concretely, the requirements regarding banks’ activity with respect to their capital have been made more precise; banks’ activities with the related persons have been reviewed; the managing structures of banks and their obligations have been determined in a clearer way; the requirements concerning the transparency of the banking activity have been re-enforced; requirements regarding the consolidated supervision have been provided; corrective measures and penalties have been clarified; the requirements and definitions concerning the taking of the bank under administration or leading it to liquidation have also become clear; the relationship with the Deposit Insurance Agency has been provided; a specific chapter dedicated to the consumer protection in the banking activity has also been provided, etc. At the same time, some of the essential regulations, mainly those related to the regulative capital and capital adequacy are being assessed in order to introduce in them some elements of new standards defined in the new Accord of the Basel Committee, also known as Basel II. In particular, banks’ activities with its related persons have been reassessed in the context of defining the relationships leading to conflict of interest between the bank administrators, employees and shareholders and the function, the duty and the role they have with regard to the bank. One of the main directions of the banking activity is crediting. Its regulation and supervision approach bears a special significance considering that this activity is being rapidly expanded, both in form and volume. Specific aspects of this activity have been treated separately, one by one, under the framework of a special Regulation of the Bank of Albania. A remaining crucial issue is the execution of the collateral (in particular, the one related to mortgage), in the conditions when the borrower presents problems relating to the credit settlement. With regard to this issue, we think that the proposals deriving from the banking industry concerning suggestions on some amendments in the Civil Procedure Code, aiming at making the complaining procedures and time procedures of the asset auction shorter, the asset dealing during the sequestration, etc, need to be taken into consideration. It is also necessary to begin the work on drafting the Law “On the Auction Procedures”, provided for by the Article 573, paragraph 4 of the Civil Procedure Code, as well as make the respective amendments in the Law “On the Registration of Real Estate” and the respective regulative framework. These measures shall have positive effects over the progress of the crediting activity serving as a better support to the economic growth in the country. We aim at having an executing title, which is really executable. Another law calling for a greater attention from the authorities to assess its applicability is the Law “On the Prevention of Money Laundering”. Undoubtedly, the reputation of the banking system, the obstacle of the economic development through the deviation of sources from the legal activities, the obstruction of necessary investments and the fiscal policy sabotage, the criminal activity which violates the human life and freedom, are some of the consequences that the money laundering and the financing of terrorism brings, which very often could be carried out on the grounds of a banking system. But, I have to emphasize that under the conditions of our country where the informal economy is quite considerable and where information technology infrastructure in the data processing and analysis 2/3 collected on the purpose of money laundering prevention is insufficient, a new approach needs to be adopted; an approach which would focus the authorities’ efforts on combating the phenomenon according to the risk profile of different sectors and certain social groups that are considered as more vulnerable to the phenomenon. For this reason, we think that more attention must be paid to other sectors in the economy, where there is a need for a greater and more coordinated imposition of the law requirements. Moreover, according to the Bank of Albania, and other foreign experts as well who have been working with us, and other specialists from the state institutions being engaged in the field of money laundry prevention, the actual law needs to be revised because it causes premises for significant formalism, especially in the activities related to the reporting of transactions and the identification of doubtful transactions. Being a member of the working group led by the International Monetary Fund experts, the Bank of Albania has contributed to the drafting of a new project of this law. At the same time, the Bank of Albania is working on the adaptation of a regulative framework related to the financial activity performed by non-bank financial institutions. There is room for further improvement in the expansion and extension of the regulative requirements and the improvement in the existing framework concerning the supervisory practice and their activity report. In this context, the reporting system of these institutions activity has been approved, along with it a regulation on the activity of savings and credit associations and their unions has also been approved. Regarding these latter, the Bank of Albania is working on the establishment of the accounting manual and the inspection manual. In February-March during this year, our financial system was subject to an assessment process organized by the World Bank and the International Monetary Fund. In the final report, sent to the Albanian Government and the supervisory authorities in the country, several issues were identified which involve the need of changes in the regulative framework. Many of these elements related to the Bank of Albania activity and the entities licensed and supervised by it, are part of the changes in the aforementioned regulative projects. In conclusion, I would like to stress once again the commitment of the Bank of Albania in granting its greatest contribution to the improvement of the regulative framework, related to both banking and financial system. I believe that in pursuing our objective in approaching our legal and regulative framework in the financial area to the best standards, this journal issue that we are promoting today shall serve at its best. I wish it success! Thank you! 3/3
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Greeting speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the meeting Business - Bank Communication Day, Tirana, 20 October 2005.
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Ardian Fullani: Bank-business relationship in Albania Greeting speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the meeting “Business Bank Communication Day”, Tirana, 20 October 2005. * * * Ladies and Gentlemen, Recently, the promising paces in the increase of crediting to the economy from the banking sector make us realize that the numerous meetings organized with the scope of approaching banks to businesses are finally producing their results. Nonetheless, it is yet, too soon to describe it as a victory. Without diminishing the significance of these meetings, I think that the expansion of business crediting is not an effortless issue to be solved, especially when considered that our economy is still in transition. Frequently, the solution to the arousing issues goes beyond the good will of both, the business and banking community. Thus, avoiding the rhetoric of the previous meetings which habitually sets one’s party claims against the other, I would like to emphasize the need of a better coordination of efforts by the two communities to the solution of various issues. A few days ago, on the privatisation anniversary of one of the participant banks present in this meeting, I stressed the necessity of intensifying the institutional relationship between the banking system and the different business associations. Therefore, this meeting is an outstanding example of putting this initiative into practice and I trust it will serve as a good start of the regular contacts between the banking association and the business one. The bank-business relationship institutionalisation might assist in resolving a number of issues, which may be challenging to be addressed individually by banks or businesses, be they large ones. The best example is the effort of reducing the informal economy. All present parties in this meeting have expressed their pros to the fight against evasion and informality. In reality, however, the dishonest competition forces many of them to choose the informal means, since, contrary, they will find themselves out of the market. The breaking of this vicious circle could be made possible by a better coordination of our efforts, in order to avoid the so-called free-rider phenomenon, where the dishonest business is given too much room to take advantage of the situation. Hence, I welcome today’s meeting, hoping that it shall not simply remain within the communication context, but rise in a higher level of coordination. 1/1
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Greeting address by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional seminar on Inflation targeting in practice, Tirana, 10 October 2005.
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Ardian Fullani: Inflation targeting in practice Greeting address by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional seminar on Inflation targeting in practice, Tirana, 10 October 2005. * * * Dear participants, It is a great honour for me to address the opening speech of the regional seminar “Inflation targeting in practice” organized by the Centre of Central Banking Studies in association with the Bank of Albania. I am delighted to see that the audience has an international composition. At the same time, I would like to take the opportunity to give my cordial thanks to Mrs. Gill Hammond, CCBS Deputy Director and all speakers accompanying her during the proceedings of this seminar. I would also like to thank the Bank of England and in particular the Director of the Centre of Central Banking Studies, Mr Mario Blejer, an old friend of mine, who continues to give his contribution to the improvement of the Albanian image in the world, just like many years ago. This seminar is being organized in a very opportune time for the Bank of Albania. In less than two months, I shall be once more in front of a very distinguished international audience, to address the opening speech of the Open Forum on “Pre-conditions for launching inflation targeting in Albania". The object of this forum is to discuss the prime pre-conditions to be met by the Bank of Albania before launching the implementation of a new monetary policy strategy, with a particular emphasis on Albania’s membership to the European Union in the long-term run. The fact that we have been successful in controlling inflation during the last years holds true. We have managed to attain a general stability and I believe the policy adopted by us has been one of the key factors. Another fact which holds true is that, for some time, we have been considering to take another step, attempting a more sophisticated, effective and certainly a more responsible and transparent monetary policy approach. To this aim, we have come to the conclusion that the actual framework of the monetary policy requires the necessity of being further completed and perfected with standard elements, adopted by other countries in the world and where the targeting inflation regime has proven to be successful. We are aware that this is not an effortless initiative to be seized. Therefore, I consider that this is a great fortune for the Bank of Albania to have the possibility, on the verge of discussing the preconditions of adopting this regime, to closely discuss and consult the distinguished guests present in this seminar. I trust straight opinions and recommendations shall be brought forth, be they challenging to be accomplished. According to theory, inflation targeting is a direct regime. The Central Bank forecasts the forthcoming inflation performance; this forecast is then compared to the targeted inflation rate; and the difference between the forecast and target determines the proper adjustment of the monetary political instrument. But, unfortunately or perhaps, fortunately, this relatively new monetary regime is not the rescue solution of a central banker’s affliction. I am confident that the honourable participants who are speaking during the three days of the seminar, shall enlighten in more details, based on the experiences of the central banks they represent, the complex issues and challenges they had to encounter, while adopting this regime. The agenda of this three-day seminar seems promising, and the interweaving of theory and practice is outstanding. It begins with the theoretical considerations on inflations targeting, proceeds with the three main pillars of monetary policy communication: independence, transparency and accountability. Not by accident, the new approach required by the inflation targeting regime has been defined as the “forecast path”. The distinguished economists from the Centre of Central Banking Studies shall introduce us to the econometric techniques, which come to help during the inflation forecast process. To conclude, the Czech National Bank, shall bring the experience of an economy in transition adopting this regime. And last but not least, on behalf of the Bank of Albania, I would like to thank the Centre of Central Banking Studies (Bank of England) for the opportunity granted to the institution I govern, to cooperate 1/2 and to consent the holding of this regional seminar in our country. This activity is the first in its kind, and I express my highest considerations for the trust that the Bank of England has put to the Bank of Albania. The Centre of Central Banking Studies is internationally recognised as a centre of intellectual excellence in the area of central banking studies. Considering the goal that this centre has set to itself, as an opportunity provider to central banking employees to be endowed with ampler perspectives in the respective areas of expertise, I call for your attention to listen to what the distinguished experts shall say. Their professional achievements and the central banks they represent guarantee this. Thank you and good proceedings! 2/2
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Greeting address by Mr Ardian Fullani, Governor of the Bank of Albania, at the 5th anniversary ceremony of the privatisation of the National Commercial Bank, Tirana, 18 October 2005.
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Mr Ardian Fullani: Towards a solid, sound and efficient banking system in Albania Greeting address by Mr Ardian Fullani, Governor of the Bank of Albania, at the 5th anniversary ceremony of the privatisation of the National Commercial Bank, Tirana, 18 October 2005. * * * Ladies and Gentlemen, Today I am honoured to see in this jubilee meeting how the National Commercial Bank has grown and consolidated and together with it the whole banking system in Albania. I am delighted to consider that after a long restructuring period the banking system is now taking its proper role in the economy, that of the provision of free funds to the growing needs of the Albanian business and consumer, improving at the same time the number and quality of services. For this reason, I am honoured to have the opportunity of taking the floor in this meeting, to address and discuss jointly with you some present and future issues, which, I estimate, are important for the further enhancement of the banking system contribution to the country’s economic development. Allow me to start discussing first about the work we are doing as Bank of Albania to create a favourable climate for the business and economy development. Monetary policy followed during the recent years in succession has targeted to further reduce money price in order to give aspiration to the economy, while we have been successful in keeping inflation under control. As a consequence, I deem that we have created essential incentives towards establishing a sustained business climate where business decisions and plans are not exposed to risks arising from the uncertainty of inflationary erosion. Since almost a decade, Bank of Albania has been engaged in using all the capabilities to set up a modern payment infrastructure, in order to bring the banking system closer to the clients, making it open in relations with them. Thus, after implementing the Real Time Gross Settlements (RTGS) and Automated Electronic Clearing House (AECH) systems, we have already mobilised all our efforts to create the credit register. Currently, after the implementation of AECH system, we have provided one more opportunity not only to the banking system but also to periodic service businesses, so as to enhance its economic efficiency. On this occasion, we appeal to both parties, banks and businesses, to cooperate with each other for making more effectively use of the priorities provided by this new system. Bank of Albania deems that a banking system supports the economic growth when it is first of all a financially sound system. The emerging economies, like our economy, are generally characterized by a fragile stability. For this reason, Bank of Albania has attempted to take all-encompassing measures aiming at strengthening its supervisory capacities, in order to ensure a solid, sound and efficient banking system. The banking system performance: During 2005 impressive developments have been highlighted. The up-to-now data indicate that credit to the economy has increased by about 3-4 percentage points of GDP, giving clear signals for a promissory excitement of the economy financing in the future. Till August 2005, compared to last year’s end, the system assets increased further by 14.5 per cent, while there was augmentation of banking products as well as extension of their network. Compared to yearend of 2004, the banking system has attained an increasing profit level, at ALL 4.65 per cent. Return on equity (ROE) has resulted 24.8 per cent, while credit quality expressed as a ratio between (net) bad credit and total credit portfolio is only 2.39 per cent, from 4.2 per cent it was at the end of 2004. However, there is no room to be excited by figure euphoria, because credits are still new and their quality will have to carefully be examined. Another significant development of the banking system relates to the client’s service, which through the electronic terminals is being obviously accompanied by the increased number of electronic cards in circulation. Banks already provide debit and credit cards in cooperation with international companies such as Visa Card, MasterCard and Diners Club. Six banks provide the ATM service and ATMs 1/4 reached the number of 180 by the end of August 2005, while points of sale reached the number of 391. Of course, an important aspect remains also the further expansion and consolidation of the banking system. The geographical extension of territory coverage by the banking business, the strengthening of competitiveness, the introduction of new products without mentioning other recent developments, constitute an additional argument in the vital role the banking system has and will have to play in the future. The country’s map covering the banking business expanded further, including new regions ever covered before. At the end of August, the total number of branches reached 109 or 21 branches more than the end of the previous year. I seize the opportunity of this event to express that positive assessments about the banking system have been given also in the report prepared by both the World Bank and International Monetary Fund, after conclusion of the assessment they formulated on the financial system in Albania (FSAP). Of course, this is good news. The conclusions of FSAP, of this important international passport, are an indication of our earlier conclusions that the Albanian financial system is characterized by a supervised and effective banking system and by the other segments that are still in the initial development stages where the core issue remains their regulation and supervision. Despite the positive developments there is still much to do. The degree of financial intermediation continues to be relatively low (about 11 per cent of GDP). Some economy sectors, like agriculture, still continue to be less or not at all credited. The contribution of bank crediting to the production investments is still low and furthermore, considering the high share the credit takes in supporting trade activity, we can come out with the conclusion that the major part of credit is going for the financing of imports. Likewise, the degree of using the banking system is not within the required parameters of the time and, furthermore, the degree of cash use continues to be high. In addition, the financial markets continue to remain superficial and subject of speculations. The restricted alternatives of investing free funds are indeed a reason to this situation. The financing of budget deficit continues to be still as the best alternative. However, the banking system should think seriously of enriching the market with other instruments rather than of using at maximum this riskless investment. To be more concrete, I will highlight further on some directions, which, I think, in the medium-term perspective are of priority to further stimulate and activate the bank credit in the economy, as the main instrument through which the banking system promotes the economic development of a market economy. Beginning with the Bank of Albania contribution, it relates first to the duty of meeting the legal obligations to achieve the overall macroeconomic stability with a special emphasis on inflation control. We remain determined in our position that inflation under control is a valuable contribution to achieve the objectives of the country’s economic growth, the enhancement of employment and of the living standard in general. On the other side, Bank of Albania will encourage and support without any hesitation the further development and consolidation of the banking system in particular, and of the financial sector in general. We are deeply committed to undertake the necessary steps to implement all the recommendations given by FSAP. For this purpose, we are ready to offer all our human capacities to contribute in this direction. I use this opportunity to appeal on taking immediate actions towards redesigning the licensing and supervisory process of the other parts of the financial sector. Bank of Albania will continue to pursue a prudential policy in performing its function as a licensing authority of financial entities that are involved in the crediting activities. In the spirit of what I have stated above, I use the opportunity to express our commitment to involve in our supervisory structure all those credit companies or institutions, which one way or another mobilise the population’s funds or manage public funds in the crediting process. Assessing the information issue as a critical element in facilitating the lending activity, I would like to point out that Bank of Albania has already included the project of establishing the credit register in its immediate plans and we are strongly committed to implement it as soon as possible. This register shall be under administration of Bank of Albania and the participation of other member banks of the system will be compulsory. Only in this way, the information evasion can be minimized as well as its integrity can be ensured, and it would be simultaneously available for each of member banks of the system. 2/4 Being aware that credit issue is complex and connected with many obstacles arising from inaccuracy and misadministration of the mortgage system, from deficiencies in the civil procedure for mortgage execution, which make the operation of Executor Office difficult in administering correctly these procedures, we will undertake initiatives aiming at enhancing the effectiveness of mortgage system, as a guaranteeing and selective instrument of great importance. The banking system has a primary role in creating a warm climate in the relationships between business and bank. Above all, I would like to request that the banking system be more transparent and open to the public. Transparency is one of the most important factors, which strengthens the relations between client and bank and, furthermore, it gives a wider meaning to the reciprocity concept in the bilateral relations bank-depositor and bank-business. I think that most of the common people still manifest a certain hesitation to refer to banks. One cause might be also the lack of detailed information. Banks should be more active, not only for advertising new products and services, but also for explaining more correctly the prices/costs they hold and the necessary requirements that are to be met for their benefit. There are not a few cases when clients are not well informed on the interest rate they have to pay for their loans or on the criteria applied by the banks to benefit credit. Communication from depositors is neither the best. While small changes of deposit interests may be justified by the changes of market conditions, changes somewhat stronger need to be accompanied by full relevant information and explanations. The strengthening of this transparency should be accomplished not only in the name of ethics but also in the name of the increase of market competition. The system can play a greater role in reducing cash in the economy, by increasing and improving further the level of services. The positive recent developments have given their effects in reducing cash quantity in the economy. On the other hand, we have conducted an intense public activity, of informative and promotional character, where meetings of another nature have frequently been held and in which we were concretely involved as a banking system. Allow me just to remind you the open meetings we have already organised with the business of utility services and with that of Treasury bills primary market. I hope that now, after finalising the Automated Electronic Clearing House project, each bank should think seriously of increasing the benefit degree from this new facility offered by the Bank of Albania. After the implementation of this project, I estimate that we should think more seriously of increasing the number and the quality of electronic payments. For this purpose, I would appeal to start thinking from this moment on of future projects in the payment infrastructure. I personally will insist that even in this direction we should focus as a banking system on the European Union directives, so that to orient every step in the future towards the country’s integration in the European Union. Short time ago I was informed about a new initiative of EU, which requires establishing within a certain period of time, a unified payment system within the euro area, including payments with cards. For this purpose, I would suggest that respective specialists from the Association and Bank of Albania be informed as soon as possible about this project and they should come out with their relevant suggestions. Also, I remain persistent in my position that we have to adopt in Albania the most advanced solutions for all the infrastructure projects we are going to implement. I believe that we don’t need to examine and consider old-fashioned models, which besides the initial cost would require all the time new funds for their maintenance and modification. In addition, now when the public administration became a client of the system, I think that there are real opportunities to solve the payments of utility services through the banking system. Returning to the financial markets, I think that in spite of the above-mentioned restrictions there is room for improving competitiveness among banks even under the current conditions. I would like to draw your attention on the following topics: • The system should be more active and keep its public promises to put its windows at the service of selling Treasury bills directly to the interested public. We as Bank of Albania have kept our promises, applying a commission, which is supposed to cover the transaction cost, while this measure will be accompanied by the inhibition of cash receipts at the Bank of Albania windows. Also, banks should invest in modern technology to enable the reallocation of funds of their customers in various investment alternatives, by electronic means and not as it happens more frequently today that individuals still move carrying cash bags. • Banks should be more active in the T-bills secondary market. We should clearly inform the public that whoever is interested can discount his/her bills at any time like each individual 3/4 who has put little money aside can refer to the banking system not only to deposit but also to purchase Treasury bills. • The interbank market can and must improve. Nowadays, commercial banks exchange a big quantity of liquidity with the central bank. But, even exchange of this liquidity among commercial banks must be intensified. This would ensure more financing and investing opportunities for individuals and companies, including banks. • Banks should give more attention to foreign exchange and Treasury bills markets, to further deepen and expand them. Thus, besides the introduction of new financial instruments, it would be also necessary to activate the utilisation of the existing instruments. These improvements would be for the benefit of the economy in general, that is for the benefit of individuals, companies and banks themselves, but also of the central bank and government. Thus, individuals will have more opportunities to invest their savings, companies would have to make better use of new business activities, banks would have to gain higher benefits and the central bank with government would become more efficient in implementing their policies. Allow me now to concentrate myself a little bit on the honoured businessmen guests, who, in spite of the modest financial support offered in the beginning of transition period, have showed a really impressive performance. In my position as Governor of one of the most important institutions in the decision-making of economic policies, I would like to present you, using the opportunity of this event, some suggestions that I sincerely hope you will welcome and well-understand. First of all, I would require more professional performance in the relations between businesses and banks. Without exaggerating, I would say that we are still far away from the best practices and standards, and as a consequence all the economic, political, financial, social segments still leave to be desired. The relations to be established between you and banks should be reciprocal, open and legal cooperative relations. More concretely, business should understand that bank is an integral part of its activity, if it is willing to be successful for a long-term period. Finally, I would encourage more institutionalised links of the banking system with various business organisations. Maybe it is time that Association of banks establishes regular contacts with business representations, contacts that would certainly upgrade the relations between business and bank to a higher level. Also, I use the opportunity to renew the Bank of Albania commitment to participate in this initiative by offering its expertise in projects, round tables, forums, debates, etc., which will aim at improving the business climate as well as increasing and channelling more efficiently the bank credit. Thank you. 4/4
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Greeting speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Open Forum 'Preconditions for Inflation Targeting in Albania', Tirana, 1-2 December 2005.
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Ardian Fullani: Preconditions for inflation targeting in Albania (opening speech) Greeting speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Open Forum “Preconditions for Inflation Targeting in Albania”, Tirana, 1-2 December 2005. * * * Ladies and Gentlemen, It is with great pleasure that I welcome you to the Open Forum “Preconditions for Inflation Targeting in Albania”. I am extremely pleased and proud that I have the honor to welcome so many distinguished national and international guests. For the Bank of Albania it is the first time to organize an event of this character and with so many distinguished guests. I am very grateful that you accepted my invitation and warmly welcome you. I look forward to hearing your comments on the proposals that Bank of Albania will be presenting today and tomorrow. There will be ample time to hear all your comments and to exchange ideas on Albanian policies. Our main theme in this Forum is concerned with the principal objective of the central bank. According to our central bank law The principle objective of Bank of Albania is to achieve and maintain price stability. The regime we are going to discuss here for achieving this objective is Inflation Targeting. Our present formal monetary policy regime is called a heterodox Monetary Targeting. But within the central bank we use even different names for it. Some call the monetary regime a “two pillar” approach as it has features of Monetary and Inflation Targeting. Often also, the current regime is already referred to as Inflation Targeting. Under the present monetary policy regime Bank of Albania adheres to a monetary program. Monetary policy aims at administering the money supply and interest rates with the view of achieving price stability in the short to medium term. The exchange rate is freely floating. Bank of Albania is considering to move to a fully fledged Inflation Targeting regime. Based on available information today, we consider this regime to be a good choice. We envisage moving smoothly to this new framework within a realistic time frame. I say here deliberately smoothly. Many steps have to be made gradually in time. Furthermore we have to analyze carefully all the new information that will become available to us. The main reasons for adopting Inflation Targeting concern (more) transparency and (more) credibility. The central bank wants to move to a more transparent monetary policy regime with a strong anchoring of expectations over the medium term. According to Bank of Albania, Inflation Targeting is considered to be the appropriate monetary policy regime for Albania in these respects. In our current conduct of monetary policy we follow rules but also take discretion. A regime that provides well-defined and unambiguous objectives would bring us more “constrained discretion”. The discussions today and tomorrow will focus on the conditions that we have to meet before formally launching Inflation Targeting. Here in Albania we are aware that essential requirements have to be fulfilled for obtaining a successful IT regime. Some of these preconditions do not depend on Bank of Albania, such as the fiscal stance. Other preconditions do not only depend on Bank of Albania, such as structural reforms or deepening of the financial system. During these two days I hope to find out on which of the listed preconditions for Albania we share the same views, and where our views differ. Next to this open discussion on the conditions for a successful monetary policy regime, there is another important reason for our gathering here. By means of this Forum the central bank adds to transparency and contributes to the enhancement of the cooperation within the region. I refer here to the region in a broad sense. Bank of Albania finds good relations with neighboring countries extremely important. Coordinated efforts to meet conditions and requirements that are set internationally are paramount for Albania and the Balkan region to attain the deserved place on the European map. They will bring economic and social prosperity to the Albanian people and other people in the region. Albania is a relatively small country and for that reason we have to remain modest. But at the same time I can honestly say that I am proud, extremely proud, that the central bank of Albania can help in opening the way to a further and hopefully rapid convergence of Albania with Europe and other, more developed countries. Better communication lines between Bank of Albania, regional central banks and international organizations will pave the way for a further development of commercial banks and other institutions. Ultimately a solid bridge will be built between Albania and the outside world, entailing a soundly developed financial system, a sustainable economic rate of growth and higher welfare levels for Albania. In order to have productive discussions I wish to emphasize the open character of our meeting here. The Forum is deliberately called an Open Forum. I will appreciate any comments that can contribute to the further institutional building of the central bank of Albania up to the highest international standards. Only a discussion free in spirit – or as we say in Albanian “i hapur” – can bring us closer to each other at the same high levels. Now coming to the end of this speech, I wish you all some fruitful but at the same time pleasant days here in Tirana. I am sure that our representatives of Bank of Albania will present their main views in a transparent way and I look forward to the discussion that will be started by the Panel Members. I now give the floor to the Chairman for starting the Open Forum.
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Farewell speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Open Forum 'Preconditions for Inflation Targeting in Albania', Tirana, 1-2 December 2005.
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Ardian Fullani: Preconditions for inflation targeting in Albania (closing speech) Farewell speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Open Forum “Preconditions for Inflation Targeting in Albania”, Tirana, 1-2 December 2005. * * * Ladies and Gentlemen, I want to conclude this Forum by saying first and foremost that we have had two very productive days! It was a great pleasure for me to listen to your views, constructive suggestions and fruitful ideas concerning monetary policy in Albania. I thank you very much for all your contributions! At the end of this Forum I would like to give my personal views on the road ahead for Bank of Albania. But I will first put some developments in perspective. Since 1990 and until today in 2005, the Albanian economy has been transformed from an isolated centrally planned to an open market economy. Before 1990 there use to be only a state mono-bank. Nowadays, there is a central bank with a network of commercial banks and other financial institutions. In 2000, the central bank began to fully rely on indirect instruments for conducting its monetary policy. As you can see, Bank of Albania has a relatively short history of central banking. In my opinion, the central bank is moving in the right direction. But time has come to decide how to proceed in the near to further future. This has been the main reason for organizing this Open Forum. For our country, an ultimate objective is the accession to the European Union. Accession to the European Union implies a full membership. As a consequence, it implies eventually the adoption of the euro after the accession date. EU accession will ultimately induce entering into ERM II, and thereafter adopting the full legal tender of the euro. There will be an automatic adherence to the monetary policy of the European Central Bank. However, these developments still belong to the future. Having this EU-time path in mind, we are aware of the changing world surrounding us. Albania as a small and open economy is part of this dynamic world. Today, we observe a rapid globalization, liberalization, continuous financial deepening and broadening, with new financial innovations in a always more interconnected world. Albania is influenced by these developments on a day to day basis. Albania therefore, needs a daily monitoring of new developments and it needs to cope with these international challenges. Before reaching the ultimate EU-accession objective in this constantly changing world, there is still a long distance to cross. As it concerns monetary policy, Bank of Albania today thinks that Inflation Targeting is the way to take. Better highways will bring us more quickly from Tirana to the Airport. Likewise, the better monetary policy is able to maintain price stability, the quicker Albania can take the road and reach the levels of neighboring Europe with their higher welfare levels. We are fully aware that adopting fully fledged Inflation Targeting is a process that requires hard work with several preconditions in place, as these two days have underlined. Getting to Inflation Targeting is more of a marathon than a steeplechase. Our two days here have shown that it is not a discrete onetime decision that resolves all problems. It should also be a smooth process. This holds in particular for a transitioning country like Albania. Our country faces different challenges and virtues compared with developed countries. Now, how is our Working Agenda set? I want to distinguish between the working areas within and outside the central bank. And the working area outside the central bank can be split into Albania and the international environment. I see the further building of the central bank as a recognized and respected institution as one of my primary tasks. Qualified young and ambitious people need to help us bringing our internal discussions and work to higher levels. Cutting-edge discussions and fundamental studies are needed to make the central bank choosing the best policies, on monetary policy as well as on supervision and financial stability (in a broad sense). The human resources capacities need to be secured. Inflation Targeting is to be further scrutinized in all respects. Econometric models need further development for forecasting inflation and analyzing transmission channels. More statistical work needs to be done, in particular on micro information from the real side of the economy. A specialized unit should concentrate on all areas that cover the consumer price index. A clear and professional communication strategy is to be developed. Information on monetary policy is to be translated into a language for the different population groups in our country. Next to all these activities, we need to continue our discussions on the Monetary Decision Making arrangements that are deemed essential for Inflation Targeting. These activities within Bank of Albania are on my agenda for tomorrow. Outside the central bank in Albania we need to take all efforts for a further development of the financial markets and other transmission channels. We cannot do this on our own. In this respect we should establish a deeper constructive collaboration with other national institutions. We should elaborate with the Ministry of Finance and the Parliament on the legal issues for strengthening the central bank’s independence. With the Ministry of Finance we have already projects, such as the anticash, credit office, T-bills market and so on.. But a topic high on our and the agenda of the Ministry of Finance’s agenda should be the statistical framework. Statistics by means of Instat need to become timelier and need to be improved for the purposes of policies by the central bank as well as by the government. As discussed also these days, we should take all efforts in bridging the gap between Bank of Albania and the other central banks in Europe. The central bank law served Albania at the time it was laid down. Now at the brink of the year 2006 we all agree that it needs amendments. Governance at the central bank needs to reach the levels of governance at the central banks in more developed countries. We need a full independence of monetary policy on the one hand, and of fiscal and other government policy on the other hand. We need more professionalism. We need monetary policy conducted with a view to the future. We need to improve on accountability. We need to make our people contestable within and outside Albania as it concerns the policies. I would like to see more open discussions where we discuss elaborately about our differences in opinions but at the end of the day also reach agreements that - as their sole purpose - benefit the Albanian economy. Our cooperation with international organizations like the International Monetary Fund will be maintained and open discussions about consistency issues with the new monetary strategy will carry on. Cooperation with the European Commission should become intensive in order to harmonize all central bank requirements in line with EU standards. In my view EU is one of the highest priorities on the Agenda of Albania, and the central bank will provide all cooperation in making its central bank law and all further rules and regulations according to EU-standards. Next to this, the relationships with the Bank for International Settlements and the European Central Bank need to become closer. As a special point I want to highlight again the cooperation with the central banks in the region. We can more often share our views about monetary policy, supervision and financial stability. We can more often have common projects. One of the big projects I have in mind is the process of preparation for the accession to the European Union. As you see, our Agenda is quite full. Probably not only in the short term but also for the medium term. But let me stop here. I am sure we will meet again in the future. But I conclude here by saying that I hope to meet you again in the very near future. At these occasions I will update you about any steps and progress we have been making within Bank of Albania! Today I spoke a lot; tomorrow we will start implementing what we said today. Once more, thank you very much and have a safe return home.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Southeastern European Financial Forum, the Second Edition, Bucharest, Romania, 11 November 2005.
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Ardian Fullani: Basel II, its implications, opportunities and challenges ahead for Albania and Southeastern Europe Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Southeastern European Financial Forum, the Second Edition, Bucharest, Romania, 11 November 2005. * * * Ladies and Gentleman, The topic to be discussed at this forum is certainly timely. You need not look any further than news headlines to understand why risk management matters so much. Several events remind us that when banks lack the commitment to manage their risk prudently, they will fail to uphold their responsibilities to their shareholders and public at large. Consequently, the cost to society can be high and the impact on the economy devastating. Sound corporate governance comes about only when there is a genuine commitment to do the right thing and to manage risks in whatever form they may arise. Risk managers must provide timely, objective and accurate information to their management. In turn, senior management and board of directors need to make sure that there is an atmosphere of transparency within the firm, one that promotes healthy and disciplined risk taking. In order to improve understanding and management of risk, the Basel Committee has been formulating regulatory approaches to foster a safe and sound banking system and greater stability within financial sector. It has become clear, though, that the 1988 Accord and many of its amendments have become outdated and overtaken by advances in the banking and the financial sector, and other economic developments. As a consequence, the Basel Committee has come up with a new proposal known as Basel II. This proposal is intended to be more risk sensitive than the 1988 Accord, in order to provide a better alignment and calibration of regulatory capital and capital adequacy with the underlying economic risks that banks face. Categorizing debtors into a fewer risk ‘buckets’ was certainly a progress in 1988, but it open the gap between the regulatory risk measurement of any given transaction and its actual economic risk. This favours high risk loans over the low risk ones, given the 100% risk weight charged, irrespective of the risk profile of firms receiving the loan. Consequently, it adversely affects the accuracy of assessing capital requirements and allocation. The most concerning side-effect has been the distortion of financial decision-making which is, loans and investments made on basis of regulatory constraints rather than genuine economic opportunities. The new Basle II accord tries to improve on these issues by encouraging banks to become more sophisticated in their risk assessment and aligning more rigorously regulatory requirements with internal risk measurement methodologies. It is important to recognize that the application of the New Accord is principally intended for large international banks, which are complex institutions usually operating in developed countries. Therefore, Basel II has often been questioned about its implications and appropriateness for banking in emerging market economies, and it is on this point that I would like to focus my remarks. In principle, the three-pillar structure of the New Accord provides more precise directions to regulators to strengthen bank supervision and incentives to banks to become more sophisticated in risk management. Implementation of Basel II eliminates “one size fits all” methodology to assess risks and offers instead a wide range of methods to evaluate risks based more on failure likelihood. But the supervisory authorities in several emerging markets and many developing economies are concerned that Basel II puts a challenge they cannot meet. Probably our greatest concern relates to the need of the standardized approach to rely on external rating agencies for calculating minimum capital requirements. Currently domestic rating agencies are totally absent in Albania and not well developed as in many other non-OECD countries. On the other hand, in most of our economies many small enterprises cannot afford to be clients of international rating agencies. Since borrowers unrated from rating agencies will be assigned a 100% risk according to Basel II, initially most domestic credits may end up under this 100% category. This could reduce risk sensitivity of the new system brining it close or similar to that of Basel I. On the other hand, Albanian banks hold a significant share of government treasury bills and notes. Actually, under Basel I to this exposure of the banking system denominated in local currency is assigned 0% risk independently whether credit risk of the sovereign debt is rated or not. Under Basel II, standardized approach, it is possible that sovereign debt is assigned a risk weight between 0% to 150%, most likely 100% since it falls under unrated category. This means that banking system in Albania may have to increase capital allocation to comply with the minimum level of the capital adequacy ratio. An important intention of Basel II is to strengthen market discipline by developing a set of information disclosure requirements. In our countries there is plenty of room for improvement in this respect to allow market participants to assess key information on risk exposure, risk assessment process, and hence capital adequacy. This is important since it increases public pressure on banks to have a better performance in assessing and monitoring risk. However, in short run information disclosure might also have some adverse implication, say in Albania. Let me explain myself better on this issue. Public is usually more sensitive to bad news than positive developments. In countries like Albania, reactions between good or bad news are even more asymmetric than in mature market economies. Public in Albania is particularly over-reactive toward grim news on banking sector or on a certain bank while tend to ignore what falls in the positive side. This could be due to both historical factors, e.g. the crisis of financial system in 1997, and culture factors e.g. low level of bank business understanding, e.g. the overreaction of public to the introduction of the Deposit Insurance Law in 2002. This means that enhanced information disclosure required by Basle II, could be problematic if not supported by a proper public understanding. That’s why I feel a bit concerned about the effectiveness and appropriateness of an immediate implementation of Basle II. Therefore a more gradual approach may be necessary. This approach could take the form of an interim standard between Basel I and Basel II that could offer banks in emerging market economies some of the benefits of Basel II without having to face a prohibitive cost. This means that Basel II adoption should not be made mandatory in financial assessments (of WB, IMF for example) and countries should be left with the option to keep Basel I. EU banking directives are mandatory for our countries that opt to join EU. As Basel II elements are embedded in EU Directives, and as our countries are making progress toward integration in the EU, we shall be faced with the challenges of Basle II implementation. I’d like to point out three challenges in particular. Albania as many other East European Countries host a considerable number of foreign banks. These consist mostly of branches or subsidiaries of banks from EU countries which eventually may have to implement the new system including its most advanced elements if their head offices decide to adopt it throughout the network for consistency and competitiveness reasons. Bearing in mind there is a high degree of standardization in the risk management practices of a banking group - which is, same risk management techniques being applied uniformly throughout the group - the host country banking supervision might choose to rely entirely on the validation conducted by the home country supervision, provided that the adequacy of the model fits local conditions. If this is not the case, the host country supervision will probably have to rely on its own assessment of Internal Ratings Based (IRB) models. However, the latter raises two other sensitive issues. First, the feasibility of IRB application is complicated by the lack of reliable data on at least a full business cycle. Second, it requires training and preparation of banking supervisors with new rules, and thereby to improve their ability to examine and evaluate IRB approaches for consistency, integrity and accuracy in order to properly measure risk, otherwise, the whole capital allocation system could become faulty. On the other hand, this new environment calls for better cooperation and coordination across countries’ banking supervision in order to avoid over regulating banks and to save resources. The second challenge relates to the need of developing our own domestic rating industry for assessing borrowers. This is indispensable to gain the potential cost reduction of intermediation out of the implementation of the new system. It will make possible for some borrowers to obtain better ratings and consequently better risk weights compared to the actual 100% unrated system. However, this is not an easy task by any mean. Rating agencies should satisfy several criteria in order to be eligible. These criteria, as you might already be aware of comprise experience, freedom from external influence, publicly available assessments, requirements to disclose assessment models and approaches, sufficient resources and finally validation or recognition by supervisory authorities in our countries. Third but certainly not the least, the new system poses a challenge to all banks to improve their capacities in order to comply with the new framework to successfully compete and survive. Banks should start adopting a more dynamic and forward looking approach to the evaluation of risk and provisions since under a risk sensitive approach there is always the risk of pro-cyclicality1, which means bank capital ratios are likely to fluctuate more over the course of business cycles. In spite of the above challenges, in Albania we have already started addressing some of these issues. First, by making sure that we have consolidated the achievements of our supervisory function by completing the requirements of Basel I. We are glad that the good progress has been confirmed also by the FSAP assessment during their mission in February-March, this year. Certain recommendations related with requirements about consolidated supervision, will be followed very attentively; Second, we have been pushing already our supervisory process and the banks, toward a more risk oriented attitude. At the same time we intend to keep a higher minimum level of capital adequacy ratio than the European standards, in order to provide for some cushion for other forms of risk like operational risk; Third, we try to gain as much as possible out of the experience and knowledge of other countries in the region, which are in a more advanced stage in their efforts of adopting Basel II requirements either partly or fully. We have also the privilege of being close to the euro area member countries, like Italy and Greece, with their banks playing an important role in our financial system. This gives us the possibility to benefit out of expertise of the supervisory authorities of these countries, in the process of adopting new requirements; Fourth, we have expanded our cooperation with other “peer” countries in the region, as the variety of problems found in our countries is very similar and the experience sharing in this respect, is very practical; Fifth, we are trying to promote an environment where issues of Basel II are being discussed in a professional level. We are not focusing only on directly involved parties (including government, other supervisory authorities of the financial market) but also on relevant clients of the banking and the financial sector. Concluding, I would like to stress that Basel II represents a logical and appropriate successor to Basel I. It embeds recent and past lessons and gives excellent directions to financial system and supervision authorities how to move ahead. On the other hand, its implementation may be a bit too ambitious and a difficult task for our countries. Therefore it is in our interest to find ways to make it more suitable to our needs by following a gradual approach rather than jeopardising its success through an uninformed adoption. According to Basel II, the assessment of the borrower’s credit risk will depend on the performance of the economy, whether it is in a upward or downward trend. In the worst case, when the economy will be wholly swept in recession, banks will have automatically either to increase the level of capital, or shift towards less risky assets, that most intuitively calls for a slow down to provide loans thus engendering credit crunch and further recession.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference organised in the context of the Financial Sector Assessment Program, Tirana, 15 December 2005.
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Ardian Fullani: Financial sector assessment program (FSAP) Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference organised in the context of the Financial Sector Assessment Program, Tirana, 15 December 2005. * * * I have the pleasure to be here today next to the Minister of Finance, Mr. Bode and Ms. Laura Kodres, International Monetary Fund expert and one of FSAP mission leaders, on the occasion of introducing a very important document, such as the financial sector assessment program or otherwise recognized as FSAP. On behalf of the institution I represent I would like to thank the joint IMF/World Bank Mission for their hard and great job during their visit in Tirana. This assessment is a very significant financial passport, a first fundamental step to a professional and straight assessment of the financial system in Albania, taking into consideration each of its segments. A special thanks is also addressed to IMF and WB authorities, who considered our request to send to Tirana their representatives to enable the public presentation of the findings and recommendations produced by this assessment. I honestly hope the conclusions made by Ms. Kodres shall be bluntly and objectively assessed by you. I would like to stress that the recommendations made by FSAP mission provide a great assistance, and as such, they should be correctly comprehended and interpreted. These recommendations assist to a high degree each policymaker, supervisory institution, market operator, and obviously to media which is very much part of this process. The way you will monitor and communicate information to the public is very important. In this context, I would like to underline that the Bank of Albania shall be very open to assist. To this aim, we have recently made the Bank communication office functional, thereby meeting one of short-term FSAP recommendations. I avail myself to this occasion to stress that our immediate plans are to provide a more contemporary communication approach, in particular in the context of preparing and launching educational and training packages, targeting different interest groups. From the moment we were acknowledged to FSAP recommendations, our institution started listing them by priority and by institutional right. As also monitored by you, we broadly discussed in the Forum organized in the first days of December the issue of establishing a Monetary Policy Committee. With regard to banking market developments, the Bank of Albania sticks to its engagements to augmenting the opportunities of commercial banks in the securities market. In more concrete terms, starting from September the Bank of Albania charged a fee for the operations carried out in its windows, and in early December the two-level securities register was placed into function. Pursuant to FSAP recommendation and with a view to enhancing daily liquidity management, the intra-credit regulatory basis was amended. The new bill “On Banks in the Republic of Albania” is complete and ready to be presented to banks for discussion. With the assistance of a specialized international consultation, we believe this shall be a new, contemporary law and it shall identify a number of issues addressed in the form of FSAP recommendations. Starting from July 2005, the automated electronic clearing house system commenced to operate. Currently, we are working on completing the regulatory framework with a view to augmenting the services provided to the economy, aiming primarily at automating utilities’ periodical settlements. In November, the Bank of Albania Supervisory Council amended the Regulation “On licensing nonbank entities”, aiming at involving all non-bank financial institutions which operate in the territory of the Republic of Albania in the Bank of Albania licensing and supervision scheme. In October 2005, the Bank of Albania Supervisory Council approved the new organization structure of the Bank of Albania, placing a major emphasis to enhancing legal counselling, statistical service and public communication. These tree functions are deemed as very significant, in particular when considered in the context of our objectives related to monetary policy and EU integration. Another short-term FSAP recommendation related to improving Bank of Albania transparency is now accomplished. Every interested person could be informed on the rules that the Bank of Albania pursues when it intervenes in the foreign currency market or be acquainted with the present agreements between the Bank of Albania and the Ministry of Finance. We have been intensifying our efforts to reaching to a rapid and effective solution as regards the Credit Information Bureau. Considering it as a very significant recommendation, we have recently added our contacts with the Albanian Banking Association in order to find a quick solution. A concrete action plan on the part of the recommendations directly related to the activity of the Bank of Albania and its competencies has already been completed and introduced to IMF authorities. What I deem as crucial is the complete assimilation of each suggestion made, and based on this absorption we have tried to build up a realistic and fully possible action plan. We believe that the successful accomplishment of the tasks included in the action plan shall be a key factor in enhancing the banking system financial stability. It shall influence the establishment of a modern payment infrastructure, increase financial market efficiency, perfect human capacities and set up a safe foundation for more sophisticated future developments. I would like to take this opportunity to emphasize that the Bank of Albania shall provide all its expertise to the inter-institutional group established to meeting many other FSAP recommendations. We hope the commitment of other institutions, be they central or supervisory, shall be provided properly, in order for these recommendations to be accomplished in due course. I am convinced the Minister of Finance and me share the same objective, which is to lead our institutions to stepping this process forward, aiming at achieving a sustainable and sound financial sector development in the country. Only by doing so, we could lay the grounds for a second assessment in a three-year time, which shall not only observe the accomplishment of these recommendations, but also determine new priorities towards financial system development. Thank you!
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Euro Mediterranean Conference on Micro Credit, Rome, 5-6 December 2005.
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Ardian Fullani: Microfinance in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Euro Mediterranean Conference on Micro Credit, Rome, 5-6 December 2005. * * * Distinguished participants! I’m glad to participate in the Euro Mediterranean Conference on Micro Credit, an important event associated with the announcement of the Year 2005 as the “International year of micro credit” by the United Nations. Authorities of a country usually aim at achieving sustainable economic growth in a non-inflationary environment. Ideally, in a free market, capital will go to those opportunities that represent the most efficient and profitable investments. But, in a developing country, markets have several imperfections and issues and capital could easily be misallocated. It could go in those investment opportunities that provide high but risky quick returns and on other low efficiency ventures that are nearly safe. This behavior could however be problematic for future economic growth of the country. Many sectors of enormous long term growth potential can be left unexploited. This means that some areas of the economy will be booming, while other areas will be considerably lagging behind leading to a very unbalanced economic development. Also, various groups of population, particularly low income groups, will most probably be excluded from financing opportunities increasing the odds of becoming poorer. As a result, social problems and issues may arise such as: job losses, loose population movements and illegal establishments, etc, which will stretch public facilities to cope with this situation. Therefore, it is important to find ways, to ensure more balanced development opportunities to all sectors of the economy and groups of population. Albanian economy, by large relies, on micro-businesses. Nearly all enterprises in Albania fall into the category of small and medium enterprises SME-s. More than 90 percent of Albanian enterprises can be classified as small or medium-size according to our INSTAT data. The majority of these companies are engaged in trade and services, reflecting their micro business nature, and less in industry. As for employment, SME-s account for more than 40 % of total employment in the enterprise sector. There is a high concentration in the region of Tirana-Durres of private enterprises than other regions, while industry is concentrated mainly in Elbasan. This new private sector especially SME-s needs the financial support to grow. Until now banking sector has not been able to meet these needs. The situation is more problematic because SME-s do not have very developed financial sectors. Usually, these countries also have difficulties to access international financial markets. I don’t want you to get me wrong about the role of financial sector. Financial sector has made considerable steps in Albania. Today, our financial sector includes many banks and non-bank financial institutions, savings and loans associations and unions, insurance and reinsurance companies, pension funds. One should say though that the development of the financial sector institutions is more noticeable in the banking sector and the insurance sector. The banking system currently comprises 16 operating institutions, with total assets of around 53 per cent of the country’s GDP. The system is well capitalized and liquid. Its intermediation role is increasing. The lending activity although small (accounting for around 23 percent of total banking assets and around 12 percent of GDP), is strongly picking up. Other financial institutions are trying hard to increase and modernize their activity. However, many problems primarily legal and property rights related which are outside financial sector are making it difficult for them to increase their credit lines. Microfinance has proved to be a more effective way to deal with these problems. With its inventive formulas it makes financial resources become accessible to small and medium businesses that account for most of aggregate production during these development stages. These resources are often used to finance small projects in areas like agriculture, livestock or services like handicraft, small food stores etc. The first microfinance institutions in Albania, were set up in 1994 as development projects co-financed by the Albanian Government and the World Bank. 13 donors cooperate with the Albanian government in supporting the development of SME-s in Albania. From 1992 a large share of funds has been allocated in Albania as donation, but only a portion has been spent. Most of these funds has been given as soft loans for Albanian government. Aid represents around 30 % and only 5 % are direct commercial loans to co-finance the private investment. This sort of finance, called “Development Projects”, is mainly used to finance SME-s’ credit needs accompanied with technical assistance. The credit line funds are given from donors as soft loans and the government allocates them to banks to be used as commercial loans without harming the banking practice and the use of own bank capitals. As a consequence, a larger part of financial crediting sources is converted into commercial funds. Today, the microfinance institutions are operating as self sustained institutions with an increasing customer base. In the last 5-7 years several other institutions have been focusing on microfinance. Currently we have 133 individual savings and loans associations organized under 2 Unions, which operate in rural areas. The number of their members is around 18 thousand and the stock of their outstanding loans is around 12 million euro. In addition, we have 7 microfinance institutions with total assets amounting to 50 million euros, and loans of 43 million euros. Banks are also getting more active in microfinance despite their little interest so far. This can be explained with tightening competitive conditions in the market and the need to explore new investment opportunities. Now we see an increasing amount of credit going to small businesses, which often helps them in the initial stages. Banks are particularly active for the microfinance in the urban areas. In fact, one of the banks has initially started to operate as a microfinance institution. It still holds a respectful position in this market segment, particularly in the urban areas. Lending to microfinance sector now counts for more than 10 per cent of the whole lending portfolio of the banking system. The quality of the microfinance loans has been satisfactory. On average, the portfolio at risk is between 1.5-2 percent, according to their reports. This is not only because of their small size (usually under 1.5 thousand euros each), but also because of the diversity of the projects, ensuring diversification of the loan portfolio. One should also say that the experience gained by the microfinance institutions in this area, have also played an important role for this good quality. The legal framework on microfinance was completed in 1996, with the approval of a special law that defined the principles upon which such institutions could be found and operate. Such principles for the specialized institutions included free will, reciprocal cooperation, capitalization of the profit and reinvestment in the community etc. Later developments made it necessary for the Law to change. Hence, a new Law “On Savings and Loans Associations and their Unions” was approved in Parliament on May of 2001. Several changes supported this new law. Besides the principles that were restated, the Law has defined the legal personality of the microfinance institutions, their permitted activities, the rights and the obligations of the members of the association, the managing structures of the associations and their functions, other important supervisory financial requirements and ratios, the role of the Unions and that of the Bank of Albania as the regulatory and the supervisory authority. Mandated with this role, the Bank of Albania has approved several regulations focusing on microfinance institutions and development. This regulatory framework, comprises the supervisory requirements to start and operate a Saving and Loan association, the indicators that enable their reporting and their financial analysis, and the principles based on which the on-site examination of such institutions occurs. The regulation of the Bank of Albania “On licensing the Savings and Loans Associations and their Unions”, is the first document issued by the Bank of Albania in this area, representing a big step forward into the formalization of these institutions. It defines the documentation requirements for the license application, the deadlines and the authority that should grant the license. These requirements are directed to the single associations, to the Union, and to the Union member association. It has been recognized the role of representing Union proposed member associations in the licensing process, meant also as an important tool to induce single SLA to become Union members. The number of the Unions is certainly not limited. The other important regulation is that of “The Supervision of Savings and Loan Associations and their Unions”. In this regulation, the Bank of Albania has defined supervisory indicators for certain typologies of risk that are characteristic of current stage of development of the microfinance institutions in Albania. Counterparty risk is assessed through the requirements for a consistent process of loan portfolio analysis. These includes the ways the loans are classified, their provisioning requirements, their potential individual or group guarantees, the supervisory norms of the loan quality etc.. In addition, the counterparty risk is indirectly controlled by the requirements in capital adequacy of the institution. There are also other risks that are considered in the regulation, for which certain requirements have been defined. For the liquidity risk, there have been set up various norms for maintaining sufficient liquid assets and limiting the duration of the loans. For the concentration risk, the regulation requirements focus on the lending activity, and set out the norms for the net exposure in relation to the total assets of the institution. This regulatory framework is meant to be actively orienting the activity of the microfinance institutions, and as such, will be revised as the developments may require. Besides these two regulations, the examinations manual of these institutions has been prepared. It is based on the CAMELS system we use for banks, and is aiming at assessing the adequacy of the internal policies and procedures, the quality of the management and the identification, assessment and monitoring of risks. The Accounting Manual is also prepared and is based on the national accounting standards, adjusted for the microfinance activity. We retain current regulatory framework, after some expected changes and approval, is adequately monitoring microfinance activity in Albania while not becoming an impediment for its development. While acknowledging the role of the microfinance as an important tool for ensuring development opportunities to small businesses that otherwise may never access financial resources, one should keep in mind that microfinance is sound if it is provided by sound institutions. There is not much benefit if such institutions fail because of lenience of their internal rules and procedures, and/or because the supervisory authority has closed an eye on them because of their social role. This will also make other institutions become hesitant in engaging in microfinance. The relationship between the microfinance institutions and the banking sector regarding their interaction in the economy financing, is a delicate issue. Their coexistence is certainly “peaceful” at the early development stage of at least one of these groups of institutions, but as the economy grows and competition increases, they tend to move toward each-other. At that stage, it is important to pay special attention for ensuring clear “rules of the game” for their activity and to provide adequate policies that allow for structural reforms of these institutions and of their market influence. In conclusion, microfinance is a very important mean to achieve a balanced economic growth, by providing financial support to small and medium businesses which are vital for the medium and long term economic growth. Compared to some other countries in the region, microfinance in Albania have shown higher growth rates with good quality. However, there is ample room for enhancing it further. Maintaining a stable macroeconomic environment, and the improvement of the level for a better law and order, and land and property rights, fair competition, are very important factors that will improve business financing in Albania. As supervisory authority we will try hard for microfinance future growth to be sound. The credit bureau project that our bank is undertaking shortly is also expected to boost credit through ameliorating information problems. Thank you for your kind attention.
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Discussion by Mr Ardian Fullani, Governor of the Bank of Albania, at the 11th Euromoney Central and Eastern European Forum - Pushing the boundaries: ensuring competitiveness in the CEE, Vienna, 18 January 2006.
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Ardian Fullani: Pushing the boundaries - the challenges facing Albania Discussion by Mr Ardian Fullani, Governor of the Bank of Albania, at the 11th Euromoney Central and Eastern European Forum - Pushing the boundaries: ensuring competitiveness in the CEE, Vienna, 18 January 2006. * * * The march onward to new markets has pushed the boundaries of industry ever farther east in the CEE. CIS countries are currently experiencing an economic boom while much of ‘Old Europe’ stagnates. There has been a recent boom in domestic markets, FDI, real estate, commercial development, among others. Will this high level of investment continue, and under what circumstances? What can the Central Bank Governors do to continue to encourage this new growth? Are there any downsides? How do Governors keep the balance between growth and stability? Will this high level of investment continue, and under what circumstances? The Albanian economy has continued its good performance also during 2005 with the exception of the end year when we encountered some electricity shortages. The positive performance concerns both the economic activity and the macroeconomic stability. Our opinion on the robust economic performance is based on an increased volume of sales, improvement of revenues from tax and VAT, a rise in the volume of lending to the economy, as well as a reduction in the unemployment rate. The creation of 13400 new jobs in the private sector during the last 4 quarters indicates robust growth and it is another indicator of the increased capacities of domestic production this year. Except for the service sector, BoA’s survey on business confidence shows an increase in the number of employees in manufacturing and construction sectors in the second quarter, where the actual index for the latter surpassed expectations. The preliminary data of the latest survey indicate that employment level has also increased in the third quarter contrary to an expected fall from the previous quarter. While it is true that there has been a recent boom in domestic markets, the picture is more mixed if we look at individual segments. Thus, FDI are still not there in Albania. Although it is well positioned to attract foreign direct investments, with its favourable geographical location, competitive salaries, and natural resources, foreign investors have been reluctant to commit their resources given the actual state of business environment. Domestic investment seems to lag behind too, based on some surveys of Bank of Albania. An important source of domestic investment has been remittances. The Bank of Albania estimations indicate that total workers’ remittances have reached around 1,028 million (one billion) of USD or 13.5 percent of GDP. This is twice as high as revenues from export of goods, which makes “work force” our main country export. Furthermore, remittances are estimated to be three times higher than foreign direct investments (FDI) inflow and its value exceeds by far official aid from abroad. During the first stage of transition in Albania policies for optimising the administration and utilisation of workers’ remittances for developing purposes have been completely lacking. A few sporadic measures have aimed at driving workers’ remittances into official channels and improving savings and investments incentives of emigrants in the country but have been by and large inadequate. More recently, we have taken a more attentive approach toward remittances and their potential contributions in financing the growth and development of the country. More specifically we are working in three main areas improvement of statistic (2) brining workers remittances into formal channels (3) directing workers remittances toward country’s development needs. There has been a boom in other areas of economy like real estate and commercial loans. Credit to the economy grew by 60-70 percent on annual terms. On GDP terms, credit to the economy has grown by 3 percentage points during 2005, approaching the level of 11 percent of GDP. It has been the main source of the monetary expansion during this period has been the increase in the volume of lending to the economy, which is a shift from government borrowing and from foreign assets. Foreign-currency loans continue to be preferred due to lower interest rates, hence accounting for nearly 75 percent of total loans at end-July. The rapid credit growth has so far had no effect on overall credit quality. The ratio of non-performing loans fell to 3.5 percent of total loans in March, down from 4.2 percent in December last year. Nowadays foreign banks in Albania hold around 95% of the total assets. Most of the assets is owned by banks coming from the European Union area. This ample participation of foreign banks has certainly had positive implication on both banks’ governance and the quality of services. This latter has improved considerably in the recent years with the privatisation of the ex-Savings Bank, still the biggest bank in the country. As a result, we have experienced an increase in the banking network throughout the country’s territory, a gradual restructuring of the banking system balance sheet including a quick increase in the lending to the economy, introduction of ATM and other new banking products etc.. Banks with private Albanian capital, that have been licensed in the last three years, have been active in trying to position themselves in these changing market. They offer a full range of banking services, having the advantage of better understanding the local environment. Despite the above achievements, the economy is still fragile and considerable progress is needed to establish an attractive framework favourable to investment and sustainable growth, driven by private sector development. Customs procedures, tax administration, land and construction permits, sector licensing, and the judiciary system are the major obstacles to investment in Albania. What can the Central bank Governors do to continue to encourage this new growth? Are there any downsides? Governance and institution building reforms remain critical for developing a rules-based business climate and attract increasing levels of investment. Under this framework the Bank of Albania is committed to go ahead with additional structural reforms to enhance banking sector intermediation and financial services provision. In close consultation with commercial banks, governmental institutions, and the private sector, the Bank of Albania developed an action plan for increasing the use of the banking system in the regular conduct of business. Regarding an important aspect of our central bank, the banking system stability, a lot of work has been done to encourage the development and consolidation of a sound banking and financial system for the country economic progress. Measures supported by the Bank include the privatization of the Savings Bank, the development of a deposit insurance system, improvement of the bankruptcy framework and collateral enforcement, and strengthening of bank regulation and supervision, which will also assist the Government’s anti-money laundering efforts. The IMF has provided technical assistance to the Bank of Albania. The IMF has also funded a resident adviser to support the implementation of the institutional development program for banking supervision developed by the Bank of Albania In the wake of the large Savings Bank privatization, the financial sector is showing welcome dynamism and the BoA is stepping up prudential vigilance. The recent FSAP exercise will certainly help to advance reforms in the financial sector. Bank of Albania is also committed to increase the mutual relationships with all international partners. We are trying to be a real partner in the discussing table, arguing on the economical-financial policies, through presenting its solution alternatives, being elaborated not only on the economic logic base but also on the Albanian reality. I am satisfied that, in the end, Albania is on the way to get a new PRGF/EFF arrangement with IMF which suits its actual needs very well. Given Albania's difficult legacy, together with the setback of the 1997 events, the country needs to accelerate its reform agenda, not least to for it to be grouped together with countries like Macedonia for EU accession purposes. This requires significant investments, improvements in public institutions, and technical assistance in all sorts of fields. The PRGF element allows Albania not only to access many of these resources from the IMF and WB organizations but also have the support of the Albanian government in absorbing more effectively available EU funds. We are also working for the institutionalisation of the cooperation between the central banks of the region. Judging from the meetings we have recently organised with some of the regional banking authorities, the initiative on regional cooperation has been welcomed. Nevertheless, I believe that it is the right time to carry out concrete measures in this direction through the establishment of a club of regional banks, which would enable the exchange of experiences and the consolidation of cooperation, mainly in the field of further financial/banking sector development in Southeastern Europe. Bank of Albania will continue to actively support and promote the establishment of this club in the future. I want also mention here the “Convergence” program which is a novel financial development program sponsored by the World Bank to promote public-private policy dialogue in South-East Europe. It could serve as an effective instrument to catalyse our efforts in bridging the gap with banking association and the other counterparts in the region. How do governors keep the balance between growth and stability? Theoretically, the answer would be to apply some kind of a ‘Taylor Rule’ by putting even weights on both output gap and inflation. However, for a small, open and developing economy the empirical experience may not be that simple. One issue would be how able are countries like ours to pursue independent monetary policies. An argument that I do advocate is that the Albanian economy is a relatively flexible economy, as it manages to bring inflation to normal levels in quite a short period of time. Rigidities, observed in some other economies, seem not to apply in the case of Albania. Here, I have in mind the long hiring and lay off procedures or the variety of rules related to the goods and services markets. Most importantly, the adoption of a flexible exchange rate regime has been and still is one of the main contributors to economic flexibility, which has a direct impact over the high mobility rate of the Albanian economy. Due to this flexibility Albania has shown impressive results in terms of price stability. Inflation has been distinguished generally by lower rates relative to other transition economies. In the last five years, inflation has stabilized at moderate levels as measured both at the end and average period figures, though it sometimes diverges from the target due to unforeseen shocks and speculative factors that are mainly beyond the central bank’s control. We will continue to aim inflation rates around the 3 percent level. However, several threats may prevent the bank from reaching the target while preserving growth. To begin with, the signalling power of monetary aggregates targeted by BoA may start to deteriorate. This might involve changes in the administrative prices and structural reforms in general, fiscal uncertainty issues, the impact of dollarisation on the effectiveness of monetary policy, the potential decrease in foreign remittances and its implication on exchange rate volatility, financial system development and stability etc. Also, what’s more important, as the economy gets more and more formal we may start losing some of the flexibility seen so far, making it more and more difficult our task of keeping inflation down with little real costs. In face of this forthcoming developments, we are considering alternative regimes such as IT that could both transmit central bank signals better and are more suitable to keep a better balance between economic shocks and inflation. On top of theoretical benefits of an IT regime compared to the other regimes, (summarised in a series of paper by Mishkin et al. (1997, 2000, 2002)) such as broader information base it utilises, its relatively higher flexibility with regard to supply shocks, the fact that it is easily understood by the public, there is also the successful reference to regime shifts in other European transitioning and developing economies can be made, such as the Czech Republic, Hungary, Iceland, Poland and Turkey. Bearing the above issues in mind the BoA retains that a switch to inflation targeting over the medium term will put us in a better position to strike the right balance between growth and stability. Accordingly, it has initiated steps to improve its governance structure and strengthen its analytical capacities, with technical assistance from the Fund. To this end an open forum took place at the end of last year where most of the issue regarding the implementation of inflation target were discussed by top experts all around the world. The main motivation for moving to the IT regime is the anchoring of inflation expectations in the medium to longer term while allowing some room to respond to shocks. I’m conscious that going to fully fledged Inflation Targeting is a process that requires hard work with several preconditions in place. Our forum clearly showed that it is not a one-off decision. It should be more a smooth process. This holds in particular for a transitioning country like Albania. Our country faces different challenges and virtues compared with developed countries.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Conference on Remittances, Bari, 4 March 2006.
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Ardian Fullani: Remittances: An opportunity for growth - the Albanian migration to Italy as a case study Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Conference on Remittances, Bari, 4 March 2006. * * * Ladies and Gentlemen, I am very pleased to speak to you today on the occasion of the Conference on Remittances. I would like to congratulate the World Bank and the Puglia Region for co-organizing this esteemed international event. I greatly appreciate your partnership and this opportunity to explore with you the possible ways for a sustainable growth, formalization and higher effectiveness of remittances. I would like to open my remarks by asking a simple question. Why are remittances our main topic today? Remittances represent the most direct and immediate benefit to emigrants families and to the economy. Remittance flows to developing countries are now estimated to be twice as much as the development aid these countries receive. In some countries like Albania, they noticeably exceed foreign direct investment. Therefore, governments nowadays are paying more and more attention in their development strategies to remittance flows as an important financial source to boost economic development, especially in depressed areas where economic conditions force people to migrate. A key input for these policies is the economic and the logistic framework behind migration and remittance. This conference and its underlying case-study make a great contribution to these developing efforts. Since the beginning of the transition, the volume of remittances to Albania has grown rapidly. Indeed, remittance flows are increasingly important relative to other foreign exchange-earning activities, representing around 14 percent of GDP, 70 percent of exports, and 33 percent of imports. Italy is the major migration destination country for Albanians. On the other hand, Albania is the number one recipient country in terms of remittance flows from Italy to other countries. Therefore, remittance services from Italy to Albania have become a topic of great interest. The Italian-Albanian remittance corridor is a relevant case to examine the effects of remittances on local communities and to discuss the ways of making these flows more efficient and less costly. A recent survey of the Bank of Albania shows that remittances have had positive impact across all Albanian regions. The influence is slightly higher in less developed regions alleviating to some extent income disparities. Remittances have become a critical source of income for households, reaching 33 percent of disposable income of an average family recipient and almost 40 percent in rural areas. The recipients of remittances are from all social groups, including middle income class (60 percent) as well as the low income class (27 percent). Our estimates show that the level and severity of poverty are significantly reduced among those households receiving remittances, with greater influence on severity rather than the level of poverty. Remittances are mostly used for imported consumer goods, services, and for the purchase or construction of houses. A small share is saved or invested in businesses, mainly in agricultural sector. Therefore, the impact of remittances in creating new jobs has been limited. In this view, I do not want to downplay the importance of remittances, but to draw attention to additional structural reforms needed to enhance their impact in the economy. It is not a coincidence that after reaching the level of 14 percent of GDP, the growth rate of remittances has been as constant as that of foreign direct investments in Albania. This shows that in the mid-term, there is no difference between the decision of foreign investors and remitters to invest in Albania. Of course, emigrants may have a better knowledge of domestic markets. They are more connected to their home-country and react faster than foreign investors. Nevertheless, they demand guarantees for their investments as much as foreign investors do. Therefore, both the volume of remittances and their effectiveness largely depend on improvements of Albanian business environment. While efforts to speed up reforms aiming to improve business environment are underway, especially now with the most recent signing of the Stabilization and Association Agreement, a question still remains: is there any other measure that may enhance the contribution of remittances in the development? The Bank of Albania in cooperation with other governmental and non-governmental institutions has been considering some concrete measures, which I have already highlighted in a conference organized by EBRD on these issues last September. I would like to briefly mention some of them here again, with some new insights. First, improving our knowledge about remittances remains critical for the assessment of policies, which directly impact the developing role of remittances in the economy. The improved information is needed not simply to assist policies on remittances but also financial infrastructure (e.g. by reducing transaction costs) and to understand the impact on poverty. The Bank of Albania has continuously emphasized the importance of accurate estimation of capital inflows in the form of emigrants’ remittances. For better statistics we have been assisted by IMF missions to bring the methodology in defining remittances closer to the international standards. Also, there is a close cooperation with our main economic partners, Italy and Greece, as the main destinations of the Albanian emigrants, to harmonize our methodologies in order to improve the estimation accuracy of remittances. The report of the World Bank on the Italian-Albanian corridor is also a great contribution to improve our understanding of remittances, and on behalf of the Albanian authorities I express our gratitude for this support. Second, formalizing the inflow of remittances is a very important moment. More than half of remittances enter the country through informal channels. Our surveys show that the bulk of remittances to Albania are channeled through unofficial sources; physically brought by the emigrants (59 percent), friends and relatives (23 percent). This is partially a reflection of the short geographical distance between the two countries. However, this high flow of remittances through unofficial channels also asks for actions to make official channels more attractive in terms of efficiency, safety, cost and anonymity. As the study team has found out, emigrants in Italy have a high banking utilization rate – more than 50 percent have bank accounts. On the Albanian side, this figure drops to less than 20 percent. Emigrant families’ access to banks is suboptimal despite the considerable geographical expansion of commercial banks in recent years. In contrast with other remittance-receiving countries, banks in Albania still have only a small market share in remittance services. However, there are encouraging signs of demand for new technologies, innovative partnerships and entry points to reach disadvantaged groups. The high fees of the money transfer applied by the banks are often brought up as a motive why individuals do not prefer this service. Nevertheless, there is already an Albanian commercial bank, which offers transfers from Italy to Albania without charging any fee for amounts up to 250 euros a day, when the average monthly delivery of emigrants usually ranges from 100 to 150 euros. In the meantime, there are several other banks that provide the same service for transfers from Greece. Actually, we are examining the possibilities to lower the transfer costs through broader bilateral agreements between the two countries. Even though, money transfer companies provide transfer services at reasonable rates with a good geographical coverage, we still observe a lot of cash entering the country in bags. I retain, this is more a regulatory problem rather than the preference of emigrants to go informal. The disparity between our two countries in terms of bank accounts accessibility is largely a reflection of the fact that in Italy you cannot get your salary if you do not provide with your bank account number. The anti-cash program initiated by the Bank of Albania clearly indicates that in order to lower the cash economy, we have to abolish the option of cash payments, including here salaries of the private sector, payments of utilities, etc. Our bank is fully committed to support this process at all levels, being these regulatory or technical. Of course, this comes at some cost, which in case of remittances is going from zero rates that informal or cash channels offer to some positive commissions required by formal channels. I understand the concerns raised by some analysts that legislation on exchange rate control or anti-money laundering could increase transfer rates further and push people to go underground. This calls for a revision of regulation that does not penalize the volume of remittances. As I mentioned earlier, the formalization of the economy is a major component of improving business environment in Albania. Therefore, “forcing” individuals to get into formal channels while comes at a short term cost of some positive rates most probably will have the long term benefit of signaling the serious intentions that we are moving on the right directions to both emigrants and foreign investors. For recipient families, accessibility to financial institutions plays a more important role due to large percentage of receipts delivered straight to the recipient’s door. In fact, the disconnection between the physical receipt of funds and the location of the financial institution may have a great impact on disintermediation among recipients. Assuming that receivers can exercise some control over the mode and location of receipt, the geographic proximity of a branch or the ability to pick up a remittance in an office (as required by Western Union) can determine an institution’s ability to compete in the remittance market of the Albania, not to mention the possibility of mobilizing savings from these new potential clients. Remittances can be a point entry for many remitters and their families to the formal financial system. Many emigrant families are either not familiarized with banks or have limited access with financial institutions. The Bank of Albania through its public communication strategy is aiming to bring the public closer to banking products and services, including transfers. No matter the small size of remittance amounts. Even those small shares left by recipient families in bank accounts could assist economic development as more funds will be available in banks to provide loan products to private sector. The same concern was initially expressed about public administration salaries. Now, this service is provided by the banking system, and we see the power of pooling small amounts. For commercial banks, their ability to market additional value-added services, such as savings products, loans or other types of credit to remittance recipients, will require the achievement of a critical mass of customer acquisition, as well as a higher technology delivery mechanism, to bring down the average cost of the investment required to serve that client. Micro credit programs and qualitative improvements of banking infrastructure, concerted with introduction of new financial instruments will also help to attract more remittances. Promoting microfinance organizations as participants in remittances market, could offer certain advantages to the microfinance sector, to the government and to remittance recipients. The costs of this expansion would primarily fall to the regulatory and supervisory authorities. We already took an important step in bringing these institutions under the Bank of Albania supervision which we expect to improve their status in the market by enhancing the confidence of operating with them. Microfinance institutions are already providing small amount loans to the low income class. Their existing programs allow them to leverage their network and geographic reach to assist remittance senders and receivers in gaining access to low cost financial services, as well as access micro-saving and investment products. The third area of our efforts is to channel the workers’ remittances toward country’s development needs. The formalization is a necessary step but does not ensure the role of remittances as a developing instrument. It is often claimed that emigrants are not the most preferred clients of banks, since this category is considered to have more unstable jobs and low level of income. First of all, this perception is not entirely correct and the results of the Italian team support the fact that the pool of emigrant savings is becoming significant enough to be a profitable business. The latest Italian bank entering the market in Albania (Banca Italiana di Sviluppo) is another witness of this reality. However, I would like to see the other banks operating in Albania to be as aggressive as their Italian counterparts in competing for this pool of savings sooner rather than later. There are also other financial services that could be offered to the remittance recipients. For instance, linking workers’ remittances with investments by channeling remittance flows toward micro-credit loans or projects; or supporting migrants’ contribution and emigrants’ communities in the development of the country. A concerning signal comes out from our survey showing emigrants low intention to invest in either private ventures and/or public developing projects. It tells us that the issue of remittances goes beyond the financial framework. Therefore we should think of new ways to improve incentives of emigrants to invest back in Albania, like the recent government initiative to offer to emigrants the opportunity to return and invest in their country by enjoying a three year exemption from the profit and personal income taxes. In conclusion, I would add that a distinctive feature that makes remittances particularly important instruments for the economic development is their relative stability compared to private capital and financial flows. In contrast to financial flows that showed a high volatility during 1990s, remittances continued to flow much more steadily. In terms of the “life cycle” duration of individual remittances, theory holds that the longer the duration of migrant status, the lower the probability of large flows of remittances. This urges us to speed up our efforts to exploit the potential of remittances sooner rather than later. Their immense role calls for new ways of achieving a sustainable growth, a full formalization and higher effectiveness of remittances. Obviously, this is not a battle we can win today. It requires a lot of attention, good will, but also a complete enforcement strategy. Thank you.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the meeting with Prime Minister of the Republic of Albania and Albanian Bankers Association, Tirana, 20 March 2006.
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Ardian Fullani: Albania’s long-term sustainable economic growth Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the meeting with Prime Minister of the Republic of Albania and Albanian Bankers Association, Tirana, 20 March 2006. * * * Honoured Mr. Prime Minister, Honoured bankers, I believe the purpose of today’s meeting has to do with a major problem, that of long-term sustainable economic growth of the country. All actors present in this meeting play a key role in this direction; therefore I think that such meetings are useful, with significant contributions to the country’s economic activity. First of all, I would like to underline that during 2005 the Albanian economy had positive developments in the following directions: Monetary policy, standing neutral for most of the year, has ensured a constant money supply to the economy, in accordance with the needs for the country’s economic development; Inflationary pressures remained under control, under the conditions of a more steady exchange rate stability; At year end, monetary conditions reflected extension of the economy financing by lending, while Bank of Albania foreign reserves were further increased; Banking system increased considerably its financial support to the economy in the form of banking loans. Credit portfolio was increased by 74 percent or ALL 52 billion in absolute value. At end of the year, outstanding credit recorded 14,6 percent of GDP, from 8.4 percent in 2004. Also the short-term program for the country’s economic development over 2006 has forecasted a further growth of the outstanding credit to 50 percent, implying further incentives for the country’s economic activity. This has made domestic business have more guarantees to invest in the economy, simultaneously inviting foreign investors for more foreign direct investments in Albania. As the Governor of the Bank of Albania, I must share with you a natural concern that is generally related to credit portfolio quality, particularly when we are faced with such a rapid expansion of the volume of lending. Even though the outstanding credit to the economy is still low, about 15 percent of the GDP, its expansion over 2006 similar to that of the previous year, would increase the potential of banks’ s exposure to credit portfolio quality risks. Therefore, the banking system should undertake all the measures to improve monitoring, analysing, and controlling capacities, aiming at preventing any possible credit portfolio deterioration. On the other hand, we will enhance our supervising capacities, particularly the on-site examinations, by working out plans of measures to prudentially control each member bank of the system. Special attention will be paid to control on specific lending procedures and review of re-rating made and of provisioning performance for non-performing loans. Furthermore, the Bank of Albania has included in its priorities of 2006 the project on creating the credit register, a facility that will help the process of controlling and verifying loan borrowers. I would like to clarify that the banking system stability is of special priority for us, therefore we remain committed to carry out precisely all the recommendations given by the IMF’ s report of Financial Sector Assessment Program (FSAP) over 2005. I think that the concept of bank is inevitably related with the concept of confidence. For me confidence is transparency, transparency and only transparency. I deem that enhancement of transparency is a primary condition that leads to increased access of the population to your business. This increase implies deposits increase, credit extension, more competition and more effective financial intermediation. Above all, enhancement of transparency means more opportunities and lower costs to your clients. Think for a moment that the quantity of money circulating and “sleeping” outside banking channels is still high. Turning back to my discussion in the last meeting organised by the World Bank and the Puglia Region, I would like to emphasize that more than half of remittances enter the country through unofficial channels. According to Balance of Payments statistics of 2005, it speaks about a potential close to Eur 700 - 800 million. I believe this fact does not need any comment. Out of our surveys the causes are different. However, high fees applied by the banks are often brought up as a motive why individuals do not prefer banking service. On the other hand the increased circulation of money through banking channels requires enhanced prudence for preventing money laundering and terrorism financing. The combat against money laundering is an ongoing challenge that relates to the major problems our country is facing with, such as: cash economy, fiscal evasion, and economy informality. Therefore, at the beginning of the year we undertook a partial examination on 7 banks. It resulted out of the examination that in general banks have the proper structures and policies on fighting against money laundering and terrorism financing. However, we also observed some deficiencies having to do with staff training and better knowledge of legal framework. Taking into account what I said earlier, I believe that you understand the massage I want to transmit to you today, that is not only banking business extension, but also significant contribution to reducing cash and informality in the economy. Recently we have made some concrete steps in this direction. Therefore, the banking system is more extended geographically and richer in products. Increase of assets, rise in the number of clients, modern infrastructure and other developments have made our contribution to cash reduction in the economy be significant. I believe that the above accomplishments, combined with determined administrative measures, will contribute to the closure of informality gates one by one in the economy. However, I observe unexploited space particularly in terms of: increasing opportunities for more electronic payments; The last year overturned the ratio in the favour of electronic payments, when their level reached the figure of 320 thousand as compared to the number of 300 thousand of payments effected at the windows. This is an encouraging sign, urging us to better focus on this direction. channelling periodic settlements for utility services through bank accounts; more concretely AEC, Alb telecom and Water supplying should be related to the banking system so that their services are settled electronically. compulsory transfer of salaries of private sector’s employees through the banking system; The so-far experience with the private sector resulted successful, while even some big private operators are applying this method efficiently. I think that the obligation to transfer salaries through the banking system will significantly decrease the evasion existing on income tax and social insurance contributions. I personally think that it is just the time to enhance popularity for imposing the creation of a banking culture and education. The obligation of each individual for opening a bank account in addition to an important massive service the state does to the population, is more than necessary. More concretely, I propose that new cards be associated with a bank account number. In conclusion, it is understandable that for being successful in the long run, more focus is needed on all the problems I briefly treated above. More loans, more prudence in the supervision, more qualified services, more free prices, less cash in the economy, more banking business, will all lead to more access of the population into your business. I deem that this is an essential prerogative that ensures sustainable long-term development of the Albanian economy.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional technical seminar on "Financial Policy Issues of Deposit Insurance Schemes in South-East Europe", Tirana, 30 May 2006.
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Ardian Fullani: Financial policy issues of deposit insurance schemes in SouthEast Europe Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional technical seminar on “Financial Policy Issues of Deposit Insurance Schemes in South-East Europe”, Tirana, 30 May 2006. * * * Distinguished participants, Ladies and Gentlemen, It is my pleasure to open the proceedings of this regional seminar on “Financial Policy Issues of Deposit Insurance Schemes in South-East Europe”. I thank the Convergence Program of the World Bank and the Deposit Insurance Agency for the cooperation. I am convinced that this seminar will be valuable for exchanging new experience and ideas in fulfilling the missions of your institutions. First of all allow me to emphasize that the banking system is important not only for being an integral part of the financial system but also for the stability it brings to a country, moving its economy forwards and leading to economic growth. The Bank of Albania, as the country’s central bank, has the main target to maintain price stability. Along with this target, the Bank of Albania is exclusively responsible for licensing and supervising commercial banks and some other non-bank institutions involved mainly in micro-credit and in foreign exchange business. The legal and regulatory ground of banking supervision is already complete and we are constantly working for its improvement. Also, the supervisory practice complies with best standards in this direction, aiming at being oriented according to banking activity risk, being efficient and proactive. The supervisory activity, along with prevention of extreme cases of insured institutions’ bankruptcy, carries out also the administration of such institutions, in cases when they fail irrecoverably. In this stage, the role and contribution of the Deposit Insurance Agency, until that moment “invisible”, appears with the whole magnitude and importance. It is indispensable not only in terms of treating depositors that have had savings at the bankrupt institution, but also in the “calming down” effect for all the depositors of the banking system. In fact, the world experience has indicated that the deposit insurance function of the customers of the banking system is an important instrument in the framework of maintaining the banking system sustainability and keeping public confidence in it. The timely payment of the deposit value at the insured amount, in the case of a bank’s bankruptcy, allows responsible authorities to be focused on the procedures intending the isolation of the case and the recovery of the values of the bankrupt institution. The activity of responsible deposit insurance institutions has different characteristics in different countries. Their legal framework provides responsibilities that are limited only in the role of the payer of the available fund and other cases, when responsibilities are extended further, up to the recovery of the insured institutions’ values that have gone bankrupt. These different characteristics also determine in essence: • The way the insurance institution is established and functions, • The way the insurance fund is managed and the forms the institution possesses for increasing its value in extraordinary cases, which is the level of the contribution amount by the insured institutions in ratio to the objectives for increasing the insurance fund and for raising the covering capacities; • Relation to insured institutions; • The role of the state in the insurance institution’s capital; • Requirements with regards to necessary human resources and objectives on the intended level of personnel’s expertise; • The way the banks and foreign bank branches are insured; 1/3 • The way of determining the payment of the insurance contribution on the basis of insured institutions risk profile, etc. In general, it can be stated that all these elements depend on: • The moment the responsible deposit insurance institution is put into function, as in the case of the Albanian experience; • The degree of banking market development; • The way of its integration and of banking institutions’ integration into more developed markets; • The development degree of financial markets in general; • The level of legal and regulatory framework completeness and perfection (not only the one closely related to deposit insurance); and • The level of public education in relation to services provided by the banking industry and by the financial market in general. The more advanced we are in the above developments, the higher in quality and number are the alternatives that allow the responsible deposit insurance institution a major role in administration of crises the insured institutions may be faced with. In fact, besides the “wealth” they provide in approximation of deposit insurance practices in the banking activity, the above changes in the legal framework and in the practices of deposit insurance activity, lay down the need of a more general harmonization, in regional level and maybe even further. In this way, we would prevent any legal stipulations, which in practice may prove to be non-functional or at high cost. I would like to emphasize once more that the whole legal framework of the banking system is a topic largely discussed nowadays, not only in Albania, but in international levels as well. Nowadays, risk management has turned into a primary issue and is in the focus of national and international institutions. In this way, regulatory systems are advised to be reviewed and elaborated to be better adapted to current developments and to financial system’s perspectives. The financial system does not operate in the vacuum. It functions under real conditions and our task is to adapt to best experiences. I think our task is to identify the best practices and to try to adjust them to the real conditions of our economy, because by adjusting them to the whole regulatory framework and banking activity, we come to a motif and motivation: the European Community. I am confident that you will use this seminar to find out joint elements in the activity of your institutions, as well as to identify the distinctions. I think it would be valuable to identify also the cases that represent what is regarded as the “best practice” in deposit insurance area. In this way, it would contribute to the achievement of the objective to standardize the regional insurance practices and to create a clearer vision on the insurance activity performance in the future. The activity of the Albanian Deposit Insurance Agency is new. As such, its capability of operating in extreme cases is not proved yet. Nevertheless, efforts are made constantly for fulfilling the necessary legal framework and procedures, covering all possible directions of its activity. Simultaneously, there is worked in terms of organizing the structure, increasing the institution’s staff number and training. Emphasis is laid on the DIA’s cooperation with the Bank of Albania, the supervisory authority, so that the DIA carries out its functions effectively. At the same time, the relation with the Ministry of Finance is taken into consideration in organizing the Deposit Insurance Agency’s structure, so as to have the solid presence of the state in it. The forms of this cooperation are numerous, but all of them should be first consolidated under normal conditions of the banking system activity. The main elements of this cooperation are: • Exchange of information on supervisory practices and observance of regulatory requirements by the insured entities; • Organization of joint trainings in getting acquainted with respective functions; • Acquaintance with and discussion on manuals and procedures requiring the commitment of both institutions in certain cases, and the testing of these procedures. The Bank of Albania and the Deposit Insurance Agency are working for enhancing this cooperation constantly. 2/3 A number of legal and regulatory alterations that are being prepared in parallel by both our institutions, and the exchange of information, as well as more frequent contacts between both institutions serve this purpose. It is aimed at adopting best practices in this area, and at implementing the recommendations given by specialized assessments of international financial institutions that assist this process. Allow me to state once more that the Bank of Albania is completely committed to provide all the necessary assistance for strengthening the capacities of the Deposit Insurance Agency in Albania, in view of its very important mission. I wish good proceedings to this seminar. 3/3
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Opening speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the seminar 'Development and implementation of business and consumer confidence indices in Albania', Tirana, 2 July 2006.
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Ardian Fullani: The development of economic information sources in Albania Opening speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the seminar “Development and implementation of business and consumer confidence indices in Albania”, Tirana, 2 July 2006. * * * The information on the markets and the most recent economic developments may be considered as the key to success for businesses in the modern times of rapid information technology developments (it is enough taking a glance at the numerous pages of the Reuters or the space the business news take to understand such developments). Although, at first, it may not seem to represent the most critical problem the Albanian businesses are currently facing, such as electricity, informality etc., not far from now there will be the need of recognizing and analyzing the market in real time, in order to cope with the challenges of globalization. Considered from a wider aspect, one’s country economy may not attain the international levels if the development policies are founded on a weak real information basis. The information on the most recent economic developments and expectations is crucial to the monetary policy decision-making process of the Bank of Albania. For long, it has been made clear that the process of maintaining price stability – our main objective – should be a forward-looking one. Considering the current situation of national statistics, which at times become available with a time-lag of two years, it is understandable that our duty becomes extremely difficult. Progress in the field of statistics and in other related fields may take a relatively long time. In the mean time, our decisions need to be based on sound basis. Under this information gap, one of our solutions was the conduction of surveys of various economic agents. Four years ago, the Bank of Albania began the assessment of business confidence index and consumer confidence index. These surveys are held quarterly with the assistance of INSTAT and involve over 600 businesses of production, construction and services sectors and more than 1500 consumers. The collected information relates to the performance of prices, consumption, income, production, employment, investment and many other indicators, which assist significantly in the monetary policy decision-making process. Many important steps have been made in this context, aiming at continuous methodological improvements of indices. To this purpose, the Bank of Albania, with the participation of foreign experts, has organized various meetings and discussions at a technical level, wherein the surveys results and analyses, as well as the related issues were presented. Moreover, the Bank has organized training workshops with INSTAT and their interviewers, with a view to reaching to a high confidence degree in such key indicators. Since the beginning, the Bank of Albania has been assisted in this significant process by experts of the IFO German Institute for Economic Research, one of the leading economic research institutes in the field of business confidence indices. This assistance was provided by the GTZ office in Tirana, which has mediated and supported the visit of a number of German experts at the Bank of Albania, as is the present occasion when we have the pleasure to have among us Mr. Gernot Nerb (IFO), one of the top experts of IFO institute, for the calculation of business confidence indices in Germany. He will be holding some presentations related to the use of indices calculated through the conducted surveys, which help to analyze the real economic and financial developments. Although so far, the results of our surveys were presented indirectly in our periodical analyses and reports, as well as in various bank studies, very soon the Bank will publish such results regularly. In this context, an important preliminary step would be the consolidation of applied methodology in the calculation of such indices through a professional expertise, as it is the case of IFO. In a second phase, in close cooperation with the respective chambers of commerce and universities, we are going to organize several meetings with businesses and academics, wherein we could get suggestions on the usefulness of these surveys. Along the same line of enhancing the economic information sources, another initiative undertaken by us relates to the involvement of the Bank of Albania branches in the collection and analysis of economic developments in various Albanian regions. So far, there have been conducted several surveys which have provided very interesting results. Unlike business confidence index, these surveys aim at getting more complete and continuous timely quantitative information on the situation of labour market, prices performance, production and on the relationship between businesses and banks. Such information will be used in the calculation of some important indicators, such as productivity, cost per work unit, etc., which are often extremely essential to the Bank of Albania work study. Currently, these indicators are not provided by actual formal statistics. I wish you a very productive day, Thank you.
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Greeting speech by Mr Ardian Fullani, Governor of the Bank of Albania, at a technical seminar on surveillance systems to assess and monitor economic and financial stability, Tirana, 24 July 2006.
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Ardian Fullani: Prevent rather than recover Greeting speech by Mr Ardian Fullani, Governor of the Bank of Albania, at a technical seminar on surveillance systems to assess and monitor economic and financial stability, Tirana, 24 July 2006. * * * Honourable participants, I would like to thank you all for your participation in this very important seminar. Allow me first to welcome Ms. Alvarez-Plata and Mr. Kholodilin, two experts representing the distinguished German Institute for Economic Research DIW, who will be holding presentations over these two days and discuss the introduction and implementation of early warning systems for the financial markets and the exchange rate stability. Over the recent years, the Bank of Albania has been working closely with prominent international partners, such as the GTZ, in various projects, which aim at enhancing and further consolidating the work of the Bank in achieving our main objectives. I avail myself of this opportunity to thank Prof. Bolle, who has been coordinating our cooperation with the GTZ and Ms. Guda, local GTZ coordinator, for making this seminar possible, as a series of activities we have been organizing jointly with the GTZ. Today’s seminar focuses on an issue we have already begun working on. Last year in April, we organized a regional seminar in Tirana with the topic “Stress-Testing”, wherein were discussed the ways of identifying timely the financial system weaknesses, which may jeopardize the maintenance of its stability in case macro and microeconomic conditions are unexpectedly aggravated. Today’s seminar focuses on similar issues, but it provides more progressive approaches as far as early warning systems are concerned. Such approaches and discussions bear a high level of technique, however, allow me to explain briefly and somehow simply the purpose of their implementation. Last week, the Bank of Albania changed its core interest rate. As you may have already been informed of from our statements, the increase in the interest rate came as a consequence of future expectations effect and of a variety of factors which relate to inflation. What is important to the policies we conduct is the anticipation and prevention of destabilizing pressures in advance, rather than their correction after they have already occurred. Waiting to take the proper measures after the signals have become a fact may be costly in two aspects. First, the maintenance of stability is not stable, as long as the measures are taken upon the aggravation of the macroeconomic situation. Second, post-destabilization measures generally have their effects after a time lag of over one year – therefore, they are not only incapable of mitigating the current situation, but they may also bring about unwarranted aggravating effects in the future, when the economy will have actually recovered to its normal situation. The concept of providing financial stability does not differ a lot from the logic of maintaining macroeconomic stability. In such a case, the saying “prevent rather than recover” bears a significant importance, considering the high costs accompanying the financial crisis. The rapid lending and financial activity expansion of the banking system over the recent years, despite its positive aspect of boosting the economic growth, has also increased the pressure of being more alert in monitoring and maintaining the financial stability. Regardless of the rigorous implementation of the best monitoring practices, the rapid growth and expansion are always characterized by elements of risk, which in normal situations are inclined to be underestimated or pass unobserved, in particular in a system level. Therefore, the methodologies to be discussed over these two days will come to help the identification of such risks and take the proper measures timely. The methods to be introduced and discussed in this seminar are numerous, varying from non-parametrical to sophisticated modelling and econometric methods. Despite their complexity, each of them is presented with their own pros and cons. Our purpose is to establish and apply a wide packet of warning instruments, so as to minimize the errors deriving from the assumptions and various methodologies used. This packet will be a complement to the wide measures that we are considering to implement in the further enhancement of supervision, in order to anticipate the situations relating to the maintenance and consolidation of the financial stability. Wishing you good proceedings, Thank you!
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at The Economist's Conference ¿ First Business Roundtable with the Government of Albania: Identifying new business opportunities, Tirana, 14 September 2006.
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Ardian Fullani: Economic outlook and important developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at The Economist's Conference – First Business Roundtable with the Government of Albania: Identifying new business opportunities, Tirana, 14 September 2006. * * * Honorable Chairman, Distinguished Participants, I am very pleased to be here today to share and discuss with you our views, future macroeconomic and financial market developments and outline our policy orientation. I was looking forward to converse to this forum. It is a great opportunity that such well known institution, focus their attention toward Albania. I would like to thank The Economist Conferences and express my deepest and highest appreciation for this venture. I am confident that members of all communities, foreign and domestic, gathered here today will leave this forum with a clear image on the economic reality and business opportunities Albania has to offer. Assisted by geopolitical conditions and actual state of affairs, although small at a glance, Albanian economy presents numerous financial and economic advantages and incentives. Recently Albanian economy has reached a commendable macroeconomic equilibrium, sustained by an economic growth of 5-6 percent, low inflation levels well contained within a 2-3 percent band, and continuously shrinking budget deficits. It is my pleasure to emphasize that the Bank of Albania and its policy has been rightfully credited and earned accolades by established foreign and domestic institutions for its notable role in such accomplishments. Monetary policy has been designed and implemented in line with midterm country’s macroeconomic program: with specific focus on price and financial stability Let me now briefly summarize what I believe are the latest most important developments, and outline our economic outlook. Economic growth After the significant electricity shortages at the end of 2005, it appears that traditional growth promoting industries like services (tourism) and construction are growing at a stable pace, contributing at a sustainable economic growth. Building upon these developments as well as other positive indicators, we expect the economy will grow at a solid rate of 5-5.5 percent. The main challenge remains ensuring sustainability of these growth rates, even higher in the long run. I believe that respective Albanian authorities have already identified the major priorities of these challenges which fully converge with Bank of Albania views. Just to remind you I would briefly summaries some of these priorities. Building new, preferably alternative, energy sources and improving the efficiency is top priority. In our view, sufficient and reliable energy supply remains a main concern to achieving economic growth. Providing a solution to this problem is a priority in the verge of increasing global demand and energy prices. Speeding up the privatization process of the remaining state assets is another important step forward. Special attention should be paid to structural reforms, particularly property rights and legal framework. In our opinion services, construction and in particular agriculture will remain driving forces of the GDP growth in the coming years. Therefore I would strongly agree with any initiative that encourages FDI’s in these sectors through attractive laws and other measures. I believe FDI’s are very important for providing long term stability of the foreign sector. Moreover the productivity growth that usually follows FDI’s inflows will play e significant role in reducing current account deficit. Our economy needs more foreign direct investments hence Country Credit Ratings constitute a chief priority for our economy. It is my belief that FDI’s represent a regional rather than an individual challenge for the South East Europe. Countries in the region must coordinate their efforts toward creating a regional market. Regional infrastructure projects will significantly increase attractiveness and competitiveness as well as international financial market awareness toward our region. It will improve confidence and provide necessary economic incentives to enter in the region leading to higher FDI’s inflows for each economy. Inflation Our economy has experienced a relatively long period of stable prices. Annual inflation figure as measured by the consumer price index, for the last 12 months is reported at 2.4 percent. Both monetary and fiscal policies have been important factors in keeping inflation low. However, recently inflation pressures have accelerated. The fast growth of credit to economy, the steep increase of oil prices, administrative increase of energy prices, as well as other risks have the potential to create inflationary pressures and pose risk to elevate inflation expectations. Bank of Albania will take all necessary actions to ensure an inflation rate of 3 per cent with a tolerance band of ± 1 percent, in the short and long run. Interest rates During the recent years interest rates have dropped reflecting the ease of monetary policy. This has been a general trend for all financial assets either in Lek or foreign currency. On average banking system applies 9.7 percent for loans in domestic currency. The yield of 12 month Government securities dropped at a minimum of 5.74 percent in June 2006. However, following the last decision of the Bank of Albania and latest trends in global markets, a modest increase in interest rates has been observed during the last three months for both domestic and foreign financial instruments. We expect this trend to persist within the next 6-12 months. Banking system The Albanian banking system continues to expand. It is solid, consolidated and fully capitalized. The system consists of 17 banks, of which only 3 are entirely domestically owned. Banking network has been extended continuously including remote areas. Banking products increased in number and improved in quality. Entrance in the market of important European financial groups created a better competitive environment and further enhanced efficiency. The expansion of lending portfolio and more competitive lending rates has deepened financial intermediation. Latest data show that in June 2006, the assets of the banking sector reached 60 per cent of the Albanian Gross Domestic Product (GDP). Rapid changes in the banking system in light of credit boom, and global market financial integration impose the need for higher standards of transparency, accountability and governance from the banking system itself. Not only with regard to Bank of Albania, but public as well. Banks should behave responsibly and must integrate the stability of the entire system into their utility function. Financial system reforms Since years the banking systems has been in a constant process of transformation. The Financial Sector Assessment Program (FSAP) marks a significant moment in this process. On behalf of the Bank of Albania I would like to thank IMF and WB, for their excellent efforts on this professional and transparent financial certification of the Albanian Financial System. Bank of Albania remains very much focused in fulfilling the recommendations of the FSAP following the priority and institutional hierarchy. • Bank of Albania has increased the access and investment opportunities of commercial banks in the securities market. • The draft on Banks Law is completed. • Automated clearing house system is operational. • The number of electronic transfers has increased significantly. There is concrete evidence that shows a continuous reduction of cash economy. • Bank of Albania has extended its supervisory authority over all non-bank financial institutions that operate within the economic territory of the Republic of Albania. • Supervisory Board of the Bank of Albania has further increased the transparency of its decision making process. Minutes are released regularly and Bank of Albania website provides fresh info on daily activity. • There is significant progress on establishing the Credit Information Bureau. We hope by the end of next year that will be fully operational. • Last but not the least I would stress out that we have already presented a detailed action plan for the remaining part of the FSAP recommendations. Honorable participants, Designing and implementing monetary policy has become more challenging. Globalization in particular has exposed our economy to foreign shocks. In addition policy actions of ECB and FED, exert their impact on Albanian economy mainly due to high extend of currency substitution. Rapid growth of lending activity is the most notable development among domestic factors. According to our figures over the last two years credit to economy has expanded by an equivalent of 10-12 GDP percentage points. At this rate it is expected to reach 18-20 percent of GDP at the end of current year. Is worth mentioning that approximately 30 percent of the outstanding credit represents consumer credit, moreover 75 percent of the outstanding stock is loaned in foreign exchange currency. This represents a very important development and deserves scrupulous attention. Our main concerns relate to inflationary pressures and non-performing loans that such credit expansion might generate. In the light of these developments Bank of Albania assessed that existing stance of monetary policy was not providing enough stimulus to curb aggregate demand. Therefore in July 2006 Bank of Albania decided to shift the course of monetary policy by raising the base rate (7 days repo rate) with 25 basis points. We are happy to observe that market is reacting following our decision. However based on our short term inflation forecasts and in presence of several risks, some of which I already explained above, Bank of Albania perceives that inflation pressures for the next 12 months remain elevated. Currently we are cautiously evaluating the extend of market response and assessing whether further action is needed. Simultaneously Bank of Albania is becoming increasingly concerned regarding the quality of loan portfolio. The accelerated pace of credit expansion, is posing challenges to both banks and to supervisory authority. The response to these challenges will aim at achieving macroeconomic stability, by means of a well capitalized banking system. With this goal in mind, the Bank of Albania, as the supervisory authority, has intensified the dialogue with the banks in order to find an adequate consensus for: setting realistic objectives of annual activity growth; containing the credit expansion and maintain good credit portfolio quality; strengthen the internal control and risk monitoring systems; and monitor carefully the capital indicators. I would like to use this floor to emphasize that Bank of Albania will be very firm to follow strictly all requirements that derive from the law and regulatory framework. On our part, we will make the necessary modifications in the supervisory and regulatory framework that target the above mentioned issues with a realistic and flexible approach. The sole purpose of this conformist approach to supervisory rules, is to provide a cushion for avoiding potential future disturbances in the financial stability. Finally I would like to strongly emphasize for all business community, households and all other economic agents that Bank of Albania will make all efforts to ensure and further consolidate the general macroeconomic equilibrium in Albanian Economy, with specific role on financial stability. I believe that business community comprehends this important mission. Bank of Albania intends to be vocal regarding its prospects for economic developments, so that none of its actions should come to you as a surprise. Therefore I invite you to interpret our signals fairly and smoothly integrate them into your decision making process. I would like to remind you that our medium term agreement with IMF and focused policy orientation toward EU and European Exchange Rate Mechanism (ERM) provides additional collateral for our pledge. Thanking The Economist Conference for giving me this opportunity I am open to take questions and share comments.
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Speech by Mr Fatos Ibrahimi, First Deputy Governor of the Bank of Albania, at the Conference "Reducing the informal economy ¿ a challenge of the Albanian Government", Tirana, 16 October 2006.
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Fatos Ibrahimi: The reduction of cash in the context of reducing the informal economy Speech by Mr Fatos Ibrahimi, First Deputy Governor of the Bank of Albania, at the Conference “Reducing the informal economy – a challenge of the Albanian Government”, Tirana, 16 October 2006. * * * Since the inception of the programme undertaken by the Bank of Albania, in cooperation with the Ministry of Economy and the Ministry of Finance, on reducing cash, it came clear that the issue of cash in economy cannot be treated as separate from the issue of the informal economy. The companies, which try not to expose their activities to the third parties, will avoid banks and will find alternative sources of financing and payment, mainly in cash. Therefore, the Government initiative on reducing the informal economy is to be welcomed when bearing in mind the great impact it will have on reducing the cash economy. It needs to be said that the process of formalizing the economy has not been considered as an excuse for not undertaking a number of measures and initiatives, which may accelerate the progress of cash reduction. Among the actions undertaken in this context, I would mention: 1. The channelling of the state administration payrolls through the bank accounts At this moment, the entire public administration payrolls are channelled through the accounts with the commercial banks. Despite the initial reluctance of a part of the public administration employees, the withdrawal of payrolls through the bank accounts has now turned into as common as any other services provided by the private market. The channelling of pensions through the bank accounts has met with certain complications, since the small amounts and the high circulation do not make them very attractive for the commercial banks. The licensing of the post for carrying out certain banking services has resulted to be a good solution for this issue. The larger involvement of the private business in this process remains a challenge. In this context, the encouragement of channelling the payments through the banking system is a crucial step to be taken. The requirement of a rigorous application of the obligation that (small, medium and large) businesses have to open and operate with the bank accounts would not only serve to reduce cash but also to reduce the informality. 2. Monthly utility payment (electricity, water, telephone) through the bank accounts The monthly utility payment is now made through banks. However, this is limited only to the clients of the bank the utilities have their account in. The holding of these utilities’ accounts with all the banks in the system, or the finding of a kind of interbank cooperation would not only serve to increasing the amount of payments channelled through banks, but also to enhancing the competition. Another difficulty encountered in this context is the implementation of bank accounts direct crediting by the utilities. This has been due to the concentration of these companies in certain banks, and also because of the problems encountered in the standardization of the bills according to particular banks’ requirements. The Bank of Albania continues to be committed to finding a solution to these problems. 3. The expansion of the ATMs and the POS (point of sale) Automated teller machines (ATMs) experienced a further development over 2005 - 2006. Most banks have established a number of ATMs in Tirana and in other main cities throughout the country. The number of electronic terminals has grown from 93 at the end 2004 to 266 in August of the present year, while the number of users has increased from 34,090 to about 295,250. ATMs are used through debit cards, but credit cards are also being widely used. Both Visa and MasterCard are actively being used in Albania and most banks are members in one of them, providing the respective cards. Although the use of cards is still limited, the growing number of service units accepting electronic payments (POS-Point of Sale) from 155 in December 2004, to 1073 in August 2006, and the gradual change of the attitude favouring the holding of cash will lead to the enhancement of the use of cards as a mean of payment. The service of electronic transactions (e-banking) as a banking product began four years ago, although it may be said that it has not reached satisfying levels as far as its introduction and the use by the public is concerned. So far, two banks have been providing this service to particular clients (mainly businesses) for the carrying out of transfers, different payments etc. Over the present year, other banks have planned to provide this service. Table 1: Number of cards and ATM/POS Cash cards 26,736 173,161.00 220,657.00 Debit cards 6,552 50,066.00 70,176.00 Credit cards 2,550.00 4,245.00 136.00 169.00 Pre-paid cards Total 34,094 225,913.00 295,247.00 ATM 205.00 266.00 EF/POS terminals 779.00 1,073.00 4. The network and services expansion through the bank offices Over 2005 the banking system continued to expand its network rapidly within the Republic of Albania territory. It expanded with more than 50 branches and agencies throughout the country, although most of them were established in Tirana. A considerable number of branches and agencies have been opening in small towns, indicating that a large share of the population is now being provided with banking services. Almost all banks have established new branches and agencies, but just like in 2004, the opening of 29 branches and agencies by the small banks (G1 group) makes an impact. It mainly relates to the significant growing number of Banka Popullore branches, which opened 15 new branches throughout the territory of Albania over 2005, and to several other banks within this group, which expanded with some new branches and agencies after a period of long inactivity. The number of employees grew considerably over 2005, by 24 per cent, from the growth of 26 per cent over 2004. This significant growth in the number of employees is mainly related to the expansion of the banking system network and to the extension of the banks’ activities, which requires a better division of work and a more complete organizational structure. By the end 2005, the Albanian banking system had 3,479 employees, from 2,816 over the previous year. Compared to the previous year, the number of employees per banking unit decreased over 2005. In 2005, banks had 13.9 employees per banking unit, compared to 15 over 2004. Such a decrease has been a consequence of the growing number of branches and agencies with higher rates than the growth of the number of employees. A considerable number of branches and agencies have been established in sparsely populated areas; as a consequence, the number of employees in these branches and agencies has been quite small. The number of loan officers has increased considerably, following the significant growth of lending over 2005 and in the upcoming period. A considerable number of banks have restructured their loan departments, aiming at a more distinct division of duties and responsibilities. The increase in the number of banks, branches and their agencies, as well as the growing number of bank employees have caused the coverage of the population to improve significantly. Thus, the number of inhabitants per bank, banking unit and per bank employee has decreased considerably. Table 2: Coverage with banking services 2,236 2,816 3,479 13.9 13.9 bank 206,851 194,971 184,410 banking unit 20,815 16,593 12,539 bank employee 1,388 1,108 Number of employees Number of branches, agencies Number of employees per: bank banking unit Number of inhabitants per : Table 3: The expansion of the banks’ network by the end of the 9-month period of 2006Banks Nof No. Banks No. of Branches No. of Agencies Raiffeisen Bank National Commercial Bank United Bank of Albania Italian Albanian Bank Italian Development Bank (former Dardania) Tirana Bank National Bank of Greece (Tirana Branch) International Commercial Bank Alpha Bank (Tirana Branch) American Bank of Albania ProCredit Bank First Investment Branch) Emporiki Bank Credit Bank of Albania Credins Bank Banka Popullore Union Bank TOTAL Bank (Tirana According to INSTAT, the population of Albania totalled 3,102,777 inhabitants in 2003, 3,119,543 in 2004 and 3,134,982 in 2005. 5. The implementation of the Automatic Electronic Clearing House (AECH) project After the introduction of the RTGS system for the settlement of gross payments, the payments infrastructure expanded with the Automatic Electronic Clearing House (AECH) system, which aims at reducing the processing time of small value payments considerably, encouraging as such the use of banking payments. Over the present year, significant improvements have been made in terms of the information technology and communication with commercial banks, which has been indicated by the programmes used and by the purchase of new programmes by several banks. These programmes constitute a better sustaining for the Banking Accounting Manual requirements and serve to the needs of the institution to expand the activity and introduce new services, such as e-banking. 6. The review of the legal framework related to the payment system in the country, paying a special attention to that part which supports the new payment instruments and actors in the country The abovementioned developments in technology and information have been supported by the Bank of Albania through the formulation of the Regulation ”On the use of information technology and communication of the entities licensed by the Bank of Albania”, approved upon the Supervisory Council decision No. 32, dated 3 May 2006. This regulation will not only assist the provision of a more prudent and complete supervision of the information technology and communication used by banks, but at the same time it will help banks in their day-to-day work and in the use of this technology. Moreover, it will increase the security measures that banks should apply in order to provide the security and the good use of the information, the maintenance of the information and the continuity of work in cases of extraordinary events. Another crucial issue to be paid a special attention to and where certain deficiencies are present, is the SWIFT system. There needs to be a better administration of the users’ profile, in order to observe the three stages of sending the messages (creation, verification and authorization), and a division of security officers’ duties (left and right officer) from the different operational duties at the SWIFT. It is also necessary that the internal bank audit (or external when provided by consultant companies) be expanded, including the information technology entirely. This audit, which currently is limited only to the system users’ profiles or to the access rights they have in the system, should include issues that relate to the functionality of these systems, the accuracy of generating the information, the changes in the system, the information security during the operation and in transmission (for on-line branches) etc. 7. The enhancement of transparency of the bank commissions applied for loan payments, and in particular the decrease or abolition of domestic commissions or of incoming payments, are another measure that the Bank of Albania is implementing in the context of attracting the public and businesses as far as the banking services are concerned. ---------- Referring to the significant decrease of currency outside banks to total money – from 31 per cent in 2002 to 24 per cent over the present year – as an important indicator of the cash economy, it can be said that the abovementioned measures have provided their effect. However, the reduction of the informal economy remains a decisive factor in order to reach to the levels of cash in more developed economies, which is below 10 per cent. In this context, the establishment of the Credit Information Bureau, initiated some time ago by the Bank of Albania and expected to finalize over the coming year, is believed to make an overwhelming contribution to reducing the business informality in the interbank level.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Bank of Albania's 6th International Conference, "Regional financial markets and financial stability ¿ a concept between national sovereignty and globalisation", Tirana, 30 October 2006.
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Ardian Fullani: Regional financial markets and financial stability Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Bank of Albania’s 6th International Conference, “Regional financial markets and financial stability – a concept between national sovereignty and globalisation”, Tirana, 30 October 2006. * * * Honorable Mr. Prime Minister, Honorable Colleagues, Honorable participants! It’s a great pleasure and a privilege to open the proceedings of the Sixth Annual Conference of the Bank of Albania and to welcome you in Tirana. This conference will focus on financial stability. The analysis and understanding of imbalances in the financial markets and of their causes is essential in central banking. The extent of social benefits and advantages that money, as a public good, creates for the society is dependent on the efficiency and capacity of financial markets to facilitate trade, production, capital accumulation , economic growth and social welfare. Therefore, financial stability may be regarded as a “public good” and hence represents a public economic policy objective. The question is who is in charge of providing this good? Personally, my attention has been drawn by Paul Volker who describes the natural role of central banks in ensuring the financial stability. The central bank’s traditional role, as lender of last resort on one hand, and as monetary policy authority on the other, requires that central banks ensure financial stability in both standpoints as a provider and a beneficiary. Our role of monitoring the contagion process and financial and monetary crises, illustrates this idea very well. At the same time, the monetary transmission mechanism is another factor that witnesses the vested interest of the central bank in preserving the soundness of the financial system. The developments observed in the last decades, and particularly in the ’90, brought the importance of financial stability to the fore and highlighted its key position among the most important economic policy objectives assigned to monetary authorities across the world. in spite of the emphasis and the vast literature on the issue, it is difficult to give a widely accepted definition of “financial stability”. Definitions of well-known academics and colleagues describe financial stability as a set of decisions and policies that deal with macroeconomic, monetary, supervisory aspects of economy and regulations of financial markets. I am confident, that those characteristics of financial stability will be widely covered in the proceedings of this conference. After a long deliberation of literature, I chose Garry Schinasi (2005) to define the financial stability, and I quote him: “Financial stability is a condition, in which an economy’s mechanisms for pricing, allocating, and managing financial risks are functioning well enough to contribute to the performance of the economy” 1 . This definition implies that the financial system is capable of accomplishing appropriately its three main roles. Firstly, the financial system is capable to achieve effective distribution of economic resources over time. Secondly, it identifies and manages appropriately financial risks. Thirdly, it can softly absorb shocks and surprises that occur in the financial system and the real economy. I think that the goal of this conference is to analyze financial markets concentrating on these three aspects, and to steer our efforts towards evaluating and guaranteeing the achievement of financial stability in our region. Our economies are quickly developing, and they are experiencing rapid changes, and we, as representatives of central banking in our countries, must adapt to these changes and promote growth without losing sight of prudential supervision. Latest trends towards expansion, liberalization and privatization of the financial system in the context of a fast-paced globalization of the world economy have put the goal of financial stability on top of the priorities in our region. During the last few years, the financial sector has recorded positive growth rates in all countries in our region. However, I think that the merit for such a growth goes to the most vital segment of the financial Safeguarding Financial Stability, Theory and Practice (2005), International Monetary Fund, page 83, last paragraph. system, that is, the banking system. The key factor to the successful growth and consolidation of the banking system has been the rapid privatization of banks, which is, at present, almost complete. This process has opened the way to the arrival of well-known international banks that have brought foreign capital, expertise and confidence in the region. The entry of those banks, besides the positive aspect of fostering growth and development, calls for higher prudence in the supervisory role of the central banks. As a result of the above developments, the degree of financial intermediation in our region has further increased. Credit to economy has played a considerable role towards the deepening of financial intermediation. Albania has recently joined the group of countries experiencing a credit boom, as annual growth rates have been in the range of 60-70 per cent in the last two years. An interesting indicator of banking system transformation is the EBRD indicator regarding “banking system reform and liberalization of interest rates”, which combines the quality of supervisory and regulatory base, the ownership structure of banking system and the degree of public access into the banking system. Based on latest data, Southeastern European Countries have progressed admirably with regard to their banking systems. It is crucial to understand that transformation of the banking system has been a key element in the long transition to a market economy. I want to emphasize that this process has brought development, has strengthened the macroeconomic stability, by positively influencing institution built-up and its consolidation, by encouraging faster structural reforms and the set up of regulatory frameworks related to economic policies. Giving a glance at the Albanian banking system, I would emphasize that qualitative developments have taken place during 2006. The banking system assets during eight first months of the year have been increased by 12 percent and are estimated at about 60 percent of Gross Domestic Product. The banking system results in profit, is liquid and capitalized. I would like to mention the entry of a new bank in our system, the Sao Paolo IMI Bank, which, besides its shares at the Italian-Albanian Bank, has preliminary agreed with the owners of American-Albanian Bank to buy its 80 per cent of the shares. This opens the way to further consolidation of the banking system in Albania. Now, let us give a glance at the rest of the financial system. It should be accepted that it still manifests problems of development and consolidation. The concerns relate to the magnitude of operators, the regulatory framework and particularly the supervision. In this way, their contribution to financial intermediation is low. It should be understood that, besides our role, the establishment and consolidation of the financial stability can not be ensured only through banking supervision. Therefore, further to FSAP recommendations for a more updated supervision and regulation, the new public agency of financial sector supervision is established. We as the Bank of Albania are deeply open to provide our assistance, so that the financial vigilance precedes the development. This will precede the expected developments in the insurance companies, pension funds, financial mediators in general. Elaborating this matter further, I would briefly bring up some weaknesses of the financial systems in the region. Financial systems in all countries of the region are still dominated by commercial banks. Other segments play a second hand role. Capital markets, despite the recent developments, are still lagging behind. The number of banks in our region is relatively high. Taking into consideration the size of economies in our region, there is space for further consolidation, mainly through mergers and acquisitions. On a regional level, notwithstanding the credit growth rates, outstanding credit as a share of GDP is small compared to that of the new members of EU. This shows that banking sectors have a limited role in financing the needs of the economies for investments. One of the main factors slowing financial intermediation growth is the high intermediation margin of interest rates between loan and deposit rates. This phenomenon could be the result of several developments, among which we can mention the lack of efficiency and competition among banks, the crediting risk that still remains high, problems with the collateral, and problems in the functioning of the rule of law as well as other issues of similar nature. The low level of efficiency and competitiveness in banking activities is also reflected even by the high capital adequacy ratios. .The injection of foreign capital in our countries has remained low, showing, among other things, the inability of our financial systems to facilitate the absorption of foreign investments in our national economies. The absorbing capacities can be improved significantly, if investors and banks conceive their strategies in regional level and not fragmented in separate countries. In this way, the financial system may serve as an accelerator of the inevitable process of the region’s integration to the European Union. Dear honorable participants, I believe our mission is vital to our future. What I have just said should not be linked only to the issues already mentioned above but to a greater goal, to that which for the moment has become the main aspiration of each country in the region, to the European integration. Mr. Trichet has emphasized that “the speed at which South-East European countries progress towards accession to the EU depends on the policies followed. It is the culture of stability and the exercise of the responsibility in economic policy making that are the crucial ingredients to achieve the bright prospects that lie ahead for the region”. Personally, I have often mentioned in my public speeches that the opportunities of the region for quick and stable prosperity are linked, among other things, to our capability to act as a team. In line with that, we do not exclude financial stability in all its complexity. It is a pleasure for me to observe that in the field of central banking, through our activity in the last couple of years, we have achieved a fruitful and productive cooperation. The presence of the regional Governors in the Conference of the Bank of Albania makes the case evident. I am confident that I share the same opinion with my colleagues present in this room, that financial stability is a delicate matter that must always be part of our agenda. Today, the Bank of Albania is honored to act as the host of this event, but I am sure that in the future this forum will be hosted by other countries in the region. I believe that this conference today opens a door, which I consider a door of the region. On this occasion, I would like to ask you to consider this conference not only as a sign of the willingness for cooperation. I think that it is our obligation and responsibility to identify future priorities for consolidating the financial stability in the region, as an important precondition towards its European integration.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Bank of Albania's 6th International Conference, "Regional financial markets and financial stability ¿ a concept between national sovereignty and globalisation", Tirana, 31 October 2006.
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Ardian Fullani: Financial stability issues and cooperation at a regional level Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Bank of Albania’s 6th International Conference, “Regional financial markets and financial stability – a concept between national sovereignty and globalisation”, Tirana, 31 October 2006. * * * Dear participants, Ladies and gentlemen, When we thought about the topic of this annual conference, there was no doubt about the need to dedicate it to financial stability issues and the cooperation at a regional level. The current time seem to be appropriate because of the developments in the national financial markets and economic developments, as well as in the speed with which the region is moving ahead in adopting best international standards in good governance, market openness and integration, technological improvements and multilateral cooperation. In my speech today, I will touch upon similarities and differences, but also uncertainties and risks that our financial markets are experiencing in the path toward modernisation and integration in the global financial markets, and will try to address the importance of regional cooperation in better facing these challenges. I will conclude with some thoughts about practical regional cooperation, which I am sharing with you, hoping to generate further discussions. At a regional level, our countries are experiencing nowadays a higher growth rate of the financial markets, compared to that of the economic growth. As a consequence, the weight of the financial sector in the national economies, strictly from a quantitative perspective, is growing. At the same time, expansion is accompanied with changes in the market ability to better accommodate market participants needs for funding, diversification and risk appetite. Undoubtedly, institutional participants in the financial markets find themselves with a larger number of possibilities for business developments and financial specialization. In addition, general public interest in using financial market products and services has increased dramatically based on the benefit they perceive from improved efficiency in everyday life activities. These developments highlight the importance of financial markets for our economic well-being, from a qualitative perspective. Let’s also recall that economic improvements trigger and support changes in social and cultural aspects of our life, bringing our nations closer to international values and principles, and to each other. As expected, because of the historical background, our countries have differed in the speed and in the depth, with which they have moved along the transition phase in the last decade. While we had many similarities in adopting the first basic and urgent reforms including price liberalization, enterprise restructuring and privatization in some economic areas, we were more distinctive in completing other reforms that would allow for institutional building capacities, which on the other hand, would make these changes root deeper in our societies. Today, our countries enjoy stable macroeconomic environments. We are experiencing low inflation levels, stable exchange rates, a more prudent and responsible fiscal policy associated with limited and manageable budget deficits. National Central Banks have established their independence and are perceived in public as respectable and reliable authorities. There are also common efforts to fully open our economies and to attract foreign capital. As we are in the process of fully opening our markets, we are benefiting from increased competition, improved productivity and efficiency, and increasing quality of services for our citizens. But, we are also facing several uncertainties and risks. Markets remain segmented and their infrastructure faces difficulties in supporting new and imposed developments. Market infrastructure deficiencies exacerbate their shallowness and make it difficult for various market participants to act in order to meet their business objectives and manage their risks. The technological improvements have to fully show their effect in meaningfully reducing costs of financial services. Regulatory gaps in different areas of local financial markets create the conditions for regulatory arbitrage and may adversely affect the supervisory work. Therefore, erroneous and costly decisions are unavoidable. The financial situation of single market participants, due to market segmentation, is highly affected by their capacity to find financial support in the international financial markets. In reality, this leads to an increasing gap among so called “big” and “small” or among foreign and locally owned financial institutions. Real economy development is an additional source of risk for financial markets. Such interaction should be carefully watched to better understand financial market trend in the future and identify financial imbalances in a country and regional level. Indeed, we are all experiencing a construction “boom”, where residential house prices have increased considerably. In some countries this is fuelled by credit expansion but in the whole region there different views whether this is affordable. At the same time, the pace of general credit expansion, particularly for consumption and in foreign currency is alarming and is forcing us to think of several “what if” scenarios and take preventive actions. It is our task as monetary and supervisory authorities, to provide a proper environment for a balanced and stable development of our financial markets. This is not an easy task for us, especially when there is no simple indicator to measure our success in achieving financial stability, and when we realize that this is a multifaceted issue that we do not fully control, and even can not fully predict. Above all, pursuing the target for financial stability is a never ending race, where the “finish line” is continuously moving ahead of us. We have to find and implement appropriate policies, knowing that these policies represent a trade-off between making the system more resilient on one side and affecting its short-term efficiency on the other. In this challenge we must bring in the financial market industry through consistent communication and promote the adoption of the international standards in good governance a proportionate or risk-based supervision. Based on our legal responsibilities, we have to approach these challenges in a national level. But, due to increasing liberalization of both labour and capital movement, and herd behaviour of financial market participants, we understand that that is not sufficient. We have nowadays in our countries the same financial institutions and the same behaviour of such financial institutions in response to a centralized business development policy, growing cross-border interaction among businesses and households, similar trends in social life. Monetary and supervisory authorities in different countries in the region, to a large extent have responded to such developments with establishing formal cooperation with home country supervisory authorities, particularly in the area of banking system supervision, by signing bilateral Memoranda of Understanding (MoU). The fact that our countries are at the borders of the European Union (EU) has caused an increased presence of EU financial institutions, including banks. Hence, the MoU’s have been signed with these EU countries supervisory authorities. The quality of cooperation varies in different countries but one can say with reasonable confidence that the willingness of the host countries to cooperate has not always met the same interest from our counterparts. To an extent this is expected, because the assets of their banks in our single countries sometimes represent only a fraction of their total assets. Nonetheless, they should take notice of our concern that this cooperation is very important for us, particularly in cases where these foreign banks dominate our local markets. The liberalisation of the financial markets in Albania has been a desirable move. We consider the inflow of foreign capital an important factor to upgrade the level of our banking system, improve its efficiency and the quality of its products, by improving competition conditions in the marketplace. In most cases, foreign banks have brought with them the expertise and the mentality of modern business development from the more developed countries they come from. As Mr. Bini Smaghi mentioned in his key note speech, the increase of foreign presence in our financial market has also triggered new ideas on how financial institutions and particularly banks intend to adjust their business volume and size to position themselves better in the marketplace. But this is something where we would like to see a more active and consistent approach, in both establishing active business development policies and bringing in good quality and experienced management in applying those policies. It is indispensable for our supervisory authorities to be informed of the policy of different important financial or banking groups that operate throughout our region. Host to host cooperation can help in this regard because some of us enjoy better communication links with the home country supervisory authority and they can share this information with the rest of the supervisory authorities in the region, within ethics and transparency principles. In practise, this can turn out to be a very valuable approach, because these regional foreign banks tend to adopt similar policies in countries with similar characteristics. Another area where we could establish a strong cooperation is the discussion that should occur when any of us is adopting certain measures that are intended to control risks that appear from trends in the financial business developments. In return, we would be able to adopt similar supervisory policies, thus reducing damaging regulatory arbitrage possibilities and other risks associated with it. One implication of the supervision/regulation heterogeneity across counties in the region is the ineffectiveness of indirect measures to control for credit growth. Therefore finding ways and pushing homogeneity in this regard would at the same time be also important to compensate the lost effectiveness of monetary policy and the eventual demand pressures. There are also a few other ideas that stress the importance of pre-emptive regional cooperation, in bringing us as a region closer to fulfilling our target of European integration. By setting up and pursuing coordinated financial market development policies, we help to integrate our national financial markets into the international financial markets, and pave the way for other economic and social reforms to follow. The modalities of such cooperation vary. Ad-hoc periodical meetings of Governors in the region, supported by more frequent meetings in a technical level to support the discussion agenda, could be one way of approaching the objective for stronger cooperation. In addition, through a more consistent communication, we can try to identify particular issues which are relevant for our regional financial markets, and pose those issues to our counterparties, being common home country authorities, other supervisory authorities where we turn for assistance, or even professional organizations where our supervisory authorities participate. I am sure our concerns can be taken more seriously if raised as a region. Furthermore, we must avail of the efficiency provided by the technology, in sharing our information. A joint web-site can be established, where we can find important information, interpretations, or share its experience regarding supervisory issues or financial stability issues. When mentioning this ways of cooperation, I am not trying to neglect what is already happening and I am mindful of the fact that there is a trade-off between the advantages of such cooperation and its costs. We should also point out that Memoranda of Understanding’s can not act as a substitution for cooperation in practice. It is important we maintain close contacts with our counterparts, on exchanging regular information on general trends and issues of respective banking systems in normal times, as it serves to establish confidence for future cooperation, particularly during distress times. Otherwise, such official cooperation agreements will do little in making a real difference. Let me conclude by saying that the objective of reaching and maintaining the financial stability is not an easy task but we could contribute a lot in its achievements by enhancing our efforts to make sure that financial market institutions are performing soundly in a stable macroeconomic environment. Our contribution can be much more effective if it is properly coordinated regionally. Such cooperation will ease our efforts in improving supervision capacities, avoid cross-border regulatory arbitrage and will serve our efforts to meet our objective of integration in European financial markets. We can enrich the modalities of such cooperation, keeping in mind that the basis of good cooperation is established in normal times, through regular contacts. Thank you.
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Speech by Mr Fatos Ibrahimi, Deputy Governor of the Bank of Albania, at the 9th CEI Summit Economic Forum "Fostering reforms and innovations for sustainable growth", a Ministry of Economy, Trade and Energy, Central European Initiative, Tirana, 23 November 2006
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Fatos Ibrahimi: Banking system reforms, accomplishments and challenges in Albania Speech by Mr Fatos Ibrahimi, Deputy Governor of the Bank of Albania, at the Ninth CEI Summit Economic Forum “Fostering reforms and innovations for sustainable growth”,a Ministry of Economy, Trade and Energy, Central European Initiative, Tirana, 23 November 2006. * * * Distinguished participants, Allow me to express my pleasure for participating in this forum and for the opportunity to present some of the main developments that have taken place in one of the most important fields of the Albanian economy, the banking system. My presentation will focus on two issues: First, the main steps followed by the reform in the banking area, presenting the problems related to commercial banks, omitting monetary aspects. Secondly, the current situation of the banking system and some of the main problems it is faced with, which need solution over the short-term and medium-term period. The banking system reform was part of the structural reforms undertaken by the Albanian authorities after 1992, which aimed at macroeconomic stability and Albanian economy transformation into a market economy, by privatizing the economy and creating financial and social protection institutions. The banking system transformation in Albania followed the same path as in other former socialist countries. The first important phase started with the passing from the one-tier banking system into a two-tier system, in which the former Albanian State Bank was divided into two banks, with a qualitatively distinguished activity from each-other. The Bank of Albania was given the conventional functions of central banks, such as: monetary policy, currency issuing, foreign exchange market; while the National Commercial Bank, together with other banks, were given the conventional banking functions, such as accepting deposits, extending loans and other banking services. The Laws “On the Bank of Albania” and “On the Albanian banking system” adopted in 1992 constituted the grounds needed for this transformation. It is worth mentioning that one of the fundamental elements of the Law “On the Bank of Albania” of 1992 was the granting of a relatively high degree of independence to the central bank, as a legal, institutional, financial and personal independence. This independence has been increasing constantly throughout these years, not only as a legal and institutional independence, by amendments made to the Law in 1996 -1997 and after the approval of the Constitution, but also as an independence in the real aspect. Under the Law of 1992, the dependence of the Central Bank passed from the Government to the Parliament, being given simultaneously the functions of determining the volume of credit, issuing, banking interest rate, the payment system, etc. At that time, the reform in second-tier banks was focused on three main directions: 1. Introduction of a new regulatory and supervisory framework; 2. Institutional policies in treating the non-performing loans; 3. Plans related to the privatization of state-owned banks. Notwithstanding the measures taken for the banking system transformation till 1997, when the collapse of pyramid schemes reached the climax, the banking system was not able to operate effectively in carrying out its intermediation function. Private banks, which consisted of small foreign banks or joint-stock banks and which did not have any subsidiaries, hesitated to extend loans and were focussed on foreign exchange transactions and trade financing. The state-owned banks were engaged in domestic lending, but they operated as government agencies, with soft restrictions in funds management and failed to apply the lending practices in compliance with international standards. Also, the Central Bank’s supervisory capacities of that time were limited. Some data indicate that the level of non-performing loans at end of 1996 reached to 60% of the total loan portfolio. Besides the weak performance in credit intermediation, the range of services provided to the public was also limited. Many of financial activities in the economy were carried out outside the licensed financial institutions. The financial infrastructure, including the payment system of accounting and audit was also rather weak. Lack of a formal operational banking system, associated with an insufficient structure of regulations and supervision, contributed to the flourishing of pyramid schemes. The 1997 events served as an encouraging element for deeper reforms in the banking sector. The government of that time, in cooperation with the International Community and the Bank of Albania, affirmed the commitment to implementing a full program of reforms needed for the banking system. The government’ commitment to carry out a full program of structural reforms in banking sector served as an instrument for re-establishing the public confidence in financial institutions and services. The program of that period was focussed on four main objectives: • Improving the legal and regulatory infrastructure; • Building sound and reliable institutions; • Strengthening the financial infrastructure; and • Liquidating or privatising the state-owned banks. Besides the adoption of new laws on the Bank of Albania, on the banking system, on bankruptcy, and on safe transactions, of importance was the program for a rapid change of the state-owned banks’ ownership, which led to the liquidation of the ANB and the establishment of the Bad Assets Resolution Trust. The NCB was recapitalised and privatised in 2000. During 2004, the privatization process of the Savings Bank was finalized, being purchased by the Raiffeisen International Bank Holding, thus recording the transfer of 94% of the banking capital to private ownership. Currently the Albanian banking system is composed of 17 banks, 14 of which are of foreign capital. The capital source is from different places, such as Greece, Italy, Austria, Germany, United States of America, etc. After the privatization process of the former Savings Bank was over and a 100% of its stock was transferred to the Raiffeisen International Bank Holding AG in August, the capital ownership structure during that period underwent significant changes, having the share of “domestic government capital” estimated at 6% from 32.1% at end of 2003, and the “domestic capital” at 12.75 from 35.15% it was in the same period of the previous year. Figure1: Banking system capital ownership structure in years 1 Recently, the improved climate for the development of business and the economy, the Savings Bank’s privatization from the Raiffeisen Bank, the macroeconomic stability, and the low inflation, have all led to rapid development of the banking system. Hence, we can highlight that: • During 2005 and onwards, considerable developments have occurred. The system was more oriented towards the lending activity. The latter one constituted 26% of the portfolio, from 16% in the same previous year period. In 2005, the outstanding credit of the banking system increased by ALL 57.6 billion 2 or 82%, from ALL 19.3 billion or 38% in the previous year. In the meantime, the significant growth rate of the outstanding credit compared to end of 2004 has been reflected even in the changed credit structure by terms. It comes out of the analysis that the short-term credit has maintained the same growth rate, while a shifting of the mid-term credit to long-term credit is noticed, particularly when the comparison is made with year-end 2004. Banking system assets of the nine-month period of 2006 increased by ALL 71 billion or 14% more than at year-end 2005, maintaining almost the same growth rate with the previous year. The downward trend of the large banks’ contribution to the growth of the system indicates a reduction of the overall banking activity concentration. Meanwhile, the banking system assets performance in years, but particularly in 2005, expressed as a share of GDP, shows increased depth of the banking system intermediation. The ratio under discussion is estimated at about 59.3% for year-end 2005, versus around 52% at end of 2004 and 60.4 % at end of the nine-month period of 2006. Though in 2000, the National Commercial Bank was privatized, the increased weight of the domestic government capital in comparison to 1999 is explained with the growth of the size of the shareholders’ equity of the Savings Bank to ALL 5 billion, from ALL –9.3 billion at end of ’99 (it is evidenced with a negative value because of the accumulated losses of the SB). At end of ’99, the weight of the paid-in domestic government capital accounts for 41.7 percent, from 27 percent of the weight of the domestic government equity capital While the credit outstanding in ALL is increased by ALL 17.5 billion or 128 percent, the one in foreign currency is increased by ALL 40.1 billion, or 71 percent. Compared to end of 2004, the banking system appears with an increasing level of profit, to ALL 6.1 billion. Return on equity resulted to 22.24% at end of 2005 and 19.2 % at end of the nine-month period of 2006, while the credit quality denominated as a ratio of the net non-performing loans to total loan portfolio is at 2.3%, from 4.2% at end of 2004. However, it is still soon to judge about the credit quality, because credits are still new and their quality has to be monitored prudentially. • Year 2005 recorded ALL 33 billion of the shareholders’ equity of the system, or about ALL 7 billion higher compared to 2004, and 19% of the capital adequacy indicator or about 3 percentage points lower than in the same previous year period, whereas for the nine-month period of 2006 these indicators are respectively: shareholders’ equity of the banking system reached ALL 39.8 billion, being increased by ALL 6.8 billion compared to year-end 2005, and the capital adequacy indicator was 18.3 % or 0.3 percentage point lower than in the same previous year period. • Another welcomed development of the banking system belongs to the customer service, which through electronic terminals, has been naturally associated with the increased number of electronic cards in circulation. Presently, banks provide debit and credit cards, in cooperation with the international companies of Visa and MasterCard, Diners Club. Nine banks provide the ATM service and the number of the latter ones at end of December 2005 was 205, while in August of this year it has reached to 266. In the meantime, the number of the points of sale has reached to 1073, of debit cards to about 70,176 and of credit cards to 4,245. • Undoubtedly, the further expansion and strengthening of the banking system is an important aspect. The geographic extension of covering the territory with banking business, the increased competition, the introduction of many new products and the new recent developments constitute an additional argument for the vital role played by the banking system. The map of covering the country with banking business was further expanded, including new regions uncovered previously. Thirty new branches and agencies were opened during 2004, while in 2005 their number became 48, making the total number of branches at end of 2005 reach 127 and that of agencies reach 113. • The positive developments in the banking sector and the increased number of subsidiaries and agencies have brought about a considerable increase in the number of employees. So, at year-end 2004, 3491 persons were employed at the Albanian banking system, from 2816 persons in the previous year. This constitutes a growth of 24% per year and expresses clearly the priority the banks are giving to the enhancement of human resources, as a necessary condition for growing the activity in the future. • These developments indicate an improved perception, not only by banks but also by businesses and households for the investing environment in Albania, encouraged even by the sustainable macroeconomic environment. The annual increase of the number of employees that work at the banking industry by about 24%, versus 26% of the previous year is a logical outcome of the positive developments in the banking sector. An important role in these developments has been played by the Bank of Albania, in terms of creating a favourable climate for the development of business and the economy. We may highlight here: • The monetary policy followed in the recent years has always aimed at cutting the interest rates, with a slight change in 2006, intending to keep inflation rate under control. This has impacted on the establishment of a stable business climate, where the business plans and decisions are not jeopardised by the insecurity of inflationary erosion. • Since some years the Bank of Albania has been committed to create an updated payment infrastructure, so that the banking system is open and closer to customer relations. Hence, after putting into operation the real time gross settlement system and the automated electronic clearing house system, the establishment of a loans register is presently aimed at. After the completion of the automated electronic clearing house system, another possibility is created not only for the banking system but also for the business of services of a periodic nature, so as to enhance its economic efficiency. • The Bank of Albania deems that a banking system helps the economic growth if it is sound financially, since the developing economies, such as our economy, are generally characterised by a fragile stability. Therefore the Bank of Albania has taken a number of measures, aimed at enhancing its supervisory abilities, with the purpose to have a strong, sound and efficient banking system. Regardless of the positive developments, still much has to be done. The degree of financial intermediation continues to be relatively low. Some economy sectors, such as agriculture, continue to be slightly credited or not credited at all. The banking credit contribution to productive investments is still low, and moreover, given the high weight of lending to support the trade activity, the conclusion drawn is that the majority of loans go for financing the imports. Also, the degree of using the banking system is not in the required parameters, and moreover, the degree of using cash is still high. During the current year, it has been worked for improving the existing Law “On Banks in the Republic of Albania”. These improvements are being driven by the need for adopting the European directives in this area, and by the Basle principles for an effective supervision. Compared to the existing law, the new draft is aimed at being more complete, more accurate in some of its elements, including new concepts in compliance with the European directive 83/349 and other important directives. Amendments are envisaged in the way of licensing activities according to capital level, in the consolidated supervision, etc. Many provisions are planned to be introduced in the law, as concerns to risk management, which so far has been covered by some regulations. The draft-law, for which international financial institutions have also given their assistance, has been subject to a large discussion with the banking industry and is currently submitted to the Parliament for passing it. In conclusion, I would say that: As a result of reforms undertaken, the Albanian banking system, as the most dynamic part of the financial system, has recorded a constant progress in the recent years. This process is the fruit of clear visions and earnestness with which the Albanian authorities have treated the banking sector reformation, fruitful collaboration these authorities have had with international financial institutions, such as the IMF, the WB, for drafting the medium-term strategies and beyond, for the development of this sector as a vital sector of the market economy and the numerous challenges it has been faced with throughout these years. Hence, the Albanian banking system is presented as safe, sound, under a constant reformation and consolidation process, passing into a qualitatively new stage, which will provide the business and bank customers with a modern banking service that aims at achieving the levels and standards of Western banks.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional seminar "Development and implementation of business and consumer confidence indices in Albania 2", Tirana, 1 December 2006.
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Ardian Fullani: The confidence indices Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional seminar “Development and implementation of business and consumer confidence indices in Albania 2”, Tirana, 1 December 2006. * * * Dear participants, Today’s seminar, on the confidence indices, has a special importance, due to the fact that it regards the evaluation and decision-making basic elements in economic policies, information and in its real dimension. As in any decision-making process information is the first step to reach a sound judgment on the right monetary policy for a central bank. It is indispensable for the monetary authorities to prepare the analysis of the macroeconomic indicators, in order to prepare a monetary policy that ensures the stability of the internal indicators as well as the relations with the partner economies in trade affairs. On a more general view, the economy of a country can not achieve competitiveness and international standards, if development policies are built on a non complete information basis. The preparation of a complete information framework in the economic field is a challenge for the regional countries to reach occidental standards. At the current stage, for Albania this challenge is even more urgent. The actual condition of the national statistics has room for spreading the statistical basis and for providing stable statistics over time. However, the progress in the statistics field, as well as in other related ones, needs time, funds and the right legal ground for undertaking substantial projects. Meanwhile, our decisions have to rely on as much as possible sound basis. Drafting the confidence indices, as indicators of economic expectations, does not substitute the lack of statistical information on the current situation of an economy. These indices enable monetary markets and authorities to rearrange in time the strategies that preserve balances of related goals. Confidence indices enable a central bank adjustment of monetary policy stance in the right time in order to preserve price stability, while the economy grows at a potential pace. The developed countries are in frontward regarding the preparation of confidence indices as indicators of expected performance of the economy. Integration of the markets and the globalizing process increase the necessity of preparing these indices in our region, because the objective of monetary policy, the price stability, reflects stability and economic openness towards regional countries and further. It has already been 4 years that Bank of Albania has started the evaluation of business and consumer confidence indices. These surveys are being run on a quarterly basis, with the help of INSTAT, and involve over 600 businesses of production, construction and services sectors and about 1500 consumers. The information collected covers the performance of prices, consumption, income, production, employment, investments and some other indicators, which support the decision-making on the monetary policy stance. In this important process, the Bank has from the beginning been assisted by the experts of Ifo Institute for Economic Research, witch is internationally renown in the field of business confidence indices. So far, the results of these questionnaires have been indirectly reflected in the periodical analysis and reports and in other different papers of the central bank. The further consolidation of these indicators, paves the path of their publication for the purpose of being used by the economic agents, as an extra way of communicating with the central bank. A preliminary step in this direction is also the consolidation of the applied methodology for calculating these indices, through a professional expertise as that of IFO. The undertaken steps, in expanding and consolidating the statistical basis of the monetary authority in real time, will enable the management on time of the situations and challenges, which are lead by economic development and the further integration of the regional markets. Coordination of the work between regional central banks for adopting the methodology and the indices enables the maximal use of existing knowledge basis on the specific features of our region, against that of the most developed economies. The use of the same methodology for establishing the indices will make it easier to compare them to each other. In parallel, these indicators will serve as a communication tool with the international institutions, specialized in best presenting and identifying the priorities according to the countries and with the foreign investors interested in our country. Our purpose is to maximally adapt the indices we are drafting to the best international practices in this field, far from voluntarily solutions. Without any doubt the main challenge remains their efficient use in our decision making process. We do appreciate that the products, we have been discussing during these two days, the confidence indices in general, will be a successful mean of communication for the Bank of Albania with the market’s actors and the general public. I do not hesitate to declare that the launch of these two products, especially in the context of our purpose to adopt inflation targeting, will further improve the decision making process at the Bank of Albania. Recently, the Bank of Albania has accelerated the development pace, regarding the improvement of the decision making process and the refinement of the mechanisms that lead to its decisions. The issue is how quickly the market’s actors will follow the current pace of the Bank of Albania. It is important that the difference between the two velocities reduces, in order that our dialogue with the market will be standardized and transparent. To enable an as much as possible contemporary communication, among others, an important part plays the cooperation between Bank of Albania, the financial market, Ministry of Finance, INSTAT and the other institutions. In addition, it must cooperate more with other groups of interest, such as Chamber of Commerce, Konfindustria, Medias and the general public. At this point, I want to emphasize that the role the media plays is really special. A professional media would be able to construct reliable and comprehensible communication models, easily understandable by the public. The products we are getting ready to launch soon, that means the confidence indices, have to justify their designation. Stated differently, the public must believe the product of the Bank of Albania is reliable, that product is the object and the real indicator of the public’s expectations. In the meantime, we expect to have back the echo of the public’s trust. Wishing you all a fruitful working-day, Thank you!
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the "Round Table on Target Inflation 2", Tirana, 8 December 2006.
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Ardian Fullani: Bank of Albania – progress during 2006 Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the “Round Table on Target Inflation 2”, Tirana, 8 December 2006. * * * Ladies and gentlemen, I want to conclude this Round Table by thanking you all for your contributions. We are really happy that you came to Tirana for discussing the monetary policy strategy of the Bank of Albania. This Round Table on Inflation Targeting was an excellent follow-up of the Open Forum. At the Open Forum last year in December we globally discussed the many preconditions for Inflation Targeting. During these two days of the Round Table, yesterday and today, we went far deeper on these complex issues. These issues need to be solved before the Bank of Albania can put a fully fletched Inflation Targeting regime into place. At this Round Table we have discussed the progress that the Bank of Albania has been making during 2006. One of the discussed topics was the econometric modeling and forecasting. The Bank of Albania uses now a reliable analytical framework that provides information useful to the monetary policy decision making. Under Inflation Targeting more information would be needed about the expected inflation developments in the future. As laid down in the central bank law, the primary objective of the Bank of Albania is to achieve and maintain price stability in Albania. For keeping prices stable we need to be able to forecast the development of prices in the future. Our current econometric models provide us information about these future developments. Our internal studies show now that the Bank of Albania is able to make reliable forecasts. We also discussed the consequences of situations where the consumer price index increases, let us say, more than 3% at an annual basis. This may for instance happen due to higher electricity prices, or higher oil prices. These energy prices are a main share of our daily expenditures. Therefore, they are a main share of the total basket of consumer prices for the “average” Albanian household. However, the focus of our discussions was the analyses of the further impact on the Albanian macro-economy. Higher prices will lead to a lower purchasing power. Households will buy less in case of a price increase, under the condition of unchanged household income. Then, if many households in Albania start consuming less, the Albanian economic growth will suffer. The Albanian production will slow down due to the overall lower demand for goods and services. This process can take some time. But, anyhow, each economist will agree that strong increases in prices are bad for the economy. A high inflation, that is another way of saying a strong increase in prices, will harm economic growth. The Bank of Albania aims at an average increase of the consumer price index of 3%. The Bank of Albania will set the interest rate for keeping expected price increases to 3% plus or minus 1 percentage point. It has built a macro-econometric model with all these channels that transmit monetary policy in the Albanian economy. The main purpose of the model is to analyze the reaction of prices, private consumption and business investment and so on, in reaction to changes that may take place. We call these changes in analytical terms “shocks” to the economy. Our macro-econometric model is promising. Very promising. But for building econometric models we need statistics. Albania has statistics, but we need better statistics. For the year to come, the Bank of Albania wants to improve the statistical framework. The Bank of Albania needs better statistics, I said. With “better” statistics I mean here “more” statistics, “reliable” statistics and “user-friendly” statistics. We need to measure all macro-economic developments in the economy better. And we need to keep track of these developments. Our Albanian history is still short. We only have time series for about 15 years. In time we will logically have longer time series. Our time series need to become timely available and they should be fully understandable. Inside the Bank of Albania we can work more on statistics. In the year 2007 the Bank of Albania will improve its own database on monetary and financial statistics, and on the balance of payment statistics. But, for other statistics we depend upon our national statistical office, INSTAT. We also depend on other institutions for providing us with relevant information. Next to the broadening and deepening of the statistical framework the Bank of Albania will improve upon its communication with the public. We discussed during this Round Table the transparency of the Bank of Albania. We concluded that significant progress has been achieved. But next to transparency, the Bank of Albania wants to improve upon the information that it provides to the public. The Bank of Albania aims at making monetary policy understandable to everybody. We know already that money matters. The more money we possess, the more we can buy, and the more our economy will grow. The more our economy grows, the more people can share. Poverty will be reduced. But what about monetary policy? We all know that higher wages or lower prices are beneficial for our personal pockets. The higher the wages, or the lower the prices, the more we can buy. But for the Albanian economy as a whole, there is a flipside. This flipside is inflation. More spending will lead to higher prices in the medium to long term. And these higher prices, I can also say “higher inflation”, is damaging for the Albanian economic growth. For this reason the Bank of Albania safeguards price stability. Our main task is to keep prices stable. In order to do so, we set the main interest rate. The Bank of Albania wants to communicate better on all these monetary policy issues. It wants to explain the monetary and financial benefits at the micro and at the macro level. It wants to explain better why it is aiming for an inflation rate of 3%. The communication strategy of the Bank of Albania is to explain the working of the monetary policy issues and its own tasks, to you all. The understanding of the public is needed for a good conduct of Inflation Targeting. Credibility has to be gained. As said before, a solid statistical framework is also indispensable. Reliable statistics can tell us about the past and the present. On the basis of this, the Bank of Albania can use its econometric models to forecast the future. The Bank of Albania can conduct monetary policy, and can target inflation better, in case of better forecasts. We can stress the preconditions. But the fulfillment of all preconditions for Inflation Targeting depends also on others in the Albanian economy. Under Inflation Targeting, the monetary policy aims at a precise inflation target in the medium term. The Bank of Albania can only reach this target in case the interest rate setting affects the deposits, credits, private consumption and business investment, GDP, like in a developed market economy. Only in this case can monetary policy be effective. Therefore, some preconditions for putting full fletched Inflation Targeting in place can not be met ONLY by the Bank of Albania. They depend upon the development of the Albanian economy, they depend upon the provision of statistics by INSTAT and others, they depend upon the understanding of the public. They also depend upon other key players like the Ministry of Finance and they depend upon the efficient working of the financial markets. Other preconditions for Inflation Targeting can partly be met by the Bank of Albania. The full implementation of Inflation Targeting can therefore take place ONLY conditionally. One can compare this situation with the tailoring of a suit for a special occasion. Let me make this comparison. One can find a good tailor and ask him to make a suit for a special occasion. All measures can be taken, such as the length of the arms and the length of the legs. The suitable materials can be found. One needs the appropriate fabric, in the appropriate color. Upon all these preconditions of (1) the good tailor (2) the precise measures (3) suitable materials, the tailor can start the tailoring of the suit. But, there is still no guarantee that the suit will fit you perfect. Or, it may happen that you look appealing in the tailor-shop, but not at the day of the special occasion. For instance, the temperature may have fallen so that you need an additional coat, or even a different fabric. Or, the environment of the special occasion may make you look overdressed. You tried to make it perfect, but the environment is lagging behind. Factors that you could not influence yourself can make you look different from how you had wished to look with the new suit. Conclusion: The suit is not suitable, or better, the suit is not (yet) suitable. For this reason we have to try the tailored suit regularly. All preconditions for Inflation Targeting need to be checked and re-assessed on a regular basis. At this Round Table we discussed econometric modeling, statistics and communication, also the legal framework, the internal governance at the Bank of Albania and the arranged agreements with the Ministry of Finance and INSTAT. During this year we drafted the new Banking Law. This law increases customer protection, sets the legal grounds for credit information registry, introduces new rules for risk administration, bringing more confidence in the banking system as well. With the assistance of the IMF legal department we revised the agreement with the Ministry of Finance. These agreements were standardized to emphasize the role of the Bank of Albania as fiscal agent. Moreover this agreements aim at creating a cooperative and partnership environment. We remain committed to further increase cooperation with major governmental agencies to ease their proper understanding of monetary policy process, its implications and the need for harmonized and coordinated policies. Concluding I would like to underline that we are carefully evaluating the degree to which these preconditions are met before shifting to fully fledged inflation targeting in the medium run. Such strategy will further increase the effectiveness of the monetary policy in Albania further consolidating the price stability and contributing to sustainable economic growth. We will re-assess all preconditions regularly through these types of meetings with foreign professionals. In the meantime we are establishing a professional dialog among central bank, INSTAT, Ministry of Finance and other government institutions. Once more, ladies and gentlemen, I thank you very much for your contributions. I wish you a safe return back to your home countries.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at The Fifth International Banking Forum, Athens, Greece, 6 December 2006.
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Ardian Fullani: Past and future banking reforms in Albania and the region Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at The Fifth International Banking Forum, Athens, Greece, 6 December 2006. * * * Honorable Dr. Margret Doyle, Dear Mr. Chairman, Distinguished participants, Before starting my speech I would like to briefly address the perennial question that stands at the heart of our quest: “Are the prosperous times ahead of us?” It comes to my assistance an old saying of one of your ancient philosophers, Eupides: “Prosperity is full of friends”. As we are gathered here as friends, I believe we have a positive answer to this question. I would like to thank “The Economist Conferences” for inviting the Bank of Albania in this very important forum. It is a great pleasure to be here today. The topic of my speech will be economic reforms. I will take this opportunity to express my views on past and future banking and financial reforms in Albania and the region. The topic is not new of course. However, reforms and their implementation are a dynamic process that must reflect changes and expectations for future developments in both domestic and global markets. Therefore, it will always be an open discussion in need for new ideas and solutions. Central banks are important contributors to the economic reforms and their implementation. They not only welcome and support but also generate reforms in the capital, labor, and product markets. Such reforms have ripple effects that go beyond economic benefit of a long run stable growth and financial stability. I believe that positive spillovers will be materialized in the South East European region’s prosperity and its economic and political integration in European Union. The Bank of Albania has been a constant generator and supporter of reforms both institutionally and as the provider of stable prices, sound macroeconomic conditions and financial stability. It makes an undeniable fact that financial integration which we are experiencing will be to the forefront of European Union integration process. It will ease the challenges and speed up the process of European integration which Albanians have embraced by wide popular consent. Like in many other transition economies banking reforms in Albania were implemented as an integral part of the structural reforms undertaken to transform the Albanian economy in a market oriented economy. Continuous improvement, along with approval and implementation of new banking legislation and supervisory regulation; liquidation and privatization process of the state owned banks; and foreign ownership; have change banking and financial markets. Foreign banks have been an important push factor toward increasing efficiency, number, quality, and coverage of financial intermediation. New entries, mergers and acquisitions are recently altering the market structure in both asset and liabilities. Reforms that brought big European players and their capital in the market, have further increased confidence in our economy and in the region as whole. However, the presence of foreign banks does not replace the need for legal and institutional framework. Moreover, latest developments in banking and financial markets might foster additional risk factors related to asymmetric exposure, issues of home host supervision and financial safety net with foreign banks dominance. These challenges and the expected financial developments in the region will outline the scope and the structure of reforms in the future. So, please allow me to briefly present my view on the future trends of regional financial markets. Financial markets in the region are becoming part of broader global developments which fuels financial integration, liberalization, and financial innovation. The lucrative regional market and the consolidation process have imposed a vertical financial integration in the region. Less than ten European banks with headquarters in Vienna, Athens or Milan dominate the regional banking markets. The process of financial integration will continue, making the region more and more integrated to the European Countries. Financial systems are leading the road to financial integration and the positive spillovers of such process will spread over. Financial markets are and will continue to be bank dominated. Non banking financial sector will grow very rapidly, but banks will continue to be the major players. They will help to further build the needed financial infrastructure for nonbanking financial activities, and support growth in our economies. Not long ago I asked a friend of mine who had recently returned from migration after 15 years: “Why did you come back”? His answer was simple but true: “It is not important for me where I like to live – he said – it is important where the opportunities are”. As the gap in living standards closes and Albanians see opportunities flourishing in Albania, they will come back. They will bring important human capital and managerial skills, which they have gained in the countries where they work. Many Albanian emigrants are at this stage of the migration cycle and we see potential benefits from such a process. It is the role of banks to match this human capital with necessary financial capital and provide financial services to develop their entrepreneur skills. This role comes very naturally to Greek commercial banks that operate in Albania, which I take the opportunity to thank for their early confidence in Albania. They are natural partners for these new entrepreneurs who are familiar with the culture, and probably have a long history operating with respective Greek offices. The fact that such ventures could also involve Greek capital in the case of pure joint investments makes one more argument in support of my observation. According to the Bank of Albania surveys, Greek companies are ranked first by the size of capital invested in the Albanian economy, while holding the second place for the number of Foreign Direct Investments. The involvement of these banks in financing such activities will play a positive role in shifting the balance of the loans portfolio from retail and consumer crediting toward production activities in industry and agriculture. At the same time, it might also fuel the growth rate of credit to economy, which has already experienced very rapid growth during the last two years, raising concerns for macroeconomic and financial stability. The results of reforms were not limited only to the openness and development of domestic financial market. They generated price and financial stability, sustained economic growth, assisted institutional building and increased confidence. These developments attracted interest of, and brought big financial groups in the region in general and Albania in particular. As I mentioned above entry of big financial groups, and the consolidation process that has followed since will continue to grow. What we are observing right now in the market is that the big fish is eating the small fish; the very big fish is eating the big fish in the European market with implications for the host countries. However, the process is far from over, gigantic fish (global player) might enter the region by eating the very big fish. Last but not the least, there will be mergers among domestic banks as well. Despite the increase in the concentration ratio that comes with these mergers and acquisitions, we have started to observe increased competition in our market. This competition increases efficiency, introduces new services and products, lowers spreads and generates positive spillovers for economic activity. While this makes a good precondition to foster financial stability, it is not a sufficient condition to increase financial discipline. Currently, the activities of financial institutions and commercial banks have a limited scope; however, we are starting to see the signs of financial conglomeration. We have no doubt that this trend will grow and continue in the future. It will bring innovation, new financial instruments and products in the market. Along with this, rapid growth of credit and debit cards as well as other systems of payments will continue to grow. While these instruments might not subside or even reduce the use of cash, this trend must be taken into account. Transition economies of the region are lucrative markets. They are growing substantially faster than traditional European markets and offer impressive prospects for high profits and significant growth. To give you an example, return on banking activity in Albania during the last two years has been around 20 percent. These positive prospects and the eagerness to compete quickly and beyond rational limits for profits and market share may create potential risks. If managers were to lose sight of the entire picture, and financial constrains, such competition might result in mismanagement, nonperforming loans, and other banking problems. Therefore, there is no room for sloppy managerial attitude. It is very important that managerial staff must be up to the challenges which, if materialized, could be more complex than in the self-regulated developed markets. It is important to act enbloc and engage in regional projects of infrastructure including here the financial ones. We have great confidence in the ability of the banking system to promote the best banking and cautionary practices; however, I believe that preemptive action is needed to ensure that latest observed trends do not hamper financial stability. Therefore, we cannot neglect improving our legislative, regulatory and prudential measures as a major element of financial sector reforms in Albania. In this regard, a new Draft Banking Law is prepared by Bank of Albania; likewise, a new Law on Securities will be introduced shortly. In addition, efforts are underway to revise legislation on Pension and Investment Funds, and draft a Law on the Payments Systems, which will substitute several sublegal acts issued by the Bank of Albania until now. This process aims at gradual harmonization of the banking legislation with that of the Acquis Communnautaire. To address issues of increased competition, poor managerial practices and safeguard stability, the Bank of Albania is working toward establishing a Credit Registry, revising regulatory framework on capital adequacy ratio and credit risk management, increasing on-site supervision, and improving its stress-testing models. Following Financial Stability and Assessment Program (FSAP) recommendations, a separate entity “The Authority of Financial Supervision”, has been established recently to supervise the securities, insurance and pension funds markets. Last but not the least, I would like to address the implementation of the Basel II accord. While it will shape the financial market, I believe it will pose challenges to our banking system and to us at the moment. We have initiated the implementation of the new accord, but we are currently being pragmatic to approve only the adoption of well understood elements of Basel II that can be implemented in a safe way. Now, I would like to shift your attention to the other important pillar of banking reforms: the role of the central bank itself and its monetary policy. The contribution of the Bank of Albania to the economic reforms comes also through maintaining stable prices and helping to ensure financial stability. Over the last five years the Bank of Albania stability oriented monetary policy has generated low and stable inflation; it has also ensured that medium and long run inflation expectations have been well contained. The economic growth has been robust at around 5-6 percent of GDP, while enjoying a high degree of financial stability. Reflecting broadly on the nature of the monetary policy I would say that it has always been focused on maintaining price stability and using the control of monetary aggregates as an intermediate target. Current account and foreign exchange transactions were liberalized at the early stages of transition along with the adoption of the free floating exchange rate regime. Indirect instruments are been used to transmit interest rate and liquidity signals to the market. Repo rate has become the signaling tool for short term interest rates while repo and reverse-repo operations are used to manage liquidity. Reforms in the conduct of the monetary policy have granted greater flexibility to banks to determine both the volume and terms of lending and deposits. The Bank of Albania has provided all necessary conditions to ensure sustainable economic growth and stable prices; however it alone can not guarantee that the objectives will be fulfilled. All these positive developments have taken place in the presence of a well contained fiscal expansion, as element of sound fiscal policy and bold structural reforms. Banking system has become an important provider of domestic financing for the government. Commercial banks have played a major role in it, while direct financing from the Bank of Albania was limited to address issues of independence and deficit monetization. Recently Government introduced to market papers of five years maturity. In addition, with the consent of the IMF, government will shortly issue euro denominated government securities. Bank of Albania welcomes such development as a certification of cautious and responsible fiscal policy. At the same time we call for more prudence and proper addressing additional risks. It is undeniable however, that these latest developments have been achieved under the watchful eye of International Monetary Fund. IMF has been an important element of the reforms in Albania. Its presence and the memorandum of understanding signed under the framework of ESAF and current blend of PRGF and EEF Programs, enhanced credibility of our economic reforms and served as external anchors. However, as our economy grows and current agreement ends at 2009, we will soon get full ownership of our economic policies with a reduced role of IMF under article 4 of the Agreement. The Bank of Albania has a proven track record of competence, credibility and professionalism in the service of our economy. These three elements provide necessary conditions to support and guarantee achievement of economic goal of stable prices and boost credibility in Albanian economy; but, we can not be hold responsible for the behavior of the other players. I am convinced that we need to find and implement clear domestic and foreign anchors to preserve the credibility of our reforms in the future. For the way ahead we are focusing our efforts in the identification and utilization of key elements of the state, politics, markets, institutions and general public that could efficiently play the role of domestic anchors. As part of this preemptive action, the Bank of Albania is carefully considering the possibility to launch a fully fledged inflation targeting regime of monetary policy in the midterm. This will be a conditional decision based upon results of current ongoing research, evaluation of the preconditions and building up of capacities. Other possible anchors such as a memorandum of understanding with ministry of finance and public education are considered as well. On the foreign side we see numerous prestigious partners which understand our concerns and appreciate the value of fiscal discipline. They enjoy the power and the virtues of an influential voice. Some of them have already been partners in reforms and will be shaping the future ones. European integration process and the Association and Stabilization Agreement that we just signed in provides nominal anchors. In addition, sovereign ratings and other independent country reports could also play this role. The Bank of Albania intends to establish open lines of communication and adopts instruments that will automatically start building up pressures before it is too late. My personal conviction is that European Accession lies out as a natural process, where central banks have a vital role to play. This approach would be of mutual benefit and it will speed up the convergence toward European standards, making the political decision a natural outcome of our efforts. To make this process more effective the central banks and the European institutions should continue the dialogue, why not even by surveillance, supporting, assisting and guiding us in fundamentals and economic financial and legal, infrastructure. This process would increase our responsibility and accountability to make Albania an eligible partner. Let me conclude my discussion quoting Euripides who says: “Much effort, much prosperity”. Thank you again.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the conference "The Mission of Contemporary Central Bank" organized by the National Bank of Poland, Warsaw, 15 December 2006.
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Ardian Fullani: Concerns of the prospective ERM II members Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the conference “The Mission of Contemporary Central Bank” organized by the National Bank of Poland, Warsaw, 15 December 2006. * * * Your Honor Mr. Balcerowicz, Honorable Governors, Dear Colleagues, Ladies and Gentlemen, I would like to take this opportunity to thank Mr. Balcerowicz and the National Bank of Poland for the invitation. It is an honor for me to take part in this discussion and to share my thoughts concerning the challenges facing prospective ERM II members. The central theme of this conference – the mission of the contemporary central bank with the focus on euro adoption – is of crucial importance for countries aspiring to become members of the big EU family in the not-too-distant future. Drawing from the experience of current and prospective members, accession to this family is a complex and challenging process. As a test of the nominal convergence of a country, the ERM II mechanism has attracted a lot of academic interest and criticism. Conceptually speaking, the ERM II directly precedes the full integration in the EMU. (I) ERM II as a step towards EMU To put the ERM II in a proper context, we need to be clear on the fact that it is an early necessary step before Euro adoption. Therefore, entry into ERMII is conditional on the economic and political readiness for entering the EMU. Several considerations need to be made. By adopting a single currency, the country foregoes independent monetary policy and the central bank can not act as a lender of last resort. The loss of monetary policy independence can be problematic if a country has achieved little in the way of real convergence (both structural and cyclical convergence) and is susceptible to asymmetric shocks. On the other hand, the loss of the lender of last resort function by the national central banks implies high and protracted fiscal costs in the case of financial crises. For this reason, a healthy and resilient financial system would be required for participating in the monetary union. It is partly a reflection of these economic challenges that the new EU members appear to be following different trajectories towards EMU. On one hand, Slovenia, the Baltic countries, Malta, Cyprus and Slovakia have proceeded to join the ERM II with a view to enter EMU in the future. The other countries, notably the larger Central European ones, have opted to stay out of the ERM II in order to have more time to do the necessary economic adjustments. (II) Challenges of the ERM II Once the economic argument and the political consensus are strong enough to support EMU membership, the acceding country can decide to enter the ERM II mechanism. What could go wrong for accession countries during the ERM II? Some often-cited issues are related to fiscal consolidation, financial stability and the choice of the central parity. Let me say a few words about these issues. - The exchange rate stability is one of the five (nominal) Maastricht convergence criteria. Consumer price stability, long-term interest rate convergence and fiscal consolidation are the other conditions a country has to fulfill in order to gain EMU membership. Clearly, the burden of ensuring compliance with these conditions does not fall solely and exclusively on the monetary policy authorities. The fiscal and labor policies must be aligned with the monetary policy objectives and the achievement of political commitment to ERM II is of paramount importance. I find the practice of monetary and fiscal policies dialogue, as stipulated in Accession Strategies of some of these countries, a commendable achievement. - Financial instability has been identified as a potential negative outcome of the bilateral fixing of the exchange rate for accession countries. Limited exchange rate flexibility under ERM-II and disinflation conditions expose the EU acceding countries to large ‘convergence play’ capital inflows. 1 If the exchange rate in accession countries is forced to fluctuate within a relatively narrow band, the outcome might be additional and unnecessary inflation. The central bank’s reaction to increasing inflation would restrict economic growth. Such an outcome is even more likely in the presence of the Balassa-Samuelson effects, commonly experienced by the transition economies. 2 In such a scenario, the dual task of preserving the domestic and international value of the currency can be jeopardized. It is on these grounds that the ERM II design has come under attack, as an unnecessarily lengthy period. 3 Thus, it is not surprising that some acceding countries prefer to stay there for the shortest time possible. - The last issue I would like to discuss is the determination of the central parity rate. The potential implications of an exchange rate misalignment are large, as the corrective burden would fall on the real sector. An undervaluation or overvaluation of the exchange rate would result in higher inflation or lower economic growth until the real exchange rate returns to equilibrium. In the absence of a nominal exchange rate channel the adjustment process would tend to be slow. Now let me briefly turn to the policy implications the aforementioned issues pose. The ECB policy stance on ERM II (ECB, 2003) emphasizes the primacy of the inflation objective over the exchange rate stability. Approaching the EMU in the context of an IT regime seems quite a plausible option, and one which is even encouraged by the ECB. The period of residence in the ERM II needs however to be as short as possible, so as to avoid the inherent incompatibility of these two targets in the face of the Balassa-Samuelson effects and increased capital inflows. The countries approaching the EMU from a fixed exchange rate regime might have a different perspective on the subject. However, even these countries will experience the Balassa-Samuelson effects, facing a difficulty to reconcile the fulfilment of the exchange rate and price stability criteria. At the same time, given the wide fluctuation bands that are foreseen by the ERM II template, the credibility gain is likely to be marginal. (III) Policy implications As a conclusion, let me re-emphasize the need for a careful approach to the EMU in that a certain degree of real economic and structural convergence is needed. The EMU membership can not be delayed by much however. First, a really high degree of economic convergence might require a lengthy period of time to be achieved and people could perceive an enlargement without EMU as incomplete. Second, in adopting the single currency the exchange rate risk will be eliminated, resulting in positive impulses to the financial market development. Thirdly, the endogeneity forces of trade and financial integration discussed in the literature might be an additional driver of real convergence that is worth exploring. Neither economic theory nor central banking practices offer an optimal approach to ERM II from the point of view of the monetary regime. The alternative theories agree however, on the need to stay there for the shortest time possible *** To conclude my speech, let me briefly say a few words on the Albanian case. See Begg et al., (2002). It is worth remembering that the Maastricht criteria were designed to ensure the nominal convergence of industrial economies with roughly similar economic structures. Their validity in ensuring the convergence of transition economies is an issue that is hotly contested by several economists (see Buiter et al., 2002). See Buiter and Grafe (2002) and Begg et al. (2002). (IV) The Bank of Albania approach to EU accession The monetary policy of the Bank of Albania focuses on maintaining price stability through the control of monetary aggregates which are used as intermediate target. Indirect instruments are used to transmit interest rate and liquidity signals to the market. Repo rate is the leading indicator for short term interest rates while repo and reverse-repo operations are used to manage liquidity. Over the last five years the Bank of Albania stability oriented monetary policy has generated low and stable inflation; it has also ensured that medium and long run inflation expectations have been well contained. The economic growth has been robust at around 5-6 percent of GDP, while enjoying a high degree of financial stability. (In other words, it seems like we are already close to the ERM II standards.) Such results reflect the opinion that economic convergence should not be held back by the political one. Political processes dictate that ERM II and EMU should be preceded by entry into the EU. The Bank of Albania has a clear view of the EU accession process. The design of the current and future monetary policy strategies is in line with the ultimate objective of EU accession. - On the policy side, it is striving to maintain monetary conditions in line with the Maastricht Criteria. In this respect, Bank of Albania is carefully considering all available alternatives of monetary policy regimes, among which priority is given to fully fledged inflation targeting strategy. This framework will provide a more sophisticated approach to decision-making and will create a better platform for communicating our commitment to price stability, ultimately leading to a better anchoring of inflation expectations. However, the choice of the new regime will be a conditional decision based upon results of current ongoing research, evaluation of the preconditions and building up of capacities. To this end, we are carefully refining our technical capacities and decision-making processes, following the necessary preconditions, working to achieve real independence for the monetary policy, upgrading our analytical capacities and designing appropriate internal processes. - On the structural side, the Bank of Albania is also pushing the reform agenda in the financial sector. The reform agenda in the Albanian financial sector aims at gradual implementation of the Acquis Communnautaire standards in banking legislation. We are revising the legal infrastructure. In this regard, a new Draft Banking Law is prepared by the Bank of Albania; likewise a new Law on Securities will be introduced shortly. In addition, efforts are underway to revise legislation on Pension and Investment Funds, and draft a Law on the Payments Systems, which will substitute several sublegal acts issued by the Bank of Albania until now. Prudential regulations have been tightened in response to rapid credit growth and intensified competition in the banking system. We are working to ensure proper supervision over the parts of the Albanian financial sector that are outside the Bank of Albania’s jurisdiction, while trying to preserve fair competition across the sector. The Bank of Albania is assisting the MoF to improve its debt-management capacities. I believe our hard work will be reflected in a satisfactory rating of our sovereign debt, due to be carried out early next year. The competence, credibility and professionalism of our monetary policy provide necessary conditions to support and guarantee achievement of economic goals and successfully fulfill economic convergence toward ERM II preconditions. However, our achievements will not last in the absence of a careful fiscal policy and conservative fiscal expansion. The Bank of Albania is not the only major economic player. Therefore, we must find and implement clear anchors to guarantee the compliance of other players’ economic policies. In this respect, we can transform ERM II preconditions into an important foreign anchor to preserve the credibility of our reforms in the future. As a pre-accession country, Albania will be facing ERM II problems in the medium term. We are well aware of the difficult road ahead and the challenges we will face. Nevertheless, we remain committed toward economic and legal reforms considering it as a natural approach toward EU accession process. *** References Begg, B., Einchengreen, B., Halpern, L., Hagen, J. Wyplosz, CH. (2002). “Sustainable Regimes of Capital Movements in Accession Countries”, CEPR. Buiter, W.H. and Grafe, C. (2002). “Anchor, Float or Abandon Ship: Exchange Rate Regimes for the Accession Countries”, EBRD 10 Year Anniversary Conference. European Central Bank, (2003). “Policy Position of the Governing Council of the European Central Bank on Exchange Rate Issues Relating to the Acceding Countries.’
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the launch of the European Fund for Southeast Europe, Tirana, 6 March 2007.
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Ardian Fullani: A vision for the future of the Albanian economy and financial system Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the launch of the European Fund for Southeast Europe, Tirana, 6 March 2007. * * * Honourable Mr. Prime Minister, Honourable Mr. Minister of Finance, Dear Mr. Glaubitt, Dear friends, I am honoured to be invited to the occasion of launching the European Fund for Southeast Europe. I regard this new initiative in the Albanian financial system as a highlight development, due to the financial potential and to the signals it brings to our market. It has become almost inevitable to start each speech with a short description of the latest economic and markets’ situation. I invite you to interpret it as an opportunity to understand our vision for the future of the economy and the financial system. From the general viewpoint, I would briefly highlight that the inflation and inflationary expectations have been kept under control, the economy is growing under stable rates and there is an increasing business confidence. The financial markets are relaxed, well-regulated and lucrative. It is good to evidence that apart from the other contributing factors, the Bank of Albania has played a key role in providing for such an environment with its prudent policies pursued over 2006. Global factors have increased their interest in the developments of the Albanian economy, with a special focus on the macroeconomic and development policies. The expansion of global markets has exerted pressures on our economy, expected to be increased in the future. The Bank of Albania is paying a special attention to the considerations and signals deriving from these markets and invites the business community to do the same. The entry of foreign players into the market should encourage the domestic business to re-dimension or re-consider its role in the development of the market in general, and of the financial one, in particular. Over the last years, the Bank of Albania, being supported by the business community, has paid a special interest and attention to the development of the domestic financial system. If I were to ask you: “Have we been successful?” your answer would have been “Certainly, yes.” It holds true that we have made significant steps towards a modern banking system and facts do speak for themselves: there are 17 banks, all private-owned; stable growth and profits; great European players; new products and modern approaches; consolidation; sound competition and last, a new contemporary law on the banking system. In this respect, one might even say that the transition to a modern financial system is approaching its end. However, allow me not to fully agree. Do not forget that what I have been talking about represents a crucial, but solely, segment of the financial system. It is in the interest of the economy, private sector and households, and in our interest as well, as the monetary authority, to push the development of the entire financial system. I think that the financial system we have is not enough to foster our expectations in the context of the economic and financial development of the country. I would not exclude the banking system from the observation. The high and stable profits have further deepened the concentration of the banking system and investment in a financial market segment. Such a trend might affect financial stability due to an undesired mix of financial and human capital and of managerial abilities in a restricted segment of financial market. Moreover, these risks could be fuelled by reckless competition and market share deriving from the concentration and issues of immoral speculations. The launching of this scheme, apart from emphasizing the confidence in our development policies, helps to provide the layers for the financial system and to fill in the gaps in the financial markets, stating an indisputable fact that there is room for boosting and strengthening those segments which do not seem to be lucrative. This is a significant signal for small-sized enterprises having great ambitions. These developments should help us to really understand the true potential of the Albanian economy and they must be read by all players as such. Moreover, they must understand that such entries will make the rules of participating in the market clearer. They set the standards for the quantity and quality of both financial and human capital, which make a company an eligible market player. Time requirements impose the necessity for building similar capacities with the new entrants, otherwise the market will not tolerate. In this context, the Bank of Albania will be cautious to avoid any negative consequences deriving from the timely misinterpretation of current and expected developments. In our belief, all participants in the system should act responsibly and professionally, no matter how small they are. The misinterpretation of this new philosophy would be intolerable, with consequences for the financial stability, since it operates as a whole. These developments impose to us, as a monetary and supervisory authority, the adoption of more contemporary standards. The new players, in additional to sound macroeconomic policies, require the establishment of a market that can accommodate their business in both assets and liabilities. In response to these challenges, the Bank of Albania aims to formulate and later on, implement a medium-term strategy for the development, licensing and supervision of banking financial institutions. The key objectives of this strategy would be summarized in: the adoption and application of supervision standards deriving from Basel II Accord; the adoption of more conservative practices related to the principle of selective licensing; the constant promotion to boost the banking system, mainly through mergers and acquisitions; the adoption of both theoretical and practical approaches related to services and products to develop all the financial market segments. With the latter one, we intend to provide the right incentives for the managers to extend their business in those market segments where they are located, helping in this way to fully develop that particular market segment. I take this opportunity to invite all the existing financial institutions to grow, expand and become active players within the market segments where they operate. Otherwise, they should seek those market areas where they provide most of their efficiency, considering their financial and human capital and the products they own. The Bank of Albania seeks to use market segmentation as a prerequisite for building market discipline in the financial system: First, to facilitate the monetary policy, through the perfection of monetary transmission mechanism. Second, to boost the country’s economic and social development. Therefore, the Bank of Albania sees this new entry as a premise for the development and revitalization of money and capital market. Allow me to explain it more broadly. The available fund in this scheme is considerable. However, the positive stands in the fact that these additional funds will be used to launch new products and services in those market segments which have not had so-far, access to the financial infrastructure. This is particularly true for small-sized businesses in local communities and rural areas, to which large universal banks are not their perfect partners. Moreover, the financial market is being enriched with a new instrument, which will be a novel investment alternative for all the economic agents concerned, be they households, organizations or businesses. The orientation toward micro and small entrepreneurships reflects a sound and specialized understanding of their financial needs. They represent a key element of economic infrastructure, of employment and income growth, in particular for the sector of agriculture and local communities. Undoubtedly, this new initiative will also provide its positive effects to the social context of these segments. In this context, the launch of the European Fund for Southeast Europe is a new element, which will serve as a catalyst for a number of new changes and opportunities, in line with the requirements of a modern market, able to support the perspective development of the country. Its expansion throughout our region will allow the further enhancement of regional co-operation and will facilitate other regional initiatives. You are welcome and we assure you that you have our full co-operation in your activity and in developing the market and free initiative of Albanian economic agents. I wish you a lot of success in your work.
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Address by Mr Ardian Fullani, Governor of the Bank of Albania, to the meeting "The banking system over 2007: the Governor communicates with the market", Tirana, 26 March 2007.
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Ardian Fullani: Summary of the latest macroeconomic developments in Albania Address by Mr Ardian Fullani, Governor of the Bank of Albania, to the meeting “The banking system over 2007: the Governor communicates with the market”, Tirana, 26 March 2007. * * * Distinguished participants, Considering the today’s meeting of a special importance in line with our institutional tradition and intensive communication with the general public, particularly with the main market stakeholders, I would like to thank you for your participation. I think that such meetings further increase the degree of mutual understanding, aiming at enhancing the financial market efficiency. Allow me to start my address, making a brief summary of the latest macroeconomic developments. Likewise in 2005, the Albanian economy, even during the last year, continued its path towards macroeconomic consolidation. The country’s GDP is estimated at 5 percent growth in real terms. This growth has been associated with price stability, denominated in an average annual inflation of 2.4 percent. The monetary conditions, characterised by historically low interest rates and a stable exchange rate, have favoured the rise of investments and consumption in the economy. Particularly, they have been reflected even in the rapid credit growth, further sustaining the economy growth. The fiscal developments have resulted within the programmed levels, contributing to further consolidation of the public finances and to budget deficit control. The extension of the country’s economic activity has been associated with increased foreign trade exchanges. The balance of payments for 2006 has recorded positive terms, sustaining the exchange rate stability. From the BoA’s monetary policy viewpoint, I would like to underscore that year 2006 coincided with a change of the previous direction. Initially in July and later on in November 2006, the BoA’s Supervisory Council rose key interest rate by 0,25 pp, leading it to 5,5 percent, from 5 percent at end of June 2006. The Bank of Albania decisions were a reflection of a number of risk factors, whose presence constituted a potential risk on the long-term inflation performance, which, I re-emphasise, from the legal viewpoint, constitutes our primary objective. The Bank of Albania is confident that its decisions were appropriate and they have served to orient inflationary expectations within the target range. End-2006 and first quarter of 2007, as well as current inflation forecasts indicate that we have been successful in this direction. However, I avail myself of the opportunity to re-emphasise that we remain totally committed to successfully monitor the current developments and the implications they may entail in future development. Our focus will continue to be the control of inflationary pressures in the economy. To this end, I would like to attract the banking system attention to a new project of the Bank of Albania, which is going to assist us a lot in this regard. Our researches, the business and consumer sentiments do not succeed in attaining appropriate dimension under the conditions of lacking the financial market expectations on inflation, exchange rate and key interest rate. In the near future, a new requirement will be made to the banking system, having to do precisely with what I previously said: Which is the bank’s expectation on inflation, exchange rate and repo rate in the short and long run. Personally, I consider it as a new challenge for the banking system; therefore I would insist that the whole banking system should deal seriously with this problem, to timely incorporate scientific analysis and research centres into its organisational structures. I am confident that the banking system has already understood that, inter alia, it is just the time for such institutions to pay attention to developments of the economy, intensifying the analysis on current and future developments. Another issue I will deal with in this address is the monetary policy decision-making perception and implementation. Given the current stage of financial market development in Albania, high level of euroization and other objective and subjective factors, I would say that the monetary transmission efficiency is not yet in the parameters of the developed financial markets. The currency market is still concentrated; its specific segments are characterised by insignificant trading volume and high volatility. Effective liquidity management is an important element for us, which, as in other central bank, goes beyond a mechanic management of excess liquidity withdrawal or injection in case of shortage. By managing the liquidity, we have aimed at implementing the monetary policy decisions made by the Bank of Albania Supervisory Council to the market. Liquidity management intends controlling shortterm interest rates, keeping them in line with monetary policy decisions. Concretely, the frequent use of other instruments, besides the main instrument of the Bank of Albania, reflects the Bank of Albania’s determination in terms of controlling short-term interest rates. I would also like to point out that preventing or solving situations of liquidity shortage or excess are not sufficient for achieving the liquidity management goal by the central bank; the effective liquidity management should ensure its smooth re-allocation among banking system operators. As a result of liquidity concentration, this would reduce the short-term interest rate volatility. In this framework, in 2007, the Bank of Albania will start the application of a new Regulation “On repurchase and reverse repurchase agreements” which will bring about a novelty on interventions for a more effective distribution of banking system liquidity. This development of the regulatory framework will foster the repo market among commercial banks. It will contribute to the establishment of a more active inter-bank liquidity market and more active liquidity management by commercial banks. Not only the information but also the real time of its transmission is of unquestionable importance to the financial market. In this context, I would like to emphasize that though the central bank has the necessary statistics to estimate the banks’ positions and their operations, we expect from them to work more for enhancing the transparency in this regard. To encourage banks in terms of enhancing the transparency, the Bank of Albania has provided to the system the Regulation “On calculating fixed interest in interbank currency market”, whose application shall be of importance not only to the Bank of Albania, but also to commercial banks for active liquidity management. In the same line, the central bank, through its active participation in the “Dealers Association” is supporting even the creation of a code of conduct for interbank relationships, which is deemed to lay another stone to market development in Albania. As I mentioned above, the political decision-making of the Bank of Albania is forward-looking. From this viewpoint, I would require from the banking system to adopt the same philosophy: “React today to prevent undesirable events in the future! As Alain Blinder has stated: “Frequently the decisionmakers only look through the window and make case decisions, based on current circumstances”. Therefore, the banking system should adopt the same philosophy for assimilating and factorising the Bank of Albania’s decisions into the short- and long-term operational strategy. Another issue is an argument, which given the importance and the current stage of the economicfinancial development of the country, assumes an extremely high importance. The financial stability has become a central topic of current practical-academic debate. I would like to bring to your memory the regional conference of the Bank of Albania organised in October of the last year related to this issue. While the debate continues for determining a number of qualitative and quantitative indicators to measure the vulnerability of the economy, I would like to attract your attention to a higher attention we jointly should pay in this direction. The macroeconomic stability is of primary importance, but without doubt, even the financial stability is of the same vital importance. We should not forget that the segment represented in this audience constitutes the most developed and regulated part of the whole financial sector. The banking system in Albania has been transformed into a promoter of the country’s economic sustainability, by extending funds to the economy. At the same time, the variety of financial products it supplies is being increased year on year. At end-2006, the banking system was presented in a good financial position. Its assets were to ALL 624.3 billion, or about 25.7 per cent more than in end-2005. The banking system deposits have amounted to ALL 520.3 billion, reaching 20.2 percent on annual basis. The loans portfolio is estimated at ALL 197 billion, 55 percent higher than year-end 2005. About 28 percent of the loans portfolio has been extended in ALL, while the rest in foreign currency. At end of 2006, the loans portfolio quality resulted to 3.05 percent. In December 2006, the capital adequacy ratio was 18.1 percent; while the banking system profit was ALL 7.45 billion. Return on assets was 1.36 percent, whereas return on equity was 20.2 percent. It is my pleasure to observe the increased number of branches and banking agencies and the ever increased geographic covering of the territory with banking services and products. The entry into the market of distinguished European banks is another accomplishment of the last year, which is expected to continue even during the current year. Being driven by competition, banks have been more aggressive in lending, using new segments of the lending market, such as consumer credit or real estate loans. In spite of what I mentioned earlier, it does not mean that we are automatically immunized against various risks, which may occur from one moment to the other. Furthermore, the rapid credit growth is an argument for more prudence, particularly in terms of its quality. Being completely aware for our role as a decision-making and regulatory institution, we have decided to raise our vigilance in this direction. We will create a specialised unit, i.e., the Financial Stability Department, as a first step. The safeguarding of the banking and financial system stability will be given a new dimension relating to the policy of licensing the conduct of banking business by the Bank of Albania. Once more, the Bank of Albania emphasizes its objective related to licensing and the presence of sound institutions in the banking system: which are backed by influential and experienced shareholders in the banking industry; which apply the best standards of accountability in management; which conduct a balanced business with well-administered risks; which are able to cope with and develop under the competition provided in an open and integrated market into the international financial market; which boost the country’s economic development and which, transparently provide to the public qualitative and efficient banking products and services. The Bank of Albania is confident that only financially stable banking institutions guarantee the foundations of a financial market, which develops dynamically and which is able to avoid systemic financial crises. Therefore, the Bank of Albania sustains and encourages the process of transformation and consolidation of the activity of banking institutions. They naturally come to help the banking institutions which are faced with difficulties during their own activity and others which intend to expand the business through a more effective use of ample financial sources. In this framework, the Bank of Albania, based on the new banking system law, cooperating with other financial market authorities, will work for enriching and stratifying this market with efficient financial institutions specialised in financial activities, which sustain the banking activity and ensure a better covering of the population needs with financial services. Regardless of the above, I think that the system should be more committed to this direction. Banks, particularly those that are more active and of systemic importance, should set up and strengthen their risk management structures, mainly in terms of market risks (interest rate and exchange rate), credit risk and operational risk. This implies not only the ensuring of human capacities, but also the establishment of necessary systems of information and technology. This process should not be considered as a cost-advantage relationship in material level and in the short run, but as an indispensable process, which hedges the bank from risks, which, under certain market conditions, may be intensified, resulting to fatal circumstances. While the supervisory attention is focused particularly on large banks that are of systemic importance, the same importance is assigned even to small banks, which are faced intensively with the consequences brought about by enhancement of market competition. In view of this, the Bank of Albania requires from the management of these banks to act quickly for protecting their business. The necessary operations should intend the qualitative improvement of banking services to the public, development of joint projects with larger banks and with other financial institutions inside the country and abroad, establishment of a more suitable work environment and provision of necessary promotions to their staff. In the meantime, their boards of directors and shareholders of these banks should strengthen the monitoring and should be ready for a larger financial support for the bank’s activity. In particular, I would like banks to be cautious with regard to: • The continuous monitoring and controlled conduct of lending activity, focusing on setting realistic development objectives, on the exposure to related persons, exposure to foreign currency – in particular, to borrowers with insufficient financial assets in foreign currency, exposure to new loan products, such as consumer loan, etc. It is crucial for banks to rigorously observe the lending and loans’ quality analysis procedures. Moreover, they should maintain a conservatory stand, in terms of being insured with pledges and collaterals, and of providing for reserve funds, required in cases of non-performing credit risk. In this context, the Bank of Albania expects commercial banks to duly observe the final amendments made to the regulation “On managing credit risk”. • The consolidation of internal control systems of their activity, in view of the adoption of best accounting standards in management, as well as the careful formulation and analysis of financial statements by the banks’ structures and their internal and external auditing. With regard to the latter, we are under the process of enhancing the reporting system, by shortening the reporting time of the financial data, periodically reported by banks to the Bank of Albania. We think that banks should qualitatively improve the method of preparing and reporting these data to the Bank of Albania. These issues will be the topic of discussion in a special meeting to be held in the near future. From the legal viewpoint, the issues related to the conduct of a safe banking business have been addressed at a higher level, in the new law “On banks in the Republic of Albania”, passed by the Albanian Parliament on 18 December 2006, and becomes effective on 1 June 2007. Some of its important amendments are the following: a more complete addressing of banking business supervision issues, including the organization, the risk monitoring, the provision of prudential supervision norms, the clarification of procedures related to the management and liquidation, the inclusion of some general principles related to the client’s protection (consumer of banking products) etc. Following the notification sent by the Bank of Albania on January this year, the banks should speed up the steps to duly and timely carry out the necessary changes in their internal procedures, which ensure the complete consistency of their business with the requirements of the new law. I take this opportunity to draw your attention in terms of applying the legal requirement for the observance of international financial reporting standards, starting from 2008. This is an issue banks belonging to European Union banking groups are more prepared for. However, these banks, and in particular other banks not availing of this opportunity, should co-operate with external auditing companies, in order to define the concrete measures to be taken in their activity for the observance of this legal requirement. Dear participants, I believe today’s meeting is a good opportunity to communicate with one-another; therefore, I invite you to keep on exchanging effective ideas and thoughts. On behalf of the institution I represent, I would like to reassure you that the Bank of Albania remains fully committed and accountable in fulfilling its legal mission, capable and willing to loyally co-operate with any institution or stakeholder influencing on the country’s economic and financial development Thank you.
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Address by Mr Ardian Fullani, Governor of the Bank of Albania, at the Workshop "Catching-up in South-Eastern Europe: The Role of the Financial Sector", Tirana, 3 May 2007.
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Ardian Fullani: Financial stability in Albania Address by Mr Ardian Fullani, Governor of the Bank of Albania, at the Workshop “Catching-up in South-Eastern Europe: The Role of the Financial Sector”, Tirana, 3 May 2007. * * * Honourable participants! Today’s workshop on “Catching-up in South-eastern Europe: The Role of the Financial Sector” is of special importance, because it is aimed at providing a panorama of the financial sector development trends in the countries of the region. Actually this seminar follows the VI Annual Conference of the Bank of Albania, held in October of the past year, which focussed on financial stability issues from the viewpoint of regional financial sector. We have the pleasure to have today the presence of Mr. Max Watson, an Economic Adviser to the Director General on Economic and Financial issues at the European Commission. He will hold a presentation about economic developments and financial systems of our region. Taking advantage of the opportunity of Mr. Watson’s presence in this workshop, I would like to inform you that the Bank of Albania has established a constant communication with the European Commission, as concerns to the country’s economic and financial developments through its participation in some periodic meetings taking place annually between the Republic of Albania and the European Union. The organisational, legal, operational approximation with the European System of Central Banks, stated also in the Bank of Albania’s Mid-term Development Strategy, remains one of its main strategic targets. In view of this, the Bank of Albania has paid special attention to establishing specific structures and creating human resources capable of being faced with various approximation phases and eventual membership to the European System of Central Banks. Also, approximation of laws and by-laws with the Acquis legislation remains of special importance. The Law “On the Banking System in the Republic of Albania”, passed by the Parliament on December, provides a good example in this regard. Simultaneously, the Bank of Albania has actively contributed to the maintaining of the country’s macroeconomic stability, by keeping low and steady inflation rates and by supervising the banking system prudentially. It is aware of its role as a promoter of the country’s economic development, a process that will naturally facilitate our integration into the European Union. Over the previous year our economy was characterised mainly by rapid credit growth. The loans portfolio reached lek 191.2 billion, or 21.3 percent of GDP at end of 2006. In absolute terms, credit to the economy grew by lek 69.3 billion, compared to the growth by lek 52 billion over the previous year. In 2006 the annual credit growth was 56.7 percent, providing good support for economic needs. The relatively high pace of banking system lending to the economy has also continued over the first quarter of the current year, drawing our attention, as the regulatory authority of the banking activity, to the need to monitor any risks this expansion may comprise. More concretely, this growth has led to decrease of capital adequacy rate and liquidity; however, banks have continued to be well-capitalised, liquid and profitable. Quarterly stress-tests carried out by us have indicated that the country’s banking system is flexible against any probable shocks relating to exchange rate, interest rates or credit quality. The Bank of Albania has continued to prudentially monitor the rapid credit growth, enhancing its banking supervision. In this framework, the establishment of the Credit Registry, expected to be carried out within December 2007 is of special importance. Currently, we are working for completing the legal framework that will enable the Registry establishment and functioning. At the same time, the decision is already made on selecting the company that will provide technical solutions to the Registry. We are confident that all these measures will contribute to the maintaining of credit quality and the financial stability of our country. Wishing you a fruitful workshop, I give the floor to Mr. Watson. Thank you!
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Address by Mr Ardian Fullani, Governor of the Bank of Albania, at the presentation of the 2006 Annual Report of the Bank of Albania, Tirana, 10 May 2007.
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Ardian Fullani: Bank of Albania – 2006 Annual Report Address by Mr Ardian Fullani, Governor of the Bank of Albania, at the presentation of the 2006 Annual Report of the Bank of Albania, Tirana, 10 May 2007. * * * Honourable Mr. Chairman, Honourable ladies and gentlemen, members of the Economy and Finance Commission, It is a special privilege for me to present to you, pursuant to law requirements, the 2006 Annual Report of the Bank of Albania. This report provides a summary of the Bank of Albania activity in implementing the legal and constitutional obligations. First of all let me focus on the national economy performance, and then on more specific parts related to the institutional responsibilities and direct contributions of the Bank of Albania to subduing inflation, maintaining financial stability, enhancing the financial infrastructure and on our role to European and regional integration. 1. Economic developments over 2006 The country’s economic development over 2006 has generally complied with its mediumterm development plan. The overall Albanian economy has undergone comparably satisfactory growth rates, due to the private sector’s dynamism, macroeconomic stability and the fruits of the so-far structural reforms. The banking system has provided a powerful incentive to economic activity sustainability and to growth of credit to the economy by about ALL 70 billion or above USD 700 million. Based on available economic indicators, the growth rate is estimated at about 5 percent. This growth has been associated with price stability, reflected in an annual average inflation rate of 2.4 percent. The monetary conditions, characterised by historically low interest rates and exchange rate stability have favoured the rise of investments and consumption in the economy. In particular, they have also been reflected in rapid credit growth, by further sustaining the economy growth. The fiscal developments have taken place within the programmed limits, contributing to further consolidation of public finances and budget deficit control. However, the realization of capital expenditures requires a larger focus on the programmed level, as concerns the pace these expenditures have been carried out. The economic growth has been reflected also in the labour market. The number of employed persons in the country has boosted, though it has not yet fully reflected the developments in other sectors of the economy. The country’s economic activity extension has been associated with increased foreign trade exchanges. The balance of payments has been closed in positive terms, thus supporting the exchange rate stability. The quantitative and qualitative indicators of economic performance show a satisfactory growth, based mainly on the activities of services and industrial production. The sales carried out by economic enterprises during the first nine-month period accounted for about 11 percent higher than in 2005. The fact that the first quarter recorded a high annual growth of sales shows that services and production enterprises overcame the problems entailed by power supply constraints at end of 2005. The industry sector, particularly the process industry has recorded positive developments. The country’s trade activity continues to ensure the majority of sales, and to record significant annual growth rates. It is estimated that construction sector has performed almost at the same level with that of the previous year. Direct and indirect indexes of this sector impose the necessity for a broader attention, particularly to a better allocation of private or public financial resources. Construction developments over the recent years, and particularly the extreme concentration of constructions on certain territories, prove the lack of efficient urban development policies, without guaranteeing long-term sustainability of the branch. Furthermore, construction continues to be dominated by housing buildings, lagging behind other strategic items, such as investments in road infrastructure, in industrial constructions, in land improvement and in agricultural infrastructure, as well as other investments directly related to the standard of living of small urban and rural communities. Agricultural production during 2006 partly recovered the growth rate decline noticed in 2005. The sector growth projection stands at 2.5 per cent for 2006, higher than the growth of 2005, but lower than the average growth rate noticed over five latest years. Investments in agricultural sector and financing by the banking system will increase in accordance with the potential of this branch, providing that hurdles arising from various structural problems are eliminated. Agricultural land is not used at maximum, because of external and internal migration and the problems with ownership titles. The relatively underdeveloped rural infrastructure makes more difficult the emerging of products in the market. The parcelling out of agricultural land impedes the effective organisation of production, decreases the profitability and raises the agricultural mechanics utilization cost. The Bank of Albania deems that energy remains our main challenge in the short-run and in the medium-run. We have been faced with underlined power supply constraints for about a decade. The current crisis coincidence in time with a global environment that is rather sensitive to this problem has relatively increased the energy import costs, which could be unsustainable in the long run. It has resulted out of Bank of Albania surveys that the negative consequences arising from this situation are numerous and directly related to the economic activity of the productive sector, in both levels, corporate and small and medium sized enterprises. The frequent recurrence of such situation poses the risk that periods of significant power constraints are no longer regarded as accidental shocks, but they are more and more classified as permanent factors that should be factorised in the production cost, and hence should be taken into account in pricing policies and their expectations. To this end, the Bank of Albania estimates that, starting from 2007, all the respective decision-making stakeholders should apply a new concrete management policy, different from the 15-year practice. An integral part of it should be not only the management of current energy resources, but also concrete steps in the distribution network, as short-term measures to pass to long-term operations, which would imply the establishment of alternative energy sources. The solution of the energy situation at the soonest time possible will provide positive impacts on the Albanian business, the soundness of public finances, the country’s sustainable economic development and the macroeconomic stability. Concluding this part, I would like to point out some other issues, which I think should be encompassed in the priority list of the country’s medium-term economic and financial development. The Albanian economy is leaving the status of a transition economy and is approaching to that of a developing economy. This qualitative step requires further deepening of structural reforms, enhancement of effectiveness of development policies and enlargement of the country’s absorbing capacities in terms of fostering the Albanian economy competitiveness at regional context and beyond it. I would highlight the constant trade deficit deepening, as an issue of the present and the future. Even though the current cross-border position of the country is not problematic, being materialised in such indicators as external debt, foreign reserve level or overall balance of payments position, I would point out that the rise of exports is not sufficient, particularly in the context of high reliability of the Albanian economy on remittances. The relatively high current deficit, around 7.6 percent of GDP, is another argument in this regard. The latter one, also in the presence of a fiscal deficit, increases our economy’s exposure and makes necessary the provision of foreign currency inflows of a more steady nature. This would be translated into a need for more qualitative foreign direct investments, which in turn, would contribute to a steady growth of exports. To this end, taking advantage of the global environment, which is constantly searching for new markets, I would suggest a more qualitative national marketing strategy. This strategy should highlight professionally and contemporarily, all the recent incentives and the multiple opportunities Albania provides. Also, I think it is just the time to integrate even the joint regional projects into our long-term development plans. Road infrastructure, energy, communication, tourism and other areas are still underdeveloped in regional level. Therefore, I assess that regional projects of strategic nature raise the interest of domestic and foreign investors. If taken separately the economies of the region are relatively small, but altogether they form an attractive market, with more investment opportunities. In recent years, it is noticed that the penetration of foreign investments in our region is relatively small and mainly, it reflects the privatization process of important public properties. The same thing has occurred to the Albanian economy. More concretely, during 2000 – 2006, the overall foreign direct investments, according to the balance of payments statistics, are estimated to about USD 1.45 billion, about 3.5 percent of GDP realised over the same period. If we would identify the reasons why FDIs inflows are so modest, we might mention the complex problems characterising our region, while different reasons that reduce the absorbing capability of our economy exist even in the national plan. The Bank of Albania deems that the country’s current stage of development creates great possibilities in this regard. The experience of the newly acceded countries has indicated that the signing of the Stabilisation and Association Agreement and the following negotiations have been associated by high FDI inflows. However, we can not assume that this phenomenon will be automatically present even in Albania. Therefore, the Bank of Albania deems that further deepening of structural reforms is necessary and that this process should be followed by improvements in the business climate and by enhancement of the degree of law enforcement. The last but not the least, I would like to point out that the degree of economic activity coverage with statistics is still low. The monetary policy that we are following is an as much dynamic as visionary process. Besides the existence of efficient markets, it also needs to be supplied with new and methodologically accurate statistics. Besides our constant efforts and good understanding with INSTAT, we find it necessary to appeal for a greater attention of the whole society and of respective institutions in particular, to increasing statistical information and further consolidating the existing one. It is just the time that all the monitoring, licensing and decision-making institutions, including also the numerous nongovernmental organisations, must feel a great responsibility in this regard. It is just the moment that they develop indirect measuring and estimating approaches for many demographic, economic, social and financial indicators. Let me now present another important issue in my speech, which has to do with one of the main legal responsibilities of the Bank of Albania, i.e., consumer price stability. 2. Inflation and monetary policy Consumer goods price inflation over 2006 was generally within the Bank of Albania’s targeted range of 2 to 3 percent. Year-end recorded a 2.5 percent annual inflation rate. It was almost similar to the 2005 annual inflation rate of 2.4 percent. Inflationary pressures, though moderate, have been increasing over 2006. The average annual inflation rate amounted to 2.7 percent during the second six-month period of the year, from 2.0 percent it was in the first half of the year. In general, the annual average inflation steadiness during the recent years, speaks for the inflation rate stability, in spite of the fluctuations in time and size of the factors that have conditioned the consumer price performance. Developments on the demand and supply side of the economy have been balanced, without creating premises for inflationary pressures. The fiscal policy has observed the programmed indicators on annual basis, stabilizing the impact of the public sector component on the aggregate demand. Also, the monetary policy has controlled liquidity conditions and interest rate developments, and has attended the exchange rate performance, monitoring through them the economic activity financial stimuli. On the other hand, the low inflation rates in the recent years have been reflected in anchoring the inflationary pressures of the economy close to the Bank of Albania’s target. The latter might have contributed to constraining the second-round effects that may be caused in the Albanian economy by some supply shocks, such as high oil prices and managed price rises, with which the Albanian economy was faced. Monetary conditions and monetary policy decisions Monetary policy decisions on the key interest rate in the economy have been taken on the basis of constantly analysing the current and expected developments of the demand and supply factors springing from internal and external environment. Under the conditions when an enlivening of inflationary pressures was evidenced and in the presence of a number of factors expected to further favour this situation, the Bank of Albania decided on changing its monetary policy stance, at the beginning of the third quarter of 2006. This change occurred after a neutral period that had lasted about one year and a half. The monetary policy change was materialised in raising the key interest rate twice during the second half of 2006. In July and November 2006 the one-week repo rate was lifted respectively by 0.25 percentage point. The maturity in monetary policy decision-making was reflected in the time lag between both tightening movements in the interest rates. In July-November 2006, many assessments have been made on the degree of banking market response and sensitivity to monetary policy stance on interest rates. The interest rate rise by 0.5 percentage point is estimated to have normalised the annual monetary supply growth rates, fully responding to the public and private sector demand for monetary assets. Monetary policy operations have assisted in stabilizing inflationary pressures of economic agents in the medium run. Fiscal policy The Bank of Albania has estimated that during 2006, the fiscal policy provided a satisfactory support to inflation developments. Fiscal indicators were realised in accordance with the budgetary program, preventing premises for inflationary pressure rise in the economy. During the fourth quarter of 2006, a high concentration of budgetary spending was noticed. The budget deficit realization as of year-end, estimated at about 3.2 percent of GDP or 0.7 percentage point less than that of the previous year, has influenced on the contraction of inflationary pressures and control of monetary expansion. Demand factors During 2006 domestic demand has significantly sustained the positive economic growth rates. Good performance of the domestic demand has been indicated by a number of economic activity indicators. Hence, the sales index for the first nine-month period of the year recorded an annual growth of 12.4 percent. In particular, the rise of imports of machinery and equipment and the real estate credit growth are indicators of investment expansion in the country. The domestic demand has been increasing also due to rapid growth of lending activity, which recorded a 57 percent increase in annual terms. Notwithstanding the positive effects of investment expansion, the domestic demand growth exercises pressure on the overall price rise. In absence of any obvious inflationary pressures on the demand side, it is estimated that the Albanian economy is making use of free capacities without raising the costs and final prices of goods and services. Also, it should be highlighted that part of this domestic demand has been met by rise of imports and trade deficit, thus mitigating the pressure on consumer prices. Supply factors Import prices The Albanian economy is a relatively open economy and therefore, import prices constitute an important element of the country’s inflation. Generally speaking, the economic conditions of trade partner countries of Albania have been favourable during this year, easing the control on supply side pressures and enabling the observance of inflation target. Oil prices Consumer prices during 2006 were influenced by a stressful situation in the interbank oil price market. The impact of this factor, as concerns the intensity of operation in inflation rate, was not uniform, being higher during the first nine months of the year and recording a decline during the last quarter. Exchange rate During 2006 exchange rate developments have dampened inflationary pressures of the supply side. The national currency has been appreciated against the American dollar and has maintained unchanged its position vis-à-vis the euro. The lek’s appreciating tendencies, though weakened in the recent months, have led to the decline of import price in domestic currency. In this way, the exchange rate has contributed to containment of the high international oil price effect and to maintaining a low inflation rate. Agricultural production Agricultural production is one of the main domestic factors, which condition the consumer price developments. The quantity of domestic agricultural production influences instantly on foodstuff price level. During 2006, the seasonal effect of agricultural production rise appeared later than in the preceding years, leading to foodstuff price decreases only in September and October. Production prices During 2006 the production prices continued the downward trend noticed since April 2005. However, the concentration of production price index on the productive sector of industry makes difficult its comparison to consumer price index. Also, the domestic production share is not yet a determinant component of goods supply in the domestic market, thus not affecting the consumer prices. Wages and unemployment The good performance of the economic activity during 2006 was also reflected in labour market indicator, and particularly in unemployment rate. New employment possibilities were created, making unemployment rate continue its downward trend observed since more than two years ago. Improvements have also been made in terms of incomes. So, government sector wages, the minimum wage and pensions have increased in accordance with the budget plan. The so-far inflation performance shows that Albanian economy does not suffer from any significant discrepancy between wage rise and productivity. Inflationary expectations The business and public expectations in short- to medium-term have fluctuated around the inflation rates recorded. According to Bank of Albania periodic estimates, the public expectations have converged, mostly around 1-3 percent. In the meantime, the business expectations on price performance have reflected a high volatility. The monetary policy and the consolidation of macroeconomic stability have played an important role in anchoring the expectations of public at large to Bank of Albania’s inflation targeted rate. 3. Money supply During the major part of 2006, monetary indicators have reflected the stabilised demand for monetary assets. The average M3 growth rate resulted to 12 percent. The demand for money of the public sector grew by 3.3 percent during 2006. This relatively low borrowing has balanced the high lending rates of the private sector, positively impacting on the maintaining of monetary stability. In compliance with the trend noticed over the latest years, monetary developments have been characterised by shifting to longer-term monetary assets. Currency outside banks has followed the general trend of the demand for money. The currency outside banks to M3 stood at 24.2 percent at year-end or 1.7 percentage points less than in the previous year. In nominal terms, the currency outside banks grew by ALL 13.6 billion or 9.1 percent. The macroeconomic environment during 2006 has been favourable for a steady growth of banking system lek deposits. The positive real interest rates have been associated with further rise of lek deposits. They rose by 38 billion during 2006, satisfying the needs of the economy for ALL 35.9 billion and the needs of the government for credit in ALL. In 2006 foreign currency deposits rose by about 29.4 percent. The higher growth rate of foreign currency deposits versus the money supply growth rate led the ratio of foreign currency deposits to M3 to about 29 percent. The share of foreign currency deposits to total deposits rose to 38.5 percent, against 35.5 percent in 2005. 4. Demand for money The increase in the demand for money reached its peak in December, by an annual rise of 16.7 percent. The main contribution to the increased demand for money throughout the year was rendered by credit to the economy. This contribution recorded its maximum in June, being mitigated during the coming months due to growth of public borrowing. Foreign currency position has maintained a relatively steady weight in establishing monetary assets during the year. Credit to the economy The banking system developments and the increased role of banks as financial intermediaries, have led to significant expansion of lending activity during the recent years. The loans portfolio amounted to ALL 191.2 billion or 21.3 percent of GDP at end of 2006. The loans portfolio for the economy constituted 31.3 percent of total banking system assets and about 37.4 percent of the banking system deposits. During 2006, credit to the economy increased by ALL 69.3 billion in absolute terms, compared to ALL 52 billion in 2005. During two latest years, commercial banks have better met the increasing demand for ALL loans, which at end of 2006 constituted 29 percent of the loans portfolio, thus evidencing a moderate extension of its share. Corporate credit constitutes the main share of banks’ portfolio, amounting to 66.5 percent of the total at end 2006. In annual terms, corporate credit increased by 52 percent. The credit distribution structure by use has tended to be more uniform in comparison with the previous year. Most of corporate loans (34.5 percent) have been used for purchasing machinery and equipment, while 23.2 percent of corporate loans portfolio has been used for financing investments in activity area expansion. In 2006 the household credit was 7 percent of GDP, or 33.5 percent of the total loans portfolio. More than half of loans to households (59.3 percent) have been extended for financing real estate purchases, while the financing of consumer goods purchases has also increased. The ratio of consumer loans to total household portfolio is 27.3 percent, from 20 percent in the previous year. In particular, consumer loans increased obviously during the summer holidays and during the end-year celebrations. Concerning lending to specific sectors, it should be underlined that trade remains the sector mostly credited by the banking system, by 22.4 percent of the loans portfolio. The growth rate of credit to construction has been inhibited during 2006. This sector presented temporary improvement signs during the summer, then turned back to the downward trend. In the meantime, the low volume of credit to agriculture speaks for constant structural problems that inhibit lending to this sector. Given the geographical coverage with loans, it is observed that 68 percent of the portfolio is concentrated in Tirana. Durrës and Vlora come afterwards, by respectively 8 and 4 percent of the loans portfolio. This reveals the high economic importance of Tirana, and the need for improving the economic infrastructure in the rest of the country. Net foreign assets The foreign currency position of the banking system improved during 2006. Net foreign assets of the banking system amounted to US$ 2.4 billion at yearend, recording an annual growth of about US$ 440 million. Government demand for money The government account has had an unusual performance during 2006. During the major part of the year, the government demand for money was negative, concentrating the planned domestic borrowing on two last months of the year. The overall deficit financing for 2006 resulted to about ALL 22.6 billion. 5. Financial market and interest rates Year 2006 was characterised by an increased activity in money and capital market, while the interest rate performance was generally oriented by the Bank of Albania’s monetary policy. Under the conditions of excess liquidity, the interest rates had a downward trend during the first half of the year. The interest rates went upward after the tightening signal of monetary conditions in the second half of the year. The interbank market was more active during 2006, thus ensuring a more efficient way of banks’ excess liquidity management. The average daily volume of transactions amounted to All 1.6 billion or ALL 0.2 billion more than the previous year average. The interbank market was characterised by narrowing the interest rate spread according to maturities and their positioning close to key interest rate. The average overnight-weekly interest rate spread dropped to 0.7 percentage point in 2006, from 1.6 percentage points in 2005. In the first half of 2006, there was a constant decline in treasury bills yields and government bonds, due to low government demand for funds. In the second half of 2006, following the Bank of Albania’s tightening signals and the increased demand for liquidity in the system, there was a gradual rise of these yields. The yields increased respectively by 0.83, 0.45 and 0.98 percentage point in comparison with the previous year. The government bonds issues has increased compared to the previous year, making the banks’ portfolio, as the sole participants in this market, increase to ALL 37.0 billion. The share of bonds to total government securities increased 22 percent in 2006 from 12 percent in the previous year. Their maturity structure varies from 2 to 5 years. Five-year bonds were issued for the first time in November of this year, for the amount of ALL 6.3 billion. The demand for them resulted higher than the issued amount. Lek deposit interest rates went down during the first half of 2006, and up after the tightening monetary policy signals. The interest rates were raised faster for long-term maturities, reflecting the adjustment of their term to long-term government debt rise. Lek credit interest rates went down for all maturities during 2006. The weighted average interest in December 2006 fell to 12.92 percent, from 13.50 percent it was in the previous year. Though the intermediation cost declined in comparison to the previous year, the spread level is still high. It is influenced by imperfect competition in this market and by higher risk nature of loans extended in ALL. The interest rates of deposits denominated in lek and euro continued to go up, as a result of monetary policy tightening by the Fed and the European Central Bank during 2006. Simultaneously, the interest rates of loans extended in these currencies went up. The interests of six-month to one-year loans in Euro and six-month loans in USD underwent the highest rise. At end of 2006, the weighted average interests of loans in USD amounted to 9.42 percent and interests of loans in Euro amounted to 8.17 percent, from 8.47 percent and 7.95 percent they were respectively at end of the previous year. 6. Exchange rate During 2006, the Albanian lek has maintained its appreciating trend against the principal foreign currencies, though at a low intensity. In effective nominal annual terms, the lek has been appreciated on average by 1.1 percent during 2006. During the previous year, this appreciation was 2.8 percent. The lek-foreign currency interest rate spread, though downward during three latest years, continued to be at positive levels. Economic developments during 2006 have sustained a stable domestic currency. The lek’s appreciating pressures have been concentrated mainly on July-August and December. Besides the seasonal entry of foreign currency, which is the main factor of the lek’s appreciation over this period, the key interest rate increase has also been reflected in the market. The high foreign currency supply over this period has been absorbed partly by the Bank of Albania’s interventions, in respect of the target on the rise of net international reserve and in compliance with the country’s overall macroeconomic program. 7. Monetary policy instruments Fixed-price one-week repurchase agreement is the main instrument employed during 2006. According to the liquidity situation, the Bank of Albania has switched from repurchase agreements to reverse agreements, while the maturity term has changed from weekly to quarterly. This spectre of movements has been imposed by seasonal factors, by the budget behaviour and by the need to reveal certain monetary policy signals. To meet longer-term needs of the market for liquidity during the four last months of 2006, four Treasury bill outright purchase transactions were carried out, at a total nominal value of ALL 3.2 billion. During 2006 commercial banks employed the overnight deposit facility for investing their free liquidities with the Bank of Albania, on average at ALL 1.6 billion a day or ALL 0.82 billion more than in 2005. Overnight credit has been employed only in seven cases, despite the lack of liquidity over the third quarter of the year. For the fourth consecutive year, the final lending facility of the Bank of Albania, i.e., the Lombard loan was not employed at all. The required reserve instrument was used constantly even during 2006, for withdrawing the banking system liquidity. The monthly pace of ALL required reserve rise during 2006 was on average higher than in 2005, 0.92 percent versus 0.76 percent, reflecting the rise in the respective categories included in the required reserve account. 8. Foreign reserve management During 2006 the gross foreign reserve, estimated and reported in USD, has been increased by USD 368.06 million, recording the value of USD 1,793.12 million as at end of December. Out of this growth, about USD 205 million is accumulated from Bank of Albania’s interventions in foreign currency. They were intended at meeting the quantitative target for these assets and mitigating the volatility over the peak periods of foreign currency supply. While the exchange rate effect has been positive, at USD 106 million, the rest of the growth has been contributed by receipts from foreign disbursements. 9. Banking system performance The banking system continued its stable development during 2006. The net banking system result for 2006 stood at a profit of ALL 7.45 billion, about 12.9 percent more than in 2005. Revenues from the principal activity (net income from interest) resulted to 31.2 percent more than in the previous year, reflecting the banking system orientation to activities of higher return and a rise in the overall volume of assets. At end of 2006, the net income from interests was 92.6 percent of the gross banking system incomes, compared to 84 percent at end of 2005. This indicator has recorded constant growth, particularly over three last years, reflecting the overall net income sustainability for the banking system. During 2006, the banking system assets grew by All 127.7 billion, or about ALL 57.6 billion more than the growth of assets noted in 2005. The main contribution to the growth of banking system assets was given by large banks, though their share in the market is downward. The estimates show that the lending activity concentration level is lower than that of assets and deposits concentration. The significant growth of lending has been associated with increased share of nonperforming loans portfolio, by about ALL 3.1 billion compared to end of 2005. The loans portfolio quality indicator, expressed as a ratio of nonperforming loans to total loans portfolio in gross terms, is estimated at 3.1 percent as at year-end, against 2.3 percent as at year-end 2005. The banking system capability of covering loss loans with capital has been downward, but still at good levels. The “non-performing loans to outstanding loans (net)” indicator, which estimates the net size of exposure to credit risk, continues to be at low levels, by 1.4 percent as at year-end 2006. Compared to year-end 2005, the capital adequacy ratio of the system decreased by 0.5 percentage point down to 18.1 percent at end 2006. The capital adequacy ratio for 2006 continued to maintain the downward trend reflected in the preceding years. Large banks have recorded a rise of capital adequacy indicator, mainly due to increased regulatory capital at end of the year, by about 62.3 percent. At end of 2006, the ratio of liquid assets to total assets of the banking system recorded 57.6 percent, compared to 62.6 percent it was at end of December 2005. During 2006 the banking system underwent important qualitative and quantitative developments. At end of 2006 the Albanian banking sector consisted of 17 banks, of which three are of fully Albanian private equity. At the beginning of 2006 the Union Bank commenced its activity. On May 2006, there was approved the selling of the Italian-Albanian Bank’s 80 % stake, which belonged to the Ministry of Finances of the Republic of Albania and to Capitalia S.A., Italy, to the new stockholder SanPaolo IMI S.p.A., Italy. At the same period, there was also approved the 60 percent (plus 2 shares) ownership transfer of the National Commercial Bank’s stake from Kent Bank/Bayindir Bank, to the new Turkish institutional stockholder, Çalik-Seker Konsorsiyum Yatirim Anonim. On August 2006 the ownership transfer of 11.25 percent of the ProCredit Bank’s stake, from EBRD to ProCredit Holding AG (existing shareholder) was approved. On October 2006, the 71.97 percent transfer of the stake of Emporiki Bank S.A. of Greece to Credit Agricol S.A., France shareholder was approved. This transfer influenced also the indirect participation of Credit Agricol S.A. to the Emporiki Bank of Albania’s equity, to the same extent. During 2006, the banks’ network was extended also by 62 new branches and agencies, in the whole territory of Albania and abroad, having the highest share in Tirana, with the establishment of 30 new branches and agencies. Also, the opening of two branches outside the territory of Albania was approved and the opening of two other new branches is under the process of approval. 10. New activities of the Bank of Albania Payment system From the regulatory and operational point of view, the payment system in Albania has already created the physiognomy of a modern system. The number of transactions processed during 2006 has increased by 13 percent, compared to 2005. In the meantime the value of transactions has increased by 21 percent during 2006, amounting to ALL 2,664.43 billion. Compared to 2005, the daily average number of payments (in both systems) has increased from 312, to 352 or 40 more transactions per day. In 2006, a new bank was added to the payment system, leading the number of participants to 17 banks. On March 2006 the e-payment settlement by VISA cards started. Currently, this scheme counts 6 member banks. The number of cards in circulation has increased by 9 times during 2006, compared to 2004. The addition in cards number counts 127,552 cards compared to 2005, i.e., about 56 percent. Parallel to increased number of cards, the number of ATMs and POSs has also increased, respectively by 130 and 404. International integration and cooperation The Bank of Albania’s obligations stemming from the SAA relate to the meeting of the economic criteria of Copenhagen, guaranteeing the right of establishment and freedom of services for banks and other communautaire financial services, liberalizing capital movement and current payments between Albania and the EU, and approximating Albanian legislation to that of the acquis communautaire in these areas. One of the most important developments during 2006 regarding the approximation of national legislation to that of the acquis was the drafting of the Law “On Banks in the Republic of Albania”. This Law has adopted the largest part of the provisions of the 2000/12/EC Directive, with regards to initiation and continuation of credit institutions activity. On 8 November, 2006, the European Commission published the Albania 2006 Progress Report. The European Commission evaluated in the report the policy followed by the Bank of Albania in terms of cooperating with international financial institutions and maintaining inflation under control, contributing to keeping a steady macroeconomic environment in the country. At the same time, the Commission also evaluated the reliable monetary policy followed, highlighting particularly the measures taken by the Bank of Albania in terms of gradually changing its monetary policy strategy towards explicit inflation targeting regime, aiming at enhancing transparency and credibility of its monetary policies. The report highlighted also the positive developments in the banking sector of the country and assessed the progress achieved regarding the establishment of the loans register, free movement of banking and financial services, freedom of establishment of foreign banks and further liberalization of capital movement. On 27 January, 2006, the Executive Board of the IMF adopted the three-annual agreement with Albania, at SDR 17.045 million. The main targets of the new program have to do with the maintaining of macroeconomic stability, as a prerequisite for economic growth, and the improvement of financial institutions. Under Reserves Advisory and Management Program (RAMP), during 2006 the World Bank’s group provided consulting and technical assistance to the Bank of Albania for foreign reserve management. During 2006 the Bank of Albania established constant contacts with the EBRD, mainly in terms of providing information and statistics for the development of the Albanian economy in general and financial sector in particular. The Transition Report 2006 assessed positively the maintaining of inflation within the Bank of Albania’s target and the consolidation of the banking system over 2006. The Bank for International Settlements (BIS) is another institution with which the Bank of Albania kept close contacts during 2006. The BIS has been particularly active in providing technical assistance to the Bank of Albania, through workshops and training courses organised by the Institute of Financial Stability, which promotes the international financial stability through information sharing and cooperation in financial system supervision area. During 2006 the Bank of Albania enhanced the mutual relations with the central banks of the region and beyond it. Personally, I have paid official visits to many central banks of the region and Europe, discussing about latest developments in the Albanian economy and further extension of mutual cooperation and technical assistance that these banks can provide to the Bank of Albania. In June the Governor of the Bank of Greece, Mr. Nicholas C. Garganas paid a two-day official visit to Albania. It took place in the light of mutual relations between both institutions, laying special emphasis on sharing of information and experience in banking supervision area. Enhancing relations with central banks of the region reached the peak in the round table of October 2006 held in Tirana, where the governors of the central bans of Rumania, Serbia, Montenegro, Bosnia and Herzegovina and Kosovo discussed about financial stability of the region. In the framework of the Bank of Albania’s objective to benefit from the experience of the central banks of the CEE, recently acceded in the European System of Central Banks (ESCB), during 2006 the cooperation relations with the Central Bank of Poland, National Bank of the Czech Republic and the National Bank of Bulgaria have been intensified. Currency issuing The increase of currency in circulation over 2006, by ALL 14, 7 billion is a response to the balanced macroeconomic development of the country. The commercial bank’s receivables by the Bank of Albania during 2006 stood at ALL 105 billion, remaining almost at the same level with that of 2005. Concerning cash payments, from Bank of Albania’s cash-boxes to commercial banks, the supply was carried out according to their requests, and intending, at the same time, to maintain the currency in circulation structure within the projected limits for year-end 2006. The velocity of money circulation over 2006, for the shortened cycle of circulation, totalled almost at the same level as in 2005. However, the velocity of circulation underwent changes for certain denominations of banknotes and coins. Hence, a significant increase of velocity of circulation was proved in the 5.000 lekë, 1.000 lekë and 500 lekë denominations, respectively by 13.3 percent, 38.9 percent and 8.3 percent. Changes in banking legislation During 2006, further to the signing of the Stabilization and Association Agreement on 12 June, 2006, the banking legislation was amended and improved substantially once the Law “On the Banks in the Republic of Albania”, No. 9662 of 18.12.2006 was passed by the Assembly of the Republic of Albania, which shall become effective on 1 June, 2007. The Law “On the Banks in the Republic of Albania” enables the European Union member states banks and all foreign banks to provide banking services to Albania, through their branches or subsidiaries, without making any distinction in the licensing terms for their branches and subsidiaries and for Albanian banks. Furthermore, in line with the SAA provisions, the adopted law requires their treatment as Albanian banks in every aspect, once they are granted the licence to carry out banking business and financial activity. The new law provides for clearer rules on management of risk the banks may be faced with while carrying out their activity, in order to guarantee and strengthen the protection of depositors and investors and to maintain banking system stability. Given the current conditions of rapid credit growth in the banking system, the new law treats fully the other types of risks as well, other than that of credit risk, with which banks may be faced, and the permitted exposures of the latter ones when faced with such risks. The law requires for the first time, inter alia, the establishment and maintaining by the Bank of Albania of the loans register. Under the conditions of a rapid credit growth, the purpose of establishing such a register is to assist banks in making well-informed decisions when extending loans to their clients, as well as to strengthen the Bank of Albania’s supervision on the Albanian banking system. During 2006 the Bank of Albania started examining the prerequisites and implementation conditions over a mid-term period (year 2009), of a new monetary policy regime. In this context, analyses are carried out about the possibilities of improving the legal infrastructure for the creation of such conditions in compliance with international standards in this area. Also, the possibility of improving the organic law of the Bank of Albania has been considered, coinciding with the prediction of its alteration as a mid-term priority of the National Plan for the Implementation of the SAA. It is forecasted that these alterations will stipulate clearly the competences and procedures for the decision-making process of the Bank of Albania and the transparency of this process, which constitutes also a substantial precondition for the compilation and implementation of an effective monetary policy. In the framework of the legal reforms undertaken by the Ministry of Justice for the amendment and improvement of the Civil Procedure Code, the Bank of Albania has been fully committed to cooperating with the banking sector for the completion and accuracy of mandatory execution procedure of executive titles. The Bank of Albania proposals have aimed at improving the legal base on the application of procedures for the execution of acts that constitute executive titles. The main purpose is to cut the time for the execution of those acts, aiming to increase security in the lending activity, thus reducing the credit risk the banks are faced with. At end of 2006, the Bank of Albania closely cooperated with the Ministry of Finance in compiling the draft-law “On Preventing Money Laundering and Terrorism Financing”. In accordance with the respective European Union directives and other international recommendations, the Bank of Albania, being the supervisory authority of the banking system, regards with priority the legal framework improvement for preventing the use of banking system for laundering money and wealth that derive from criminal activities. During this year, with the assistance of the World Bank, the drafting and completion of the regulatory framework for foreign reserve management was carried out successfully, reviewing the Bank of Albania’s policy on the management of such reserve, the management criteria and terms, as well as the decentralization of decision-making competences during this process. Internal audit In 2006, 44 audits and 3 verification procedures were carried out. The inspectors presented 269 findings and 197 recommendations out of these audits, which were carried out at the Bank of Albania and at its five district branches, the Printing House included. 11. Bank of Albania balance sheet During 2006, the Bank of Albania assets further increased, totalling ALL 255.5 billion, about 14 percent higher than at end 2005. The constituent groups, both foreign currency and domestic assets, have reflected growth, while the first group occupies about 68 per cent of total assets, the same level as that of the previous year. On the liability side, foreign currency liabilities fell slightly (from 8 to 7 percent of the total) in comparison with the previous year, whereas domestic liabilities increased by 16 percent. Currency in circulation is the indicator that bears the main weight in this growth (about 45 percent of the growth), followed by the “due to the government” item (about 29 percent of the growth) and “due to banks” item (about 26 percent of the growth). In general, the accounting balance sheet of the Bank of Albania and the income and expenditure statement reflect some basic developments that have occurred in the economy, where the Bank of Albania plays an important role. The revenues realised during 2006 outstripped the level of the previous year only by about 5 percent. The main impact on this growth was given by income on foreign currency interests (about 20 percent more than in 2005). This reflects the performance of interest rates in foreign exchange markets. This effect absorbs the reduction of “income from ALL interests” item (about 7 percent less than in 2005), which reflects an average interest rate below that of 2005, irrespective of the upward trend at year-end. On the other hand, interest expenses outstrip the previous year level by about 25 percent, reflecting the positive phenomena of the increased level of deposits and liquidity position in the banking system. Foreign currency interest expenses have been outstripped by 64 percent compared to the previous year, whereas ALL interest expenses have increased by 14 percent. Other (operational and amortization) expenditures are almost at the same level with that of the previous year. Finally, the almost full compensation between increase of incomes and expenditures makes the net profit of the Bank of Albania for 2006 be in the same level with that of the previous year, at about ALL 5.16 billion (or 99.6 percent of the profit for 2005). Honourable deputies, Concluding my speech, I would like to underscore that during 2006 the Bank of Albania included in its agenda all the recommendations given by the Albanian Parliament in its resolution adopted on 25 May, 2006. I would also like to assure you that even in 2007, the same philosophy will characterise our work. Understanding correctly the role and mission of our institution, on behalf of the Supervisory Council of the Bank of Albania, I declare that the Bank of Albania will continue to be an accountable institution, deeply committed to fulfil its obligations vested by the Law and the Constitution. We have many priorities for 2007, but let me highlight the most important ones: • Maintaining consumer price stability remains the main legal target of the Bank of Albania. We are confident that the decisions taken in 2006 were appropriate and have served to orient inflationary expectations to the targeted range. Based on our forward-looking philosophy, we will prudentially evaluate all the risk factors, so that we operate on due time and intensity. • Macroeconomic stability is of primary importance, but definitely the financial stability is also of as much crucial importance. Given the importance and the current level of economic and financial development of the country, this priority assumes extraordinary importance. Furthermore, the rapid credit growth is an argument for more prudence, particularly with regard to its quality. Being fully aware of our role as a decision-making and regulatory institution, we have decided to raise our vigilance in this regard, establishing the Financial Stability Department as a first step. • Once more, the Bank of Albania emphasises its objective for further consolidation of the banking system. This process, which was present during 2006, should further continue in the current year. Our intention is that the banking system becomes a unity of sound institutions: that are supported by powerful shareholders, experienced in banking industry; that apply best standards of accountability in management; that carry out a balanced activity with well-managed risks; that are able to be faced with and develop under the open market competition provided by an open and integrated market into the international financial market; that support the economic development of the country and that transparently provide efficient and qualitative banking products and services to the public. I would like to thank the Albanian Parliament once more for the good understanding and constant support it has given to the Bank of Albania. Thank you for your attention.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the signing of the Memorandum of Understanding, Tirana, 17 July 2007.
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Ardian Fullani: Agreement between the Bank of Albania and the Competition Authority Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the signing of the Memorandum of Understanding, Tirana, 17 July 2007. * * * Dear participants, I am pleased to have concluded this co-operation agreement between the Bank of Albania and the Competition Authority. In observance of the legal responsibilities of the institutions we represent, this agreement concludes the formal basis for cooperative efforts, in terms of achieving the objective of enhancing the competition conditions, in which the banking and financial activity is being conducted. Fair competition promotes the efficiency in the banking business and refines the composition and the functioning of the banking market, by providing significant services to clients and the public at large, being users of banking and financial services. It has been for some years now that the Albanian economy and the financial system are in an intensive process of integration into the regional economies and markets. This process requires the improvement of the legal and regulative framework for developing the business and the enhancement of the human and institutional capacities to cope with the challenges deriving from the economic openness and the enhancement of competition. Considering this phase of economic development, it is essential that the regulatory authorities of financial markets and their institutions establish transparent and non-discriminative conditions for conducting business and moreover, develop necessary instruments to identify and eliminate cases of abuse from the financial institutions in their relationships with the other market participants and the clients. According to this agreement, the Bank of Albania shall, in fulfilling its supervisory role and in co-operation with the Competition Authority, support the latter in identifying the behaviour of banks and non-bank financial institutions, which may distort competition and ultimately, maintain an unfair position in the market, set unreal prices for banking products and services and discriminate certain clients or part of the public. In such cases, the Bank of Albania will require the Competition Authority, to start an investigation procedure, according to the law provisions. On the other hand, the Bank of Albania will continue to ensure that the regulatory framework and the supervisory practices remain transparent and provide to all entities meeting the law requirements equal terms for conducting banking and financial activity. In the context of this co-operation, the Bank of Albania and the Competition Authority shall establish the format of formal information exchange, by observing the requirements of the law in terms of its quality and characteristics. Understandably, we have taken only one step along a very long process, which requires its consistency in practice, as well. It is crucial that the importance of this agreement be fully comprehended by the staff of both institutions. Its commitment is essential, in order for our co-operation to be part of our daily job and add to the efficiency of both institutions and not to remain solely on paper. The Bank of Albania considers the conclusion of this memorandum as a cornerstone which will overwhelmingly affect the enhancement of real competition conditions, in which the banking and financial activity are currently being conducted. It is worth underlining that fair competition promotes the efficiency in the banking business and refines the composition and the functioning of the banking market. The Bank of Albania will make its utmost efforts to make the co-operation deriving from this agreement as concrete as possible and with direct impact on achieving a real, fair and efficient market competition. I take this opportunity to express the Bank of Albania commitment to carry out all the responsibilities deriving from the law and from this agreement. In addition, allow me to express my appreciation to the Competition Authority and to Ms. Lati for the support granted in the conclusion of this agreement. Thank you.
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Interview given by Mr Ardian Fullani, Governor of the Bank of Albania, to Klan magazine, published on 23 June 2007.
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Ardian Fullani: Health passes through .. bank Interview given by Mr Ardian Fullani, Governor of the Bank of Albania, to Klan magazine, published on 23 June 2007. * * * - Mr. Fullani, initially we would like to listen to your comment about the efforts of the government to channel financial business transactions through banks. Is this effort somewhat strained, given that the other party (the business) expresses itself that high transaction commissions of commercial banks increase business costs and the banks themselves are not ready to carry out the transactions? The channelling of financial transactions through the banking system, as a process already tested and under development, is a much expected action, which outside the propaganda contours will really contribute to weakening of the infrastructure that nourishes the informality. In recent years, the banking system has passed through an irresistible process of development and consolidation. Actually it may be stated without hesitation that the banking system in Albania is completely capable of encountering with dignity this requirement of the time. Dealing briefly with two or three important moments, I would start with the operation of two modern payment systems: Albanian Interbank Payment System (AIPS) where gross and real time settlements are made, and the Automated Electronic Clearing House (AECH) (smallvalue payments of clearing systems). Further on, I would highlight the significant growth of epayments, the entry into the system of two well-known international banks, the increased number of branches, as well as increase of ATMs and POS terminals for card payments in the whole territory. Encountering successfully the channelling of public sector salaries through bank accounts, followed also by those of the private sector and by a number of other banking services, I think are indicators of the proactive, ever increasing role of the banking system. To clearly understand what progress we have made so far in this direction, it‘s worth mentioning some statistics. The number of payments processed in AIPS system has increased by 11 percent, while the value has increased by 21 percent compared to 2005. In the meantime, both systems, the AIPS and the AECH have a much higher capacity than the current number of payments processed in them. At end of 2006, compared to end of 2004, the number of P0S terminals was 7 times higher, while the number of electronic cards in use has increased more than 10 times and the transactions carried out through them was above 12 millions, with a value of about ALL 188 billion. During 2006, 62 branches and agencies of commercial banks were established, leading the number to 294 at year-end. In this sense, I think that the current infrastructure of the national system of payments we provide is completely capable of facing the Albanian market demand for speed, number, quality, size and security of payments carried out through these systems. Furthermore, the Bank of Albania, in its role as the regulator of this system, is working for further standardization of payment instruments, which will lead to increased quality of services offered by banks to their clients. On the other hand, the increased inflow of transactions in the banking system will further encourage competition within the banking system. Banks would be encouraged, in exchange of low commissions, to attract as many clients as possible, who in turn, would bring about more financial resources to banks. The banking activity, as any other business, aims at profit maximisation. Therefore, it is natural to charge commissions for services offered by the system, while their amount is an individual policy that changes from one bank into the other, in accordance with the size and other specifications. I am convinced that the increased volume of work will bring about reduced banking commissions. I do not have any doubt in this regard. What I would assure you, as the governor of the Bank of Albania, is the meeting of an early requirement of the banking system to be very transparent about its products, services, commissions and prices they generally apply. - As the process of channelling the financial transactions of business through banks had to be carried out since time ago, is it better to pass the costs of the moment and to channel the economy through the banking system? I would refer to "costs of the moment" as "benefits of the future". Imagine the other side of the medal. How much informed will the banking system be in relation to the potential the various businesses have, and how much safe will it feel in crediting them without any hesitation? From this viewpoint, it is concluded that the operation is necessary and furthermore, in the final analysis, businesses, and particularly individuals will be the beneficiaries. In a broader aspect, the information on economic-financial potential of the country would increase; the banking system effectiveness would increase; the variety of banking products and services would increase; the geographic coverage by banking services would increase; and in consequence the mobilization and re-allocation of funds would be more appropriate; the competition would increase and costs would decrease. All these achievements would contribute to creating a more complete economic infrastructure of the country, which would raise the formality of the economy and would accelerate the economic growth rates of the country. - Credit extension has increased fourfold during four last years, but this has not influenced on interest cut: Is this normal? It is true that during last years we have had a rapid credit growth. During 2005 credit increased by ALL 57.6 billion or about 82 percent in annual terms, whereas during 2006, it increased by 70.2 billion or about 55%. Upward trends are as strong even in the first half of 2007. According to latest estimates, credit balance at end of 2007 will be around 21 percent of GDP. Without doubt, this view reveals that Albania, likewise most similar countries, has entered into the group of countries with high growth paces of credit to the economy. The first cause listed by experts is the so-called “catching – up process", which in other words means high growth caused by a rather low starting base. Naturally, there are also other factors, such as: macroeconomic stability, the maintaining of inflation under control, low interest rates in Albania, Europe and the USA, exchange rate stability, increased banks’ ambitions to lend and the public confidence in receiving credit. The banking system development in the recent years, its successful privatisation and the process of consolidation characterising it in 2006 are other factors that have influenced on rapid credit growth. Also we may mention the introduction of new credit products, such as consumer loans, house loans, and the efforts to make them more popular through aggressive marketing forms. Rise of credit to the economy at so high levels carries over the potential of cutting the interest rates through which it is offered. Referring to Bank of Albania statistics, if an ALL loan of 6-12 month maturity at the beginning of 2002 was given on average by above 18 percent rate, in April 2007 it was given by only 10.16 percent. However, we should be prudent and always bear in mind the fact that about 75 percent of credit is in foreign currency and therefore, in forming the price of this kind of credit, banks refer to international financial market rates, such as euribor for the euro and libor for the American dollar. What is evidenced recently, thanks to increasing competition, is that ALL credit rates as an average expression of new credits have remained almost constant during the latest years, though euribor has increased almost throughout the whole period. - Is the default risk the one that keeps high interest rates or do we have a situation of profit by banks from an economy in transition, as randomly happens? It is not the high default risk the one that obliges banks to apply high rates. In price formation policies, banks, inter alia, factorise also the country risk, which for many objective reasons is higher than that of the developed countries. Also, besides this risk, there exists also the economy informality, problems about ownership, mortgage of properties and collateral execution. All these factors make banks work hard to ensure information about the borrowers. This leads to increased costs and to the risk of misleading financial analysis of the borrower, which would influence negatively on credit portfolio quality in the future. - Time ago you have issued the warning of “bad loans” risk; what is the current situation like in this regard? A governor should always be concerned about such an important problem, related to loans portfolio quality. The current situation of credit quality remains satisfactory. The ratio of “nonperforming loans to (gross) outstanding loans, which measures the net size of exposure to credit risk is estimated to 1.5 percent. Constantly the Bank of Albania’s attention has been to strengthening of banking supervision measures. Some amendments have been made to the Regulation on credit management, consisting in improvement of the lending process of banks, improvement of risk management and some measures have been taken for enhancing transparency with the public. Also, this regulation has provided some requirements on additional capital of banks, in case they have a high lending pace. However, we have to do with a process, which never ends and which will always be at the top-list of Bank of Albania priorities. We will continue to monitor prudentially credit growth and its quality. We will further improve prudential regulations, making them in consistency with best standards used by European central banks. Only in this way a good credit quality will be ensured, for preventing any probable negative consequences on the financial stability of the country. - Until a year or so ago, treasury bills could be purchased only at central bank’s windows, while the selling of treasury bills may be also carried out at some commercial banks. Has the liberalization process influenced on yield cut? The possibility of participation of individuals in primary treasury bill market through the banking system dates back to 1996, while the Bank of Albania was included in this process only during the second half of 2001. The Bank of Albania, in its role as a central bank, having the main target to achieve and maintain price stability, since the moment of opening its windows has regarded this presence as temporary. In essence, the establishment of these windows was another possibility for the people to have greater access in purchasing treasury bills. The participation of individuals in the primary market is of non-competitive nature, meaning that they do not influence on price formation. They just accept the resulting auction price. Therefore, we may state that their impact on yield rate fluctuations is almost insignificant. Since my taking office, I have insisted that the selling of treasury bills is an operation that naturally belongs to commercial banks. To this end, we have discussed more than once with the banking system and with the Ministry of Finance for designing a strategy for the Bank of Albania’s gradual leaving from this “business” not natural to it, believing that the market forces and its principles are the ones that should manage this process. Therefore the banking system was required to be aggressive in this regard, providing to the clients the service of selling T-bills in primary and secondary markets. Parallel to that, the Bank of Albania, concerning this service at its windows, made two important steps, charging a service commission that covers connected costs and deciding not to accept cash inflows of individuals who intend to invest in T-bills. Since then, participation in treasury bill auctions through Bank of Albania windows may be made possible only in case the intended amount for investment comes in the form of banking transfers. - Can you mention the positive sides of this liberalization? These measures may rightly create the idea of a liberalization process, which I think will really lead to further deepening and expansion of the financial market in Albania. Presently, we are working for presenting a new practice in the primary market of government securities, that of the main mediators, or as already known in other terms, “primary dealers”. We believe that this relatively long period in transition has served as a school also for the public at large. What is more important in the whole process is the fact that individuals are getting more and more acquainted with market instruments. The better and with more conscience we know them, the easier is the path to real financial market development. In such an economy, individuals make the choice. - Recently you have received evaluations, since the institution you govern has succeeded in maintaining macroeconomic parameters and price level. Can you mention some of the measures you have taken during this period? It is true that the Bank of Albania‘s role in maintaining macroeconomic stability , particularly in controlling inflationary pressures, has been recently highlighted by a number of institutions within the country and abroad. However, I would highlight the public evaluation for the institution I govern as the greatest success we have achieved. This evaluation is expressed clearly in anchoring inflationary pressures in the country and in increasing the degree of using their products. Naturally I regard it a direct reflection of high technical and professional investment the Bank of Albania has made in setting up an equilibrated framework of macroeconomic policies, in increasing financial markets, in developing the monetary market infrastructure and in consolidating the banking institutions. On the political plane, the Bank of Albania has kept unchanged its focus on monetary policy, to guarantee price stability in the economy. It has monitored prudentially the liquidity conditions and interest rates in the economy, as well as other factors of potential negative impact on inflation, raising twice the key interest rate in the economy. Also, the Bank of Albania has been a productive partner in coordinating the economic policies of the country and in the performance of the agreement with the IMF. On the financial market development plane, the Bank of Albania has undertaken a number of incentives for completing the banking infrastructure and the legal framework. Reflecting largely on macroeconomic stability and on improvement of banking infrastructure, lending to the economy has undergone very rapid paces during three latest years. On the other hand, the strengthening of banking supervision measures and the prudential regulations serve as a guarantee that the banking system expansion and rapid credit growth to the economy will not create problems for the financial health of banks and for their long-term sustainability. The Bank of Albania is raising the degree of professionalism, which is a guarantee for strengthening the independence, transparency and accountability. Therefore, the decisionmaking process has been further perfected, thus increasing the credibility of the Bank of Albania to the public.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the seminar: Does Central Bank Transparency Reduce Interest Rates?, Tirana, 22 August 2007.
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Ardian Fullani: Does central bank transparency reduce interest rates? Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the seminar: Does Central Bank Transparency Reduce Interest Rates?, Tirana, 22 August 2007. * * * Honourable ladies and gentlemen, It is a special pleasure for me to introduce Mr. Sylvester Eijffinger, an academic that is wellknown for his research into central banking institutional and practical issues. Today he is going to share with us one of the latest experiences of his work in monetary policy transparency and its effects on the economy. This activity is a follow-up of the lectures with distinguished personalities from academy and finance world, part of the program on enhancing transparency through public education. Undoubtedly, we have to do with an initiative of the Bank of Albania to contribute to the enlivening of academic and scientific research in Albania. Over the last decade, there is noticed a tendency of central banks to be more and more open to the public concerning the decision-making in economic and financial policies. Transparency has become an important issue of monetary policy. The important changes occurring in central banking since the beginning of `1990 have led to interesting and contemporary topics of academic studies in monetary policy. Transparency and opening to the public became a necessary practice in the framework of adopting inflation targeting, as a good practice of communicating with the public and for meeting the final objective of monetary policy. Moreover, this practice was extended in other central banks of advanced and developing economies. The rationale behind such policy stands at the belief that central bank transparency prevents the asymmetric information that exists between policy-makers and other economic agents. From this viewpoint, transparency increases clarity on monetary policy and allows the private sector and the economy to make rational decisions. Central bank transparency enhancement has been reflected in the publication of monetary policy objective, often defined in numeric form; in the publication of inflation report and the expected inflation forecasting; in the description of monetary policy decisions, together with the analysis and assumptions leading to such decisions; and in extreme cases, in the publication of minutes of monetary policy meetings, and the voting result in the decisionmaking process. Significant examples may be found in the European Central Bank, the Federal Reserve, the Bank of England, the Central Bank of Canada, of New Zealand, of Sweden. These tendencies indicate that central bankers have strong reasons to believe that central bank transparency carries over the potential to increase credibility and reputation of the institution and of the monetary policy, why not even its flexibility. Simultaneously, transparency helps the economy to achieve low inflation and interest rates. It is very important that scientific academy and researchers investigate this confidence of ours, providing their contribution and conclusions. The Bank of Albania has assessed the importance of monetary policy transparency and has made substantial steps for raising its level, especially in the recent year. Let me briefly mention some of these improvements: I believe that you share the same opinion with me, that currently the decision-making process in monetary policy area and in that of financial stability has undergone a significant improvement, not only in terms of the analysing process but also from the viewpoint of its communication. Presently the Supervisory Council has disclosed the calendar of meetings dedicated only to monetary policy decision-making. Also, since a long time, the process of its implementation, of analysis and of proposals passes through the Committee for the Implementation of Monetary Policy, a consultative body which has not only raised the quality of analysis but has also contributed to a new updated format of the Bank of Albania’s communication with the market and with economic agents in general. No doubt, the whole above-mentioned framework passes through an analytical process of assessment and forecasting, which is synthesised in monetary policy reports, part of which are the inflation forecasting models and baseline assumptions for possible economic events to which monetary policy should response. I may elaborate this point even further, but I believe that in my public presentations, in many press releases of the Bank of Albania Supervisory Council, and in our periodical publications we have made it clear that the one-digit numerical inflation target, the explanation of both operational and monetary policy framework are a central part of the Bank of Albania transparency. Personally, I am confident that this is the core of central bank transparency. I also believe that, thanks to this increased transparency, we have been relatively successful even in the achievement of another major central bank objective, i.e., that of anchoring the inflationary pressures at the programmed levels. Enhancement of transparency to such levels indicates clearly the Bank of Albania’s obligation to be an entirely accountable institution. We are confident that only in this way we will raise our credibility, will maintain and strengthen the confidence of the public and of economic agents in the Bank of Albania and its commitments. An aspect of transparency I would highlight is that of public understanding of central bank related issues. No effective communication exists without succeeding in understanding eachother reciprocally. No matter how broad and clear the information given by central bank is, the positive effects of transparency may not be fully benefited if this information is not interpreted fairly by economic agents. This is particularly necessary for countries of a short history of market economy, where the degree of public involvement in the country’s economic life is still low. Therefore, the Bank of Albania has been very aggressive in terms of designing and developing various programs for public education. Numerous meetings with market participants, with financial and banking community, with the business, with the academy, with the media and beyond, with the public, have been regularly carried out and I assure you that they will continue with the same intensity even in the future. I would like to emphasise that the argument of transparency enhancement remains equally valuable also for the rest of financial system. Transparency, without becoming an end in itself, and without damaging the achievement of final objectives of the business is a necessary market element for building confidence and expanding business relations, in products and volume, maintaining the financial system equilibrium and stability. In this framework, transparency should become a global concept of the financial market for products, services and actions taken by it. To this end, I would request from the banking system to further enhance its transparency with the public, particularly in terms of explaining simply and sincerely the products it provides, the commissions it applies, without leaving behind the publication in due time and quality of financial results, pursuant to legal obligations. In this context, I would like to let you know that the Bank of Albania will be rigorous in meeting all the obligations arising from the observance of laws and regulatory basis. As my friend Eijffinger states: “Transparency seems to mean different things to different people”, it is understandable that the debate remains open to both, academic and practical plane. New elements, quantitative indicators, empirical models are constantly added to it. The material to be presented today, adds a new value in this regard, with practical importance for central banks. I am confident that today we will have the opportunity and pleasure to expand our knowledge and consolidate our confidence in transparency effectiveness. I invite you to be full of attention for the presentation. Honourable Professor Eijffinger, I thank you for accepting my invitation to present your research in Tirana, and I wish you have a pleasant experience during your stay in Albania.
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Address by Mr Fatos Ibrahimi, Deputy Governor of the Bank of Albania, at the European Finance Convention, Tirana, 14-15 September 2007.
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Fatos Ibrahimi: The banking system situation and the future challenges Address by Mr Fatos Ibrahimi, Deputy Governor of the Bank of Albania, at the European Finance Convention, Tirana, 14-15 September 2007. * * * Dear participants, It is a pleasure to participate in this summit and to outline some of the main developments in one of the key areas of the Albanian economy, that of the banking system. In my following discussion, I will dwell on two main issues: First, the key steps in the banking reforms, with special focus on the issues related to commercial banks and the system’s financial developments in the recent years. Second, the aspirations of the Albanian economy to absorb foreign direct investments, their importance to our financial system and the FDI growth implications in the future. 1) The performance of the Albanian banking system Reform in banking was part of the structural reforms undertaken by the Albanian authorities after 1992. In addition to the macroeconomic stability, these reforms aimed to transform the Albanian economy into a market economy, through its privatization and the establishment of financial institutions and institutions of social protection. Albania has been going through a constant process of banking system consolidation since the transition into a market economy. In most of the 90s, this process was relatively sluggish as a result of the informal financial markets which had held the country’s economic and financial development back. The high interest rates offered by these markets kept the efficiency of monetary policy in steering the interest rate pending. In addition, other issues, such as the high concentration of deposits and loans in three state-owned banks, their operational losses as a result of the increase in non-performing loans’ portfolio, the undeveloped and incoherent regulatory framework in supervision had become an impediment to the expansion of reforms in the banking sector. Following this period, the banking system consolidation process began to progress. This period is characterized by the reduction in the share of state-owned banks, their gradual privatization and the considerable increase in the number of private banks from 4 operating in 1997 to 17 banks in 2006. In this context, the central bank has been extremely prudent in selecting and licensing the private banks, where only three of them licensed the recent years are of entirely Albanian capital. Despite the increase in the number of domestic commercial banks, the expansion of the banking activity until 2003 was a prudent one, being in line with the country’s economic development. During 1998-2003, the banking system’s total assets grew by an average of 13 per cent a year, consistent with the nominal GDP growth during this period. Nonetheless, there has been a swift growth in banking assets by 67 per cent in the last three years, which is 2-3 times higher than the cumulative growth of nominal GDP. As a result of the enhanced confidence in the domestic banking system, the share of assets to the GDP increased in 2006 to the peak level of 70 per cent, which is comparable to that of the Central and EastEuropean countries. The performance of commercial loan to private sector and to households is also satisfactory. Its growth rate has been constantly exceeding the expansion rate of banking assets. Over the last years, private loan has improved considerably; for 2005-2006 it recorded a cumulative growth of 175 per cent, which is the highest growth recorded in the region and the Central and East-European countries. Another characteristic in support of foreign crediting institutions is the free choice of currency, where almost 3/4 (three-fourth) of total loan was extended in foreign currency. Thus far we may say that credit supply is in prudent levels, since non-performing loans’ portfolio, though increased moderately to 3.1 per cent of gross loans in 2006, provides evidence for a limited exposure of the banking sector to non-settlement risk. However, despite the considerable improvement in the assets quality and the commercial banks’ financial performance, the growth of lending to the private sector and to households remains low as a share to the GDP – about 21.3 per cent in 2006, compared to 49 per cent in Central and East-European countries – providing evidence for other non-utilized banking services capacities in the Albanian economy. 2) Banking law Many amendments to the law on the financial system have been made over these years. These amendments resulted from the need of adopting the European Directives in this area and the Basel core principles for an effective banking supervision. This process was successfully finalized upon the approval of Law No. 9662 “On Banks in the Republic of Albania” by the Parliament. Compared with the previous law, the new law is more complete and more accurate in some parts of it. It has integrated some new concepts which are in full compliance with the European Directive 83/349 and other important directives. It stipulates changes in the licensing of activities by level of capital, in consolidated supervision, etc. In addition, “risk management”, which previously was provided for in specific regulations, has been now summarized in a specific chapter of this law. 3) Foreign direct investments and the Albanian financial system Foreign direct investments have been assessed as very important for developing countries, since they have a positive impact on the macroeconomic, technological and institutional performance of recipient countries. The wide experience over the last decades indicates that the presence of the financial FDIs improves the soundness of the domestic financial system, through a better management of portfolio risk and a more efficient allocation of credit funds. In addition, the technological innovations deriving from the FDI inflows affect the enhancement of the banking system competition and efficiency, through the increase in the variety of products and services provided. Despite these positive effects, the presence of foreign banks in the country instigates improvements in the institutional framework, by pushing the application of international accounting, reporting and supervision standards, which does not only help the commercial banks’ decision-making process but also the central bank’s. Therefore, the FDIs are expected not only to promote the production activity in the country, but also to have a direct and indirect impact on the Albanian financial system. Foreign production companies will directly need financial transfers and services (channel payrolls through the ATMs, POS), which will be executed through the domestic financial system. The international companies investing in the country will make use of commercial banks’ funding sources in order to prevent exchange rate and interest rate risk. There have been many property-related developments in the Albanian banking system. Since its establishment, the domination of state-owned banks has been reducing and today, foreign commercial banks’ assets account for over 90 per cent of the banking system. The increase in the number of foreign banks in the system has been also favoured by the fact that such investments have not been penalized in Albania; the requirements for establishing a bank are similar for both domestic and foreign-owned banks. The current ownership is diverse; there are foreign investors from Austria, Italy, Greece, USA, Turkey, Germany, Bulgaria, Malaysia and some Arab countries. Greek banks have been present in the market since 1996; the German and Italian investment has been present for quite a long time as well, while the latter has grown substantially and has become one of the market’s key actors. Austrian investments may be considered as the most dominant ones. Their ownership has resulted from the acquisition of the largest domestic state-owned bank. The long presence of foreign banks in the Albanian banking system has influenced the establishment of a stable banking system and its stable growth. Despite the financial collapse of 1997 or the panic crisis in 2002, in none of the cases was the system’s performance a source of crisis or instability. Previously, foreign banks were more conservative in terms of expanding their geographical activity; however, the entry of Raiffeisen Bank into the market pushed them to be more active. This fact may be evidenced by the variety of products provided in the market, the growth of lending and the employment of clear strategies to increase or maintain their market share. However, the economic benefits deriving from the presence of foreign banks have not reached the proper levels yet. The enhancement of the quality of information provided to the public at large and to the central bank, the lowering of the intermediation cost, the further improvement of risk management, and the standardization of the accounting and financial reporting systems are not in the desired levels yet. Now let us now turn briefly to the possible financial relationship between the Albanian banking system and the production foreign investments flow. Undoubtedly, the positive influence foreign direct investments have on economic growth depends largely on their recipient countries’ circumstances. It requires a substantial level of financial system development as a crucial precondition. A developed financial system improves the efficiency in allocating the resources and it further enhances the country’s capacity to absorb the FDI. The entry of new investors will orient the concentration of market segments to large-size businesses. Their impact, along with the lending capacity of our banking market, are believed to be the crucial proof for their success in Albania. In more concrete terms, the circumstances in Albania are such that there is an asymmetrical distribution of total assets between banks in the market. The reference is only to banks, since in terms of total assets, the banking system shares more than 90 per cent. Other non-bank financial institutions play a more insignificant role than the commercial banks. As far as the latter is concerned, there are many qualitative banks in the market, whose presence is an attractive factor for absorbing the FDI. On the other hand, the concentration of assets and banking loans in a few commercial banks bears the risk of creating an oligopolistic environment where only a few banks establish the terms for new loans. Such a situation would increase the investment cost in the public and private sector and in households, as well. Though thus far there have not been any cases of prices manipulation or banks exercising a dominant position in the market, I deem as necessary the promotion and vitalization of other financial market segments in general. This market requires real commitment in the efficient intermediation of financial resources in all its segments. Non-bank financial institutions need to become more active by expanding their activity in the market segments they operate in. With regard to the banking system, the Bank of Albania deems the revitalization of certain institutions, whose activity shares a small part of the banking market, as crucial. These institutions need to become more active, by taking more responsibility consistent with their business plans and they need to find new ways of organization and co-operation between them in order to enhance competition and provide a more symmetrical re-distribution of banking activity in our market. 4) The system’s future challenges Some sectors of economy, such as agriculture, continue to be credited at low levels or are not credited at all. The contribution of banking loans to production investments is still low. Moreover, considering the high share of loans for commercial purposes, it may be concluded that the largest share of loans is used to finance imports. The level of public accessing the banking system is not in the parameters set in the country’s economic development objectives. Furthermore, the level of cash in economy is extremely high. All these phenomena push the borders of informality further and reduce the monetary policy efficiency. It is the financial system’s duty and responsibility to make all its efforts in co-operation with the Bank of Albania and other Government authorities to find the solution to these problems. In conclusion I would like to say that as a result of the reforms undertaken, the Albanian banking system, being the most dynamic part of the financial system, has made significant progress during the last years. This progress results from the clear visions and seriousness shown by the Albanian authorities in reforming the banking sector, the fruitful co-operation these authorities have had with the international financial institutions such as the IMF and the World Bank for designing medium-term strategies and developing this sector further. This progress is also a result of the numerous challenges the Albanian banking system has been faced with over the recent years. It may be concluded that the Albanian banking system is presented safe, sound, under a constant reformation and consolidation process. It is going through a new stage, which will provide to the business and the banking clients modern banking services, aiming to reach the western banks’ standards. ¨ With regard to the aspirations of the Albanian economy and strategies to be employed for its further opening to foreign investors, we believe that these undertakings will have a positive impact on the country’s macroeconomic, technological and institutional area. The banking system’s stage of development and the FDI flows in economy have mutual influences on each other. Hence, if Albania attracts stable and long-term FDI flows in the following years, their impact on the further development of the financial system will be considerable. Furthermore, the demand for banking products both from domestic and foreign companies will grow.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the conference organised by the Central Bank of Bosnia and Herzegovina, Sarajevo, 13-14 September 2007.
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Ardian Fullani: Regional cooperation in South East Europe Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the conference organised by the Central Bank of Bosnia and Herzegovina, Sarajevo, 13-14 September 2007. * I. * * Introduction It is a pleasure to be here today and engage in this discussion on strengthening regional cooperation. This meeting in Bosnia builds upon other important activities in which we have come together to discuss similar issues. It is one thing to organize one activity where the governors of all central banks come together to share their views and agree upon importance of regional cooperation, but it is completely another thing to have them to bind themselves to continue the institutional dialogue. Today, we present another proof of such commitment and show that regional cooperation in SEE is not a slogan but a real process with real results and products. II. Why cooperation? In general the nature and the character of any form of cooperation is shaped by the most important problems that central banks deal with. Therefore the stage of economic development, and economic and social challenges faced by our economies are bound to play an important role in this cooperation. a. Common challenges While the overall region seems to experience macroeconomic stability, issues that the central banks face today in their respective jurisdictions with their main partners bear striking resemblance. Most importantly we share the same partners. We have all accepted the same challenges and set similar priorities which converge to the same objectives. Dealing with a much faster globalization of financial sector than the rest of the economy, guarding macroeconomic and financial stability in face while this is happening, and the challenge of European integration define similar problems across the region. Structural reforms I would consider as the main future challenge. Building a stable financial system, enhancing financial infrastructure, improving financial markets, deepening and broadening through innovative initiatives provides fundamental ground for such cooperation. The memories of the latest episodes that have trembled financial markets in the western hemisphere, and the architecture of the financial system that is developing in our region (meaning the same banks becoming major players in each country) should make us aware of the potential risks. They indicate that each financial market remains highly exposed toward negative phenomenon that could develop in any of the region’s economies. b. Common destination In this respect, I see enormous possibility for cooperation and policy coordination in the direction of information sharing, institution building, modification of the legal infrastructure and lobbying in European structures. Facing these problems in group rather than separately will allow to benefit and embrace the positive effects of “economies of scale”. I also invite the ECB and EC to explore the possibility of adopting a “party” treatment for the entire SEE region, by adopting a specific program for a specific group of countries. The process of mergers and acquisitions has incorporated financial system of the region into the bigger European market. This market driven, business initiative of the financial community, calls for institutional integration as well. Bringing central banks of the region into the appropriate European structures has the potential to minimize the probability of dangerous drifting apart into worthless initiatives and create positive energy. I encourage foreign partners as well as donor agencies to adopt the same logic of coordination in the process of the compilation and implementation of technical assistance in areas of integration, institutional building, and financial stability process. This approach and will benefit the region in several ways but most importantly it will avoid major economic and social disparities between our economies, which in the long run have the potential to develop into serious threats to stability. On the other hand, several differences emerge in certain areas of developments. Yet, this provides further room for cooperation. It is a fact that our economies have adopted diverse approaches toward establishing macroeconomic and financial stability. We are at different stages of integration. It is probably due to these diverse characteristics that contagion has not been a prevailing phenomenon in SEE region. Along the path of transition our economies have encountered distinct problems in different moments. Just to point out a few examples: • Credit has penetrated deep in the culture of some economies in the region while it still remains a fast growing new phenomenon in a few others; • Some of us have experienced high capital inflows while the others expect to have in the future; • Some pegged their currencies to Euro; the others have not. For the rest of the region it is very important to know what triggered such different choices. How did authorities respond to such problems, what to expect, how to react? Due to these different paths that we have taken and nature of the problems that each economy has encountered, we are positioned in different parts of the learning curve. There is a great deal of learning by doing experience we have accumulated during this period of existence, and I believe that this knowledge must be shared. c. Common achievements We have succeeded to establish a network of communication with all central banks in the region among governors. I have noticed that they have always expressed their enthusiasm to intensify regional cooperation in this context. I am also happy to say that during my contacts with respective international organizations, they have highly endorsed our cooperation and have promised their support with regard to specific problems that characterize financial and economic development of our region. I want to take this opportunity to thank my dear colleagues (friends I should say) and the institutions that they lead for the significant efforts and distinguished contributions provided in several important activities that are or will be organized by the Bank of Albania in the context of financial stability, monetary policy decision making, foreign reserve management and economic research. III. How to cooperate? On personal grounds I can also identify other important areas of fruitful cooperation which bear common benefits. I would like to encourage the establishment of an annual SEE Central Banks Forum. This forum could discuss in details topics such as financial stability, statistics, payment systems, economic research, and why not human resources. I would like to encourage active participation of the second and third level Central Banks’ managers in this “Forum – to be”. They must follow the example of their governors and engage in a closer cooperation. They should not only follow up issues discussed and decided amongst governors, but they can open a dialogue and exchange opinions, identify the best business practices and standards and then adopt those in their daily work. IV. Conclusion I do not know how many times I might have mentioned the word “cooperation” today, but I hope that you will still tolerate me to close my discussion by saying that I strongly believe in the regional cooperation. I will never stop promoting this important process among financial systems of the Balkans. Dear governors, we have all spent enough time and energy on this important topic, to know that you share the same opinion as I do. The regional countries are on the right track, leaving behind the status of transition countries and joining the community of developing market economies. The central banks in the region need to play their irreplaceable role in order to sustain their countries in their path to common progress and reforms. So let’s keep up such attitude toward cooperation, it will build confidence in the region and enhance our efficiency. I wish the Central Bank of Bosnia and Herzegovina success and prosperity for the many years to come. Thank you.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at a regional meeting, Saranda, 24 September 2007.
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Ardian Fullani: Issues related to the Bank of Albania’s activities Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at a regional meeting, Saranda, 24 September 2007. * * * Honourable participants, It is my special pleasure to come back to your wonderful city. Today’s meeting is held in the framework of the new communication strategy of the Bank of Albania with various groups of interest. Meetings in different regions of Albania help us better understand the specifics characterising certain geographic areas, raising the premises for an ever more harmonic and complete development at the country’s level. I would like to elaborate with you some issues related to the Bank of Albania’s activity, which I think, from the viewpoint of coverage and effects, involve all the groups of interest participating in this meeting. First I would like to deal briefly with the issue of communication. Nowadays it is widely accepted that chances for long-term success become a reality if one is capable of communicating in proper language, with proper actors and on due time. More concretely, the central bank should constantly communicate simply and transparently with all market stakeholders, including the broad public, in order to be efficient and forward-looking. This is a necessary premise to guarantee institutional credibility, real independence and a sound accountability. For a long time from now the Bank of Albania has started to think in a forward-looking way about this process and I may actually declare that we have already started to obtain the first fruits. According to different estimates, we deem that market efficiency is increasing, inflation expectations are anchored around our target, while the awareness of financial stability has been constantly increasing. Notwithstanding the above, our claims in terms of information and clarification of Bank of Albania’s decision-making are greater. Proper language translation and understanding of the strategic and operational decisions (monetary policy decisions) is our strategic target. Our ambition in this regard is great and I would invite all the stakeholders in general and the banking system in particular to make more efforts for cooperation. The Bank of Albania is confident that the financial market in Albania has already created a complete physiognomy. The participation of many foreign institutions of international reputation is a testimony in this regard. Recently its efficiency is enhanced, reflected in both, the traded volume and the reduced interest rate volatility. However, the Bank of Albania has noticed that the market should develop better and faster. Presently, I am of the opinion that there are no objective reasons that would weaken the financial market efficiency and in consequence the transmission of monetary policy to the economy. The banking system has got all the possibilities and should interpret more correctly all the signals of the Bank of Albania, on due time and intensity. Also, the banking system should be seriously prepared not only with the respective structures, but also with professional human resources. This is a standard requirement, a postulate of modern times, to which we all should be committed at maximum. I would let you know that the Bank of Albania has already prepared and soon enough will launch a specific package, centred on the efficiency of the financial market, particularly of the banking one. A new law on repurchase agreements, regulatory changes in required reserve maintaining and calculation, rarefaction of Treasury bill auctions from the viewpoint of time, and presentation of the base rate are part of this package. All these measures will be implemented as a sole package and will revolutionize the interbank market operation, a vital link of the financial market for monetary policy transmission to the economy. On the other hand, they would make the operational tactics of the Bank of Albania more efficient. I invite the banking system to become part of this process, actively participating in all consultations of the case that will precede the launching of this package. Its suggestions and comments are welcomed at any moment. Monetary policy decision-making of the Bank of Albania is the second issue I would like to deal with. I would like to repeat once more that consumer price stability is the primary target of the institution I govern. Recently, I believe you have had the occasion to comprehend from the statement of the Bank of Albania Supervisory Council that the risk for an inflationary environment is present. Also, we have enlisted in our statements the probable factors, which according to our considerations make the concern real for inflationary pressures to the economy. The data disclosed by INSTAT show that the annual inflation in August 2007 recorded 4.2 percent, somewhat above the upper limit of the targeted band of 2-4 percent. August recorded a high monthly rate, 2.1 percent, a wholly unusual figure compared to the preceding years. I am confident that we have been understandable when evidencing in our analyses that the causes relate to unforeseeable factors (unforeseeable shocks) and other reasons that have to do with the demand of the economy for goods and services. It should be underlined that during the current year the factors of first nature are numerous and relate to developments within the country and to “imported” developments from international economy. To be more concise, I would briefly highlight: 1. The energy crisis, which during this year appeared earlier than usual and according to different assessments, will continue beyond what the business may envisage in its plans at the beginning of each calendar year. Naturally, the effect of the lack of energy is very complex; it affects directly the productive capacities, creates additional cost (alternative source of energy) on final products, and increases the overall uncertainty. I think that these elements are sufficient to create ambiguity in the markets, generating inflationary premises in the economy. 2. During this year we have been faced with another problem. It has to do with an international conjuncture of raised prices, which exerts its impact on our market of goods and services. Fuels and cereals are more vulnerable by this conjuncture. The needs of our economy for these two articles are increasing, while the domestic resources are limited, making Albania dependant on imports, and in consequence on international market prices. 3. In general, the economy demand is estimated to have been high at end of 2006 and in the major part of 2007. This fact is evidenced in the large credit growth to the economy, in further enlargement of the current account, in increased imports of such goods as vehicles, household electrical appliances, and machinery and equipment. Generally, the increased demand at a certain period of time means inflationary pressures on the economy; therefore we have reasons to be seriously concerned about this problem. 4. Nowadays, public expectations for future inflationary developments are in the focus of the efforts of each central bank to ensure long-term price stability. More concretely, it has to do with the perceptions that every economic agent creates about future inflation. In some cases, these expectations are mostly based also on the facts verified in the past. But, successful is that central bank, which succeeds in anchoring these public expectations with a numeric target that it considers as the optimal rate of inflation. Therefore, we are much focused in this direction, and I would like to once more emphasise in this meeting the Bank of Albania’s attitude, that we remain determined in our efforts to keep inflationary expectations anchored around 3 percent, a figure that constitutes also our numeric target. To this end, we will continue to orient our political and operational decision-making towards the meeting of this target”. As a final issue I would like to consider another major objective of the Bank of Albania, the one related to financial stability. As you may already know the Bank of Albania is the licensing and supervisory authority of the banking system and of some other segments of the financial system (non-banking financial institutions and foreign exchange bureaus). Being simultaneously even an important decision-making authority in the area of the financial and economic policies, it is understandable that a delicate challenge remains the harmonisation between both major priorities: effective monetary policy without damaging the financial stability and financial stability without damaging the monetary policy effectiveness. Currently this is the trendiest issue. Many experts, decision-makers, academics are laying great emphasis on this problem and they rank the financial stability as a principal, which if shaken it takes upon itself the entire infrastructure from which it arose, from which it was nourished and grown. Therefore, I consider it important to come back and back to this issue. Due to our not very distant history, I think that prudence in terms of financial stability is never excessive. I would like to assure you that the Albanian banking system is in a sound financial position, capitalised and profitable. Consolidation of the banking system through mergers and acquisitions, aiming at attracting internationally well-known investor with non-contestable experience in banking business is the prevailing philosophy in this regard. I believe that we have been successful in this direction. Recently there have been new entries in the system, highlighting internationally well-known banks, such as Intesa-San Paolo, Credit Agricol and Banka Societe Generale. As a conclusion, we may state that at present the Albanian banking system composition is appropriate, guaranteeing perspective support to the economy. The entry of new banks has directly impacted on raising the value of the banking business in Albania, reflected, inter alia, in the increased competition among banks and aggressiveness of the banking system towards market share. The Bank of Albania deems that a reflection of this phenomenon is also the rapid growth of credit to the economy. More concretely, credit outstanding grew by 8 percentage points of GDP over three last years. In July `07 its annual growth was above 50 percent, which makes us believe that it may account for 28 % of gross domestic product at year end. The Bank of Albania, in all its pronouncements, has argued that this phenomenon is a natural process that associates the banking business in every country. Also Albania, as most countries of the region, is under the rapid convergence process to certain parameters of the European Union. To this end, we are completely aware of the fact that the growth rates will continue to be high. Leaving aside the probable effects on aggregate demand of the economy, I think that under the conditions of such rapid growth, the real challenge stands to the credit portfolio quality. The Bank of Albania remains determined for the observance of the whole regulatory and supervisory package, which aims at guaranteeing a safe credit portfolio. We can not agree on some concepts crystallised recently, which make us understand that certain banks are running after the market share to the detriment of professional and rigorous treatment of applications for a loan. Under the conditions when many objective obstacles exist, we deem that maximum prudence should be shown in extending loans. Let me remind you of the fact that we still inherit deficiencies in terms of ownership titles, collateral and its execution, address identification, property register and credit register. Non-recognition and non-acceptance of the above deficiencies increases the likelihood that objectively or subjectively, decisionmaking for extending a loan may be wrong. I do not feel well when I see that in certain considerable cases, decision-making takes place within a short period of time, not sufficient enough to verify the case associating the credit practice. I avail myself of this opportunity to require from the banking system to observe rigorously the banking supervision and risk management regulations. Given the current structures of credit stock to the economy, I consider it important to advise banks to seriously assess their exposure to foreign exchange risk and be prudent for its management. Finally, I would draw the banking system attention also to another problem, which I have raised times ago. I have observed that there is greater prudence in terms of governance and internal audit, but there are problems in terms of transparency, window services, commission policies and recent innovations with electronic transactions. Our support will not lack in this direction. You may consider the Bank of Albania as a possibility of permanent consultation and assistance. I would assure you that we are totally concentrated on and willing to support and assist any banking institution that aspires to bring innovation, Western practices and standards to Albania. In conclusion, let me to say a few words about the city we are gathered today, about the potential and support the banking system will provide to it. Today Saranda is one of the most culminant places and may be the best show-case of possibilities and quality of the Albanian tourism, of this important sector that presently contributes by 9 % to the country’s gross domestic product. Currently the figure of 1 million tourists a year has become a reality and its perspective goes even beyond, if we continue to pay necessary economic, social and institutional attention to tourism. Beyond such impressive figures, the tourism development is translated also into a constant improvement of Albania’s image as a country under progress, of values it possesses and provides, of increased level of employment and revenues for many areas and strata of population, as provision of values of many environmental, historical and cultural, geographic and curative, economic and social potentials, etc. Notwithstanding this optimistic situation, we should not forget that Albania is a Mediterranean country, found in one of the most developed tourism areas of the world, in one of the areas of the largest variety of types of tourism, and therefore in one of the areas where competition in tourism service is in its peak, where many of the countries of the region, with a very long tradition in this sector, have turned it into a real tourism industry. Our objectives to improve rapidly and to solve qualitatively the problems of road infrastructure, water and electricity supply , sewerages, etc., should be attached to improved quality of services and implementation of standards, completion of regulatory and urban plans for all tourism areas, variety of types of tourism and tourism products. Besides the coastline tourism, which is dominant, the mountainous and rural tourism, cultural and historical tourism, archaeological and nature tourism, curative and sports tourism, massive and elite tourism should be also developed. All these are going to make the sector and the activity directly or indirectly related to tourism absorb more investments and loans, making banks, domestic and foreign businesses, private and institutional investors, etc., more interested and guaranteed for success. You should be convinced that the banking business is observing you attentively, expecting a signal, a sparkle which is mostly at your hand. The standards are indispensable and should be respected. Therefore, I would invite the local government, the business community, the individuals of Saranda to be oriented towards the future, towards tourism and urban development models, similar to those of advanced countries. Let me conclude by thanking you once more for your hospitality.
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Lecture by Mr Ardian Fullani, Governor of the Bank of Albania, at Bocconi University, Milan, 10 October 2007.
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Ardian Fullani: The convergence of economic systems and institutions of South East Europe towards the EU – a view from Albania Lecture by Mr Ardian Fullani, Governor of the Bank of Albania, at Bocconi University, Milan, 10 October 2007. * * * Good Afternoon Ladies and Gentlemen, Dear Students, I am pleased to appear before you tonight. This is a fantastic occasion and I am delighted to share with you some of my thoughts and findings over my country and the Balkan region. 1. Few words on Albania I would like to start my presentation by saying few words on my country, on its roots, on its past and its present. Albania is a small country placed in the Southeastern Europe, bordering the Adriatic Sea and Ionian Sea, between Greece, Macedonia, Kosovo and Montenegro. It is generally recognized today that the Albanians are one of the most ancient people in southeastern Europe. All indications point to the fact that they are descendants of the Illyrians. Authors of antiquity relate that the Illyrians were a sociable and hospitable people, renowned for their daring and bravery at war. Illyrian women were fairly equal in status to the men, even to the point of becoming heads of tribal federations. The land of Illyria was rich in minerals – iron, copper, gold, silver – and Illyrians became skillful in the mining and processing of metals. They were highly skilled boat builders and sailors as well; indeed, their light, swift galleys known as liburnae were of such superior design that the Romans incorporated them into their own fleet as a type of warship called the Liburnian. The famous Roman orator Cicero, astonished by the beauty of Apollonia named it in his Philippics, magna urbs et gravis – a great and important city. In the first century B.C., Octavian Augustus studied philosophy there until he heard news of Caesar’s murder in the Senate and went on to become the next Roman emperor. More than thousand years after, Skanderbeg’s stronghold in the mountain town of Kruja, became highly significant to the Albanian people, as it strengthened their solidarity, made them more conscious of their national identity, and served later as a great source of inspiration in their struggle for national unity, freedom, and independence. Skanderbeg’s military successes evoked a good deal of interest and admiration of the Papal state, Venice and Naples, themselves threatened by the growing Ottoman power across the Adriatic. Whoever discovered Albania (decided to visit Albania was marveled by its beauty and the spirit of its inhabitants. World figures were usually so moved that the name of Albania became eternal in their masterpieces of art. Albania has a reputation as a land of great natural beauty and romantic remoteness. These two characteristics have made it all the more attractive, mysterious, forbidding, challenging, or exasperating to outsiders, be they travelers, scholars, diplomats, or merchants. Many of them have referred to it as the "Switzerland of the Balkans" or as the "rock garden of southeastern Europe." On the other hand, the country's uncommon isolation from the world, arising generally from its rugged, mountainous terrain, has led foreigners to speak of it as "the Tibet of Europe" or as a country more mysterious than central Africa. The great eighteenth-century British historian, Edward Gibbon, speaking of Albania, said that it is "a country within sight of Italy, which is less known than the interior of America." The remoteness and isolation of the country became practically legendary and all too frequently gave rise to reports and descriptions of the land and of the people – even in books and encyclopedias – that were closer to legends than to reality. Perhaps because of its romantic remoteness and other reasons, Albania has exerted a continuous fascination on artists, including poets, playwrights, composers, and more recently film makers and producers of television programs. Shakespeare set his comedy Twelfth Night in Illyria – the name by which Albania was known in ancient times. Lord Byron, who visited southern Albania in 1810, wrote some stirring lines about her landscape in his poem “Childe Harold”. Morn dawns: and with it stern Albania's hills... Robed half in mist, bedewed with snowy rills. In Mozart's comic opera “Cosi fan tutte” the principal male characters, Ferrando and Guglielmo, appear for the most part as two "Albanian noblemen" in clever scheme to test the love of their fiancés. I was trying to bring a bit flavor of my country across centuries. Being a crossroad, the main gate from east to west, today Albania represents an important actor whose solely role is to provide peace and stability in the region. 2. Albania through transition For many decades Albania was cut off from other European countries, including the Central and Eastern European ones because of its extreme economic centralization and adherence with the principle of self-support. Transition brought about a structural change in the principles of economic philosophy. The market forces took over the distribution of economic resources and the reduction of existing economic imbalances. This process resulted in increased unemployment, reduced output and consumption, while prices of consumption goods increased over 100 percent. Foreign reserves disappeared almost instantly under the pressure of reduced output and drastic devaluation of domestic currency. Meanwhile a relatively large and growing stock of foreign did not stop the declining trends. Public confidence dived and many Albanians emigrated mostly in neighboring countries. Financial situation deteriorated at a fast pace as well. Monetary policy as we know it was inexistent for Albania did not have a modern central bank. Early structural reforms focused on cutting the subsidies for insolvent state owned enterprises; massive price liberalization; privatization process; land reform; and provided the necessary incentives for the rapid macroeconomic consolidation of 1993-1995. During ‘90s Albania’s path has been quite disordered scoring one of the most unique transitory experiences. It was an experiment a trail and error by everybody. It was a quest to understand and the role and position in this new market economy; to rediscover the incentives of the private initiative and the risk that embodied in economic decision making. Along this process Albanian society established the foundations of the macroeconomic consolidations that started with the new millennium and accession to EU has scored significant progress. For a long period of time the economy has grown around 6 % percent annually, contributing to an upward trend of GDP per capita reaching around 2.500 euro. Inflation has been quite stable within our target band 2-4 % supported by responsible Monetary and Fiscal policies. Further structural reforms improved the functioning of the market economy. Privatization of big and medium enterprises, the privatization of former public banks, the modernization of legal framework and many other important reforms contributed to such impressive performance of Albanian economy. In the last years I believe the country has made a substantial progress in its way towards European Union. After wasting our chances during ‘90s I believe we are in the right track and personally I’m confident that the distance to our final destination, Brussels is getting shorter day after day. The coming years are of a vital importance in adhering to EU as far as Albania is preparing itself to move with its own feet. The current agreement with IMF will finish at the end of 2008. I hope that Acquis Communautaire will become external driving forces guiding our country toward the European Family. 3. Bank of Albania Albania had its first central bank institution in 1913. It was founded as an outcome of the agreement of the Ismail Qemali government with some representatives of an AustrianHungarian bank group and of the Banca Commerciale Italiana. The Institution did not live long due to the outbreak of the First World War and it was not before the year 1925 that the bank’s activity started under the name of the National Bank of Albania. During the years 1944-1992, it was named State Bank of Albania, which at that time exercised both the functions of a central bank and those of a commercial one and only after 1992 the two-tier system is established and Bank of Albania starts performing the functions of a modern central bank. Based on a parliamentary law it has the attribute of the monetary and supervisory authority of the country. The primary objective of the Bank of Albania is to achieve and maintain price stability. It seems that this way Bank of Albania has solved the dilemma of choosing the key objective of monetary policy in favor of price stability will contribute to sustainable growth and to generate equilibrium in the labor market over long term period. From the historic prospective, since the early stages of transition we adopted a monetary targeting regime. The choice was made believing in the Friedman’s postulate that Inflation is wherever and always a monetary phenomenon. Direct control on money growth, credit growth and interest rates were the operational tools of monetary policy aiming at the control of money supply, which served as the intermediate objective. A free floating regime of exchange rate was chosen to match the monetary targets. Other forms of exchange rate regimes were never discussed due to lack of adequate foreign exchange reserves and therefore the incapability to support a fixed rate of domestic currency. In addition the floating regime was chosen as an automatic stabilizer of the fast growing current deficits. Therefore the choice between different alternatives of stabilization program was conditioned (and easy). In general this regime has resulted successful and still continues to be the operating framework of the monetary policy. I believe that its success was conditioned by low financial intermediation and under developed financial markets . The presumed stable relationship between money and transactions and permitted for confident monetary programming based on the Fisher’s equation of exchange. However, as the efficiency and speed of financial intermediation increased and financial innovation set in motion, this policy setup become obsolete. Bank of Albania moved away from direct control on money in favor of indirect control of money supply in the economy. In the context of reviewing our approach to monetary policy during the recent years we have dedicated the bulk of our research and analytical resources to better understand the relationship and causality between inflation and economic factors that influence it in the context of Albanian economy. For most of this period, we have integrated in our policy important monetary policy elements that define essential characteristics of the inflation targeting regime. Various internationally recognized experts of monetary policy have compared the current setup of monetary policy to a fully fledged inflation targeting framework. During these recent years Bank of Albania has publicly announced a numeric objective of 3 percent with a tolerance zone of plus minus 1 percent for inflation in the 12 coming months. In addition, weekly repurchase argument rate, the key policy rate, has become the most important instrument of monetary policy and signaling tool. Yet, we are still in the process of empirical investigation and quantification of the monetary transition channels, with particular focus on the efficiency of the inter-bank markets. Modestly but surely I have to admit that the efficiency of our monetary policy has increased. In general we are satisfied with the reaction of the interest rate behavior, which model the developments of the bank of Albania key rate with the appropriate lag structure. Moreover increased and more efficient communication with the public are reflected in contained inflation expectations which are anchored to Bank of Albania announced numeric objective. We are happy to observe that results of consumer and business confidence as well as financial market expectations surveys indicate these trends. It is widely accepted that such results are outcome of our continuous attention toward ever lasting improvement of institutional and regulatory framework on which Bank of Albania operates. Particularly, this stand for: independence, transparency and accountability. It is well recognized by foreign and domestic institutions that legal and real independence status of Bank of Albania enjoys satisfactory standards. On the other hand we believe that independence represents a dynamic rather than a static process, therefore we have adopted contemporaneous practices of communication explaining our decisions to Albanian public. This process is embodied in the continuous improvement of the monetary policy report, standard communication of the supervisory board monetary policy decisions, improved analyses and research efforts, and last but not the least, intensive public activity of the Bank of Albania Governor, with various groups of interest across the country. Taken together these have improved public understanding and expectation building for current and future developments in inflation and economic activity. Our approach to communication has further improved our accountability and has resulted in increased credibility and authority within Albanian public. During the past 2-3 years we have increased our ownership in the short and medium run economic and financial development programs. Since the beginning of transition the economic program has been designed and implemented under the setup of IMF support programs. The current program will end in 2008. Starting from 2009, the Bank of Albania and other Albanian authorities will have full ownership in the design and implementation of financial and monetary policies. In the meantime our relationship with IMF will continue under Article IV, moreover the IMF assistance will be considered a welcomed secondary factor. In such contest bank of Albania has been working together with important Albanian institutions, first and foremost with fiscal authorities, different European Central Banks, international financial advisories and academia to identify the new regime of monetary policy. The new regime must be efficient in the light of recent changes in financial markets and most importantly must provide good anchors for monetary policy and its sovereignty. Please allow me to briefly describe the major characteristics of what we think will become the new regime. A. Monetary policy regime As I already mentioned we have been working on the new regime for more than two years. During this period we have been tossing ideas and scrupulously studying the details of a fully fledged inflation targeting regime. As you might well understand, we are getting ready to launch the new regime at the beginning of 2009. Our analyses show that, considering the current features and expected developments of the financial markets, inflation targeting provides the best policy choice for the future. A relatively long history of low and stable inflation, efficient monetary policy, sound banking system, free floating exchange rate, fiscal consolidation and last but not the least a suitable and reliable institutional framework, are important factors that have convinced us on the potential success of inflation targeting regime. B. Institutional framework The harmonization of monetary and fiscal policy will continue to be a challenge. I believe that long run success and real independence of monetary policy is gained in the well functioning of this simultaneous relationship. Albanian Constitution and the current Bank of Albania Law grants the responsibility of monetary policy design and implementation exclusively and without equivoque to the Bank of Albania. We believe that such legal framework and Albanian society aspirations and commitment toward Maastricht criteria’s of convergence provide essential assurance for future compliance of monetary and fiscal policy. C. Financial market efficiency Albania is a small open economy and relatively highly euroized. In general the financial markets are characterized by low trade volumes and interest rate volatility. This situation represents a high concentration in assets and liabilities in the banking system as well as a very limited supply of financial instruments in domestic currency. In this respect, we have been very aggressive to prepare and introduce a new set of rules for operational framework. The new regulation aims to increase the efficiency of the inter-bank borrowing market, it targets thinking on the margin behavior of the banks by reducing the frequency of treasury bills auctions, rearranging required reserves regulation and introducing a prime rate. Our objective is to have this package operative by the beginning of 2008. D. Financial stability This process has progressed with the increase of the banking activity. However I have to admit that increase and consolidation of the banking activity is accompanied by a rapid growth of credit to economy. This rapid credit growth has become the challenge of the moment. However I believe that efficiency and soundness of financial system is a dynamic process and a continuous challenge. Frequently this challenge might generate from international financial markets too. Globalization of financial markets has increased the risk of contagion. The recent developments in the sub-prime mortgage loans, must serve as a excellent reminder of the never ending surprises, which make the trade off between monetary policy and financial stability a difficult balance. I want to make it clear that by financial stability I do not assume only the absence of a financial crisis, but a well functioning financial system that performs well its functions. I think too tight regulations that definitely minimize all the risks are not conducive to sustained growth. Therefore the real challenge for which we are working hard is to find an optimal balance between deregulation which promotes market forces and financial innovations and negative consequences of possible market failures and financial crisis. 4. Balkan region: trends and major characteristics Dear students, The rest of my discussion will provide few remarks on the developments of the South East European region. I will briefly comment on the common problems and characteristics of the region and voice my opinion upon possible direction of progress and convergence in policies. Recently the Governors of the Region have been increasingly concerned regarding the issues related with banking system activity, market efficiency, financial stability, risk exposure and of course the role of central bank. All this discussion is structured by the context of regional aspirations for EU integration. Not only because I’m a Governor but also due to my own philosophy I have come to believe that there could not be real political cultural and social integration without a reasonable financial integration. I share the same opinion with other European sensibilities on the values and importance of consolidation of democratic society and embrace of new social and cultural mentalities. Regardless I sincerely think that the process of transformation that has changed our societies since the fall of the Berlin wall is irreversible. The real question is how long this process will take to be complete. I believe that laying down solid foundations for efficient allocation of financial support and financial intermediation will significantly shorten this process. This will also provide the necessary infrastructure framework for the integration objectives and will supplement this process with the support of private initiative. On the other hand, a developed and financially integrated region will be more attractive for foreign strategic investors, opening up the path toward regional development projects, particularly infrastructure, labour market, real estate ones where region’s banks might be the financing and co-financing ones. If I would have been asked to say with simple word how I understand the convergence process my answer would be very simple: The convergence means a set of performance criterion and structural reforms benchmarks. This means that each country should adopt the standards stemming from the Acquis Communautaire and different international codes (Basle’s II) combined with energetic steps in improving economy, society, culture and environment as well. I think this is a MUST for promoting financial market efficiency in the entire Region.” Allow me to summarize financial system in the region along the following characteristics: - The system is dominated by commercial banks. Financial intermediation role of the other financial institutions is weak. The insurance industry in most countries of the region is quite small and underdeveloped. Traditionally poor governance, inadequate risk management practices and lack of consumer confidence have limited total assets held by these institutions, in the same time limiting to some extent the possibility to present a source of systemic risk to the financial sector. However this sector’s rapid expansion in some countries including Albania calls for the development of an adequate legal framework for conducting insurance business and the strengthening of the supervisory framework. Other financial intermediation such as leasing activities have grown sharply in the last years (Serbia, Bosnia and Herzegovina) representing an important source of funding source for fixed investment and for small and medium-size enterprises. Micro credit institutions have a significant presence in Bosnia and Herzegovina, being mostly established with donor funds but over the last years having shifted their funding source toward bank loans. Consolidation into larger credit unions would be a viable method to be able to offer larger loans and provide more banking-like services. Financial Sector Assessment Program (FSAP) calls for further strengthening of the underlining of the supervisory framework, even though unified supervision under a single supervisory agency was considered premature. Capital and money markets are small or nonexistent. At this stage of development it is necessary that the policy of regulatory institutions should focus on enhancing infrastructure and governance. - Banking system in the region is close 100 percent privately owned, with clear dominance of foreign capital. The banking system in the region amounts from 40 percent of total assets to GDP in Macedonia to 119 percent of total assets to GDP in Croatia and is dominated by private foreign owned/joint ventures banks. The privatization of large state owned banks has been completed in all countries, except Serbia and representing approximately only 38 percent of total capital in the banking system respectively. The system is dominated by a restricted number of big European banks that have set presence across all countries in the region. Lately there is evidence of increasing interest of other banking groups as well. - Increased financial intermediation of the recent years has lead to a rapid credit expansion. This trend reflects increasingly deep financial integration with EU Member States and supports rising trade, investment flows, and institutional strengthening. The expansion of the financial sector and inflows of foreign savings can strongly support real convergence. However, increasing credit to GDP ratio in all countries, ranging from 23 percent in Macedonia to 76 percent in Croatia also raises the concerns for a possible credit boom. There are some important trends worth being noted: Credit composition is dominated by consumer credit and less oriented to enterprises; Credit/deposit ratio has steadily increased indicating banks willingness to extend their lending activity at a faster pace than the growth of savings. However, the average of credit/deposit ratio of the region is still below the level of the new EU member; Lending is mostly in foreign currency as a result of high euroization of the economies and lower interest rates in foreign currency; Another structural change in credit portfolio relates to the upward trend towards longer-term lending, which at least in three countries of the region (Albania, Macedonia and Bosnia & Herzegovina) consisted of 50 percent or more than total lending; The spread between interest rates of deposits and credits remains high. There are several explanations to this such as lack of efficiency and competitiveness among banks, high premium risks of the economies in the transition period, collateral problems, legal system obstacles etc. However, it’s worth mentioning that the spread between deposit interests and credits has declined in the recent years, as a result of increased competition in the banking system. Despite these characteristics must be admitted that the share of the banking system in the economy is relatively small by European standards. The total of banking assets measured as percentage of GDP shows that our region lags behind when compared to developed economies. Meanwhile prudential measures indicate problems with the credit portfolio quality, and the speed of growth could be beyond what is generally accepted sound. The risks that usually accompany fast credit growth could soon exerting pressures on monetary policy and financial stability. In my opinion the low financial and real economic integration among countries in the region constitutes as well as international financial markets constitutes another major problem in the region. The problem could become more severe if you were to keep in mind the very integrated ownership structure of banking system in the region. Cross-border lending and borrowing, or other forms of international financial flows are still relatively insignificant. With the stabilization of the economy and the rescheduling of debts, the countries together with their financial sectors have started to be gradually integrated in the international markets. Sovereign ratings given for these countries have accompanied and accelerated in some cases these developments. While the financial sectors, and particularly commercial banks, have strengthened their international ties and have been gradually integrated in the international financial markets, the competitiveness from cross-border banking activities remains still restricted. Cross-border lending activity increased slowly in the countries of the region. However, even in this field there is room to move more quickly. The foreign capital penetration in the countries I refer to is still low and mainly reflects the inability of our financial systems to facilitate the absorbing of foreign investments in our economies. Finally, considering the above mentioned trends of financial intermediation the following region specific sources of risk need caution scrutiny, namely credit risk, indirect foreign exchange risk, and vulnerabilities associated with foreign branches entry. - Credit risk The acceleration of credit growth rates in some countries of the region is warning when associated with an increase in the NPL ratio. Unfortunately there are chances that the buildup in credit risk may be underestimated The deterioration in quality of disbursed credit is not immediately apparent as the increase in the share of new loans can temporarily depress the reported nonperforming loans (NPLs) and credit quality problems typically emerge with a delay. In the aftermath of deterioration in loan portfolio an increased risk of a credit crunch emerges; when banks recognize the extent of the build up they may sharply cut or reverse lending growth. Specifically the domination of foreign banks in the region may possess additional risks associated with a possible credit crunch. As long as subsidiaries of foreign banks earn high profits, they have easy access to new capital from their headquarters given that they account for a small share of the loan book of their international banking group. If the build up in credit risk is underestimated, foreign banks will tend to set overambitious ROE targets. When the extent of underestimation is recognized, banks have to increase their provisioning rate in line with their upward reassessment of credit risk, reducing ROE projections. This could lead management of large foreign bank groups to conclude that their ambitious ROE targets cannot be met and curtail lending growth in response. The entrance of big international foreign groups puts upward pressure on the entire banking system attempt to compete for borrowers. However, there is a risk that credit growth is associated with lower lending standards, enhanced by the lack of financial information available on potential borrowers that continues to be a problem in the region. As the FSAP for Albania indicates, in the area of corporate lending, firms balance sheets and income statements may be altered to avoid taxes, while information about remittance income for individuals is imprecise and unverifiable. The rising real estate prices in the region have also encouraged lending, using the real estate as collateral to a great extent. As real estate prices continue to rise, this could lead to an over-extension of credit, and if the real estate market becomes more speculative and more leveraged through bank loans, a decline in demand can cause a fall in real estate prices, causing both collateral to fall in value, and the ability of borrowers to pay to decline. Thus, there is a greater need for authorities to monitor development in real estate prices and warn against possible asset bubbles, while the collateral needs to be less homogenous. - Risks associated with the foreign exchange As a result of large financial assets euroization in all countries of the region, the foreign exchange rate fluctuations are an important source of vulnerability. Stress tests in almost all countries suggests that there is limited exposure of banks balance sheets to the direct exchange rate risk as banks are able to hedge foreign currency loans wit FC deposits and sources from their parent banks. However, the dominance of loans either denominated in or linked to the euro to borrowers with income in national currency means that sudden exchange rate depreciation could threaten their capacity to repay. - Vulnerabilities associated with foreign branches entry and domination Turning to the issue of opening of the banking sector to foreign investors, specific issues need considerable attention by supervising authorities. The recently conducted Financial Sector Assessment Program in Serbia listed several benefits. Attracting funds from households that may be reluctant to deposit with domestic banks, providing new sources of funding for domestic credit, introducing new financial products and credit instruments, reducing the influence of vested interests, and enhancing competition by buying state banks and increasing the number of players. However, in presence of externally generated and domestically generated shocks the banking system in the countries of the region can be vulnerable to lower profitability, less willingness on the part of the banking group to provide capital, and, ultimately, generate a credit crunch. Among the external shocks were listed rises in euro zone interest rates, adverse shocks to one or more of the countries of origin of the foreign banks, and contagion from an adverse shock elsewhere in the CEE region altering investor perceptions regarding the domestic economy. On the other hand domestic shocks such as declining margins from foreign banks fighting to gain market share, and lowering of credit portfolio induced by a weakening economy or an unexpected domestic political event could have large effects in the presence of less adequate risk management in the context of foreign owned banks rapid expansion and increasing euroization of financial assets. 5. Policies to mitigate financial vulnerabilities: constraints and challenges In some cases supervisory authorities (Serbia, Croatia) have recurred to less market oriented macro prudential measures to contain credit growth. While credit controls create the incentive to route lending through less regulated non-bank intermediaries, the imposition of such credit controls in Bulgaria and Croatia was accompanied by a jump in cross-border loans. Watson (2007) argues that prudential policy needs to allow for the fact that foreign-owned financial institutions, with a majority of assets in most cases, have deep pockets in terms of capital and liquidity. Thus, prudential tightening may not be able to be transmitted to a significant part of the banking sector but it may affect only smaller locally-owned banks. It follows from our discussion that the supervisory authorities may gain by the increasing transparency in financial markets which will allow consumers and other bank borrowers to be more aware of the risks inherent in foreign currency borrowing. Efforts to enhance this transparency could be encouraging or requiring banks to discuss exchange rate risks explicitly with borrowers before contracts are signed. On the other hand there is a need to discuss with banks means of assessing the risks arising from foreign currency denominated loans and adjust existing loan classification schemes or provisioning if warranted (FSAP recommendation for Albania). Monetary policy is constrained by the degree to which policy instruments are able to transmit into the economy. A tightening of policy interest rates’ effect may be constrained even in floating rate or adjustable peg regimes. A moderate tightening of policy may not be very effective in slowing the economy because of the high degree of euroization and the uncertainty associated with the final effect of exchange rate changes in balance sheets and the real economy. Many of the above issues require a significant degree of co-ordination between home and host authorities that can help fill supervisory gaps, given the very high levels of foreign bank ownership. In the process of improving the regulatory base, standards set by international institutions and especially the ECB are crucial in orienting regulators. 6. Concluding remarks The all region is going under a political, economical and social consolidating process. Now a day politicians, decision makers, analysts, almost everyone is stating the EU accession as the main priority, the top challenge for the next coming years. How far are we? That’s a difficult question. Many times I looked behind my shoulders to see how far we have come. It is indeed a long way, full of ups and downs. Along this way we have scored positive developments as well as few setbacks. Yet it has been a road toward progress. However the modern attitude of central banking requires a forward looking approach. It is for this reason that in my public appearances have always stressed the vital importance of the integration process and related issues. The success of this process will depend first and foremost by our attempts and dedication. There is only one way to get closer to the finish line. That requires waking up every morning with a European mentality, and try with all our efforts to make this dream come true. We all agree with the idea of not decorating our home with Fendi furniture whilst our roof is not yet fully covered. I personally believe our societies are becoming mindful on their efforts towards European standards. We all understand the need for reforms, the need for stronger growth, the need for macro stability, the need for regional cooperation, the need for political stabilization and peace among the different nations of the region. Therefore as my very last sentence I would envisage the need for greater reforms, greater efforts towards democracy and market economy. In this respect, I would like to quote myself in Bosnia-Herzegovina, three weeks before “I see enormous possibility for cooperation and policy coordination in the direction of information sharing, institution building, modification of the legal infrastructure and lobbying in European structures. Facing these problems in group rather than separately will allow to benefit and embrace the positive effects of “economies of scale”. I also invite the ECB and EC to explore the possibility of adopting a “party” treatment for the entire SEE region, by adopting a specific program for a specific group of countries”. It might even sound overly optimistic I see this as a mutual beneficiary relationship. The region, on its account, does provide several important advantages: labor markets are positioned right in the middle between Asian countries and new EU members; sufficient investment opportunities in real estate and infrastructure as well as high return on capital; it counts more than 20 million people and represents a fantastic touristic attraction as a product of an interesting combination of different climates with diversified geographical features and multi ethnic and cultural traditions. I think that means in real terms economic stability and sound long term regional geopolitical solution. Thanking you for your attention I’m ready to take several questions.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the General Assembly of the Dealers Association, Tirana, 25 October 2007.
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Ardian Fullani: The development of the financial market and money market in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the General Assembly of the Dealers Association, Tirana, 25 October 2007. * * * Mr. Chairman Distinguished Guests, It is a great pleasure to be here amongst old and new friends and colleagues. I have dearly welcomed the reorganization and reactivation of the Albanian Association of Dealers, and the attempts made by its new board to affiliate ACI-Financial Market Association. I am confident that this reactivation will promote, above all, the market development, education and professional training of new members. I deem that the meetings of the Dealers Association is a good opportunity to share with you some thoughts and concerns regarding the development of the Albanian financial market in general and the money market in particular. I would like to emphasize that the interbank money market is the starting point to the transmission mechanism, driven by base interest rate change. Currently it is the most important channel of transmitting monetary policy decisions to the economy. I have to remind you that where you realize the profit, the Bank of Albania implements the monetary policy, whose efficiency depends directly on your capability to maximize profit in this market. This policy is based on the assumption that market participants are rational and their primary purpose is profit maximization under the conditions of a competitive environment. The current development of the interbank market in Albania does not fulfil these assumptions yet and therefore, it makes the work of the Bank of Albania difficult in carrying out this essential function. Year 2002 recorded the start of the interbank market, the same year when the indirect instruments were introduced by the Bank of Albania to conduct its monetary operations. The Bank of Albania has attended the developments of the interbank money market in the last five years. During this period the trading volume has been fifteen folded, climbing from a daily average of 130 million lek in 2002 to a daily average of around 2 billion lek in 2007. Also there has been an increase in the maturity of the traded funds, from only trading overnight back in 2002 to trading up to three months in 2007. Also there has been an increase in the maturity of traded funds, from only trading overnight back in 2002 to trading up to three months in 2007. From the beginning of this year, we have been able to publish the fixed interest rate indexes, TRIBOR and TRIBID, which is hoped to promote the development of the interbank money market. However, we have to admit that this development has been a very slow one. During the last five years, the lek liabilities of the banking system have increased by 135 billion lek, which makes the increase in the trading volume of interbank market by a daily average of 1.9 billion lek, only a peanut in a big cake. On the other hand, besides an increase in the volume of one-week maturity transactions, longer term transactions are very sporadic. In addition, this low development of the interbank money market is also reflected to the wide spreads of the quotations for trading, published by commercial banks. Nevertheless, the development of the interbank money market is made difficult also because of other reasons, some of which are of objective nature. It can not be developed as an isolated market. It progress is highly correlated to the economic development in general and the development of other financial markets in particular. The financial market is still characterized by the domination of the banking system, while its other segments continue to be in a minor state of their development. There are interesting developments in the insurance companies market, while the segment of pension funds is still underdeveloped. Furthermore, other specialized intermediaries are completely missing, including here even the capital market. All the above and other reasons such as the high degree of informality in the economy, credit demand dominated in foreign currency, are factors which directly or indirectly impede the enhancement of money market efficiency. However, rightly comprehending that many of the reasons are of objective nature, we believe that within the limitations imposed by the abovementioned factors, still there are gaps, about which I encourage you, to jointly fill as soon as possible. In the latest survey conducted by the Bank of Albania on “Money Market Issues”, 7 out of 14 respondents (commercial banks), (which possess 59 per cent of the market share), outlined “the excess structural liquidity” as the main barrier to the development of the interbank money market, while 4 out of 14 banks (which have a market share of 30 per cent) highlighted “the credit risk” as the second most important barrier. The tendency to keep excess structural liquidity as a bank policy was pinpointed by 13 out of the 14 interviewed banks, otherwise meaning that banks that share 92 per cent of the market do have a tendency to keep excess structural liquidity. We notice that the reasons and obstacles brought up by banks are mostly subjective, and their prevention depends more or less depend on their policies and behavior. Banks keep excess liquidity because there is no a developed money market where they could invest this liquidity at all times at a fair market price. This market can not be developed on its own! It is banks’ active liquidity management as opposed to a passive one that creates incentives for developing the markets. In this context, I would highly recommend you to implement stricter internal control policies and procedures, so that they can identify opportunity cost and missed profit opportunities. Such a thing will lead to improved efficiency and competitive positions of the bank on the one hand and market development on the other. The Bank of Albania requires that you design management policies that are oriented toward profit maximization. The limitation to simple financial intermediation, such as collecting public savings and keeping them in the form of excess reserves waiting to be invested in low risk government papers, is not a characteristic of contemporary financial markets. All I mentioned above implies the indispensability for a more effective management under the conditions of enhancing the transparency. As to the structural excess liquidity, the Bank of Albania is currently targeting to keep it under appropriate levels, in order to increase the degree of the banking system reaction to Bank of Albania’s operational decisions. At the same time, we are carefully evaluating necessary refinements to monetary policy instruments, to further promote the trading in the interbank money market. Beyond the structural liquidity position, another important issue is the existence of limits that certain banks apply in lending relations with one-another. From a pure academic viewpoint, it is quite easy to label these limits as an effort to ensure an oligopolystic structure in the market. I do not like to prejudice the prudent stance and measures reflected in these limits. However, I should state that in your business with non-bank clients, there may be identified elements, to which you take a higher degree of risk than the one materialized in interbank money transactions. Considering the need for market development and the identification of the role of the Bank of Albania in these markets as the Lender of Last Resort as indispensable, we have prepared and will soon enough implement a complete package of regulations, whose purpose is to establish incentives and minimize risks in the Albanian financial market. Concretely, these changes consist in: The law on repurchase agreements. There is compiled the draft-law, which enables the risk-free conduct of repurchase agreements among commercial banks. It will guarantee the prevention of credit risk, which is cited by commercial banks as one of the primary causes for the existence of limits in the lending relations among banks. This law will also prevent the legal risk the banks are faced with when using repurchase contracts. Drafting of the regulatory framework and putting into application the custodian principle of delivery versus payment. In order to minimize the payment settlement risk and facilitate the intermediation in all types of transactions involving securities, such as collateralized loans, repurchase agreements, and outright purchase and sale of government papers, it is being worked on to put into practice the principle of delivery versus payment. Reducing the frequency of government treasury bill auctions. In collaboration with the Ministry of Finance, we have agreed on less frequent and increased size auction schedule of the government treasury bills. This less frequent auction schedule will limit the opportunity of banks to “be liquid” based on distributing their treasury bill investment in such a way that liquidity is generated by maturing these government papers. Increasing the investment base of investors. In cooperation with the Ministry of Finance and the Financial Supervisory Authority, it is agreed upon increasing the investors’ base, eligible to directly invest in the auctions of government papers. The new agreement signed between the Bank of Albania and the Ministry of Finance provides the necessary regulative framework for giving an end to the monopoly that the banking system has had in investment in the primary market of government papers, leaving space to natural and legal persons, foreign and domestic individuals. I do not feel well to assert that this step became indispensable, under the conditions of high commissions applied by commercial banks in providing this service, making the clients reluctant to this kind of investment. Earnestly believing in the efficiency and development driven by competition, I am convinced that increasing the number of operators licensed to trade government papers has also become a necessity. Primary rate for favorable clients. Being convinced that the monetary policy efficiency is enhanced through transparency, the Bank of Albania aims at including even this rate to the entirety of orientation rates used by commercial banks. This package is designed to increase incentives for you to find new profit opportunities and secure the necessary liquidity at a fair price in the secondary security markets. These measures are oriented toward promoting the activity, so that you will not wait for the client to ask for the government papers but search and find this client yourself. And the very first step you should make in this direction is: abandon the traditional pension fund security portfolio classification as “hold to maturity”. In other words, this implies the necessity for more flexibility, more diversification and for the existence of efficient risk management structures. A constant concern, which I want to pay particular attention and get your highest interest on it, is the professional development of human skills. I am not making any prejudice about the human resources that are currently working at the banking system, but I would like to point out that the mobilization of capable human resources, devoted to and shaped professionally is vital for the accomplishment of success. To be more competitive and bring new developments, we have to constantly upgrade the skills of each employee at all levels. It is true that the majority of the banks of our banking system represent international well experienced banking groups. However, I would like to emphasize that there is still room for more expertise and qualified human resources, so that the best practices of the international markets are infiltrated in our banking system. In addition, within the framework of this association, I would advocate that the Dealers Association must very soon come up with a Code of Conduct, agreed by all its members. While this code is a non-statutory body, with no executive powers, it complements the selfregulation of the market by bringing together the best minds of the market participants and professionals to create a reliable trading practice. Concluding, I would say that developing the interbank money and security markets is among the top priorities of the Bank of Albania. As such, we will make all our efforts to create the necessary conditions to minimize the trading risks, as well as create and support initiatives to active trading in the these markets. I hope these efforts will receive your understanding and more important your cooperation. It will be very satisfactory indeed, that in my next appearance in this platform I will be able to bring concrete results of our common efforts to develop interbank money market and secondary market. Concluding my speech, I would like to emphasize once more that no long-term and stable development may exist, without having effective financial markets. The financial market with all its segments, should precede the signals and novelties brought about by rapid dynamics of development of the private sector and the economy in general. Thank you all for your attention!
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bank of albania
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the workshop "Economic research in South-Eastern Europe", Tirana, 15 November 2007.
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Ardian Fullani: The importance of economic research Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the workshop “Economic research in South-Eastern Europe”, Tirana, 15 November 2007. * * * Dear ladies and gentlemen! It is a great pleasure to be here today and open the proceedings of the workshop “Economic research in Southeast Europe“. First, allow me to express my thanks to the representatives from the respective central banks for their participation in this workshop and all the other guests present today. Let us hope that this workshop will serve as a catalyst for a more intensified exchange of experiences among our region in the field of economic research. This process is of special importance with a view to improving the standards of economic research and for enhancing our know-how in this area. Undoubtedly, timely and accurate economic research is vital for undertaking more sound economic policies for boosting a stable and non-inflationary growth and for coping with various risks under a dynamic and rapid integration of our economies. From a central bank’s viewpoint, economic research should aim at reaching an optimal balance between the significance to the monetary policy or financial stability, their quality and timely availability. When compared to the academic economic research, a central bank’s economic research should manifest the same quality, but be positioned on assisting the monetary policy decision-making process. Otherwise, their added value is overwhelmingly reduced. The role of research in the monetary policy decision-making process becomes even more important under the inflation targeting regime that the Bank of Albania will fully adopt in the near future. Economic literature defines inflation targeting framework, inter alia, as “comprehensive and multi-dimensional information, analyses and statistics”. As in many central banks which adopt the inflation targeting regime, the Bank of Albania has oriented its resources for economic research, mainly to understanding the process of inflation and of its forecasting, and to understanding the transmission mechanism of monetary policy. The building of a macroeconomic model for the Albanian economy is of special importance to the economic research of the Bank of Albania. Moreover, issues related to the real, foreign, financial and the fiscal sectors, as well as other issues related to the improvement of economic statistics are in focus. Undoubtedly, the constant improvement of economic research, of their ethics, quality and significance to monetary policy should be of high priority. The Bank of Albania is conscious of the fact that research in the abovementioned areas should be further consolidated. Dear friends! Allow me to state my opinion that from the strategic point of view the consolidation of research requires the improvement of economic data, the enhancement of cooperation between the public administration institutions and the academia, as well as between various countries, and the absorption and increase of human capacities in this area. Following my speech I would like to briefly explore these three issues. Economic research uses the economic data as its core input. Consequently, the availability and quality of economic data represent a key factor to the development of timely and accurate economic research, to the maximisation of benefiting from them, as well as to the minimization of wrong decision-making and the costs it carries over. Unfortunately, the availability and quality of these data cannot be labelled as satisfactory. In addition to problems of collecting and calculating the statistical basis, the data base is related to and influenced by the speed and various stages of the development of the Albanian economy and by the changes of policies promoted by the taking place of these stages. The Bank of Albania has continuously and will constantly call on the improvement of economic data. In this context, today’s workshop places special emphasis on the discussion of the estimations and approximation of some economic time series for some important economic indicators, as well as on their role in the development, ethics and the quality of research of empirical nature. Economic research is essential for a wide range of areas. Hence, no institution can and less can a small central bank cope by itself with all the needs for economic research. Quite contrary, the institutions need to identify the areas and issues of economic research where they possess certain comparative advantages and then, closely cooperate with each other. In this context, the cooperation between the institutions of public administration and the academia, the cooperation between different countries and the establishment of research nets on various areas are of prime importance. They would not only enhance the efficiency in carrying out the research, but also stimulate the professional critique and opposition and reach higher standards. The research mission described above, clear and well-defined within the framework of a central bank should not be understood as an isolate mission. The studies can not take place in a closed environment. They need debate and exchange of ideas with the academy, business and other interested stakeholders. In this regard, it is my pleasure to state that the Bank of Albania has made its research subject to reviews in activities organized particularly for this purpose (inflation targeting, round tables, Friday workshops, etc). I invite you to do the same thing even during this activity. In view of debate and discussion, we have made constant efforts to attract academy and intellectuals in the discussion of our works. The Bank of Albania has introduced the “series of Friday seminars”, as an infrastructure to promote this debate. Twice a month this forum invites the interested persons within and outside the Bank of Albania to discuss their research on topics of economic nature. The activity is as much open for home and foreign researchers from the academy and business as it is open for the Bank of Albania employees. In this point, I should emphasize that we expect and encourage more interest by home and foreign academics for this series of seminars. I invite the academy and all the researchers to consider this invitation as a repeated one and become more and more active in discussing the strategies and development of economic policies. The Bank of Albania is entirely open and invites all the stakeholders to boost this cooperation. Today’s workshop represents in itself a concrete example of interest for cooperation between the parties and of our aim to boost it further. Moreover, distinguished personalities from the finance and the academia have been present in various lectures, workshops or conferences. I am personally involved in this open discussion through a cycle of lectures held in the Albanian universities and in eminent and prestigious European universities. Young economists who represent the future and a key basis of human capacities should be also encouraged to do economic research. We aim at establishing a culture of research and of a supportive structure with new elements that do have not only the desire but also the necessary knowledge to study the economic phenomenon. To this purpose, the Bank of Albania organizes annually the Governor’s Award for the Best Diploma, which encourages the students of economics to carry out economic research, mainly focused on the areas of a central bank’s activity. In conclusion, I encourage you to consider the benefits deriving from the useful critics and recommendations during this workshop. I also hope that your participation in this workshop results useful, in terms of exchanging the know-how on various issues and in particular, on the ethics and econometrical techniques. It is with pleasure that I declare this workshop open and I invite you to deepen our knowledge! Thank you!
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the VII Annual Conference of the Bank of Albania "Monetary Policy Strategies for Small Economies", Tirana, 6 December 2007.
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Ardian Fullani: Monetary policy strategies for small economies Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the VII Annual Conference of the Bank of Albania “Monetary Policy Strategies for Small Economies”, Tirana, 6 December 2007. * * * Dear ladies and gentlemen, It is a great pleasure to open the proceedings of the 7th Conference of the Bank of Albania. On behalf of the institution and myself I take this opportunity to welcome all participants. I am confident that the following two days will instigate debate and discussion on key central bank issues. This year’s main topic will focus on the classical function of a central bank: “monetary policy”. Institutional framework, decision making process, monetary transmission efficiency and other issues related with financial markets, macroeconomic and financial stability, will make interesting topics of discussions from our esteemed speakers. I am confident that our panellists are well-known senior experts; therefore, on behalf of the institution I would like to thank them heartily for accepting to share with us their views and findings. Given that the proceedings of the Conference will extensively cover theoretical models and countries experiences as well I would like to briefly present the evolution of our central bank during the last three years. To our pleasure the enhancement of analytical and modelling capacities of the Albanian institutions has been widely recognized yielding a greater ownership in our medium run economic and financial development programs. Since the beginning of transition most of these programs have been designed and implemented under the setup of IMF conditional support programs. Even the current policy setup is designed under such program. We currently believe this is the final one which gets IMF financial support, implying that our economy is matured and that Albania is on the right track. After many hardships of transition, the Albanian authorities should have full ownership in the medium-term development programs of our country. This is the reason why the Bank of Albania has quite for long been engaged in a comprehensive process of scrutinizing and choosing the best options. The year which is coming to an end marked another important chapter in this context. In contrast to the previous two years, the Bank of Albania has further deepened its cautious research of all aspects characterizing the present and future of monetary policy. It has been quite for a long time that the central bank has publicly announced its efforts in assessing objectively and professionally the future of the Bank of Albania monetary policy. These were not sporadic efforts but part of a process which initiated three years ago with the only objective of finding the answers to the following questions: Should we move to another monetary policy regime? What regime would be the most appropriate one? I believe you share the same opinion with me that finding the answers to the aforementioned questions is not an easy thing. This is not a plain mechanical action. In the last three years the Bank of Albania has been involved in an intensive process of assessment, analysis and conclusions for the future of monetary policy. And we have not been alone throughout this process. Together with other Albanian institutions – first and foremost with fiscal authorities, different European and regional central banks, other international financial institutions and academia, we have tried to identify the most suitable monetary policy regime to be adopted. During the last three years, we have been tossing ideas and scrupulously studying the details of a fully fledged inflation targeting regime. Based on the current features and expected developments of the financial markets, we believe the inflation targeting regime provides the best policy choice for the future. A relatively long history of low inflation, constant soundness of the macroeconomic situation, stable and sound banking system, free floating exchange rate, a suitable institutional framework, fiscal consolidation are important factors that have convinced us on the potential success of inflation targeting regime. However, we are aware that there is still a lot to be done in this context, in particular as far as monetary transmission mechanism and financial market efficiency are concerned. Furthermore, under a relatively rapid and considerable development of the Albanian economy we are sure that the advantages a complete and independent monetary policy framework provides are larger in size than the disadvantages. Therefore, the currency board has not been considered a possible option for the future. On the other hand, the current operational targets (quantitative limits on net assets of the Bank of Albania and the banking system), or the so-called performance criteria, which are part of today’s decision-making, might not be able to preserve their binding power after the expiration of the conditional agreement with the IMF in 2008. These intermediate objectives may be replaced by a concrete and transparent objective such as the inflation rate, which provides a more direct communication of monetary policy decisions in economy in order to achieve the main target of the Bank of Albania. Consequently, summarizing what has been previously said we have identified the inflation targeting regime as our best choice versus currency board and monetary targeting. Another argument which supports our choice is that various internationally recognized experts have compared the current setup of monetary policy to an implicit inflation targeting framework. Furthermore, we believe this regime will provide a better platform for harmonizing the monetary policy with the fiscal one, implying that the fiscal authority will seriously commit to support the proposed setup. To this purpose, we invite the Albanian Government to reach a consensus on the key objectives of both policies, monetary and fiscal, adopting the convergence criteria as a strategic goal. Success in this endeavour requires Albania, among other things, not only continuity on the path of sound macro policies but even strengthening them further. This means a monetary policy focused on maintaining price stability and a prudent fiscal policy which will ensure that Albania’s deficits and debt ratios are sustainable and at low levels to increase the attractiveness to international investors. Put differently pursuing a monetary policy focused on price stability and a prudent fiscal policy, will no doubt reduces Albania’s risk premium. The benefit of this achievement will be felt throughout the economy. To support my idea I have to tell you one fresh news. Yesterday Albania succeeded to sell internationally a seven year fixed rate bond in Lek. This was not a result of a toss of coin, but a reflection of international confidence in the Albanian economy and its macro policies. This confidence should increase in 2008, 2009 and beyond. Regardless of the monetary policy regime it is to be said that the chances for this setup to be successful are greater under a developed financial market, which understands properly the monetary policy signals and transmits them adequately to the economy. Monetary policy efficiency implies the financial market efficiency. This issue has been part of my earlier discussions; however I would like to highlight that only recently we have taken concrete steps which will improve certain financial market segments. We have currently tried to adopt a set of measures which will facilitate the reformation process of the financial market by further deepening it. In more concrete terms, the Government securities market and the interbank market have been most particularly under our special focus. After several consultations with all actors in place we decided to come up with a package of initiatives and priorities during 2008 whose purpose is to establish incentives and minimize risks in the Albanian financial market: - Broadening and deepening the base of participants in the Government securities market Starting from January 2008 we will increase the investors’ base, eligible to directly invest in the auctions of Government bonds. We believe it will increase the competition while so-far this was a privilege enjoyed by the banking system. - Reducing the interbank market risk So far, the banking system has applied limits on the amounts it can lend in the interbank market. Therefore, we are working on introducing a new law on repurchase agreements, which will enable the risk-free conduct of repurchase agreements among commercial banks. - Establishing the delivery versus payment system In order to minimize the payment settlement risk and facilitate the intermediation in all types of transactions involving collateralized loans, repurchase agreements and outright purchase and sale of Government papers, we are working to put into practice the principle of delivery versus payment system. - Enhancing the interbank market efficiency In collaboration with the Ministry of Finance we have agreed on less frequent Government treasury bills auctions. Moreover the size to be issued in each auction schedule will increase. This less frequent auction schedule will increase the number of transactions in the interbank market for the period in-between the two auctions as banks will try to reduce the costs of liquidity. On the other hand it will limit the opportunity of banks to be liquid based on distributing their treasury bills investment and consequently, they will seek other market options such as the interbank market. - Introducing the prime rate Being convinced that the monetary policy may be efficient through transparency the Bank of Albania aims to introduce in the first half of 2008 the “prime rate” to the set of orientation rates used by commercial banks. Regardless of the measures to be adopted I would like to say that other financial market segments need to come along with us in this challenge. I have to say that the financial intermediation role of other financial institutions is weak and it has no substantial influence on the intermediation and reallocation of financial funds in economy. I think today’s reality provides a lot of room for making the capital market reactive. According to our estimates, the number of major companies certified by well-known international auditors is ever-increasingly becoming larger. Further to my speech I would like to focus on another priority of the Bank of Albania, that of financial stability. It holds true that macroeconomic stability is crucial and precedes all other important economic and financial developments. Without macroeconomic stability there is neither growth, nor foreign investment or reallocation; consequently there is no development. However, macroeconomic stability without financial stability would be a utopia; it would be like a non-standing bridge. This is the reason why we have been paying special attention to financial stability throughout 2007. The recent developments in the sub-prime mortgage loans must serve as an excellent reminder of the never ending surprises which from time to time cause a lot of turmoil for the financial market stability. Moreover this episode once more highlights the necessity for more harmony between monetary policy and financial stability. I want to make clear that by financial stability I do not assume only the absence of a financial crisis. First and foremost it implies a functional and efficient financial system in its intermediation role. I personally believe that too tight regulations truly minimize all the risks, but on the other hand they might not always be conducive to sustained growth. Therefore, the real challenge we are facing is to find an optimal balance between deregulation, which promotes market forces and financial innovations, and negative consequences of possible market failures and financial crises. Obviously, this optimal balance is hard to be actualized in the daily practice. Therefore more empirical studies need to be made, which I believe is one of the main priorities of the newly established Financial Stability Department. However, I would like to underline that as a supervisory authority we have been very prudent during the present year, considering among others the rapid growth of credit portfolio in the last 2-3 years. I take this opportunity to inform the banking system and the public at large that starting from January 2008 the Credit Registry will begin to operate. Special attention has been paid to strengthening banking supervision, in particular to that part which relates to the governance of commercial banks. Moreover, we have required more transparency from the banking system and a more accountable relationship with the public. The continuous improvement of human capacities involved in internal control and risk management has for a long time been a concern for the Bank of Albania. With reference to the latter I would like to underscore that we have already identified three greatest risks whose presence would have severe consequences on the financial stability. I have to say that this group of risks characterizes the whole region; consequently there is a lot of room for cooperation in this context. Credit risk Credit risk directly relates to the boom of credit to economy in the last years. Although the statistics indicate that the share of non-performing loans is low, prudence is required. We all do know that the rating and re-rating methods may be a tool in the hands of banks to keep the reality away from the truth. The entrance of big international foreign groups puts upward pressure on the other banking operators attempt to compete for borrowers which may often deteriorate the credit portfolio quality. Moreover, let us not forget that the companies’ balance sheets lack transparency which makes another issue for this matter. To conclude I would like to say that the current developments in the real estates market may potentially have a negative impact. A considerable rise in prices when real estates account for about 80 per cent of the collateral may have a negative impact in case there is a sudden fall of prices in the fixed assets market. Exchange rate risk As of November 2007 outstanding credit is shared by 70 per cent of foreign currency credit and 30 per cent in the local currency. It is my impression that the figures are similar to the whole region. Extending credit in foreign currency to borrowers with income in national currency means that a sudden exchange rate depreciation could threaten their capacity to repay. Contagion risk resulting from the presence of big banking groups throughout the region Currently we are all witnesses of a large-scale penetration of some big international banking groups throughout our region. This development has obviously been welcome as it has provided a better and more efficient allocation of free assets in economy. However, I believe that more prudence is required in this context. A disturbing issue for the parent bank or a concern of one of its branches in the region may cause turbulences for the fact that these banking groups have large market shares. Moreover, host-host supervision-related concerns have not been covered by the Basle standards which makes the whole situation even more complex. In conclusion, I would like to highlight that our work has been guided by a simple but progressive philosophy which has aimed at: - Establishing sound and operating structures; - Concluding and improving the legal and regulatory base; and - Absorbing qualified and professional human capacities to cope with the future challenges. I express my belief that the Bank of Albania is fully capable to have the full ownership of designing and implementing the monetary policy. Dear participants, I tried to give a short overview of our work in the last years. I am sure than the speakers’ presentations and discussions in this conference will help us to better understand certain issues and provide the answer to several questions. I truly believe all the participants will be active by bringing and focusing on new aspects, different experience and alternative perspectives to our viewpoints. I wish you good proceedings.
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Opening speech by Mr Fatos Ibrahimi, Deputy Governor of the Bank of Albania, at the workshop ¿General introduction on Regulatory Impact Assessment and first practical application¿, organized in cooperation with the Convergence Program of the World Bank, Tirana, 31 January 2008.
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Fatos Ibrahimi: General introduction on Regulatory Impact Assessment and first practical application Opening speech by Mr Fatos Ibrahimi, Deputy Governor of the Bank of Albania, at the workshop “General introduction on Regulatory Impact Assessment and first practical application”, organized in cooperation with the Convergence Program of the World Bank, Tirana, 31 January 2008. * * * Ladies and Gentlemen, It is indeed a great pleasure to open the workshop on the “General introduction on Regulatory Impact Assessment (RIA) and first practical application” as part of the RIA Knowledge Transfer Program to be delivered by the Convergence Program of the World Bank. This workshop marks the beginning of the activities of the Special Projects Initiative (SPI) Albania that was launched on January 19th in Bari in the presence of Governor Fullani, the President of the Puglia Region Nichi Vendola, the high-ranking representatives from the Central Bank of Montenegro and the banking associations of the respective countries as well as the representatives from the Convergence Program of the World Bank, which promotes and manages the SPI Albania project. The SPI Albania will build upon the positive outcomes of the similar projects carried out in Bulgaria and Romania. Its nature of a public-private partnership constitutes the most important characteristic of this project which will aim at the acceleration of the financial sector modernization in Albania by fostering a close dialogue and cooperation between the regulatory authorities and market participants in our country. In this context, the Bank of Albania remains fully committed to contribute to the successful implementation of this project by continuing to engage in a fruitful and continuous cooperation with the representatives of the banking system in accordance with the nature of this project. The development of the evidence-based policy analysis skills in compliance with the EU’s “Better Regulation” approach will constitute the cornerstone of the SPI Albania activities. These capacity-building activities will aim at acquainting the staff of the Albanian regulatory and supervisory institutions with the necessary expertise that will enable them to draft the impact assessments of the regulatory acts proposed by the respective authorities by employing the main tools and methodologies necessary for the evaluation of costs and benefits as well as for the preparation of the market failure analysis. It should be emphasized that the Albanian institutions are not quite familiar with the techniques of Regulatory Impact Assessment and therefore trainings such as this one are more than welcome. Following the adoption of the new Banking Law in December 2006 and its entry into force in June 2007, which represented a further alignment of the Albanian banking legislation with the EU acquis, the Bank of Albania is currently in the process of reviewing the regulatory framework which will ensure the appropriate implementation of the said Law. In this framework, the preparation of the respective impact assessments for each proposed regulatory amendment in close consultations with the market participants remains one of the objectives of the Bank of Albania in the near future. These new analytical tools will certainly improve policy-making by placing a greater emphasis on the clarification of costs related to the enforcement and implementation of the adopted regulatory acts through the conduct of the respective cost-benefit analyses. At the same time, the use of these assessment techniques will enhance the transparency of policy-making by ensuring a better communication of the regulatory and supervisory authorities with market participants. Let me conclude by thanking Mr. Bossone and Mr. Brogi from the Convergence Program as well as Ms. Wesseling from the Committee of European Insurance and Occupational Pensions Supervisors for being among us today. It is my deep conviction that their presentations will prove to be highly beneficial and insightful to all participants. I wish you a fruitful and interesting workshop. Thank you.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the launch of the electronic data transmission project which relates to the execution of primary market auctions of the Government securities, Tirana, 13 March 2008.
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Ardian Fullani: Electronic data transmission enhancements in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the launch of the electronic data transmission project which relates to the execution of primary market auctions of the Government securities, Tirana, 13 March 2008. * * * Dear participants, The Bank of Albania, the Ministry of Finance and the REUTERS have successfully finalized today after a year of close cooperation the electronic data transmission project, which relates to the execution of primary market auctions for the sale of the Albanian Government securities. This project minimizes the time from the submission of commercial banks’ requests to participate in the auction until the announcement of the results to the market players. Otherwise said, the physical delivery of documentation is coming to an end. The Bank of Albania as the auction agent and the Ministry of Finance as the securities issuer have considered the more developed countries’ standards. These two institutions have had a collaborative endeavour to be close to the market by establishing a partner relationship in order to meet the mutual demands. However the achievement of success cannot be understood without the information technology support. In this respect the REUTERS has played a key role. The auction process goes through the following phases. First phase: Commercial banks’ bids are made electronically, not physically. This way of data transmission avoids the manual entry of bids, reduces the time for their entry, increases the safety and accuracy of entries by providing at end-process the minimization of operational risk and the required time to process the information. Second phase: Following the preliminary processing of data sent by the participants in the primary market the Ministry of Finance may be provided with the data electronically as well. The provision of electronic data reduces the time required for the Ministry of Finance to be informed of through the physically sent documents. Third phase: After the decision is taken the Ministry of Finance may transmit this decision electronically, contributing further to the reduction of time in informing the market related with the auction result. The entire process described in these three phases required about 5 to 6 hours but upon the implementation of this project it will be reduced to 1 hour. Fourth phase: The Bank of Albania transmits this result to commercial banks through the REUTERS. At the moment the commercial banks are the main market participants. The transmission of this information in a shorter time allows commercial banks to administer their free funds more efficiently. The enhancement of this efficiency is a step further in establishing the preconditions for developing the money market and the securities market. Dear participants, In conclusion I would like to underline that this project provides to the market an important infrastructural element. Starting from today, the securities market will speak in the language of electronics. However, the Bank of Albania will introduce in April a full package of improvements which will focus on the development of the financial market and stability. Hoping that you will be using the new system efficiently, Thank you.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional meeting "The banking system - promoter of economic development", Kukes, 12 September 2008.
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Ardian Fullani: The banking system – promoter of economic development Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional meeting “The banking system – promoter of economic development”, Kukës, 12 September 2008. * * * Dear Governor, Dear Mayor of Kukës Municipality, Dear Mayor of Prizren Municipality, Dear Mr. Uldedaj, Dear Mr. Basha, Dear participants, I am delighted to be here today and there are many good reasons why I was looking forward to this gathering. For the second time within a relatively short period of time I see this gigantic engineering work growing every day and taking its final shape. Every single person visiting the road segment Rëshen – Kalimash understands that what they have in front of them is an extraordinary engineering, civil, useful, far-sighted and patriotic work. Similarly, my return to Kukës after quite a long time has surprised me. There is now a completed airport, cross-border activity has intensified, the climate is extraordinary and soon this town will turn into a city with modern infrastructure. Numerous opportunities are ahead of you. Your cleverness stands in perceiving them and making use of them cleverly in order to enhance the opportunities of the Kukës community and the North-East region. The other reason for making me feel delighted is the presence of my Kosovar counterpart, Mr. Hashim Rexhepi. This meeting is of special significance. The Central Bank of the Republic of Kosovo is now growing and consolidating day after day under the management of an Albanian professional unlike some time ago when the management of the central bank was the task of a foreign central banker. Meetings of this kind are now turning into a tradition. After holding similar meetings in Korça, Gjirokastra, Shkodra and Saranda we are now being introduced with a new reality of the North-East region, and I believe that the town of Kukës plays a key role in this area. Through these regional meetings we aim to be in touch with the economic and financial reality of different regions in Albania. Given the weather, cultural, social, geographical, demographic, objective and subjective characteristics, each region has different economic and social development opportunities and levels. From this viewpoint, we aim to fully be acquainted with these specific characteristics, identify all the financial and natural resources, formulate “recipes” and other advice which would help in making more rational use of them. Beyond what I previously stated, I would like to clarify that the exploration of the potentials that the different regions have to offer and the identification of their level of use is also essential in terms of the banking system’s activity, in particular of the geographic expansion and financial intermediation. Another major reason motivating the Bank of Albania to organize these meetings relates with the establishment of a more effective communication channel between the Bank of Albania and the public. We believe that the direct contact with various social groups in different geographic regions (that is to each and every family), in addition to the traditional means of communication, press conferences, monetary policy or financial stability reports, is a very efficient tool and frequently determinant. I would like to dwell today on some matters of interest to the entire audience. First I would like to make a brief outline of the Bank of Albania’s latest analysis of the economic and financial situation in Albania: In brief, three are the main developments of greatest interest to the audience: With regard to the international developments, the economic and financial situation has been very complex in the last months. Inflation has turned into a point of concern in most foreign economies, mainly driven by the high prices of raw materials, oil and food. In addition, economic activity in developed economies has experienced sharp turns. Euro area economy is at present in front of many questions, while the US and some Asian economies have shown slow rates of economic growth. Credit crisis has caused many reputable international institutions to experience large financial losses and its contamination process is still present. Recently, the two US mortgage giants, Freddie Mac and Fannie Mae, which were on the verge of collapse, were subject to an unprecedented and costly rescue plan designed by the US Treasury Department. All these issues have triggered uncertainties in the markets, causing the future forecasts to be more challenging and the participants’ exasperation to peak. I would consider the immunity shown by our economy in terms of price stability as the most outstanding development. Albania’s economic activity is progressing in line with our previous expectations. A few days ago, INSTAT published the inflation figure for August 2008, according to which annual inflation marked 2.5%. Following a 12-month period of inflation rates standing at around 4-4.5%, in line with our forecasts, it is assessed that inflation will fluctuate in the next few months at around 3%, which is our quantitative objective. Worth to note, however, is that the risk for its upward deviation is still present and it mostly relates with the international developments mentioned above. The main risks stemming from the internal environment relate to any possible deterioration of the energy situation and the plausible implications with the fiscal situation in the future. For the moment, the main risk stems from the lagged effects (otherwise referred to as second round effects) of certain developments such as the rise of wages beyond an acknowledged logical level. Any similar rise would generate new inflation, to later impose another rise in wages, which in turn would again and again trigger inflation. I do not think this is the right path. Wage-inflation spirals have been studied relatively early and they represent the least appropriate recipes to offset the inflation effects. I would like now to move to the latest performance of the banking system, with both its good sides and the risks associated with them. The Albanian banking system is going through a phase of swift development and promotion of new products. I believe you have noticed that many banks have been engaged in aggressive marketing strategies which promote different types of household loans and terms and attractive interest rates for deposits collection. In addition, banks’ branches and agencies have constantly expanded. Only during the present year, 73 new branches and agencies have been opened and 15 others are in the process of being opened. The same characteristics more or less apply to the District of Kukës as well. Currently, six private banks perform their banking business in Kukës, while two other banks are in the process of commencing to operate. As of end June 2008, the banking system has extended a total of about 1.2 billion leks of new credit (around 15 million USD) of which 66% to households and the rest to the businesses in the area. It is nice to notice that this figure accounts for about 66% of deposits collected in this region, providing evidence for a relatively high financial intermediation level. The rapid development of the banking system, the high competition in the banking market and banks’ eagerness to win their market shares requires greater prudence. The Bank of Albania has taken a number of measures to increase prudence in view of attaining the banking system stability. In its last meeting, the Supervisory Council of the Bank of Albania took the following decisions: • Some amendments to the regulation “On risk management in the activity of foreign banks’ branches”; • Some amendments to the regulation “On capital adequacy ratio”; • Some amendments to the regulation “On credit risk management”; • Approval of the regulation “On minimum requirements for information disclosure from banks and branches of foreign banks”; • Approval of the regulation “On transparency of banking and financial products and services”. The entire package of regulations was launched in the open forum we had this spring with the banking system. This package aims to better discipline the banking system in terms of assessing credit risks, setting penalties for banks when non-performing loans increase, encouraging lending in lek and enhancing transparency with bank clients for each product and service. Dwelling further on the issue of financial stability, I would like to underline that the Bank of Albania is scrutinizing cautiously the developments in the external sector of the economy, which for the moment remain a concern in terms of long-term developments in economy. The stable growth of imports in goods and services and the current deficit deepening require special attention. The main implications relate among others with the financial stability at home while they have their roots in the imposed correction of long-term imbalances within a very short period of time. Triggered by the increase of real estates prices, the steady appreciation of the lek, workers’ remittances and the rapid growth of credit and budget expenditure during the present year, the high current deficits have become a dominant phenomenon in the external sector of the economy. Their automatic and abrupt adjustment would prompt the correction of exchange rates to the rapid and strong depreciation of the lek, drop in private and public consumption and reduced economic activity which could generate crisis in the external sector and spread to economy, hence, jeopardizing the financial stability at home. Availing myself of this opportunity to address to the audience I would like to explore this issue further. Skipping the theoretical arguments, I would note that the high current deficits mainly originate from the consumers’ behaviour. In plain words, what I am trying to say is that in a general economic level we consume more than we produce. This extra consumption, which is mainly financed by borrowing, is mainly driven by our expectations for higher income in the future. That is, in a household level, there is deficit, triggered by the insufficient income to cover household consumption. The international financial crisis and the negative consequences on the global economic and financial activity stem from household consumption beyond the sources (providing additional financing from banking loans) and the rise of real estates prices. This consumption approach was followed by the increase of current deficit and long-term liabilities for households. When these liabilities exceeded the long-term equilibrium level, the household sector could no longer pay off the accumulated debt. What were the consequences? An extreme and constrained adjustment of consumer behaviour and approach. Households could no longer pay their debts to banks and maintain the same level of consumption. These individual imbalances altogether appeared in a macro level, mainly in the form of abrupt fall of demand, slower economic activity and depreciation of the exchange rate (US dollar depreciation). Naturally, the financial system could not escape from being affected by this challenging contagion. What I have stated above points out the necessity of making thorough analysis at a micro level in addition to the macro ones. That is, the recipes for attaining a stable macroeconomic situation should begin and be sustained by prudent analyses at a micro level. It is for this reason that I would like to dwell on and explore one of the indicators that affects the structure and modelling of household budget. I refer here to workers’ remittances which have played a key role in smoothing consumption and at a lower level, meeting investment needs, mainly for real estates and small household businesses. Remittances have somehow offset the low productivity and the negative effects triggered by unemployment. In addition, they have helped to preserve financial stability, by establishing more balanced ratios between income and expenditure. Given the importance of workers’ remittances, one would rightly raise the following question: What is their perspective? How can they be managed more effectively? For a relatively long period of time, they have been vital to our country. According to a Bank of Albania survey on the first quarter of 2008, about 26% of Albanian households living in the territory of the Republic of Albania are recipients of remittances from abroad. Households’ geographical distribution indicates that 59% of recipient families live in the rural areas while the rest in the urban ones, receiving about 66% and 34% of total workers’ remittances, respectively. Remittances represent the most important component of rural families’ monthly income, accounting for about 40%. The largest part of workers’ remittances (about 70%) for the first quarter of 2008 was used for non-productive purposes. About 48% was used for consumption, which entails meeting households’ everyday needs for food, clothes, furniture, etc., 16% for construction and reconstruction and 10% for education and medical purposes. Around 19% of remittances are used for investment and savings, providing evidence for their economic impact on Albania. Despite these figures, their future prospective is yet unclear. The integration of Albanians into their host countries, their economic and financial situation and other similar reasons have a negative impact in the long term. Our analyses and assessments show that the difficult economic situation the developed economies have been experiencing, expressed in the economic slowdown, unemployment growth and increase of inflation, has also provided its impact on the performance of remittances which have grown less this year relative to the previous years. Empirical studies of the Bank of Albania show that the cease of these flows would put our consumption model and the long-term balance of the external sector of the economy in the difficult position. Our concern related to the household budget stands in the fact that the behaviour model we adopt at a household level can also affect the behaviour model of given regions. The Albanian economy has by and large made evident progress, detaching itself from the IDA country group. Macroeconomic indicators have for a relatively long period been positive and stable. However, beyond the nationwide average indicators, detailed statistics by regions indicate that welfare in mountain areas has progressed at slower rates relative to the other regions. According to World Bank assessments, an average resident in the mountain area has 12% less per capita real consumption than the average resident in Tirana, while in 2002 this figure was 9%. According to the same source, the average rural coast resident has 34% higher per capita consumption than the average mountain rural resident. Generally, poverty has a strong positive relation with the family size and a negative relation with age and education. In contrast, the District of Kukës has great potentials for more prosperity in this area. First, your district is distinguished for its rare natural beauty and diversity from the mountain and ethnographic tourism viewpoint. The opening of the border with Kosovo in particular has provided us with real opportunities to perceive the Northern Alps as a single complex with their continuity to Kosovo and why not to Montenegro. I think the completed airport, which could very well be used for the transportation of winter sports fanatics, is another strong point. It is the local authorities’ task, to undertake in co-operation with the local stakeholders projects and feasibility studies, which in a later time may be submitted and presented to the central authorities or the specialized international operators. I would like to inform you that at the moment, their interest is overwhelming and concrete. Time is ripe for you to increase the marketing of these potentials and point out their strong advantages accurately. Second, your district is well-known for being rich in minerals. I do not know if you have any geological inventories or maps which accurately identify the mineral resources. If you don’t, this is too late. The current price structure is very favourable and I believe that any reactivation of existing mines and the opening of new mines implies more employment, more hope for this region and fewer migratory movements. Third, your district, in particular the town of Kukës, finds itself in a crucial economic crossroad, not only in terms of roads but also of air. Unfortunately, statistical information related to cross-border economic and financial activity is missing. Nonetheless, I have to admit that the potentials are not being rightly handled. We are the same people, speaking the same language and sharing the same customs, hence, there is no point for us to be held back by the absurd barriers of time. The completion of the new road and its stretch to the largest harbour in the country create the proper grounds to turn the Kukës town into an extraordinary transit point for passengers, goods, services, art and culture. Fourth, your district should make clever and great use of the presence of a university in this town. My call is just plain: invest in mobilizing a professional and specialized teaching team. Spend on education, on knowledge and the culture it produces. In this context, the local government could set financial stimuli. The final goal will be to establish a national educational centre, which serves to the local community living on both sides of the border. I honestly hope the future managers grow and be a product of this university. Fifth, I believe you should pay your utmost attention to the presentation and spreading out of information on the potentials your district has to offer. Pretending you possess something that is worth it is only one side of the coin. The other is how able you are to find buyers, to get them buy what you want to sell. In this context, the complete identification, regulation, presentation and promotion of these great potentials are of prime priority. For analogy purposes, I would like to bring an example: It is now for two years that the Bank of Albania has been organizing the yearly competition “The Governor’s Award for the best diploma thesis”. Last year, the third prize went to a student of the University of Shkodra for a very original thesis which introduced the potentials and opportunities of the Puka Region, the development of mountain tourism and the positive macroeconomic impact it will bring to the region. This paper was assigned a prize for the originality of the topic chosen to be explored and the economic impact its presentation may have. The thesis did not only seek to present a profitable business opportunity, but also make an assessment of the positive impact this investment would have on the life of the community. The positive influence on the latter is crucial for important strategic investors. We awarded this paper not only for its original exploration by a passionate student from Puka, but also to increase public awareness and promote this new and modern mentality. When a single student manages to produce this much, a university, a local community and all of us together have great potentials to achieve even more. I brought with me today a copy of this thesis. Dear participants, I tried to briefly discuss some issues that I personally find vital and benefiting for you and the Bank of Albania. Perhaps my speech may have sounded somehow provoking; however I believe this is the right time for us to put a halt to some transition phenomena or impairments. Although I am aware of the numerous and complex problems, I can clearly see some light at the end of the tunnel. The chances are right there. Our duty is not to waste them. On behalf of the Bank of Albania I assure each institution, individual, company, undertaking or initiative that we are open to collaborate for the best of future progress and prosperity of this community. Thank you once again for your attention and hospitality.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Open Forum with the Albanian banking system's players, Tirana, 29 September 2008.
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Ardian Fullani: Achievements and challenges of the Albanian banking system Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Open Forum with the Albanian banking system’s players, Tirana, 29 September 2008. * * * Dear heads of commercial banks operating in Albania, Dear participants, It has almost been 6 months since the first open forum was held, at the core of which were the achievements and challenges of the Albanian banking system. Today’s forum is a follow-up of the debate which commenced 6 months ago with the good will and goal to further bolster the banking system’s stability in Albania. I consider the first forum a successful one, given that it generated a number of important decisions that have been made recently. In addition, I have the strong conviction that the discussions to be held this afternoon will be productive and will serve to the prudent examination of the banking system’s activity, in particular in the context of the recent developments in the global financial markets. To begin with, I would like to provide a general overview of the banking sector’s financial situation and the extent of impact from the developments in the international financial markets. During the first half of 2008, the banking sector maintained its stable growth pace. The Albanian banking system is lucrative, well-capitalized and liquid. The good financial result continues to be driven by the rapid growth of high return on investment activities. As of end June 2008, credit portfolio of the banking system accounted for nearly 43% of total assets, increasing by 3.6 percentage points relative to end-year 2007. Consumer deposits remain the main funding source for the activity, accounting for 80% of total assets. Business funding through the credit lines from the parent banks increased to 9% of total assets in the first half of 2008. As of end June 2008, return on average assets was estimated at 1.3% while return on average equity equalled to 16.6%. Capitalization indicator of the financial sector, and in particular of the banking one, increased slightly. Capital adequacy rate of the banking sector showed a slight increase to 17.3% as of end the first half of 2008. Liquidity indicator continues to remain at higher levels compared to the other regional countries. Liquid assets of the banking sector share 47% of total assets, dropping by about 5.7 percentage points relative to end-year 2007. The spread of the U.S. economy crisis to the international financial markets and the uncertainty for the nature of its effects, the institutions’ map, the types of instruments and its extent, do theoretically increase the risk of its impact on the financial system at home. Basically, this crisis has not provided its impact on the banking activity in Albania. The Albanian system’s immunity to this crisis arises from certain factors, namely: • The relatively low exposure of the Albanian financial system to international financial institutions; • The low integration level in general; and • The well-capitalized activity of European banking groups and their branches operating in Albania. In general, we consider that no risks that may be materialized or which may harm abruptly and severely the activity of the financial system are identified. However, I would like to dwell on the risk analysis of the banking sector. Scenario-based risk analyses confirm that the banking sector has the capacity to cope with the various risks that may arise as a result of the unwelcome shifts in the exchange rates and interest rates. Prudent monitoring of assets’ quality is required and time is ripe to pay greater attention to the performance of liquidity indicators. With respect to the latter, the following aspects are crucial to keep under consideration: First, the absence of a developed money and securities trading market curtails the financial institutions’ capacities to meet the unexpected liquidity needs through the sale of assets considered as “liquid”. In addition, as a result of the financial crisis in the international markets, the trading of some securities, which were previously considered as favourite to the investors, has become challenging Second, the differences in the size of the banking sector’s institutions, the collateral’s quantity and quality, and the restrictions for the direct exposure among institutions hamper the circulation of liquid funds in the interbank market in the duly time and extent. Third, given the enhanced competition, there is a risk that significant disproportions arise between assets and liabilities in the balance sheet, with regard to type of currency and maturity term; Fourth, some institutions have also turned to borrowing from parent banks in order to maintain the lending promptness and size; Fifth, owing to objective factors that have conditioned the lack of efficiency, the banking sector at home has been characterized by very high liquidity levels. Given the enhanced competition and improved efficiency, it is objectively expected that liquidity indicators being to shift downward. These factors hamper the setting of the optimum liquidity level, in which the enhanced efficiency in fund use does not shackle the institution’s capacity to cope with the business risks. All these elements provide evidence for the need that the banks’ governing structures follow practices that allow the institution itself to meet the expected liquidity needs independently, however, having options which improve their capacity to generate liquidity in urgent cases. You must re-evaluate the securities’ portfolio quality, in particular that in foreign currency, in order to attain the optimum characteristics of safety and tradability. In addition, the portfolio of placements in foreign currency in the form of deposits or related products with international financial institutions should have as its main objective the safety of the investment and the adequacy of maturity term. In a broader context, you should reassess the adequacy of certain indicators’ level in terms of differences in maturity terms and the type of currency of assets and liabilities. Assets’ quality, which is mainly affected by the quality of loan portfolio, remains a constant risk to the banking business in general. The reduced quality of assets does not only impair the institution’s income, but also harms its liquidity position. In the case of the Albanian banking sector, the loan portfolio quality has been decreasing, although at gradual rates, and the situation is presented as entirely manageable. The rapid growth of credit and the challenges certain sectors of the economy that have been lent significantly may be faced with, are factors that will continue to exert pressure on the loan quality in the near future. Hence, it is crucial for you to implement a policy of rapid detection of non-performing loans and promptly create reserve funds. It is for this reason that the Bank of Albania will increase the frequency of controls and the efficiency in monitoring and checking this process. The Bank of Albania, through its Supervision Department, has prudently and constantly monitored the developments’ dynamics in the banking sector, part of which are also the recent developments related to interest rates on market products. We consider these interest rates as aggressive, providing their impact on the profit margin and representing a potential risk to the structure of balance sheet. As you are aware, we have required from you information related to the strategy and procedures followed by your bank with respect to the application of these terms and interest rates, the purpose and grounding basis for the decision-making process and the structures involved. It is essential for the Bank of Albania that any decision made is a product of deep and comprehensive analyses from the most junior expert to the decision-making structures, placing in addition special emphasis on the impact on the financial result. The entire process should be transparent, understandable and absorbing by the public at large. Otherwise, it will provide opposite effects. This summer provided evidence for the fact that competition in terms of gaining market shares is a determinant element of the Albanian banking system’s behaviour. It also holds true that we are dealing with one of the core principles in the functioning of free market economy: COMPETITION. However, given the fact that the other market principles, namely profit maximization, are not on the same wavelength, the balances between them may be distorted and consequently, different risk elements may be present. I repeat from the previous forum that it is necessary for you to consider the macroeconomic consequences of your behaviour at an industrial or institutional level, since they are important factors which ensure the long-term stability of your institutions and the system in general. The difference between large and small-size banks, when public confidence in the system in general is in question, is relative. Each bank has its role and share in the system and the difference between the concept “a small bank” or “a large bank” in the context of systemic risks, is ever-increasingly reducing. In addition, the U.S. financial crisis was caused by the imprudence of financial institutions to assess the stability of private debt and accurately weigh the effect of macroeconomic developments on the U.S. household budget. Its consequences remind us of the expression “there's no such thing as a free lunch”. With regard to the issues explored in the forum held in April, I would like to bring to your attention two other issues that I believe remain indisputable priorities for our work in the future. As promised in the first forum, the Law “On repurchase agreements” has become effective upon its entry into force on August 19th 2008. Although this project was pre-announced by the Bank of Albania, according to the information made available by the operational staff of the central bank and the respective commercial banks, we notice that the entry into force of this law has found you unprepared. Hence, I require from you that the issue of binding contracts for the execution of repurchase agreements be placed at the top of your short-term agenda. Your legal staff should equally assess both the retail and the Treasury Department products. Judicial and operational assistance will be provided by the Bank of Albania, but on the other side the Bank of Albania will not intervene in solving the liquidity needs in case these needs arise from the non-observance of the law on repurchase agreements. I find it pleasing to confirm that after a general agreement on their usefulness, the package of regulations we brought to you in the first forum, has now become effective. The Bank of Albania is now expecting swift responses, in order to minimize their obligatory enforcement by us. The new regulations increase prudence in the elaboration and protection against foreign currency credit risk. I do not want to fail to disclose our stance that Albania needs a liquid and well-capitalized banking system given the situation we are going through. Regulations on transparency and obligation to disclose are another important part of the last package. We have now taken steps to a more regulated market and other parties should follow the same steps as well. I refer here to banks’ clients who at present have, can and should be acknowledged of all their rights in relation to the banks servicing them. In every meeting with you, I will highlight the need of strengthening the control on the business of the institutions you are governing. In addition to the fact that only this way the personal philosophy of each of you with regard to the development of the institution will come true, this process is vital to the well-functioning and safety of its business, even more given its rapid growth. In this context, the control structures should act rightly and extend to all the bank’s activities. Given the absence of a good collection, processing and reporting process of the business data, the control process on the institution’s activity finds itself jeopardized. The process of the banking sector’s data collection and processing has improved over the recent years as a result of investments in modern technological systems. In many cases, however, it is observed that the adoption of these systems is made only partially and hastily. Their full potential is not used and the banks’ personnel may not be fully familiar to their use; hence, weakening the necessary human control on these systems. Consequently, the control process on the institution’s activity is segmented, and the process of data collection, processing and reporting at the required quality and time is hampered. As a result, you being heads of commercial banks and us the system’s regulatory authority, risk to take decisions on data which are not fully accurate and furthermore are “old”. Being present in different banks and in different levels, a final solution should be found to this issue. This situations needs to change and therefore, I require strong commitment from you and your shareholders. In more concrete terms, I require each bank to promptly: a) Make a “cost/risk” analysis of all its activities and expand the information technology systems, at least in those areas of the activity where there is greater risk in terms of absence of accuracy in processes; b) Place all branches and its activity in a “net”; c) Strengthen the human control structures in all the business processes, in particular in the treasury operations, deposits’ collection, credit extension and execution of transfers and payments; d) Document and keep track of the entire process, evidencing clearly the responsible structures and people, and regulating the process of delegation of responsibilities. Going back to the situation in the international financial markets, I would like to highlight that any negligence with regard to the serious assessment of the latest developments in these markets cannot be forgiven to any of us. The monitoring and assessment of each event, news, action or response from the participants in the different markets should turn into every day routine in our work, in particular when energetic measures need to be taken in line with a given situation. In this context, the possible extension of credit lines from parent banks and the possible increased dependence of the banking sector on them represent an increased element of risk. You must avoid at any cost your dependence on these funds and pay careful attention to preventing the deepening of the spreads that may arise in the type of currency and maturity term. In the context of global economic developments, the uncertainty related to the future prospects in consumer prices and economic growth in the euro area EU countries and the USA, will affect the performance of interest rates in the money and credit markets and the exchange rate performance. These changes may affect the internal market through the exposure of the Albanian financial sector in assets and liabilities denominated in foreign currency. In addition, there is a risk that the challenges the economies of the EU countries and broader are going through be reflected in Albania through the fall in workers’ remittances, deterioration of trade deficit and decrease of foreign direct investments. Even though the materialization of these risks and their extent are not expected to be significant, you must assess the impact of these scenarios in your development objectives and take the necessary measures to be protected from them. In a broader context, in your relations with the parent banks, remember that you are leading banking institutions operating in Albania and that you are accountable to the Albanian authorities and the Albanian public for the well-functioning of your institution’s business. Increased vigilance is required from you in order to maintain low exposures in the international financial markets and ensure a well-capitalized and liquid business. The Bank of Albania will constantly monitor and confirm that you are taking the necessary concrete measures to maintain and improve the capacity to constantly generate a positive financial result, by preserving the assets’ quality and the liquidity indicators. If necessary, being the regulatory authority of the banking sector, the Bank of Albania will orient and support these measures through constant revision and creation of necessary regulatory stimuli.
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Interview of Mr Ardian Fullani, Governor of the Bank of Albania, to Voice of America, 14 October 2008.
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Ardian Fullani: Interview with Voice of America Interview of Mr Ardian Fullani, Governor of the Bank of Albania, to Voice of America, 14 October 2008. * * * What is the dynamics of this year’s meetings? Is Albania immune to this crisis? What measures have you as an institution and the government taken to cope with it? This regular meeting in Washington has been special. Besides permanent discussions with the International Monetary Fund and the World Bank, priority was given to discussing about the grave world financial situation, the way to weather this crisis, along with possible solutions. At the same time, a special analysis was made for separate countries, of course Albania included, as a country that has a program with the Fund. So, participation in these discussions has been important. I would be interested in seeing Albania not only in our framework but also in the regional framework and even broader, because this situation should be considered in perspective, not only for what happened today, but also for what will happen tomorrow. The week has been full of activity. Washington has been involved in a special and unique whirl of discussions among important economic-financial institutions, policy-makers and international banks for finding a solution, not only for the moment but also for resolving the situation over the medium- and long-term, as well as for discussing about the future global economy’s prospects. Many taboos have been broken and discussed around; now the global economy is confronted with new challenges for the future. In view of this, it is important to emphasize the G7 meeting and yesterday’s meeting on the Euro area, organized by the President Sarkozy in France. The decisions of these meetings appeal for more action – rapid, well-organized and effective – as well as for more cooperation and coordination rather than competition and arbitrage in law and regulations. Simultaneously, these decisions appeal for supporting public packages for a re-capitalisation of financial banking institutions, for putting the lending system into operation and for taking all relevant incentives in order to raise public credibility for these institutions, with the purpose to liven up the banking and financial system, as well as the economic life of different countries. In specific terms, what measures have you as an institution taken to raise the credibility of this public already concerned about the financial situation? I have said it time ago that this grave situation is not any longer a situation aggravated by international financial institutions or by various packages they used, as it comes out today, but it has merely turned into a great confidence crisis. Presently cooperation, coordination and a greater attention is required as concerns not only to the current problems but also to the prospects of the situation. We have been cautious. Over last two years I have taken some initiatives for coordinating our operations in regional framework. Two years ago we organized for the first time a Conference on Financial Stability in Albania, where seven governors of central banks of the region participated. Besides the Governors’ Club, we have actually a club that functions precisely for supervision, where we discuss about all banking supervision problems and make a coordination of laws and respective regulations. Last year the new banking law entered into force, while the current year has been full of changes regarding four basic supervision regulations, having the main focus on increasing bank management quality, bank transparency, internal control and risk management. The financial crisis here in the United States of America started with a fictive house price rise. How do you evaluate this market in Albania and how concerned are you about non-performing loans? I would like to repeat what I said a week ago, when the financial stability declaration was made public, i.e., the Albanian banking system is not “contaminated” from “toxic” products of the American market and other markets. Anyway, have foreign banks operating in Albania invested in markets that may be contaminated? The Albanian banking system is safe. The security of this system rests in its parameters of capital, liquidity and profit. The Albanian banking system is profitable, and non-performing loans are within the specified international parameters. Our supervision standard is another additional element of the protective network that the Bank of Albania creates. Special attention the Bank of Albania has paid to the banking supervision, particularly over last two years. It is a great guarantee for the public in order to raise the confidence in these institutions. The increased confidence in these institutions is a cornerstone for a steady longterm progress of any world economy, especially under such situation. We have always preceded the situations, treating the financial stability problem with primary importance. I have announced in public more than one year ago that the financial stability and the macroeconomic policy walk hand in hand. I think every investment in financial system quality is an investment made for a better and more successful implementation of monetary policy. At your meeting with the IMF, of course you have discussed for the perspective of prolonging the program of the IMF with Albania. Is there achieved any preliminary result? What camp do you belong to, the camp protecting the prolonging of this program or the one that says that the government’s responsibilities should increase, by the IMF leaving now? Presently there are no camps; actually there has not been any camp ever. Personally I believe that the IMF is the best certifier of our national balances and statistics and the guarantor of our macroeconomic policies; unquestionably, the best guarantor to associate Albania towards European membership.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Joint Press Conference of the IMF Mission with the Ministry of Finance and the Bank of Albania, Tirana, 11 November 2008.
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Ardian Fullani: Recent economic and financial developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Joint Press Conference of the IMF Mission with the Ministry of Finance and the Bank of Albania, Tirana, 11 November 2008. * * * The regular visit of the IMF’s EU1 European Department mission is made in the context of the last review of the current 3-year PRGF – EFF Arrangement between the Albanian authorities and the IMF Board of Directors. This last review coincides with a sensitive outlook of the world economy, which is facing a highly intensive and uncommon global market correction. Given this situation, present and future prospects still remain vague and uncertain. However, worth to note is that the Albanian economy has exhibited admirable immunity to these developments. In this context, the prudent and systematic work of the Bank of Albania, both in terms of maintaining the macroeconomic balance at home and safeguarding the banking system’s financial stability, has provided an overwhelming contribution. Over the last two years, the Bank of Albania has been an active actor in both directions, analyzing carefully all the risk factors and taking various measures to minimize their materialization in practice. In our work we have been guided by the philosophy that one cannot build authority in the market through the mechanical use of a set of instruments but through the market perception and trust in the policies pursued by the authorities. The conservative policy – the increase of the interest rate extended in a time period of 18 months – is the concrete application of this philosophy. In addition, measures have been taken in terms of amending and constantly improving the legal and regulatory package. The entire process of measures and decisions has aimed at ensuring the financial system’s efficiency and stability. The latest regulatory amendments, which have brought a new dimension to the banking business in relation to the customers, foreign currency lending, investments in parent banks and internal control, are of particular importance. The Bank of Albania will persistently make an assessment of the existing regulatory framework and aim at improving it, in order to address the present and potential risks. I believe the set of actions taken recently by the central bank have been a kind of intensive therapy which has contributed to the increase of the banking system’s immunity. With reference to the economic and financial situation at home, I would like to inform you that the Bank of Albania shares the same opinion with the IMF and the Ministry of Finance regarding the current period as of end 2008. We project that the GDP will grow during the present year by 6 percent. In addition, our projections indicate that the 12-month inflation will mark around 3 per cent at end year, which is very close to our numerical target. All the other macroeconomic indicators attest to a relative stability with rates being close to our projections. Despite this positive outlook, the public attention is at this moment future-oriented. In this context, the year 2009 shows a more complex setting, with numerous challenges ahead not only for the real economy but also for the monetary policy, the fiscal sector, the external sector of the economy and the financial system at home. With respect to the international developments, the partner countries are close or have now plunged into economic recession. The decline of the economy, among others, affects negatively “the export of its surplus” in goods, capital and investments in partner countries. In this context, the possible slowdown in foreign currency inflows may constitute a future occurrence, although the intensity at which this phenomenon may be exhibited is still vague. In the recent months there has been a halt in the price rise of raw materials, oil and foods. In addition, a rapid correction process of these prices on the demand side has commenced. The further fall in prices may affect the decline on both sides of foreign trade. But, given the difference between imports and exports by several times, the net effect will naturally be the reduction of trade deficit. Worth to note, however, is that the fall in prices may impact indirectly the performance of fiscal revenues since the amount on which the fiscal tariffs are applied will be lower. We are now facing the reduction in lending and credit lines extended by parent banks to their subsidiaries. Based on these arguments, the Bank of Albania assesses that there is an increasing risk that the economic growth may slow down in 2009. The harmonization of the two basic policies in economy is a key element which ensures growth and a balanced development. In this context, we are in the process of analyzing the new project drafted by the Government for 2009. We remain constant in the belief that the harmonization of both basic policies remains a priority in the future as well. To this purpose, we require from the Government the inclusion in the fiscal package for 2009 of a fiscal rule on the performance of fiscal policy. This rule should be quantitative, monitorable and extended through the entire political mandate, with a clear bias towards the quantitative Maastricht criteria. Other possible risks involve those related to the hydro-energy situation and to the possible rise in the energy price or to the performance of agricultural production at home. In its last monetary policy meeting, the Supervisory Council of the Bank of Albania concluded that there is a balance in the risk factors affecting the consumer price performance. Inflation expectations are now being anchored around our objective. Inflation is forecasted to continue to fluctuate around the current values during 2009 and 2010. The Bank of Albania remains committed to take all the required measures that will help contain inflation within our 3 percent target. In terms of financial stability, I would like to re-stress that the banking system continues to operate at optimal parameters which are in line with the prudent banking supervision standards. The latest analyses indicate that the banking system has satisfactorily coped with the domino effect of the international financial market. The central bank has supplied the market with necessary liquidity in order to avoid any unwelcome situation in the system. I would like to assure you that the Bank of Albania will continue to do so based on the market needs and specifications in different periods of time. I avail myself of this opportunity to address to the banking system, both to commercial banks and to their respective parent banks, to prudently analyze the Albanian economy in order to provide it with the real chances through the support with banking loans. The latter has been a key element in the economic development of Albania and consequently, it has to remain so in the future as well. Special emphasis should be also paid to the development of the money market. The new instrument of repurchase agreement transactions needs to be put in place as soon as possible. The Bank of Albania, the Ministry of Finance and the banking system need to mobilize the entirety of their resources and expertise in order to ensure a more liquid and stable money market. In view of this, I assure you that the central bank will assist and be fully committed to achieving it. The Albanian business should keep being active, far-sighted and dynamic in developing its business plans. Only this way it will be well-capitalized, lucrative and credited by the banking system. The business should co-operate closer with the bank, not only in terms of receiving loans but also in obtaining financial advice, which is a pre-requisite for ensuring its long-term stability. I would also like to address to households and the public at large and advice them to be calm, cautious and rational in the way they manage their savings and investments portfolio. Any kind of savings or investments outside banks and in the form of cash bears considerable moral, financial and physical risks. My appeal is simple and straightforward: consult your bank for any actions you take. The banking system remains your best consultant. Prior to making a financial transaction of any kind, have the opinion of your bank as well – it is your banker. In conclusion, I would like to highlight that the banking system is a national wealth – it belongs to us all. Let us develop it further in order to ensure a stable growth and a better future for the generations to follow.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Banking Law Workshop, Tirana, 17 November 2008.
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Ardian Fullani: The link between the legal system and financial markets Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Banking Law Workshop, Tirana, 17 November 2008. * * * Dear everyone, The conviction that two monologues do not make a dialogue not only pushed me to study law after my economics studies but also to listen to and toss ideas with colleagues from different professions. I find it especially pleasing when I do this with lawyers, given that there is one particular person I talk to the most – my spouse. The dialogue between the banking market and the legal system has always been important to any country. Nowadays, it has become extremely vital. For our country to continue sailing towards safe shores of economic development, financial stability and prosperity, I believe these two oars are required: judicial order and the financial market. Dwelling briefly on the legislation issues, I would highlight that the economic activity is mutually dependent on the legal system at home. As one of the distinguished economists and academics, Mr. Mishkin, says – ”The legal system, which as you know, is not only composed of legislation and rule books, but also of the infrastructure of the civil courts and the market regulators, represents a fundamental determinant of economic growth, especially in connection to financial development”. The link between law and finance is inextricable. The financial instruments do not operate in a vacuum. As long as they serve to people, they are based on legal relationships. A financial asset is ultimately a claim in the form of paper (contract) or electronic form (account entry). In any credit relationship, the possibility of default is always looming and this inherent complication cannot be solved without a precise system of norms that protects both the creditors and the debtors. As Shakespeare’s Merchant of Venice reminds us, the legal system has to ensure that the debtor does not walk away from his obligation. At the same time, the lender cannot be too taxing for the debtor. Hence, as anywhere else in life, the balance (that is, the balance of justice) should provide for the wellbeing of the financial system, which is based on these classical relationships, no matter how much modern they are. Fundamentally, the legal system should ensure that contract and property rights are sufficiently clear, protected and predictable. In more concrete terms, the parties should not only be aware of these rights, but also exercise them freely and fully during the binding of the agreement or in cases of litigations. For this reason, the independent role of the court, its perception, the efficiency in judgment and the enforcement of the court decision are essential features, whose deformation has a direct impact on the functioning of the financial system. To better illustrate this idea, worth to note is that the motionless of ownership titles, the delay in ownership-related litigations and the non-execution of the collateral have a direct impact on the share that mortgage loans in particular and the loans in general have compared to other countries. This yet unsolved legal issue has yielded the discouragement of the economy support with banking loans. As long as the banking system manages the people’s deposits, it must be safe and avoid any possible financial losses that may arise from the legally binding loan relationship. Undoubtedly, it is not easy. The risk elements that associate this relationship are numerous and different in nature. Namely, there is a risk which relates to the type of currency, a second one to the performance of collateral prices, a third one may relate to the operational risk, and so on. The materialization of a single or a number of risks would put the bank into a difficult position. However, the Bank of Albania, in its capacity as the supervisory authority, compels the banking system to create reserve funds for any jeopardized loans. The only direction the Bank of Albania and the banking system feel powerless relates to the non-execution of the collateral and the de facto impossibility to provide the disposition of the collateral, in particular when the collateral is in the form of real estate. Thus, the banking and financial market need to be built and developed alongside the legal system. Unless there is certainty in exercising and protecting contracting rights, there could be no domestic or cross-border financial transactions. The perception and exercise of these rights, the independent judgement in cases of litigations, the reasonable time in solving the conflict, the efficiency and velocity in enforcing the court decision are the greatest warranties to offer not only to the domestic and foreign investors, but first and foremost to the MARKET itself. The Bank of Albania has intensified its efforts in this context, in particular in terms of defending before the Constitutional Court the quality of banking and financial contracts as executive titles. The same arguments support the legal changes made to the execution of mortgages and collaterals. These changes are presently being discussed in the Parliament and the market is looking forward to their finalisation. Based on this philosophy of market functioning and regulation and believing that the market and the right are dynamic, the Bank of Albania has supplied the banking market and the banking right with a new instrument – the Repurchase Agreement. By means of the Law on Repurchase Agreement and the master contract, the Bank of Albania has initiated a process which needs to be further developed by the specialists of the area. Personally and institutionally, we are expecting these efforts to be concluded with the execution of the first transactions of this kind. It is for this purpose that I invite all the participants in this workshop, which for the first time has brought together judges, prosecutors and lawyers from the banking market, to be active and complement one another. With the conviction that our initiative will be followed by other similar activities in the future, I wish you good proceedings. Thank you for your attention.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Opening of "Klik Ekspo Group" Fair, Tirana, 25 November 2008.
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Ardian Fullani: Albania – optimistic, flexible and adaptive to challenges Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Opening of “Klik Ekspo Group” Fair, Tirana, 25 November 2008. * * * Honourable Prime Minister, Honourable Ministers, Honourable Ambassadors, Dear Mr. Uldedaj! Dear entrepreneurs! Dear ladies and gentlemen! I feel privileged to be here with you tonight and at the same time, be a friend to the Albanian entrepreneurship. The times we are living through require the special attention of economic and financial forums, in particular when the latter bring together the governmental bodies, the banking system and the private entrepreneurship. The global table of discussions on macro-finance and future policies is the present focus; hence, I consider this forum as a follow-up of this prevailing philosophy of the time we are living in. Set in a comprehensive context, the economic developments in the recent months have been characterized by the vague situation the monetary and financial markets and institutions have been going through – which in the last couple of weeks has been followed by other developments. The most recent data show that the economies of developed countries – the USA, Euro area, England and Japan – have recorded decline in economic growth. However, most emerging economies have shown higher immunity to the consequences of the global crisis. Economic activity has been buttressed by domestic factors, which is the main reason to justify the immunity in addition to the incomplete financial integration with the developed countries. Although Albania has been “a net importer” of global developments, its economy has shown high level of resistance and absorption. In the third quarter the present year, the Albanian economy continued to maintain its previous course. The available data on the first nine-month period show that the economic growth has been in line with the projections. Macroeconomic balances remain stable and the banking system continues to be sound. Economic growth at home has maintained its upward tendency. Services and trade sector in particular have provided the main contribution to the economic growth. CPI inflation continued to fall in October to 2.7 percent. Developments in core inflation indicate that the macroeconomic balances at home and the monetary conditions have been adequate to ensure an inflation rate close to the Bank of Albania target. The achieved stability has been also prompted by the inflationary expectations of economic agents which have been anchored at around 3 percent. These developments attest to the fact that the central bank’s measures have been effective in terms of containing the inflationary pressures. The fiscal policy pursued during the entire year 2008 has observed the targets set in the Medium-term Budget Programme for 2008-2010; consequently, it has not yielded any repressions in economy and performance of prices. The Albanian banking system continues to operate under optimal parameters, in line with the standards of prudent banking supervision. The latest data indicate that the domino effect induced by the developments in the international financial market has been handled with satisfactorily. In addition, the Bank of Albania has supplied and continues to supply the interbank market with the required amount of liquidity. As I have mentioned in my previous statements: There’s no such thing as a free lunch! Meaning that emphasis should be put on the far-sighted perspective characterizing the Bank of Albania in the recent years. I do not refer here only to price stability, but also to the greatest challenge: banking system stability. The Supervisory Council of the Bank of Albania has constantly amended the regulatory basis creating incentives for more qualitative lending, while other decisions have aimed at providing more banking system transparency to the public, more efficient internal control and better management and governing structures. Regardless of what has been stated above, the future is of prime importance. For many reasons that I have also mentioned in my previous statements, end-year 2008 and almost the entire year 2009 will in a global context be hard, full of challenges and we will be walking through unknown paths. Overcoming this economic crisis requires time. Its solution will materialize through the resetting of a number of internal and external economic balances, the re-arrangement of many supervisory institutions and the re-design of the regulatory framework on many financial market segments. Put in this general setting, the idea that our small economy would resist this global economic tsunami with no consequences at all sounds as unrealistic. However, this issue is even more intricate. Detecting the risks we may plausibly be faced with is not enough. I think our top priority is the design and implementation of preventive and remedial measures, which would reduce the materialization level of these risks. When I say “our”, I mean the state with its entirety of institutions and mechanisms. Our main challenge – involving the central bank, the banking system, the government, other decision-making and executive authorities, business community and the public in general – is to maintain the aggregate demand, the production potentials and the financial resources in economy at unchanged levels. These are our top national priorities. Put differently: keep the real economy going; make sure economic growth does not shrink; ensure your business maintains the same rates and that employment grows instead of reducing. This, dear participants, is may otherwise be referred to as ensuring the stability of the country’s economic growth. On behalf of the institution I represent, I would like to assure you that the Bank of Albania – being one of the main economic and financial decision-making authorities at home – remains entirely committed in this context. The times we are going through require all the development strategies, economic policies, measures and rules to undergo a strict cost/benefit analysis. In this context, although the crisis is not outlined yet, we have already drawn the first lessons from it. Public and private authorities need to consider these lectures as future opportunities. Mistakes can teach us how to better serve the future. We should have an optimistic view of the future and at the same time make sure our stance is realistic and consistent. Time is ripe for Albania to start producing more goods and services than before. Despite the admirable progress in this context, the gap is still wide. Agriculture and industry remain two important branches of the economy operating far from their potential. Additionally, other sectors that have revitalized during the transition years require more orientation and tuning. These measures will enable better diversification of the Albanian economy, augmenting its stability with the passing of time. Other challenges I believe relate to the country’s external position, implying the reduction of current account deficit and the provision of alternative resources of foreign currency inflows. Therefore, I think that the role of the state needs to be more pronounced, not only in terms of completing the legal and regulatory basis but also of concluding a number of important structural reforms, in particular those related to the land, ownership titles, pensions, to the support of the small and medium-size business, to the further improvement of business environment and the ongoing upgrade of national infrastructure. The further strengthening of safety nets, in the context of a stable fiscal and financial position, is an obligation whose accomplishment would reduce both the real and perceived risk of the Albanian economy, hence creating incentives for the growth of domestic and foreign investments. Time is ripe for the state budget to involve the participation of private entrepreneurs in strategic investment projects through joint financing programmes. The banking system plays a vital role. Banking loan has played a key role in Albania’s economic development. It has been a source of profit in your business and it has to remain so in the future as well. In my recent communications with my counterparts and in the various meetings with senior officials of foreign banks’ main headquarters I have truthfully presented our country’s economic situation and I have required from them to keep their interest in the Albanian economy unchanged. I avail myself of this opportunity to address to the Albanian entrepreneurship. You have to keep being active and focused on formulating and implementing your future business plans. This would be the only way for you to remain well-capitalized, lucrative and credible to the banking system. In the current economic conditions, private entrepreneurship should be a supporter and promoter in the formulation of domestic strategies at home, in the region and broader, and in their implementation process. All conditions are in place for the Albanian business to go beyond the official regional borders, hence, becoming a factor in ensuring a stable regional activity. This also means a real integration into the targeted standards. Concluding, I would like to highlight that the small countries like Albania, should be optimistic, flexible and adaptive to challenges. Only in this way, they may find themselves able to sail into the international waters. Thank you.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the reception for the bankers & representatives of banks operating in Albania, organized by the Albanian Assoc. of Banks, on the occasion of the closing year 2008, Tirana, 18 December 2008.
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Ardian Fullani: Achievements and challenges of the Albanian banking system Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the reception for the bankers and representatives of banks operating in Albania, organized by the Albanian Association of Banks, on the occasion of the closing year 2008, Tirana, 18 December 2008. * * * Dear Chairman of the Albanian Association of Banks, Dear managers of the Albanian banking system, Thanking you for this invitation, I avail myself of this opportunity to provide some considerations of the path we have been through during 2008 and the challenges ahead us. What we have been through during this fall sounds unreal and somewhat unbelievable. Many taboos have overturned and the list of news enlarges day after day, including also schemes of financial mega-fraud. I commenced my speech this way so as not to overlook this unusual global event, to provide an outline of the general economic and financial setting surrounding our environment and above all, to underline an immense truth: that the Albanian banking system has shown admirable resilience and that the immunity shown has not only been a matter of luck. The year 2008 has been an intensive year of ceaseless changes, at the centre of which were the safeguard and consolidation of macroeconomic stability at home and the banking system’s financial stability. Taking a quick glance at the Albanian economy over the present years, I can state that it has maintained the projected growth for year 2008, under stable consumer prices and domestic currency exchange rate. Monetary policy has been throughout the year 2008 cautious and has kept the key policy rate unchanged at 6.25 percent. In addition, fiscal policy has been characterized by the collection of budget revenues beyond the Government’s projections and by the concentration of expenditures in mainly infrastructure-related projects. As in the recent years, the banking system has sustained the economic activity and consumer demand with loans, hence providing numerous incentives for a stable economic growth. The positive performance of the economy and of certain economic sectors – in particular trade and construction – has been propelled by the positive rates of domestic demand at home. Lending has maintained its high annual growth rates of 42 percent. As a share of GDP and the system’s assets, loans have recorded further growth to 36 percent and 41 percent, respectively. Businesses were the main banking loans’ users, accounting for 66 percent of loan portfolio growth. This positive performance was associated with a favourable macroeconomic and financial setting. During the second half of the year, the CPI has recorded an annual drop to 2.6 percent in November. In addition, other inflation measures, such as core inflation, traded and non-traded inflation, attest to the downward intensity of inflationary pressures at home. The inflationary expectations of the economic agents have also provided their contribution to this stability. According to our surveys they are anchored to around 3 per cent. These developments attest to the fact that monetary policy and the strengthening of supervisory measures by the Bank of Albania have proved to be effective in containing the inflationary pressures. Taking into account the central bank’s role and objective, I would like to underline that our commitment and success in preserving price stability has been mirrored in the anchoring of the inflationary expectations close to our 3 percent target. The banking system’s performance for the present year proves to be positive. In the early year 2008, credit registry started to operate. Its establishment represents a key innovation of the financial infrastructure in Albania. We all attest to the fact that by putting the credit registry into operation, we have contributed to: • Having basic understanding of credibility of the borrower and avoiding careless borrowers; • Reducing a bank's cost in collecting information on borrowers; • Promoting increased borrower discipline; • Identifying all borrower liabilities and providing such information to lenders; and • Improving the banking industry database, through developing the borrower loan history. According to the latest data, the banking system appears to be lucrative. Return on assets for the entire year 2008 is expected to be 1.17 percent, while return on equity 14.7 percent. During the present year, banks have expanded their investments while augmenting their capital on the other hand. Capital adequacy accounts for 17.5 percent of total assets and off-balance sheet items classified by risk. The liquidity situation of the banking system for year 2008 is presented as good. Despite the downward trend shown in the recent years (owing to the high credit growth rate), liquid assets to total assets in the system account for about 46 percent, which is considered as being satisfactory. The main resource of funds in the system – customer deposits – have been ever-increasingly consolidating their upward trend, mirroring public confidence in the Albanian banking system. As of end October, total deposits in the system amounted to 665.9 billion leks, up by 5.7 percent compared to end-year 2007. Following the open forum this spring, the Supervisory Council paved the way to approving a package of new regulations, which aim at harmonizing the regulatory and supervisory framework with the best international practices. In accordance with the new banking law, new criteria have been established for measuring, supervising and reporting of bank’s large exposures to a person/customer or a group of related persons/customers or having a special relationship with the bank, aiming at managing the risk stemming from the concentrated exposure to them. The strengthening of internal control in banks and branches of foreign banks has been another focus of the Bank of Albania during the present year. The new regulation considers internal control as part of bank’s accountable governance. It provides the platform for establishing an efficient internal control system as key factor in the banks and branches of foreign banks’ governance and management. Special attention has been also paid to the transparency related to banking and financial products and services. The regulation harmonizes the requirements on the way and mode on providing information to customers on banking products and services, on the publication of effective interest rates on deposits and loans, on the method of calculating the effective interest rate on loans, on the constituent elements to be specified in loan and deposit contract, on the marketing of products and services, on keeping the customer’s data confidentiality, on dealing with the customer’s complaints and on the establishment of specific structures to deal with these complaints. Part of this new package has also been the standardization of the required information that banks and branches of foreign banks have to make public, related to the bank’s main activity, its organization and management, its financial performance, its financial situation, the risk management and the accounting policies. In light of the international situation and in order to better diversify the risk stemming from the concentration in banks’ investments in the international financial markets, the Supervisory Council of the Bank of Albania amended the regulation on the management of risk from banks’ large exposures, aiming at reducing large exposures’ threshold. Enhancing the efficiency of the financial market and of the money market in particular, has also been at the central bank’s focus. During the year 2008 was approved the regulation on the master repurchase agreement, hence providing a new instrument which reduces risk in borrowing transactions between banks. After this short outline of our performance, of the Bank of Albania and of the banking system, it comes natural to claim that we have acted rightly by taking a number of preventive measures that have helped us absorb the negative effects of the latest events. Dear bankers, Year 2008 is leaving and a new year is coming now. Like the majority of various world economies, even our country is in front of many uncertainties. I would not like to overlook the domestic factors, but however, what is currently considered as the hottest issue, has to do with the overall global environment. For a long time from now, various agencies, and national and international institutions have forecasted a year of world contracted overall production. It would be utopian, and to a certain extent a lack of prudence, if we think that our economy would be slightly or not at all affected by global crisis. Though Albania is a small economy, it is open, with numerous relations for exchanging goods and financial funds. I have emphasized in my public presentations that all the actors should be prepared for harder days. In light of this I would like to notify you of a number of statements, findings or actions that we (I mean the Bank of Albania and the banking system) are going to carry out in the coming months. 1. Based on the latest analysis of the country’s economic and financial developments and on inflation forecasts for two forthcoming years, I would like to emphasise that there is a good anchoring of inflationary expectations around the Bank of Albania’s 3 percent target. Latest developments and information suggest that risks balance to future inflation is shifted to downward trend, creating space for manoeuvring in the near future. 2. Based on recent empirical studies of the Bank of Albania, it comes out that the relation of credit to economy with the country’s economic growth is positive and relatively strong. So, the credit growth leads to maintaining current paces of the country’s economic activity. In the recent years credit to economy has eclipsed the contribution of the public sector to generating and using financial funds, also based on a long process of the country’s fiscal consolidation. This process of more effective usage of funds impacts on increasing the efficiency and the economic growth. A contraction of credit to economy carries over the risk of reverse action, of eclipsing the credit to economy contribution from the public sector’s spending. In this sense, being aware of all the difficulties ahead, I would insist once more on my request to you to continue to keep credit to economy paces. 3. Further to my previous requests, I would once again require from you to be more active in the money market, in the interbank market and in securities market. The Bank of Albania has repeated time and again that we will satisfy all the financial market liquidity needs, but on the other hand we require from you to be more independent from your headquarters, in the policies you apply with relation to domestic financial market, in terms of investments portfolio. You are licensed and operating in Albania, therefore, you have under your management the Albanian citizens’ savings and the essential task of every banking system is the financial intermediation in the country they are operating. The Bank of Albania will insist for the fastest implementation of repurchase agreements in the transactions you carry out in the interbank market. The Bank of Albania makes use of a systematic approach in its dealing with and operating in the interbank market, which necessarily requires an efficient liquidity re-allocation among banks. Such a thing is carried out by applying repurchase agreement, thus preventing credit risk. In the meantime, the Bank of Albania is completing the regulation on DVP (delivery versus payment), which will simultaneously bring about even the settlement risk prevention. This constitutes another step in terms of financial infrastructure improvement for an efficient banking market. • • 4. The Bank of Albania is also looking into some other measures to better precede the optimal functioning of the banking system. Under more concrete terms, the Bank of Albania will require that the dividends materialised over 2008 be destined to increase the capital of banks you manage. I have constantly pointed out that our system is well-capitalised, but however under current conditions I regard its further increase as a prudential measure. 5. One of the strategic goals for the central bank’s objectives is the strengthening of its institutional independence and credibility, being a central and accountable institution for the mission entitled by law. One of the factors impacting directly and indirectly on the strengthening of this independence is also the fulfilment and improvement of the Bank of Albania’s legal framework in line with contemporary standards. To this end, we are working under three main directions: Drafting the Law “On Payment System in the Republic of Albania” is included in short-term priorities that the Republic of Albania, through the Bank of Albania, has undertaken in view of the obligations deriving from the SAA, the European Partnership, as well as in short-term and medium-term priorities required under the National Plan for the Implementation of the SAA. This draft law aims at: - Strengthening the system’s institutional framework; - Enhancing legal framework transparency through tasks clarification of participants in the system; - Stipulating a complete regime for licensing and supervising the whole relevant systems. Alterations in the legal framework of the Bank of Albania will be also associated with effective regulatory framework improvement, having banking supervision regulations on focus. 6. The Bank of Albania, starting from this year-end, will launch into circulation the new banknote with the face value of 2000 leks, while the whole existing series has been re-printed. I would like to highlight that the whole series of the re-printed banknotes and of the denomination 2000 leks is equipped with most modern security elements. In the meantime I avail myself of the opportunity to clarify to the public that the new denomination is an adjustment of the current structure, filling in a large gap between both existing denominations of a higher nominal value. 2009 will be a difficult year, and therefore everyone should take appropriate measures to correctly realise and interpret his role with professionalism. To maintain the dynamics of the country’s steady development toward full European convergence, the banking system must further perfect its infrastructure. I would regard the improvement of customer service and the increase of public education and communication as sound foundations of this infrastructure. All the above-stated, along with technology investments, would enable a higher transparency to clients and more competitive service costs. This would lead to improved image to the public, enhancing the public confidence in the banking system. Dear bankers, Allow me to conclude my speech by emphasising once again the great importance the moment imposes to us. Wherever we are, inside the country or abroad, we must regard the challenge of overcoming this crisis as a patriotic task, which requires commitment and a high moral, social and political awareness. Thanking you once again for the invitation, I avail myself of the opportunity to wish you happy year-end celebrations.
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Speech by Mr Fatos Ibrahimi, Deputy Governor of the Bank of Albania, at the meeting of launching the "Program on the Development of the Small and Medium-sized Enterprises", Tirana, 20 January 2009.
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Fatos Ibrahimi: Development of small and medium-sized enterprises in Albania Speech by Mr Fatos Ibrahimi, Deputy Governor of the Bank of Albania, at the meeting of launching the "Program on the Development of the Small and Medium-sized Enterprises", Tirana, 20 January 2009. * * * Your Excellency Mr. Ambassador, Honourable Mr. Ministers, Honourable participants, It is a special pleasure for me to attend this event and I avail myself of the opportunity to greet on behalf of the Bank of Albania this joint recent initiative, between the Ministry of Economy and the Italian Collaboration. The financial support of small and medium-sized enterprises has a particular importance for the development of this project and for the release of managing abilities of the economic units. The financing of small enterprises, for the small developing economies, is a worthy opportunity to increase both the employment and the economic activity based on the initiative, ideas and producing capabilities of small groups or of distinguished individuals, who owns the courage and knowledge to generate material goods and to increase the welfare of the society. The small and medium-sized enterprises in Albania, over the transition period, have been growing with quick steps, hence showing up as a distinguished characteristic of the whole Albanian transition, having survived to the domestic economic difficulties as the fall of pyramid schemes or other problems related to the reforms and the process of completing the institutional and legal framework. The contribution of small enterprises to the growth of service, construction, trade and agriculture sectors, where micro-enterprises compose the largest part of this group, has been obviously significant for the short-term and stable revival of the Albanian economy. These enterprises have provided a substantial input to the decrease of unemployment and to the rise of productivity in the aforementioned economic activities, with a considerable impact for the quick growth of the Albanian economy. The domestic economy is noticeably improved over the last decade and the progress made over an expanded period of these last years reflects a positive and relatively stable macroeconomic environment. The growth rhythms of real GDP, are assessed as plausible, and in general higher compared to the other countries of the region. The consumer price level as well, has resulted in compliance with the target of the central bank for the price stability. “The calmness” of the external factors that struck the supply reaction and the domestic macroeconomic stability, provided the inflation rate be normalised within the targeted limits. The developments occurring in the exchange rate already are perceived as stable compared to its high fluctuations characterising the ’90s. In the view of domestic currency against the main foreign currencies basket, LEK has appeared with appreciation tendencies on continual basis during an extensive period, thus acting as a softer against the imported inflation. Estimations carried out at the Bank of Albania reveal that the relative high growth of real GDP during the period 2003-2007 is endowed to the rise of work productivity as well as to the increase of investments in the economy. Simultaneously, banking system is expanded with detectable and confident steps. The situation appears also pleasurable regarding banking credit to the private sector. Business credit has played the main contribution to the enlargement of banking credit portfolio, by 66%. The augmentation of this portfolio is considered to have impacted positively the growth of economic activity for the main sectors. In September 2008, credit portfolio was dominated from the lending to trade sector (around 25%), to construction (around 15%) and to industry (over than 15%). The credit to small and medium-sized enterprises as at November 2008 resulted at 60% higher than the year end 2006, based on the calculations of the Bank of Albania, hence being a ratio over the half of the bank total credit granted to the business. Thus, crediting activity of banking system has supported the growth in the main sectors of economy and has assisted to the further deepening of the financial intermediation. This support is identified in the larger geographic expansion of them as well as in the services gamma and the improvement of products supplied by the financial system. The today initiative is a significant event, to sustain the growth of financing for this vital part of the economy and it will help to soften the negative impacts of the world economy slowdown. I encourage the banking system and the other players of the market to undertake similar initiatives in order to not impede the financing of small projects, which owns the possibility to be transformed into profitable enterprises. At the same time to maintain a stable and long-term progress of the country, in line with its European aspirations, the banking system should go on the way toward the perfection of service versus the clients, the intensification of communication and public education. Bank of Albania believes that the sources of the stable growth for the mid-term and long-term period consist not only on the encouragement of the work productivity increase or of the investments in industry and construction, but also in other strategic sectors. For the Albanian economy as a developing economy, domestic investments and foreign direct investments in strategic sectors as tourism and infrastructure shall be a real foundation to the economic growth. The positive chain effects are expected to be reflected on the preservation of the steady growth rhythms. Hence, the overall macroeconomic stability will be seen as a precondition in promoting the further intensification of the domestic and foreign investments. At the closure, the continuation of reforms and of the indispensable structural improvements will bring about positive and long-term outcomes for the establishment of a more secure climate for the domestic and foreign business investments. Thanking you once again for the invitation, I wish you good proceedings of this important event for the development of the business in Albania.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Monetary Policy Statement for the second half of 2008, Tirana, 29 February 2009.
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Ardian Fullani: Recent economic and financial developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Monetary Policy Statement for the second half of 2008, Tirana, 29 February 2009. * * * World economy and the financial system in particular were severely hit in the second half of 2008. The crisis which struck the heart of the global financial system was progressively and relentlessly transmitted to the economic activity of advanced economies leading some of the latter into recession. The Albanian economy has been resilient amid this hitting wave. According to the available official data and judging upon a number of indirect indicators, the Bank of Albania notes that the economic activity throughout the year has by and large performed in line with the early 2008 projections both in terms of economic growth and preservation of macroeconomic balances. The Bank of Albania in particular has met its primary objective mandated by law, contributing to the maintenance of price stability. Average annual inflation rate marked 3.4 percent, which is close to the central bank’s objective. The recent global-scale developments attest to the further economic downturn. Despite the slackening of inflationary pressures as a result of the reduced demand and the slump in basic commodity prices, the tightening of lending standards and the fall in consumption and investment have led to uncertainties related to the duration and intensity of this troublesome situation. Against this backdrop, the facing of the economic activity contraction at a global level remains an open issue. The Euro area economy is already experiencing an economic slowdown. Euro area GDP contracted in the third quarter while the unemployment rate reached 7.8 percent in November 2008. The U.S. economy showed quite similar features. The further contraction of economic activity – owing to the deterioration of financial indicators in the U.S. corporate and household balance sheets, mirrored in lower consumption spending and reduced aggregate investment – drove the unemployment rate to reach 7.2 percent. Monetary and financial stimuli managed by central banks and the ministries of finance have helped to bolster confidence and relieve pressure on the financial institutions. Against this backdrop, the “resilience” shown by emerging countries is displaying the first signs of weakening. In contrast to the first half of 2008, the latest data attest to the moderation of economic growth rates in the majority of these countries. The channels through which the slowdown in advanced economies has affected the emerging countries differ depending on their development characteristics. China and India have been severely hit by the slowdown in exports; Russia had hard times owing to the slump in raw material prices in the global market, while East European countries have been impacted by the tightening of funding conditions on a global level. In contrast to many emerging countries, the Albanian economy has been sustained by domestic demand, while – although upward – foreign demand in the form of Albanian exports has provided a proportionally lower impact over the economic growth. Economic activity at home has been almost entirely sustained by domestic financial resources, while foreign financing in the form of credit lines or portfolio investment has been less considerable. Operating within all the parameters of financial soundness, the Albanian banking system has been dynamic and effective in channelling the savings towards the funding of corporate production or household consumption. This process has been also facilitated by the macroeconomic stability which enabled the fall of risk premiums in economy and helped to gradually extend the investment horizon. These features led the economic activity at home to record adequate growth in the first three quarters of 2008, a period which is covered by statistical data. With regard to the last quarter, indirect data on economic activity – mainly financial ones – suggest a slight slowdown of economic activity, however, remaining within the projections for 2008. Manufacturing, where construction continues to share the main weight, provided the main contribution to the increase of turnover indicator in terms of volume. Investment in major road infrastructure projects and the recovery of construction permits from the prolonged constraints triggered high growth rates in construction activity during this period. In addition, the sector of services continues to provide the primary contribution to economic growth at home. The positive developments in domestic production have been also evidenced by the increase of economic tendency indicator, derived from the business and consumer opinions, and by the increased number in employed persons. In annual terms, unemployment rate fell by 1.5 percent to 12.62 percent, being mainly triggered by the increase in the average number of employed persons in the private agricultural sector. Notwithstanding the inflationary pressures of early 2008 – mainly triggered by supply-side shocks – CPI annual inflation was brought back within the Bank of Albania’s target during the second half of 2008. In the second half of the same year annual inflation rates stood close to the central bank’s target – 3.0 and 2.5 percent, respectively, in both quarters. The performance of the inflation rate in the second half mirrored the global effect of the fall in basic commodity prices (mainly foodstuff and oil prices) as well as a more favourable price conjuncture of goods and services in the domestic market as a result of their demand coverage with an ever-growing supply. The return of inflation within the targeted band was not only conditioned by the relaxation of supply-side shocks but also by the adequate monetary conditions which provided room for the balancing of demand and supply-side factors. Monetary policy stance was neutral throughout 2008 and the key interest rate was kept unchanged at 6.25 percent. In tandem with the strengthening of several banking supervision measures in terms of credit risk management, the monetary policy has led to a more balanced credit growth and has transmitted the appropriate stimuli for consumption and savings. The adequate monetary policy and the keeping of inflation under check by the Bank of Albania have been also reflected in the anchoring of economic agents’ inflationary expectations close to the 3 percent target of the central bank. In absence of unexpected shocks on financial stability, inflationary expectations or other supply-side factors, the balance of risks on inflation over the period to follow seems to be shifting downward. In this context, worth noting is the contribution of fiscal policy which has ensured the preservation of macroeconomic balances by keeping the budget deficit at adequate levels. The carrying out of public spending in line with the budget plan has facilitated the control of domestic demand pressures and has bolstered confidence in the country’s macroeconomic stability. Budget revenues collected as of end November have met the 11-month plan of the Ministry of Finance by about 96.4 percent, while expenditures met 92 percent of the plan. Following the developments in the first half of 2008, budget performance for the period July to November 2008 was characterized by a more active carrying out of expenditure. Budget deficit created after the first half of 2008 was mainly financed through foreign resources. On the other side, the external sector of the economy continued to be characterized by the deepening of current account deficit, which in annual terms, increased by 48 percent in the third quarter of 2008 to about 252 million euros. As a share of GDP it accounted for 13.7 percent which is about 5 percentage points higher than the same period the previous year. In addition to the trade deficit widening, the deepening of current deficit was also triggered by the narrowing of the positive balance of revenues and current transfers’ account. Its stability is imperative to ensure Albania’s financial stability and a stable and long-term economic growth. Therefore, the dynamics in the balance of payments developments remains an area which needs constant monitoring by the Bank of Albania. Monetary indicators had a stable performance in the second half of 2008, although the end of the period showed signs of their downward growth rates. Average annual growth rate of money supply was about 13 percent. A small part of deposits were withdrawn from the banking system in the last months of 2008 as a result of depositors’ concerns following the vague situation in the global financial system. In relative terms, these withdrawals made up a small share in commercial banks’ balance sheets and did not affect the banking system’s soundness indicators or impair its financial intermediation role. Credit to the private sector continued to provide the main contribution to money growth. In annual terms, credit growth fell during the second half of 2008 relative to the first half the same year. Intermediation indicators increased further; the ratio of loan portfolio to deposits and total assets was 63 and 43 percent, respectively, as of end November. Following September, the structure of loan portfolio by currency displayed a higher annual growth rate of lek denominated loans. The performance of loan portfolio by customer attests to higher annual growth rates of business loans relative to household loans. In contrast to the first half of 2008, loan portfolio to construction and trade shifted downward while loans to industry increased slightly in the second half of the year. The performance of money markets during the second half of 2008 was conditioned by the developments in monetary indicators and the real economy. As experienced by many countries, the increased vulnerability of banks to liquidity has brought about the reduction in the interbank trading volume and upward interest rates on deposits. The coverage ratio of Government demand for money has reduced and some risk premiums have increased in the last two months. This performance brought about the increase in Government securities’ interest rates and in a few cases in the loan interest rates. In response to these developments, the Bank of Albania intervened in the money market by injecting liquidity at different maturity rates. In addition, the central bank changed in November the form of repo auctions to auctions with undetermined amounts in order to better satisfy the banks’ needs. *** Economic and financial developments have by and large been positive during 2008. Economic growth performed in line with the early year projections, while the main indicators of macroeconomic and financial stability remain solid. The negative impact of developments in global economy was marginal. However, as in other emerging countries, the Albanian economy cannot remain immune for long to the direct or indirect impact of the global economic crisis. The Bank of Albania public statements have constantly noted that the global crisis impact over the Albanian economy will largely depend on its intensity and duration. The persistence and deepening of the global economy crisis signal that the Albanian economy will go through a harder economic environment in 2009, which may call for the solution of many issues. The slowing remittances and the tightening of financing conditions are the channels exposing the Albanian economy the most to shocks in the global economic environment. The expected impact of these factors would materialize in a slower economic growth in 2009. We note that the economic and financial programs of all economic agents need to reflect and consider this prospect. A slower economic growth does not necessarily translate into a crisis in Albania, but rather as a temporary development propelled by external factors. Hence, promoting policies need to be formulated based on this underlying premise. They should at no case be designed to the detriment of long-term macroeconomic stability, which represents one the most treasured assets the Albanian economy has achieved during the transition years. The preservation of financial stability remains crucial for the long-term economic development and under constant consideration in the Bank of Albania decision-making process. In this context, confidence in the banking system and in its balance sheets would be the most rational behaviour of any individual, business or other agent in the Albanian economy. Global experience shows that the mutual interaction between the real economy and the banking system in terms of savings, use of payment infrastructure and expertise in the area of financial counselling and support with funds is a key feature of economies that have managed to progress and leave behind the transition countries’ level. In conclusion, I would like to assure the public that the Bank of Albania remains committed to creating the proper premises which boost economic activity at home, without infringing the objective of price stability. In addition it will keep working on firming up financial stability in the country. The Bank of Albania decisions will be a direct contribution to smoothing out the negative effects deriving from the international crisis and they will help to ensure the further maintenance of economic and financial balances at home.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the meeting with representatives of exporting companies and Albanian Association of Banks, Tirana, 23 February 2009.
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Ardian Fullani: Albania’s economy against the background of global developments Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the meeting with representatives of exporting companies and Albanian Association of Banks, Tirana, 23 February 2009. * * * Dear participants, It is a my great pleasure to welcome at the Bank of Albania premises, so many honourable guests, whose contribution to ensuring stable growth rates of the country’s economic activity has been significant in the recent years. Your role has been vital in involving Albania to the globalization process and in attracting foreign investments. Export industry is of great importance to the Albanian economy. During the transition period, our economy has recorded a negative trade balance, which, in turn, has caused a constant current deficit. Long-run macroeconomic stability requires that in the course of time, these balances are paid from future trade surpluses. You realise that it has to do with a challenge you have to cope with at present and in the near and distant future. Naturally, I can not avoid mentioning that a great role also belongs to decision-making institutions, which should create, by means of economic development policies, relevant incentives, the background and infrastructure on which your business will be based and promoted. Macroeconomic developments in recent years and overall trends reflected in the standard of living indicators, show that the Albanian economy has succeeded in completing the transition stage and entering the group of the developing countries. Nevertheless, currently the Albanian economy is being influenced by second round effects that have affected the advanced economies of the world. In general, first effects of the financial crisis outburst in American, Asian and European markets were: tightening of lending terms, reduced liquidity and decreased value of the national wealth of those economies. These phenomena triggered less consumption and investments, and eventually led to overall economic slowdown of all those regions. Such developments have also affected the developing economies, since globalization process has turned them into factories of large economies. In consequence, this phenomenon has triggered the spread of crisis effects even in the developing economies. Naturally, reduced demand has caused overall decreased investments of developed economies in traditional exporting markets. Currently, capital flows that have financed high current deficits, particularly into transition economies of the Central and Eastern Europe, are interrupted. Furthermore, financial and manufacturing companies, as well as households from advanced economies, being faced with financial difficulties, are exercising pressures to withdraw their funds from the developing economies. All these developments have shaken the macroeconomic equilibrium of the developing economies, which are experiencing current deficit deepening and strong pressures on their currencies. This contagion mechanism, through which the crisis ignited in most advanced economies of the world is spreading worldwide, has made Albanian economy feel the effects. Even though the financial system was not influenced by the world financial crisis, second-round effects are being reflected and will be reflected even in the future. The Bank of Albania has assessed that, driven also by a large global market “drought”, 2008 has recorded reduced foreign currency inflows and increased current deficit. During two last months a moderate foreign exchange rate depreciation was noted. However, we should take into account that Albania is in a more favourable position than other economies of the Central and Eastern Europe. Our advantage stands on the fact that unlike other countries of the region, we have not financed our current and trade deficits with shortterm foreign capital inflows, otherwise referred to as “hot money”. The Bank of Albania has prohibited lending to the economy with the so-called “exotic currency”, which once upon a time represented funds of a very low cost, ready to penetrate even to our economy. Let me remind you that many developing economies have fallen into the trap of those funds, suffering now gravely from their flight. Furthermore, we have adopted a flexible exchange rate, unlike fixed or managed exchange rates. The Bank of Albania has assessed that current developments, particularly those of our main partners, will bring about tendencies which are generally different from those with which we have been working over last ten years. Actually, the euro area is in crisis. Economic growth is negative; the euro is loosing terrain versus the dollar; unemployment is increasing; and prices are going down. Important industries, such as the financial industry or that of machineries are undergoing the worst situation over 50 recent years and governments of these countries are obliged to approve aid packages, to guarantee their survival. According to the most optimistic assessment, this situation will not be improved, at least until the end of this year. Therefore, I emphasise that exporters should adopt new philosophies. They should be innovators, increase products and discover new markets, beyond the traditional ones, which have currently been hit from the economic and financial crisis. Global developments impose adoption of new approaches. The country’s economic and financial development stage and passing into the group of the developing countries have created conditions for businesses in general and export industries in particular to adopt new standards in business management. Businesses should understand that the optimal regime of their activity requires new elements. Current developments of the world economy make necessary the increase of prudence for managing the financial asset portfolio, overall risk and exchange rate risk in particular, as well as for identifying alternative financial methods and instruments. Businesses should invest in increasing analysing and forecasting capacities. They should build their development scenarios, including even the envisage of their possible financial losses from non-operation. They should also employ capable human resources, specialised, educated, that is professional ones, in order to ensure an efficient activity. To this end, I invite you to cooperate more with the banking system, to stand by banks, but also by the Bank of Albania and be open with them. Make use of this communication for constructing preferential cooperation. This path will create to you the opportunity to find and promote appropriate financing instruments and possibilities to overcome difficulties of the moment and guarantee the future of this important branch of business. Foreign currency income growth from all possible sources is translated into increase of macroeconomic stability in general and of financial stability in particular for the Albanian economy. At present, the geographic, demographic, economic and social characteristics of the Albanian economy present advantages, which if wisely utilized, may be materialised into economic benefits. Therefore, export sector constitutes an important source of profit and of foreign currency flows for financial intermediation in foreign currency. From this viewpoint, the support of exporters by the financial sector, not only with products and financial resources but also with financial consultancy, is an activity of mutual benefit. For this reason, I deem that the role of the banking system may be one of the main promoters to absorb some of advantages generated by the current international situation. Availing myself of the presence of banking system participants, I would like to address an institutional appeal to them: Assess more prudentially the role and potentials of this industry, stand by it with advice and financial consultancy, review your policies on commissions applied to it and in this process, give priority to a larger funding for it. Recent crisis indicated that we all sail in the same waters and we may resist the waves, only if we confront these challenges together. Export is a generator of foreign currency flows needed so much for the currency stability, which is related to all other balances, financial system’s stability also included. Under these conditions, we should be aware that a joint action, of national importance, deeply patriotic for the values and future of the country is needed. Make the market more lively, more competitive and more innovative. Now the financial infrastructure is complete and it is up to you to use it more efficiently. It is the time to try to seek other balances in terms of foreign currency flows into the economy. Remittances have been important for a long time. They were the largest foreign currency serum in the economy. However, we should be aware that other indicators, such as exports and foreign direct investments will be prior items in the total foreign currency flows in the future. This should be realised by everyone and based on this ground, let us work together for the future. Dear participants, International initiatives are in the process. The Berlin meeting was extremely important in this regard. There was broadly discussed and converged into the idea that there is room for more coordinated actions, and protectionism is not the answer to the crisis. The London meeting will make new steps in this regard. Promoting investments for a cleverer future, setting new models for a new world, more structured and with renovated industry, will be in its focus. The crisis will have its own winners. Winners will be those that will develop new policies, products, services and markets of a non-cyclic nature.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the meeting with actors from foreign exchange bureaus, Tirana, 6 February 2009.
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Ardian Fullani: Developments in the Albanian financial system Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the meeting with actors from foreign exchange bureaus, Tirana, 6 February 2009. * * * Honourable Managers of Foreign Exchange Bureaus, Honourable Cambists, The country’s vigorous economic and financial development has promoted the development of the financial system. We have all witnessed its constant growth in a number of institutions, products and quality of services, as well as its geographic expansion. Financial intermediation has been increasing, enabling ever more effective transfer of unused funds for financing the economy needs. From this viewpoint, the segment you represent has also played its important role. For many years on end, we have tried to transfer the foreign exchange business from informal to formal channels. This process has had its own ups and downs. However, I feel well to state that recently very positive developments have taken place. Since 2000, the number of entities carrying out foreign exchange business is ten-folded. The Bank of Albania has granted 227 licences to foreign exchange bureaus, with a comprehensive territorial extension. During the period of June 2007 – December 2008, 136 foreign exchange bureaus applied for and obtained a licence. Allow me to remind you of the moment when the Bank of Albania adopted a set of more liberal rules on the conduct of foreign exchange business, particularly in terms of minimum required capital. Today’s meeting is the first between the Bank of Albania and you, but it is a follow-up of meetings we have held with market stakeholders, with commercial banks’ representatives and other groups of interest, who are interested in and can impact on the accomplishment of these objectives. The Bank of Albania has constantly assessed the foreign exchange market as the most developed market in the country, which is a reflection not only of the force of free market initiative, but also of the existence of a more competitive environment in it. We appreciate that foreign exchange bureaus have played and are playing an irreplaceable role in its development and performance. Notwithstanding the increased international market share and the ever larger role the commercial banks are playing in generating liquidity and in setting the price in this market, the Bank of Albania constantly regards your role as necessary for further enhancement of efficiency in foreign exchange market operation. Leaving out of focus, just for the moment, the structural factors of the Albanian economy, which make necessary the existence of foreign exchange market share even in the form of cash, the Bank of Albania regards this role in view of your positioning as important mediators between cash operations and operations carried out through the banking system. In this aspect, I could not help mentioning also the obligation you have in terms of more rigorous implementation of money laundering prevention law. As you may already know, presently Albania applies the flexible exchange rate regime, which means that market forces are the ones that determine its level. Your behaviour has constantly helped reflecting in this price the demand and supply for this commodity, preventing the risk of price mismatch to overall market conditions and to the macroeconomic climate of the country. In this framework, I would also like to highlight your positive behaviour, related to positioning future flows of the supply and demand for foreign currency, particularly during critical periods of the market, which relate to the seasonal exchange rate behaviour, as a rational behaviour that helps reducing exchange rate volatility. Given the above, the Bank of Albania is highly interested in getting informed with your opinions about market operation, positive or negative changes having occurred recently, relationships between foreign exchange bureaus and commercial banks within the framework of competition and mutual benefit. The Bank of Albania expresses its willingness to provide trainings on various products that may be traded by the domestic foreign exchange market. As the first step in this regard, we plan to deal with forward operations, which will better serve the smoothing of seasonal effects of exchange rate behaviour and the hedging against undesirable foreign exchange movements. Highlighting the general but very important nature of the above issues, we would also like to share opinions on current economic situation with you. Psychological effects on foreign exchange rate performance are another extremely important factor. Taking into consideration the current world crisis, the Bank of Albania, appreciating your position in generating information from both, businesses and the broad public, would be interested in your opinions; Moreover, it would welcome your suggestions about any possible forms of generating these opinions periodically. In conclusion, intending to leave more room for discussing and exchanging ideas, we welcome your opinions even about other issues, related to reporting to the Bank of Albania or implementation of money laundering prevention law.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Press Conference on Publication of Business and Consumer Confidence Surveys, Tirana, 16 February 2009.
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Ardian Fullani: The importance of consumer confidence indicators Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Press Conference on Publication of Business and Consumer Confidence Surveys, Tirana, 16 February 2009. * * * Distinguished participants, We are holding this meeting to announce business and consumer survey results. These surveys represent an important long-run project of the Bank of Albania. Starting from today, the Bank of Albania will quarterly publish them, together with supporting materials for the user, including a publication schedule, the methodology applied for their compilation and the relevant questionnaires. Considering this day as a special one, I avail myself of the opportunity to share some ideas with you on the importance of confidence indicators, their methodology and the significance the Bank of Albania has given to this project. The publication of business and consumer confidence indicators is an important moment for enhancing Bank of Albania’s transparency. For some years on end, these indicators have been produced and made use of by Bank of Albania’s experts and by its decision-making structures, but now it is just the time to share this useful product with potential users of all levels. I would like to highlight that the results obtained from the processing of businesses’ and consumers’ answers are totally independent of and not influenced by the Bank of Albania, by economic, political and social conjunctures at home and abroad. All the users of this information should be aware that this information does not substitute or duplicate the official macroeconomic statistics. These qualitative indicators are compiled on the basis of opinions and expectations of the interviewed economic agents. I would like to be more concrete relate to this point. The Bank of Albania, having the awareness, independence and a certain degree of institutional transparency, and aiming at achieving high professionalism, plays an active and proactive role in the country’s economic development. Economic analysis is under direct function of the monetary policy decision-making process. In essence, the decision-making precedes the medium-term developments, sustaining the maintaining of price stability as the primary policy target drafted and implemented by the Bank of Albania. Profound analysis of the past, present and future developments of the economy contribute to appropriate decision-making. I assure you that building a complete “picture” of the present and the future of an economy is a rather difficult process, not only for an emerging economy, such as that of Albania, but also for the most advanced economies of the world. Economic and financial developments are accompanied by elements of insecurity, which have become, as you already know, dominant in last two years. Making decisions on the future of this already globalised world of economic links, requires professional maturity. Assessing and selecting appropriate and reliable statistical information requires profound intuitive abilities. Making the selected data bank beneficial to the decisionmaking, requires analytical foresight. As a matter of fact forward-looking decisions should be made on the basis of an ever larger and timely information; They should be constantly consulted with specialized economic and financial market agents. The Bank of Albania, likewise other central banks, endeavors to increase the qualitative and quantitative data base, in order to improve analyses and the decision-making process in making new steps. The finalization of the several-year project of the Bank of Albania, along which the Business and Consumer Confidence Indicator was consolidated, is an accomplishment of one of the medium-term development strategy objectives of our institution. The decision to publish these indicators passed through a prudent process and matured only after experts and decision-makers of the Bank of Albania were convinced that the confidence indicators, together with other indicators, revealed valuable additional information about the recent and future developments in the country’s real sector of the economy. Allow me to briefly summarize some of the basic concepts on confidence, tendency and the foregoing indicators. They have been widely used in many advanced countries of the world, particularly over the last two decades. These indicators are constructed on the basis of information collected from surveys, which are technically referred to as Business and Consumer Confidence/Tendency Surveys. The Bank of Albania conducts these surveys in cooperation with INSTAT. Increasing demand of analysts, decision-makers, market agents and the broad public for timely economic information and the ability of these indicators to hint business cycle turning points, have made them very common and useful. The peculiarity of these indicators is that they reveal information on the tendency of various economy indicators, based on qualitative opinions of businesses and consumers. The Bank of Albania has been working for several years to construct these indicators, based on the results from large-scale surveys conducted with 720 businesses and 1200 consumers. The cooperation with global leaders in this area has been very efficient. Experts from the German Institute of Economic Studies have supported the process of methodological and economic analysis of business confidence indicators. While working for this project, Bank of Albania’s experts have studied and applied important aspects of contemporary methodologies followed by the OECD countries and by the European Commission. Until coming to the decision to publish them, researches and tests have been constantly carried out on the developments, suggested by these indicators and later on verified by the statistics of the INSTAT. The compliance degree of the tendencies from both sources is assessed as statistically significant, thus making them useful. Various methodologies and empirical findings have been introduced in technical round tables, and in working papers and articles compiled by the Bank’s experts. For more than four years, the results revealed by these indicators have been more and more taken into consideration by Bank of Albania’s decision-making, thus contributing to the building of inflation expectations indicator. They provide preliminary information on expected producer price performance, an important link for the price-setting process in the economy. Consumption and savings tendencies of the population are revealed through relevant indicators. In conclusion, the economic sentiment indicator combines the businesses’ and consumers’ opinions, giving hints of the economic prospects in the short run. I would like to speak at length about the importance and informational utility of the confidence and the foregoing indicators. But, I would rather emphasize the respect the users should pay to such indicators, opting for being oriented to the large information flow through them. I regard this only as the beginning of a comprehensible and transparent cooperation. To this end, other special meetings and activities will follow, enriching various groups of interest with knowledge on business confidence or tendency indicators. I have confidence in the added values they will bring to users’ analyses. But, I advise and require of users, researchers, economic journalists of written and electronic media, students and pupils, businesses and consumers and the broad public, to rightly understand these indicators, before using them. These tendencies have resulted from businesses’ and consumers’ opinions and do not constitute the official stance of the Bank of Albania. The Bank of Albania has built them on the basis of an advanced methodology. It has made use of the information obtained from interviewed businesses and consumers and it has confidence in their qualitative assessments and in those indicators. Their publication enhances the public transparency and makes the decision-making process more comprehensible. It is up to users to decide whether to use these indicators or not. I assure you that experts from the Bank of Albania will stand by the users, making them wellinformed, highlighting that further improvements will be made in this area. Thank you for your attention!
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional meeting, Korca, 13 February 2009.
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Ardian Fullani: Recent developments in the global and the Albanian economy Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional meeting, Korça, 13 February 2009. * * * I feel very privileged to be among you again, in this marvellous audience of intellectual values and professionalism. It is the second time I visit Korca in the capacity of the Governor of the Bank of Albania and I observe with pleasure that this city has made admirable progress. Allow me to emphasise once more that Korça, this charming and hospitable city, has given and will always give me pleasure. Usually favourite topics for a Governor are monetary policy, financial stability, banks and money, structural reforms and economic-financial policies. However, the current situation makes inevitable the communication on recent developments the global economy in general and the Albanian economy in particular are being faced with. Global economy is confronted with numerous challenges. 2008 year-end and January 2009 have definitely confirmed recession in the USA, Germany, Britain and Japan, let alone many other European emerging economies, such as Ukraine, Hungary, Byelorussia, Serbia and any other country. While risk of further financial stability shocks is overcome for the developed economies, the economic situation is deteriorating more and more, where unemployment is increasing rapidly, along with output reduction. In the meantime, the emerging economies are experiencing a deterioration of financial conditions, tightening of lending, pressure on exchange rate and at the same time significant reduced demand for some very important branches of the economy. I made this introduction to make you understand that global economy is experiencing a great contraction, which as concerns the shocking intensity and extension, has never been experienced before in the modern history or after the second world war. Many taboos have fallen and continue to fall. The grave financial crisis ignited and erupted at the heart of capitalism, in the USA and from there it spread up quickly all over the world. Though it may sound paradoxical, our economy has been resistant to this tsunami. According to available official data and judging upon a number of indirect indicators, we have concluded that the economic activity over 2008 performed in line with the early 2008 projections. Generally the economic activity at home has been sustained by domestic financial resources, while the Albanian banking system has been dynamic and effective in channelling the savings towards the funding of corporate production or household consumption This process has been also facilitated by the macroeconomic stability, which has enabled the fall of risk perception in the economy. Dwelling briefly on the fulfilment of legal obligations of the Bank of Albania, I would like to highlight that inflation returned within the 2-4 percent target of the Bank of Albania over the second half of the year. The relaxation of supply-side shocks and appropriate monetary conditions have been key factors enabling the balancing of demand and supply-side factors. During 2008 the key interest rate was held unchanged, at 6.25 percent, aiming at and materializing the anchoring of economic agents’ inflation expectations close to the 3 percent target of the Bank of Albania. Money market activity was conditioned by the performance of monetary indicators and the real economy. In response to these developments, the Bank of Albania intervened in the money market by injecting liquidity of different maturity terms. Also, in order to better satisfy the banks’ needs, the Bank of Albania changed in November the repo auction form to auctions with undetermined amounts. In the end of January 2009 the Bank of Albania’s Supervisory Council decided to reduce the key interest rate by 0.50 percentage point, recording a turning point in the monetary policy stance in terms of easing it. However, I should underline that developments during 2008 year-end and early 2009 enable an objective and real assessment of the overall economic-financial situation of the country for the present and the future. Let me mention two or three of them, bringing our insight to your attention. 1. During January 2009 the logical reluctance of individuals towards their bank, reflected mainly in the form of deposit withdrawal over the period of OctoberDecember 2008, came to an end. Naturally this is a good news indicating that the Albanian banking system has passed a difficult exam, which many of its “colleagues” in the region and beyond could not pass. The liquidity situation has ameliorated. Symmetric distribution among banks has promoted increased volume of interbank market transactions, turning it back to normal trading levels. In response to Bank of Albania’s reaction, this has been associated with reduced interest rates for all instruments and maturities. Is it accidental? Is it merely destiny? No, it has neither to do with destiny, nor with turning back to any slogans of the centralised economy era. According to latest data, the banking system appears profitable. Return on equity is 11.35 percent for 2008. In the meantime, banks have extended their investments but they have also increased their equity. Capital adequacy rate is 17.23 percent of total assets and risk-rated off-balance sheet items, while loan portfolio quality is at satisfactory levels. Year 2008 coincides with increased prudential policies of the Bank of Albania in terms of adopting a more conservatory approach. The passing of the new banking law, the 2007 developments once credit bubble exploded in the USA and high lending rates over 3-4 last years were assessed with prudence by the Bank of Albania. Therefore, in early 2008 the Bank of Albania organised the first open forum with the banking system, submitting through an open communication, a new packet of prudential regulations for being discussed there, aiming at consolidating the financial stability of the country. The Bank of Albania’s Supervisory Council gave way to the approval of the whole proposed packet, thus creating an effective vaccine, which has produced appropriate antibodies or has provided the immunity I mentioned earlier in my speech. Which are these modifications that have increased our resistance so much? • In compliance with the new law, there were approved new criteria for calculating, supervising and reporting large exposures of banks to parent banks and connected subjects, aiming at managing the risk deriving from concentrated exposure to them. • In order to achieve a more effective management, a new regulation was drafted, strengthening the internal audit in banks and branches of foreign banks. It regards the internal audit as a part of the general governance of banks. It ensures the platform for creating an efficient internal audit system, as the main factor in management and administration of banks and branches of foreign banks. • A special importance was given to transparency of banking and financial products and services. This is another aspect where we intervened during 2008. The new requirements standardise the way and form of supplying customers with information about banking products and services. Special emphasis was laid on obligatory publication of effective interest rates for deposits and loans. Through this information bank customers may get acquainted with calculation of loan effective interest rate, elements of credit and deposit contract, marketing of products and services, maintaining of customer data and confidentiality, dealing with customer complaints and establishment of specific structures relating to such complaints. • Part of the new package was also the standardization of obligatory information the banks and branches of foreign banks should disclose about the main business of banks, their organisation and management, financial performance and position, risk management and accounting policies. • Taking into consideration the international situation and aiming at a better diversification of risk deriving from the concentration of bank investments in international financial markets, the Bank of Albania’s Supervisory Council made some other amendments to the Regulation on Risk Management, consisting mainly in putting more prudential benchmarks on large exposure indicators and on the techniques of collateral calculation and recognition. After presenting the work we have done during 2008, naturally we have the right to claim that we have acted appropriately, taking many preventing actions, which have helped absorbing the negative effects of recent developments. 2. Initial data of December 2008 indicate a contraction of credit to the economy, particularly of credit in foreign currency. Allow me to explain once more that it has to do with one of the gravest symptoms accompanying the latest financial crisis internationally. This is so real that in developed economies, credit to the economy and the interbank channels have almost stopped functioning or are operating at minimum levels. Though peripherally, this development has been materialised even in our economy. However, I believe that, what really matters is the future. Of specific contacts we have had with banks operating in Albania, we have drawn the conclusion that we share the same concern that a drastic stoppage of credit to the economy would gravely damage the economic activity of the country and the financial system’s position. Therefore, we are constantly communicating with banks, to guarantee that during 2009 the Albanian economy will receive the deserved financial support from the banking system. I am confident that the presence of senior representatives of the banking system here in this hall testifies the awareness and understanding of this concern. The decision made some days ago by the Bank of Albania, as also stated in the press release on the Supervisory Council’s meeting, creates “more breath to the economic activity of the country”. I feel well to observe that the banking system has already reacted. Treasury-bill and interbank market interest rate reduction has been evidenced. 3. Interbank money market development, as a necessary bridge for enhancing the effectiveness of monetary policy transmission, has been and will always be in Bank of Albania’s focus. As such the interbank market development has been subject to discussion in many meetings conducted by the Bank of Albania. In these meetings banks have highlighted credit risk as one of the main obstacles for the development of this market. To minimise this risk, the Bank of Albania drafted the Law on Repurchase Agreements and sample contracts. The passing of this Law finalised the Bank of Albania’s endeavours to set up an appropriate legal infrastructure for the market of repurchase agreements among commercial banks. Following its passing, the Bank of Albania held a number of meetings, aiming to clarify its core elements. The main purpose of these meetings was to speed up the concluding of relevant contracts among banks, in order to materialise the practical implementation of this Law. The period we have left behind is regarded as sufficient for finalizing the process of drafting and signing individual contracts on repurchase agreements. Therefore, I draw the attention of the banking system to proceed quickly, sparing the time for signing respective contracts. The process finalization should be necessarily followed by daily quotations of banks in terms of interbank borrowing and lending. The latest decision of the Bank of Albania’s Supervisory Council serves the spirit of transparency increase and customer protection, making compulsory the quotation of mortgage loan rate on the basis of Bank of Albania’s key interest rate. Distinguished participants, Recently the Bank of Albania has constantly stated that year 2009 carries over numerous challenges, which in the context of sharp global issues, make our task more difficult. However, I would highlight that assessing objectively the current situation and that of the near future is an expression of prudence. We at the Bank of Albania remain committed to monitor cautiously all the economic-financial developments, willing to take proper actions to further consolidate the macroeconomic and financial balances. In this way we accomplish our constitutional service for the country’s sustainable growth and development. In this difficult task, I avail myself of the opportunity to invite all the stakeholders and the broad public to become part of the dialogue for finding ways and optimal solutions, in order to minimize the negative effects the international economy transmits to our country.
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Speech by Mr Fatos Ibrahimi, First Deputy Governor of the Bank of Albania, at the Crans Montana Forum "The Albanian banking system in front of the international financial crisis", Tirana, 27 March 2009.
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Fatos Ibrahimi: Macroeconomic developments and the characteristics of the Albanian financial system Speech by Mr Fatos Ibrahimi, First Deputy Governor of the Bank of Albania, at the Crans Montana Forum “The Albanian banking system in front of the international financial crisis”, Tirana, 27 March 2009. * * * Dear participants, Let me start by thanking the organizers of this meeting, for enabling this joint discussion regarding the status of our financial sectors and the measures which are necessary to sustain its resistance to the negative effects of this unprecedented global crisis. Indeed, what started as financial crisis in the US, has transformed itself into an economic crisis, that is having dire consequences in real sectors of the world economy. The hope is that, like earthquake bands, the magnitude of the crisis effects will fade out as it widens and is confronted with measures taken by countries to resist it. I will start by describing the main macroeconomic developments of our economy and the characteristics of our financial system. Then I will mention some of the related measures taken by Bank of Albania, in its role as the monetary and supervisory authority of the country, and our expectations for the foreseeable future. Our economy has been in a solid path of growth for the last decade, with an average annual growth of around 6 percent. It has benefited from economic reforms that have provided development opportunities for our business sector, have opened markets, have increased competition, have stimulated flexible labor markets and have increased social revenues. Both fiscal and monetary policies have been cautious in providing the necessary stimulus to the economic growth, by being consistent and disciplined in the pursuit of their objectives to achieve fiscal consolidation and ensure a low-inflation environment. The size of the annual budget deficit in relation to GDP has been between 3 %, leaping to 5.7 % for 2008, while the public debt has been stable, reaching up to around 55.6 % for 2008. The annual inflation growth rate has been for a long time within the corridor defined by the Bank of Albania of 2 4 percent (and close to the Bank of Albania target of 3 percent), indicating success in anchoring market participants expectations for price developments in the economy. This steady good economic performance has been supported by a flexible exchange rate that has been instrumental in supporting and maintaining a balanced growth, by maintaining the right incentives for interaction between domestic and foreign counterparties. Fundamental changes have occurred in the financial sector too, thanks to consistent and successful reforms in the last decade. Nowadays the banking sector in Albania counts 16 banks, all in private hands, where the foreign capital dominates. During time, the banking sector has increased the number of branches, has improved its products to the public and has increased its intermediating role to provide an important contribution in the economic development of the country. At the same time, the entrance of well-know European banking groups from Austria, Greece, Italy and France, has been associated with consolidation in the banking industry. As it is the case in the entire region, the banking sector dominates the financial sector in our country. Our supervisory work aims at adopting the best international standards in the field. As a result, our legal and regulatory framework is considered to be consistent in achieving our objective of a stable and sound development of the banking activity, and is continuously improved. From the practical aspect, we combine both regulatory and risk based supervision. The data reported from the banking sector are analyzed off-site and verified on-site. We also try to stay in close contacts and cooperate with foreign supervisory authorities, as an important instrument in improving the effectiveness of the supervisory work. Nowadays, the assets of the banking sector represent around 87 percent of the country’s GDP. Loan portfolio has reached around 37 percent of GDP. Due to increasing competition after the privatization, its growth has been very strong in the last 4 years, albeit starting from a low base. Deposits represent around 80 percent of the banking sector liabilities, and the loan/deposit ratio stood at around 62 percent. Hence, the banking sector relies heavily in domestic deposits, both in national and foreign currencies, to perform its lending activity. The foreign currency position of the banking sector is quite balanced, as assets and liabilities in foreign currency stand respectively at around 49 percent of total assets, and liabilities of the banking sector to nonresidents (almost entirely in foreign currency) is only 10 percent of total liabilities. The banking sector is well-capitalized and liquid. The capital adequacy ratio stands at around 17 percent, compared to the required minimum of 12 percent. Liquid assets to total assets, is at around 43 percent. In the last 4 years, the average return on equity has been above 20 percent while the average return on assets has been around 1.5 percent. The branch network of the sector counts around 350 branches all over the country. In the last three years mainly, the banking sector has also introduced modern payment infrastructure and products, to allow for increasing usage of electronic payment cards and internet banking. Despite solid performance in the last years the Bank of Albania has been vigilant to point out areas of the banking activity, related with domestic developments that required attention from the banking industry. Until before the appearance of this international financial crisis, we have expressed our concern regarding the rapid increase in lending which, until 2007 reached up to 8-9 percentage points in terms of annual growth to GDP. The composition of the loan portfolio, which is dominated by the euro dominated loans, is also a point of concern, although this position is supported by a strong presence of foreign currency denominated liabilities in banks balance sheets, a generally supportive environment of exchange rates and interest rates over time and very close trade links to Euro-area countries like Italy and Greece. In this regard, Bank of Albania has been consistent in its approach to introduce regulatory measures that would discourage rapid increase in lending, encourage banks to lend more in domestic currency and increase transparency toward clients on banks products and services. Since the middle of last year, Bank of Albania has been vocal in its concern regarding the indirect impact of the financial crises, in particular regarding the performance of the real economy. We pointed out risks to economic growth related with a potential decline in credit from the banking sector, an increasing trade deficit (due to a slowdown in exports), a sharp contraction of remittances (due to perception of lower wealth and increasing unemployment in the developed countries). We stated that at these times, there is a much stronger need for a careful monetary policy and responsible fiscal policy. When it comes to the monetary policy, we have been careful in maintaining incentives for promoting savings in local currency assets and anchoring expectations for low and stable inflation rates. From an operational perspective, over the second half of last year, the Bank of Albania took a number of measures: • strengthening the surveillance of financial market developments, and in particular of the banking sector; • strengthening bilateral and multilateral meetings with bank representatives, asking them for increased vigilance due to current international market conditions; • increasing contacts with other domestic institutions that regulate and monitor the financial markets, in particular with the Authority of Financial Market Supervision; • increasing the number of publications, including the Financial Stability Report 2007 (Sept.) and the Statement on Financial Stability (Oct.), which try to analyze the elements of the crisis and its potential effects on Albanian Banking Sector and the economy; • increasing the presence in the Media, to explain the crisis, to clarify the position of our banking sector toward the potential crisis effects, and to maintain public confidence in the banking sector; • changing and improving the reporting framework of banks, in particular regarding their exposure to international markets (and the mother-banks) and their liabilities (deposits and exposure to credit lines) from mother-banks); • reviewing our “back-up” plans to assess the possibility of new actions, should we encounter a worsening scenario; • changing the form of our open market operations and starting to execute “open amount/fixed price” weekly reverse repurchase transactions and longer maturity ones, to better suit the liquidity needs of the banks. When it comes to cooperation with the home countries, we have very much appreciated their measures to enhance the safety of their banks, as this provides a sense of financial infrastructure security in our host-countries as well. We believe that these measures will be adjusted to a developing environment, and will be instrumental to also target some of the concerns of the host countries related with: a) the importance of maintaining reasonable flow of funds in euro from the headquarters of the banking groups toward their foreign subsidiaries, both for liquidity and lending support; b) the importance of gradually steering the lending portfolio of their foreign subsidiaries toward local currency of the host countries. Events of the second half of 2008 have shown us the importance of having a balanced economy and a solid financial and banking sector. Despite the increasing effects of the international crisis, the economy showed a solid growth, in an environment of declining inflationary pressure. Impact of the international crisis started to materialize in the last quarter of the year, as shown in developments of the balance of payments and in the banking sector balance sheet. Indeed, a fall in external demand and a rise in unemployment rates in some of the EU neighbor countries caused a decline in the remittances and in exports. In addition, public sensitivity to (sometimes unbalanced) news on international crisis developments, increased the uncertainty about the safety of their savings in the banking sector, and caused some deposits withdraw. In spite of this, due to satisfactory levels of capitalization and liquidity, the banking sector coped well with such developments. In terms of general developments, the banking sector asset annual growth slowed to 12 percent, compared to 19 percent of the previous year. In addition to a decline in loan growth, the loan quality also worsened and non-performing loans reached 6.6 percent of total loans. But the comfortable ratio of loans to deposits still supported a solid annual credit growth of around 35 percent. The financial result of the banking sector for 2008 was positive but lower than the previous year due to a slowdown in profit-making activities. The exchange rate of the domestic currency was stable over the year and with depreciating tendencies versus the euro and the American dollar over the first quarter. In relation to expected domestic developments for 2009, we expect economy to face greater challenges. Economic growth will be positive, but almost half of what was in 2008. The planned fiscal stimulus will be harder to reach, due to potentially higher difficulties in realizing revenues and in providing other sources for financing the expenditures. Hence, there might be a need to prioritize fiscal expenditures over the year. Financial intermediation of the banking sector, to the public and the private sector, could be lower and potentially with higher cost, due to supply and demand factors. Due to tighter financing conditions, businesses and households are expected to undergo a painful but necessary adjustment process in the short term. This might prove to be beneficial in terms of efficiency gain in the medium term. Inflation may temporarily go under the corridor of the Bank of Albania, but is expected to be within the corridor for most of the year. Monetary policy will make sure that proper incentives to hold local currency denominated assets are maintained and that inflation expectations are kept anchored at the target of Bank of Albania. This is expected to also be important in maintaining adequate financial intermediation capacity in the medium term. The profitability of the banking sector is expected to be lower this year, due to lower volume of the profitmaking activities (lower credit supply/demand), potentially higher financing costs and increasing provisions for non-performing loans. But this is not expected to have a substantial effect on capital adequacy and liquidity indicators. More than sufficient capitalization and liquidity parameter of the banking activity will protect the stability of the banking sector and of the financial system going forward. While the international crisis is impacting every country, the magnitude of the impact will depend on length of the international crisis and the state of that country’s economy. Expectations for the recovery of the world economy, somewhere between end of this year – beginning of next year, if materialized, will remove the uncertainty and the psychological boost will likely support the sense of earlier and stronger economic benefits. In spite of the difficulties ahead, it is deemed that the position of the Albanian economy and of our financial system is balanced and capable of withstanding the impact of this international crisis. In this effort, our economy will find support in factors related with the flexibility of the real sectors and of businesses, the appropriate level of some macroeconomic indicators related with fiscal and monetary areas, the stability of the banking sector and the very limited exposure to nonresident’s assets and liabilities, the ability of the public authorities to maintain fiscal and monetary discipline and to act in a decisive and harmonized way to support economic growth. Thank you!
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the presentation of the 2008 Annual Report to the Parliamentary Commission of Economy and Finance, Tirana, 8 April 2009.
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Ardian Fullani: Economic and financial developments in Albania during Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the presentation of the 2008 Annual Report to the Parliamentary Commission of Economy and Finance, Tirana, 8 April 2009. * * * Honourable Mr. Chairman of the Commission, Honourable Ladies and Gentlemen, It is my pleasure to be among you again in this annual meeting. The Bank of Albania considers this forum not merely as a fulfilment of its legal obligation, but also as an opportunity for enhancing its transparency and accountability. I will present in my speech an analysis of the Albanian economy over the past year and a summary of Bank of Albania’s work on the fulfilment of its legal mission and other commitments in view of strengthening the safety and raising the efficiency of the Albanian banking system. Also, availing myself of the opportunity of this public communication, I would like to share with you our views on the challenges the Albanian economy is faced with and the right path for their solution. The Bank of Albania deems that the addressing of these challenges should be in the centre of attention and a top priority for economic policies. Preceding the conclusions of Bank of Albania’s analyses, I would like to emphasise right from the beginning that the country’s economic activity has performed on sound bases. The Albanian economy has fulfilled a number of prerequisites for having a stable and long-term economic growth, giving primary importance to macroeconomic stability of the country. However, in the presence of current challenges the Albanian economy is being faced with, these bases should be safeguarded and further strengthened, compiling appropriate economic policies by relevant authorities and reviewing the economy agents’ development plans. 1. Performance of Albanian economy during 2008 Allow me to make in the following a brief retrospective analysis on the performance of the Albanian economy during 2008. Global background The world economy experienced a constant deterioration throughout 2008. The world economic growth moderated to 3.4 percent in 2008, from 5 percent it was in the preceding four-year period. The most striking 2008 highlight was the financial turmoil and its spread to the real economy. The complex nature of derivative financial instruments, employed at most in the latest years, raised uncertainties about assessment of certain institutions’ exposure to financial instruments qualified as toxic. This uncertainty shifted into lack of confidence and termination of financial market operation, impeding the smooth operation of the lending system to the economy. Under these circumstances, the real economy was instantly affected by the lack of funding for consumption and loans, leading developed countries to recession. High inflationary pressures over the first half of the year, conditioned by strong economic growth and reflected in price hikes of oil and raw materials, were significantly dampened during the second half of the year. Monetary and financial markets have experienced a great volatility. Risk re-evaluation in financial markets was associated with securities price cut. Also, interest rates, exchange rates, stock prices and trade volume were obviously volatile, depending on market news and on the perceived risk of the situation. Economic growth Against this turbulent global background, the Albanian economy has had a comparably positive performance. Expecting confirmations from official statistics, the Bank of Albania deems that the country’s economy has grown in line with the year-start projections. This growth has reflected the dynamic development of some sectors of the economy, supported by increased consumption and investments and constant structural and infrastructural improvements in the economy. Economic growth of the country has been sustained mainly by strong domestic demand, which remains the main generator of economic growth. Consumption, investments and government spending increased over 2008. External demand in the form of exports increased rapidly during the last years, but it still remains at low levels for sustaining the country’s economic growth. The country’s economic activity has been financed mainly from domestic sources. Due to its high liquidity during 2008, the banking system has been able to respond to the economy demand for funds through increased financial intermediation. The banking loan portfolio increased by 7.3 percentage points of GDP during 2008. The economic activity at home was presented in two different pictures during 2008, significantly affected by international market developments. Official statistics indicate a significant growth in the economic activity volume during the first nine months of the year, reflected in a higher turnover indicator and an increase in credit volume, in budget revenues and in external trade volume. The overall turnover indicator, which is a proxy of the value added in the economy, increased on average by 17% during the first nine months of the year. The highest annual growth rates were noted in construction and trade, while industry, transport and communication present a slowdown of the growth rate compared to the previous year. The last quarter presented a qualitatively different picture of economic developments. Under the influence of the global economic and financial turmoil, the economic activity showed signs of slowdown, while monetary indicators underwent considerable volatility. The country’s economic activity slowdown during the fourth quarter of the year was signalled by a number of indirect indicators, such as: deterioration of the economic trend indicator, resulting from the processing of business and consumer opinions about the current situation of the economy and their expectations; decreased remittances and export slowdown during the second half of the year; and curbing of lending activity during the last quarter. Consumer price inflation During 2008 the Bank of Albania fulfilled its legal obligation for maintaining price stability in the economy. Consumer price inflation has fluctuated within the Bank of Albania’s targeted rate. Annual average inflation rate settled around 3.4 per cent for 2008, being close to Bank of Albania’s target of 3 per cent and within the 2-4 per cent tolerance band of the Bank of Albania. The controlled inflation rate reflected Bank of Albania’s appropriate monetary stance and policy. The right monetary policy led to balancing of the demand and supply factors and anchoring of inflationary expectations around the Bank of Albania’s target. Inflation behaviour has not been uniform during 2008. High domestic demand and the shocks from the global economy, in the form of high prices of primary commodities, were reflected in high inflationary pressures during the first half of the year. The annual inflation peaked at 4.6 percent in May, recording the highest inflation rate over last 5 years. These high inflationary pressures were clearly reflected in the increase of core inflation and of non-tradable goods, which are also synthetic indicators of inflationary balances in the economy. The easing of supply shocks and the slowdown of the domestic demand during the last quarter of the year were accompanied by a gradual fall of inflation rate, down to 2.2 per cent in December. This fall reflects a better balancing of the domestic demand and supply, and lower imported inflation rates. Balance of payments and external sector of the economy Year 2008 was characterised by a significant growth of economic and trade exchanges. Domestic demand is reflected in the growth of both, the trade deficit and the current account deficit during 2008. The current account deficit is estimated at 14.9 per cent of GDP, mainly affected by rapid growth of imports and a decline of remittances during the second half of the year, due to increased spill-over effects of the economic and financial crisis on the neighbouring countries’ economies. The trade deficit accounted for Euro 2.4 billion, being 13.1 percent higher than in 2007. However, foreign currency capital inflows have been sufficient to contribute to closing of the balance of payments with a positive result for 2008. Foreign reserves of the Bank of Albania increased by about Euro 192 million or by 0.9 percentage points of GDP. In macroeconomic terms, the high deficit on trade account signals high levels of consumption and investments in the economy, financed from foreign savings in the form of capital inflows. In a longer-term analysis, Albania’s current account deficit is a normal phenomenon in the context of the country’s development level. Especially positive is the fact that the major share of the country’s imports is represented by imports of machinery and equipments and that of intermediate consumer goods. However, current account deficit widening is an element that should be constantly monitored, since its financing sources are not always steady and necessary corrections for the current deficit compliance with the available funds for its financing are frequently difficult. Macroeconomic policies should be prudent to ensure longterm sustainability of the balance of payments, as one of the principal aspects of the macroeconomic stability and long-term growth of the country. Fiscal policy and indicators Fiscal policy is one of the main instruments for stimulating and controlling the economic activity. Due to its weight, the public sector is a significant generator of the economic activity and a determinant of the financial conditions of the economy, of interest rates, of the exchange rate, and its liquidity. During 2008 fiscal policy was more expansionary, thus being reflected in enlargement of the budget deficit and of the public debt. During 2008 budget deficit to GDP reached 5.7 percent, being expanded by about 2.2 percentage points in a per annum basis. Public debt level amounted to 55.6 per cent of GDP, from 52.2 per cent in the previous year. Budget revenues and expenditures increased respectively by 15.3 and 22.6 percent during 2008, accounting for 27.3 and 32.9 percent of GDP. Improvement of public debt management in terms of extending maturity time-length and diversifying the financing sources is a positive highlight, which has helped to refinance the debt and control its cost impact on debt indicators. However, the Bank of Albania deems that the fiscal policy should not distract attention from maintaining long-term stability of fiscal indicators and minimizing their impact on financial markets. Fall of budget deficit during 2009 and the commitment for drop of public debt in the long run should be constant priorities of the fiscal bodies. In line with that, the Bank of Albania deems that more endeavours should be made in order to improve the expenditures structure, in view of decreasing the share of current expenses and increasing the capital investments. Monetary performance Due to the slowdown noted in the last quarter, the pace of monetary expansion decelerated slightly relative to the previous year. The average annual growth rate of M3 eased to 12.3 per cent, down from 15.8 per cent in 2007. Growth of monetary assets of the economy is attributed mainly to banking system credit growth. The degree of financial intermediation in the economy further increased. Banking system deposits to GDP amounted to 80 percent during 2008, compared to 78 percent for 2007. Credit to GDP amounted to 37 percent, recording an annual growth of 7.3 percentage points. During 2008 deposit developments were characterized by seasonal volatilities. Deposits level recorded high growth paces mainly in summer and an obvious slowdown in the last quarter of 2008. On the asset side loan portfolio of the banking system for the economy increased by about 35 per cent during 2008. The credit structure performance revealed a slight shifting of the loan portfolio towards foreign-currency-denominated loans. The preference for foreign currency-denominated loans is attributed to their lower interest rates. It would have been accurate in the presence of a stable exchange rate. It is wrong under Albania’s conditions, where the exchange rate is flexible and the possibility for its depreciating movements can not and should not be excluded. Therefore, the Bank of Albania has concluded that commercial banks’ clients do not pay due attention to the exchange rate risk, when they choose a foreign currency-denominated loan. Credit growth pace has been decelerating along the year, reflecting both the tightening of lending standards in response to Bank of Albania’s regulatory measures and the tightening of the system’s liquidity position. The banks’ difficulties in generating adequate liquidity and their more prudential policy in terms of lending, were reflected in the slowdown of credit to the economy growth and of fiscal sector’s financing. Financial markets Albanian financial markets have reflected not only the performance of economic developments at home, but also those of international financial markets. Under these conditions, their indicators, such as liquidity, interest rates, trade volume and exchange rate, have been characterised by a higher volatility, however, remaining within the normal parameters of operation. In a general view, deposit interest rates indicated upward trends for deposits in the national currency and those in the euro. On the contrary, credit interest rates reflected downward trend during 2008, bringing about reduced intermediation cost of the banking system. In particular, positive is the latest evidence for drawing attention towards ALL credit and raising the competition through interest rates in this market. In implementation of its objective for price stability, the Bank of Albania applies a flexible exchange rate regime. It implies that the exchange rate price is market determined, reflecting the balancing of foreign currency demand and supply forces. During the major part of 2008 the lek’s exchange rate vis-à-vis foreign currencies was steady, but it started to slightly depreciate by the end of the period. The positive performance of the national currency during 2008 was supported by a number of factors, such as: macroeconomic stability of the country, positive result of the balance of payments, inflation anchor close to Bank of Albania’s target and approaching of this indicator to that of the euro area, as well as the positive interest rate spread. The banking system Year 2008 was characterised by intensive developments in the Albanian banking system. The banking activity grew further throughout the year, both in the quantitative aspect – geographic coverage of the country and intermediation degree – and in the qualitative aspect – the variety of services provided and the intermediation cost. In the meantime, deposit withdrawals taking place during the last quarter, tested the system’s stability sensitively. Developments over this period testified that the Albanian banking system passed successfully its first test of stability. This system continues to be committed mainly to collecting deposits and increasing lending activity. Though at moderate paces, the system’s assets and liabilities further increased during 2008. The analysis of the system’s indicators reveals an upward risk level and its downward financial capacity along the year. The banking system performance recorded a downturn over 2008, from the viewpoint of net result performance. This reflected both, the enhanced competition in the system and the rapid increase of expenditures for provisioning, particularly during the second half of the year. However, the volatility and the non-good performance of some of the main indicators has not put at risk the regulatory capital level needed for covering risks deriving from the system. The performance of above indicators is not regarded as critical, but the dynamics and intensity of development require a more prudent monitoring on an ongoing basis. 2. Bank of Albania’s activity during 2008 As the monetary authority of the country, the Bank of Albania’s mission is to ensure price stability in the economy. In order to fulfil its mission, it drafts and implements independently the monetary policy and monitors and regulates the financial market activity in general and that of the banking system in particular. Also, the Bank of Albania is an important and active actor in the country’s efforts for European integration. Let me further make a brief presentation of Bank of Albania’s work throughout 2008. Bank of Albania’s monetary policy and operations The Bank of Albania’s monetary policy is drafted and implemented exclusively in view of fulfilling its primary objective, i.e., achieving and maintaining price stability. Inflationary pressures present during the first half of the year and the shaking of agents’ confidence dictated the pursuit of a prudent monetary policy during 2008. The key interest rate was held unchanged throughout the period, aiming at a better balancing of the demand and supply ratio, and contributing to subduing of inflation expectations in the economy. Along with the strengthening of some banking supervision prudential measures for credit risk management, this policy has brought about a more balanced credit growth and has transmitted proper encouragement for consumption and savings. The international confidence crisis in early fourth quarter of 2008 encouraged deposit withdrawals from commercial banks in Albania, highlighting lack of liquidity in the banking system. It was reflected in raised interest rates, slowed banking activity in the money market. The Bank of Albania intervened in the monetary market by injecting liquidity, in order to cover the banking system needs for liquidity. The dynamics of 2008 events required the usage of all open market instruments and modification of some of them. The Bank of Albania has injected liquidity of a weekly, monthly and quarterly term. It has increased securities basis that may be used as collateral and has reduced the upper limit of interest rate corridor of its operations. Also, in order to better satisfy the banks’ needs for liquidity, the Bank of Albania changed the main auction type, from fixed-amount auctions into fixed-price auctions. Also, the Bank of Albania has induced more flexibility to banks for short-term liquidity management, by raising the quantity of the daily required reserve usage. All these operations have served for settling down the liquidity situation and attenuating its impact on interest rate rise. They have also prevented balance sheets of commercial banks from contraction and have been reflected in enlargement of Bank of Albania’s balance sheet. Banking regulation and supervision Year 2008 coincided with an upward prudence of supervisory policies of the Bank of Albania. The passing of the new banking Law gave way to adoption of a new package of measures, highlighting: • In compliance with the new Law, new criteria were adopted for calculating and reporting large exposures of banks to parent banks and connected entities, aiming at management of the risk deriving from concentrated exposure to them. • In order to achieve a more effective management, a new Regulation was drafted, strengthening the internal audit in banks and branches of foreign banks. • Taking into consideration previous problems, a special importance was given to transparency of banking and financial products and services. This is another aspect where we intervened during 2008. The new requirements standardise the way and form of providing information about banking products and services to clients. • Part of the new package was also the standardization of the required information that banks and branches of foreign banks should make public, related to the banks’ main activity, their organisation and management, their financial performance and position, the risk management and the accounting policies. • Aiming at a better diversification of risk deriving from the concentration of bank investments in international financial markets, the Bank of Albania’s Supervisory Council made some other amendments to the Regulation on Risk Management, consisting mainly in putting more prudential benchmarks on large exposure indicators and on the techniques of collateral calculation and recognition. • The Bank of Albania has prohibited lending to the economy with “exotic money”, implying funds of a very low cost, ready to penetrate even into our economy. Let me remind you that many developing economies have fallen into the trap of those funds, currently suffering gravely from their flight. In view of enhancing the transparency, these measures were discussed in advance with the banking system, through an open forum held with representatives of the system. Financial market developments during 2008 highlighted the appropriateness of measures taken by the Bank of Albania. Its actions for absorbing the spill-over effects of the international crisis at the lowest cost possible, have continued to take place even during the first months of 2009. Legal and regulatory initiatives During 2008, upon the passing of the Law “title repurchase contract”, the Bank of Albania’s efforts to create a proper legal infrastructure for the development of the repurchase agreements market among commercial banks were finalised, creating the possibility for the usage of these agreements as flexible instruments to ensure and invest interbank market liquidities, in view also of enhancing the efficiency of the monetary policy transmission. Also, another important highlight of the effective legal framework during 2008 was the approval of some amendments to the Civil Code Procedure of the Republic of Albania, which are expected to provide positive effects in terms of easing and shortening the time frames of collateral execution procedures for loans extended by banks and branches of foreign bank. Also, in view of improving the existing regulatory framework in banking supervision area, intending its adjustment to the requirements of the new Law “On Banks in the Republic of Albania” (which entered into force on 01.06.2007) and to the Acquis Communautaire in this area, and in accordance with the commitments under the Stabilization and Association Agreement, the Bank of Albania adopted some regulations on internal audit system and transparency of banks to the public, which are expected to positively impact the overall management and administration of banks. European integration In the framework of European Integration, the Bank of Albania has paid special attention to the meeting of Bank of Albania’s obligations stemming from the SAA related to meeting the Copenhagen economic criteria for EU membership, guaranteeing the right of decisionmaking and the freedom to provide financial services to EC banks and other financial institutions, liberalization of capital flows and of payments between Albania and the EU, as well as approximating the Albanian legislation with that of the European Community (acquis communautaire) in these areas. During 2008 the Bank of Albania kept regular contacts with the Ministry of European Integration and posted there monthly progress reports, which reflect the progress achieved in terms of implementation of legal and applicable measures, in accordance with the terms specified under the National Plan for the implementation of the SAA, as well as a description of the degree of compliance of the legal acts adopted by the Bank of Albania with the acquis. In the framework of the National Plan for the Implementation of the SAA (2007-2012), the Bank of Albania continued working for legal issues and applicable measures it should adopt. Hence, pursuant to the Law “Banks in the Republic of Albania” which entered into force on June 2007, the banking supervision regulatory framework was reviewed, particularly in terms of management, transparency and internal auditing of banks. Transparency of the Bank of Albania and its communication with the public A special importance in the everyday activity of the Bank of Albania is given to public relations and communication, since an open and transparent communication with the public helps to raise confidence in and efficiency of its decision-making. The Bank of Albania has carried out a number of activities and meetings with banking and financial system stakeholders, with different representatives of the media and academics, lectures at high schools and universities, regional meetings with representatives of the banking system, local government, business and the public. The Bank of Albania has carried out its work in two main directions: first, enhancing the transparency and communication with the public on its decision-making; and second, enhancing the banking system’s transparency. During 2008 the Bank of Albania tried to enhance the transparency about decision-making and its effects on the economy, adding not only physical contacts and the number of publications, but also investing in public education, in order to raise the economic culture in general and the financial one in particular. It has aimed at ensuring a compliance of the rational decision-making at micro level with Bank of Albania’s decisions. Only during 2008: • There were published more than 4500 pages in Albanian and above 2100 pages in English; • There were distributed about 80.000 educational brochures; • There were carried out training workshops for about 100 teachers of economics in Tirana and Vlora; • There was organised a competition on “Real value of money” in Tirana and Vlora; • There were organised 44 conferences, workshops, seminars, forums and round tables; • There were organised 5 training workshops with journalists from visual and written medias in the field of economics. Also, “Transparency on Decision-making” was enhanced by providing signals on future tendencies of monetary policy decision, thus creating a standard form of communication that enables the public to perceive the direction of future monetary policy decisions. “Transparency on Economic Developments” was enhanced through the publication of inflationary expectations tendencies generated from forecasts and analyses based on empirical models of the Bank of Albania and from the extension of the forecasting period from 12 to 24 coming months. Also, it is worth noting that in the framework of the banking system transparency, a set of regulatory measures were prepared, aiming to enhance transparency to clients, and protect them in consequence. The financial result The Bank of Albania has carried out its economic and financial activity pursuant to effective laws. Its balance sheets have been constantly monitored and have been audited by the KPMG, which has certified their truth in compliance with the accounting policies adopted by the Bank of Albania’s Supervisory Council. During 2008 Bank of Albania’s balance sheet assets increased by ALL 60.1 billion, or about 23 percent. This growth is attributed mainly to increased foreign reserve of the Bank of Albania and its transactions for injecting liquidity in ALL. During 2008 the Bank of Albania had a net profit of about All 9.3 billion. Current and future challenges As I emphasized many times earlier in my speech, the Albanian economy is being affected more and more by the global crisis impact. The uncertainty induced from the global financial system shock was reflected in the withdrawal of a part of deposits from the banking system, thus generating liquidity problems in the system and upward interest rate tendencies. This situation has naturally decreased the possibilities and willingness of the system to credit the economy. On the other hand, global economy developments suggest that during 2009 the Albanian economy may be faced with a decreased level of remittances and capital inflows. These developments, in turn, would further decrease the possibilities for financing the economic activity and would damage the foreign currency demand and supply balances. They give rise to depreciating pressures on exchange rate, likewise in many economies of Eastern Europe. This depreciation is in itself a corrective behaviour, under the conditions of a flexible exchange rate regime applied in Albania. From Bank of Albania’s viewpoint, the main problem the Albanian economy will encounter during the current year is lack of liquidity, and related to it, the tightening of conditions for financing activities. As we have emphasised even in our public presentations, this restriction should be recognised and factorised in business plans of all economic agents. The Albanian economy will access less credit during 2009. Lack of liquidity would also reduce the possibilities of the fiscal and monetary policy for reaction. Under these circumstances, a broader efficiency is required in making use of banking system funds, via a priority ranking of expenditures in view of their impact on the economic growth. Furthermore, the Bank of Albania deems that current account deficit behaviour should be constantly monitored. Equalization of this deficit to reduced capital account inflows should be another priority of development of economic policies. As I emphasised earlier, this moment significantly conditions the financial and macroeconomic balances at home. Therefore, it will be constantly held in focus of Bank of Albania’s monetary policy. Honourable Mr. Chairman of the Commission, Honourable Ladies and Gentlemen, The current problems the Albanian economy is faced with have not originated in Albania; therefore, their solution will mostly depend on global economic activity improvement. The country’s macroeconomic stability has absorbed the economic and financial global crisis impact on the country’s economic activity. This stability, reflected in low consumer price inflation, stability of the balance of payments and public debt, sound balance sheets of economic agents, low financial market volatility, and public confidence in financial institutions, is a great capital of the Albanian economy. It is achieved through work and sacrifice throughout the past years, therefore the Bank of Albania deems that even during these challenging moments for all of us, we should pay full attention to its further safeguarding and consolidation. The private sector’s dynamism of the Albanian economy needs long-term favourable economic and financial conditions, and transparent competitive market structures to fully release its potential. Only countries knowing how to rise and respond to these shocks have managed to grow and prosper in the long run. Learning this lesson requires an explicit ranking of development priorities, separation of long-term interest of the country’s development from short-term intentions and the political willpower for their accomplishment
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the joint press conference with the IMF Mission Chief for Albania, Mr Gerwin Bell and the Minister of Finance, Mr. Ridvan Bode, Tirana, 7 April 2009.
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Ardian Fullani: Risks for Albania’s financial stability Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the joint press conference with the IMF Mission Chief for Albania, Mr Gerwin Bell and the Minister of Finance, Mr. Ridvan Bode, Tirana, 7 April 2009. * * * The Bank of Albania’s Supervisory Council has pronounced directly and transparently on risks our country’s financial stability will be faced with over the current year. In its latest statement on “Financial Stability over the second semester of 2008”, and meeting the obligations deriving from the Law “On the Bank of Albania”, an explicit rating of risks has been made, which I would like, availing myself of this opportunity, to once more point out to the public: • First, the economic growth rate slowdown over 2009 makes difficult the achievement of fiscal policy indicators in line with 2008 year-end forecasts. External trade developments will impact on reduced collection of budget revenues, while the tightening of financial conditions in the economy negatively affects the banking sector’s ability to finance the budget deficit. Therefore, in order to achieve the target on budget deficit level, reallocation of public expenditures according to importance, at the needed quantity and throughout the financial year is necessary. In practical terms this means that whenever possible, all the efforts should be made to maintain sources of revenues, to find alternative financing sources, to cancel non-urgent expenditures, to re-define projected expenditures for this year, which are not yet contracted or effected. • Secondly, external sector’s performance in the economy, mainly in the form of export slowdown, reduced remittances and increased imports, affected the foreign exchange market equilibrium, exercising pressure on the national currency’s exchange rate at the beginning of the current year. The flexible exchange rate is a correcting instrument, which automatically helps preventing external sector misbalances in the economy. However, over a shorter run, fast and uncontrolled exchange rate fluctuations negatively affect the psychology the public, thus concealing speculative operations of different subjects. Hence, there are created premises for contagion, with negative effects on operators’ confidence in the national currency and in the capability of foreign currency borrowers to timely repay their debts. Expected reduction of economic growth rate for 2009 will reflect the reduced domestic demand and therefore, it is likely to be associated with a drop of its share in terms of foreign commodities. As a result, the overall trade volume may decline, effecting a necessary correction of current account deficit of the country’s economy and putting foreign currency supply/demand factors in a more stable balance. • Thirdly, it is necessary to recover stable paces of public deposit growth in the banking sector. Only in this way, the coverage of an increasing clientele with banking products and at more beneficial costs will be enabled. I repeat, the banking sector’s position concerning liquidity indicators and business capitalization is good and its constant surveillance is a priority of the Bank of Albania. We are confident that the last decision of the People’s Assembly of Albania, which adopted an increase of the whole value of deposit insurance to ALL 2.5 million, will impact on a faster return of withdrawn deposits to the banking system. The current level of deposit insurance, likewise that of the European countries, fully and forever guarantees the savings of the major part of Albanian households. At present there are no objective reasons for the people to be concerned about the insurance of their savings held at banks. Every reluctance on putting savings at banks would unnecessarily increase the value of the missing income, due to non-benefiting of interests and other banking services. I underline that the Albanian banking sector is the best place, where our households should place their savings, thus increasing their values. • Fourth, returning of deposits to the system is necessary also for enabling a better financial performance of the banking sector, in terms of financial soundness. During the current year, the banking activity is expected to be less profitable, as a result of reduced lending and increased costs, in order to add deposits and provisioning for covering bad loans. It is important that the Albanian banking sector, after some years of a satisfactory profit, has mostly utilized it for firming up the banking sector’s capital. Moreover, through a specific regulatory act, the Bank of Albania has requested from the banking sector not to allocate the 2008 profit, in the form of dividend. In this way, banking activity capitalization is further strengthened, providing more guarantees for the financial soundness of the banking sector. Recently the Bank of Albania has been carrying out consecutive tests, to find out how the banking sector would react, if faced with ever more pessimistic circumstances. Analyses obtained from numerous stresstests made on the whole system and on individual banks reveal that neither the banking system in general, nor any bank of systemic importance in particular have been affected relative to liquidity and capitalization level. In spite of the expansion of risks spectrum and a more difficult year for extension of the banking activity, the financial system and the banking sector will remain stable.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Regional Summit of Governors and Bankers, Becici, Montenegro, 20 June 2009.
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Ardian Fullani: Challenges facing the Albanian economy and financial sector Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Regional Summit of Governors and Bankers, Becici, Montenegro, 20 June 2009. * * * Distinguished Governors, Dear participants, I want to start by thanking the organizers of this meeting, for promoting this joint discussion regarding the status of our financial sectors and the measures which are necessary to sustain its resistance to the negative effects of this unprecedented global crisis. Indeed, what started as financial crisis in the USA, has transformed itself into an economic crisis, that is having dire consequences in real sectors of the world economy. I will start by describing the main macroeconomic developments of our economy and the characteristics of our financial system, which is similar to other countries in our region. Then I will proceed with some of the measures taken by Bank of Albania, to alleviate the impact of the international financial crisis on our banking sector and the economy. I will finish by mentioning some thoughts on future policies, which I consider important to strengthen the economic environment and the financial stability in our region and in Albania. The Albanian economy has been growing steadily over the last decade Our economy has been in a solid path of growth for the last decade, with an average annual growth rate of around 6 percent. It has benefited from economic reforms that have provided development opportunities for our private business sector, have sustained markets development, have promoted competition, have stimulated flexible labor markets and have increased social revenues. Supported by an IMF assistance program, both fiscal and monetary policies have been cautious in providing the necessary stimulus to the economic growth, by being consistent and disciplined in the pursuit of their objectives to achieve fiscal consolidation and ensure a low-inflation environment. This steady good economic performance has been supported by a flexible exchange rate that has been instrumental in supporting and maintaining a balanced growth, by maintaining the right incentives for interaction between domestic and foreign counterparties. As in other countries in our region, the banking sector dominates the financial system in Albania The assets of the banking sector make around 95 percent of the total financial assets in Albania, or around 80 percent of GDP. Nowadays, the banking sector counts 16 banks with around 500 branches, all in private hands, where the foreign capital dominates. Over time, the sector has increased the number of branches, has improved its products to the public and has increased its intermediating role. At the same time, the entrance of well-known European banking groups from Greece, Austria Italy and France, has been associated with episodes of consolidation in the banking industry. Financial performance indicators have been very good. In the last three years mainly, the banking sector has also introduced modern payment infrastructure and products, to allow for increasing usage of electronic payment cards and internet banking. Undoubtedly, the banking sector has been a very important contributor in the economic growth, while preserving solid business development and financial soundness indicators. Despite the solid performance in the last years, the Bank of Albania, in its role of the monetary authority and the exclusive supervisor of the banking sector, was vigilant to point out areas of the banking activity that required increasing attention from the industry. We have continuously expressed our concern regarding the rapid increase in lending, which at some time reached up to 8-9 percentage points in terms of annual growth to GDP. We were aware of the risk it would bring to the credit quality, even though this was not expected to be relevant. The composition of the loan portfolio, which is dominated by the eurodenominated loans, has always been a point of concern. Despite the fact that this position is supported by a strong presence of retail foreign currency denominated liabilities in banks balance sheets, a generally supportive environment of exchange rates and interest rates over time and very close economic links to Euro-area countries like Italy and Greece, Bank of Albania has been consistent in its approach to introduce gradually regulatory measures that would discourage rapid increase in lending, encourage banks to lend more in domestic currency and increase transparency toward clients on banks products and services. Impact of the crisis in our economy and in the financial sector, has been increasing and … In the last quarter of 2008, the financial sector in Albania started to feel the impact of the international financial crisis. The main development was an increasing sensitivity of the public for their savings in the banking sector. People started to withdraw their deposits regardless of the currency of denomination. At the beginning, there was no pressure on the exchange rate but it started to mount at the beginning of this year, when it was noticed a contraction in the inflow of foreign currency, due to a decline in exports and remittances. The quality of the loan portfolio started to deteriorate, and the nonperforming loans reached 8 percent of the entire outstanding loan portfolio at the end of April 2009. We expect this figure to edge higher, as data from the economy and surveys of business expectations and a marked slowdown in the credit availability, suggest that the economic growth is going to be much lower than the previous year. Due to a decline in interest income margins and an increasing amount of provisions, some of the banks have started to accumulate negative financial results. On a brighter note, almost all the banks have increasingly supported loans in domestic currency. At the same time, the banking sector remains well capitalized and liquid. The capital adequacy ratio was 17.1 percent in March 2009, compared to the required minimum level of 12 percent. Liquid assets to total assets, is at around 42 percent. The capital adequacy of the banking sector is sufficient to cover for a worst scenario that combines no economic growth, a higher level of depreciation for the exchange rate, and a higher level of non-performing loans. I want to mention also that banks shareholders have quickly and sufficiently responded to our calls for capital injection. Obviously, we remain in very close contacts with bank representatives, to identify further needs in this direction. … measures have been taken to cope with the changing environment Since the last quarter of 2008, the Bank of Albania has intensified its work on various directions to carefully monitor the developments and preempt them where possible. For this reason we have: - strengthened bilateral and multilateral contacts with bank representatives, asking them for increased vigilance due to current international market conditions; - increased contacts with other domestic institutions that regulate and monitor the financial markets, in particular with the Authority of Financial Market Supervision that supervises the insurance sector; - increased the number of publications, including the Financial Stability Report 2007 (Sept.) and the Statement on Financial Stability (Oct. 2008, April 2009), which try to analyze the elements of the crisis and its potential effects on Albanian Banking Sector and the economy; - increased the presence in the Media, to explain the crisis, to clarify the position of our banking sector toward the potential crisis effects, and to maintain public confidence in the banking sector; - changed and improved the reporting framework of banks, in terms of timeliness and quality of data, in particular regarding their exposure to international markets (and the mother-banks), their liabilities (deposits and exposure to credit lines) from motherbanks, and their loan portfolio developments. These data are being closely monitored; - intensified the on-site supervision of banks, to closely monitor their process of risk management and the way they have been reacting to the new developments; - improved our stress-test analysis, in terms of introducing more conservative assumptions, and technicalities that allow for a combination of adverse scenarios; - started to execute fixed-price (unlimited amount) weekly reverse repo transactions and longer term reverse-repo transactions, and extended the list of eligible collateral for these transactions, to better suit the liquidity needs of the banks; - doubled the usage rate of the required reserves in order for banks to use more of their reserves with the central banks, should they need it during the maintenance period; - prepared and forwarded to Parliament changes in the deposit insurance legislation. The approval of these changes has provided our depositors with a significant and permanent increase in the maximum amount of their deposits that is fully insured; - lowered in January 2009 our policy interest rate by 50 basis points, to 5.75 percent, on the back of declining inflationary pressures. Since then, concern about the exchange rate developments and potential impact on inflationary expectations and financial stability have been dominating the discussions; In addition, in an improved framework of the internal discussions and decision-making, we are reviewing our “back-up” plans, to assess the possibility of new actions, should we encounter a worsening scenario. Now is the time to introduce policies that will strengthen the economic environment and the financial stability in our region... In a global level, it has now become clear that the recent crisis was a consequence of wrong incentives that supported unbalanced financial activity development and misconception of risk assessment, pricing and management. The supervisory institutions, trapped sometimes in situations of complicated structures, insufficiency of resources, inability to follow and understand market financial innovations and risk location, were not able to correct the situation in due time. The need to restore and maintain financial stability during this unprecedented crisis, has called for swift, coordinated and extraordinary measures by the public authorities, both in the area of monetary and fiscal policies. Central banks have abandoned almost any restriction and have even adopted unconventional measures in providing liquidity to the financial markets. Governments have shown a very strong commitment to reduce systemic risk by saving important financial institutions, provide guarantees for inter-bank lending, raise the level of deposit guarantees for the public etc. This crisis is providing the public authorities and markets wherever in the world, with the best opportunity to identify deficiencies and correct those for preventing a similar crisis in the future. Such task requires strong and visionary measures, which in the medium term will enable the strengthening of the supervisory architecture in different levels, but also will create conditions, including macroeconomic and fiscal ones, to avoid excesses in the financial activity, not only in the financial industry but also in the balance sheet of households and businesses. Such measures will require strong coordination and responsibility by the public authorities in the national level, and a commitment to push ahead with the necessary steps to reform and improve the supervisory superstructure in the regional, European and global level. In the European level, such measures will be supported by the findings and recommendations of the “De Larosière Report”, but of course their implementation will not be easy. As it is expected to be a more centralized model for globally systemic banks and, to an extent, a more decentralized one for smaller financial institutions, we hope that supervisory authorities in small countries will have a better determined position that would allow for clearer responsibilities and stronger voice in communication with the supervisors in the home countries. More or less, all the countries in our region have resisted the initial direct impact of the international crisis, by enjoying some natural protection from less developed and integrated financial markets and a much lower level of indebtedness from the households and businesses, compared to developed countries. However, it is now clear that at the time of continuing financial integration and economic globalization, this may not be enough to compensate for potential risks coming from less diversified economic growth, overreliance in remittances, insufficient culture of risk management in financial institutions and other economic agents – in particular for the exchange rate and liquidity risk, and very limited space from the public authorities to introduce financial measures similar to those in the developed countries. Hence, policy measures should address these and other deficiencies to find a proper solution in the medium-term. Such measures should reflect the preference for preventive approaches. … and in Albania The Bank of Albania has been vocal in its concern regarding the impact of the international financial crises, in particular regarding the performance of the Albanian economy. Risks to economic growth have increased and they are related in particular with a further decline in credit from the banking sector, an increasing trade deficit (due to a slowdown in exports), a sharp contraction of remittances (due to perception of lower wealth and increasing unemployment in the developed countries). We believe that at these times, there is a much stronger need for a careful monetary policy and responsible fiscal policy. Regarding the financial sector, we believe that there is also a need to establish certain rules, that would support a more balanced and safe development of the financial industry in general and of the banking sector in particular in the future. Firstly, on general measures, I would support any such one that will contribute to: the establishment of a strong legal framework for property title and property rights in Albania, which in return will be instrumental in developing a non-financial asset market and increase price transparency and ultimately, strengthen the process of risk assessment. Secondly, efforts should be made to develop the non-bank financial market as well the capital market in general. This will help to better support the economic development of the country and of various economic agents, increase their opportunities to finance their needs in a more diversified and competitive way (thus improve their skills in managing risks) and release some pressure from the banking sector. Thirdly, the public authorities in the country (the supervisory authorities and the Government) must have sound contingency plans for possible financial crisis management. Recent events in other countries, have shown the importance of having a wellcoordinated plan of actions, which is discussed, agreed and tested in advance. Fourthly, when it comes to the regulatory and supervisory framework of the banking sector, I am in favor of introducing the necessary changes to make it less pro-cyclical. In the case of Albania – where the minimum required capital levels are already high, I would be more in favor of introducing the model of dynamic provisioning adapted to the business structure and to the level of technical sophistication of the banking sector. In addition and in a more general position, I would support a revision of the regulatory framework toward clearance and simplicity, even though it might be interpreted like I am supporting more a rule-based approach in supervision. I think that a regulatory framework is really effective and successful when it combines both the simplicity and transparency of a rule-based approach with the flexibility and forward looking characteristics of a principle-based approach. In any case, I believe it is necessary to make banks responsible for convincing the supervisor on the risk and return characteristics of various new products, before they exceed a certain threshold in size and exposure. This is achievable if the supervisory framework is always built with the main focus on assessing and managing the risk in different directions of the banking activity. Fifthly, when it comes to choose between lending in domestic currency or foreign currency, one should have various considerations in mind related with the nature of currency flows in the country, the concerns of the transmission mechanism of the monetary policy, the nature of the exchange rate regime, the currency composition of the asset-liabilities of the banking sector etc.. In this regard, we shall support a stronger role of the domestic currency in the lending activity of banks, and will make lending in foreign currency more costly for banks if it is not supported by retail savings in foreign currency. Thus, the over-reliance of banks in wholesale financial resources in foreign currency to support rapid lending should be addressed and managed in due time. I find this meeting as very useful to discuss these issues and others that you have identified. I believe that the ultimate goal should be to establish a genuine and effective cooperation and to support a coordinated approach where possible. Thank you very much for your attention.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Press Conference on Monetary Policy Decision of Supervisory Council of the Bank of Albania, Tirana, 29 July 2009.
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Ardian Fullani: Recent economic developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Press Conference on Monetary Policy Decision of Supervisory Council of the Bank of Albania, Tirana, 29 July 2009. * * * The Supervisory Council of the Bank of Albania, at its meeting of July 29, 2009, after getting acquainted with the latest economic-financial developments at home and abroad and analysing prudentially the confidence indicators, banking system expectations and forecasts made by Bank of Albania’s staff about eight coming quarters, decided to keep the base interest rate, i.e., the weekly repurchase agreement rate unchanged, at 5.75 percent. This decision of the Supervisory Council is based on the following arguments: The economic developments in the first half posed strong challenges to the Albania economy. The global crisis affected our economy, swinging the factors and balances that have sustained the economic growth, thus testing the immunity and self-adjusting mechanisms of the economy and raising certain complex questions to economic agents and macroeconomic policies. The economic recession hitting a major part of our trading partners is accompanied by the fall of trade exchanges and of foreign currency inflows. Rise of uncertainty in global financial markets has shaken the confidence in the financial system, exerting pressure on the tightening of financial conditions in Albania. Both these factors are reflected in reduced consumption, exports and investments, leading to economic activity slowdown and exerting pressure on fiscal indicators of budget revenues and budget deficit. On the other hand, the reduction of foreign currency inflows is accompanied by deterioration of the balance of payments indicators and the arising of depreciating pressures on exchange rate, underscoring the role of current account stability on macroeconomic and financial balances at home and the need for taking precautions to guarantee it. World economic environment is characterised by further deepening of economic and financial crises. Curtailing of consumption and investments, under the presence of high rates of public and private debt and underlined macroeconomic imbalances, has made the world economy experience the sharpest economic downturn in last 50 years. The developed countries, USA, Euro-zone, United Kingdom and Japan have followed easing monetary and fiscal policies, aiming to hamper the economic downturn and improve the financial and capital markets situation. Under their impact, the latest data signal relative improvement signs of some macroeconomic indicators. Tensions observed over the previous periods have relaxed and the main financial indicators have shown recovering signs during the last months. In the meantime, the world inflation rates have been falling, owing to low raw materials prices and low use of productive capacities, in the presence of a low aggregate demand and increasing unemployment. The economic activity downturn worldwide was associated with contraction of world trade, tightening of financial conditions and dropping of economic agents’ confidence The direct impact on emerging countries, such as Albania, is the fall of demand for their exports, decline of foreign direct investments and tightening of lending terms in world markets. Thereupon these countries have been increasingly affected by the crisis. According to IMF, the emerging countries of Eastern Europe are estimated to incur a contraction of about 5 percent during this year. The Albanian economy, in the face of this unfavourable environment, has recorded a comparatively positive performance. There are few data on the real economy. The Bank of Albania estimates that a positive economic growth has characterised the first half of year. On the others hand, low growth of credit and money supply, deteriorated business and consumer confidence indicators, slow-down of budget revenues and specific indicators of certain economy sectors, suggest that the economic growth rate has decelerated. It is still early to draw conclusions on the economic performance over the course of 2009 and onward. The Bank of Albania deems that the premises to keep positive economic growth rates in the country are present, among which the macroeconomic and financial stability of the country is of primary importance. Economic activity at home is carried out under the presence of favourable consumer price stability. It is sustained by a soothing tendency of monetary conditions and by an expansionist fiscal policy over this period. The Bank of Albania cut the base interest rate in January and undertook liquidity-injecting operations, raising its quantity in the market. Simultaneously, we have prolonged the maturity span of injecting operations to smooth down the upward slope of interest rate curve and we have expanded the base of eligible collateral to facilitate the access of financial institution in liquid funds. These operations of the Bank of Albania have helped control on interest rate level. Bank of Albania’s intervention has been more effective in controlling the short-term interest rates. The long-term interest rates of Government securities and loans revealed rising tendencies, owing to the Government’s demand for financing and the increased sensitiveness of the banking system towards liquidity indicators. In parallel, the depreciating exchange rate trends have complemented the easier monetary conditions framework, providing advantage to exports and trade deficit improvement. However, as we have constantly underscored in our statements, the Bank of Albania has been attentive to managing the momentary stimulus, aiming above all the achievement of its target for maintaining the macroeconomic stability, by preserving internal and external balances. Annual inflation in the first semester 2009 was 2.0 percent, recording a fall compared to inflation rates of the last year, but remaining within the Bank of Albania’s targeted band. Low inflation rates over the first semester of the current year are due to the weakening of inflationary pressures on the demand and supply side, consequent to raw materials price cut in the international market and the economic activity slowdown at home. Inflationary pressure stability is clearly illustrated by low rates of core inflation of non-tradable goods one during this period, being reflected also in checked expectations of economic agents of the market. Meanwhile, after a long non-inflationary period and confirming Bank of Albania forecasts, the annual change of consumer prices revealed a slightly increasing tendency over the second quarter of 2009. The annual inflation marked 2.3 percent in June, reflecting a more complete pass-through of exchange rate deprecation effect on consumer goods prices. The Bank of Albania estimates that this factor may play a higher role in the future for determining these prices, comprising premises for short-term and medium-term shocks on price level. In the face of these developments, the Albanian economy continued to be featured by low public and private savings rates even during the first half of 2009, associated with further enlargement of current account deficit and upward pressures on exchange rate performance. Simultaneous reduction of exports and imports, respectively by 19.6 and 6.3 percent on annual level, made the trade deficit contract by 1.3 percent during first five months of the year. However, reduction of emigrants’ remittances by about 8 percent during the first quarter and the service account deterioration, made the current account deficit record an annual growth of 5 percentage points of GDP during this quarter. Though this deficit goes for financing, to a large extent, the capital and intermediate goods of import, its sustainability deserves a greater attention. Particularly concerning is the low degree of export to import coverage, signalling structural problems of this deficit due to still-low competitiveness in our economy. In this direction, a special attention should be paid to checking costs and productivity growth in the economy, by raising investments in education, and by attracting most advanced technologies in production. Also, in the medium run, the macroeconomic policies should be prudent in terms of public and private savings level, in order to control the need for using foreign financing resources. The fiscal policy during the first half of 2009 had an expansionary stance, being featured by a rapid growth of expenditures and budget deficit. Budget revenues have recorded a more moderate growth, partially reflecting even the economic slowdown effects. Though remaining within the projected level for 2009, the budget deficit by about ALL 30 billion constitutes a much higher amount than in the same period of the previous year. Under these conditions, the Bank of Albania would appreciate the taking of measures for keeping budget deficit levels and public borrowing in check, helping the maintaining of the internal and external balances in the economy. Preserving the projected budget parameters will impact positively on macroeconomic stability, by controlling the fiscal stimulus on aggregate demand and dampening the pressures on monetary markets. The demand for monetary assets increased during the last months. Money supply rise by about 8 percent is based on money creation in the economy from the public sector and from private sector borrowing, mainly in ALL. Loan portfolio grew moderately, by ALL 7.5 billion or about 5 times less than as of the same period of the previous year. Reduction of bank funds source and increase of uncertainty in the country influenced the significant deceleration of credit growth rates. However, credit to economy increased along the first months of the year, while the banking system has signalled no further tightening of the lending terms in the third quarter of the current year. The private sector’s demand for Lek-denominated loans is faced with an increasing willingness from banks, thanks to stabilization of liquidity situation and easing of monetary conditions at start-2009. Restraint of foreign currency money supply has resulted to contraction of foreign currency component of money structure, even on the demand for money side, bringing about shifting of money supply structure towards the Lek. In the first half of 2009, the financial market situation was influenced by increased uncertainty and revaluation of risk premiums that associated the liquidity constraint, consequent to deposit outflows and lending activity reduction. Ongoing intervention of the Bank of Albania in the money market, combined with measures that aimed at relaxing the market and encouraging the interbank market activity, as well as the maintaining of sound financial system indicators, made the end of the period record stabilization of liquidity positions and of interest rates. The latter displayed different behaviour, according to maturity term. Short-term interest rates in the money market decreased, consequent to base rate cut and improved liquidity conditions. Long-term interest rates rose under the conditions of a high demand for long-term funds and growth of risk premium. Primary market interest rate rise was transmitted to interest rates of new Lek-denominated loans of more than 1-year maturity, influenced even by the overall lending tightening tendency. *** The Bank of Albania deems that the issues of liquidity, internal and external balances in the economy and the financial soundness constitute direct challenges on macroeconomic stability and long-term development of the Albanian economy. Their treatment should be constantly oriented towards the need for observing the necessary macroeconomic balances of the country. Price stability, smoothing of monetary indicators volatility, a sound and efficient financial system, as well as sound public and private sector’s balance sheets, impact on reducing the risk premium in the economy. Also, they open the way to attract foreign investments and cut the cost of borrowing from international markets. In this way, they provide an irreplaceable contribution to the country’s long-term growth. Further promotion of this growth requires constant structural reforms in the economy, which should not only address the deficiencies of our economy but also precede future development trends. Investment in infrastructure should be a priority of funds use in the economy. Also, further development and consolidation of financial market segments, completion and expansion of pension system in the favour of private incentives, investment with priority in education and medical fields deserve the attention of all stakeholders of the economy. We also deem that it is just the time for the private sector to reflect the new development stage of the country, by enhancing and fostering its management. This requires a better management of business and financial risk, signifying also a closer cooperation with specialised agents in the market, extension of business plan horizons and their better orientation towards the global reality and the country’s development priorities. In light of this, the financial system should respond more prudentially to these requirements, enhancing the transparency and efficiency of its products. Now that the banking system has overcome the delicate moments it was faced with at end-2008, it should enhance its contribution to financing the private sector’s activity of the economy. However, I avail myself of the occasion to once more emphasise that the financial stability of the banking system is another major objective, to which the Bank of Albania remains deeply committed. This system will be constantly subject to Bank of Albania’s supervision and stress-test analyses.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the 8th International Conference of the Bank of Albania: "Monetary & Financial Stability Policies - Lessons from the Crisis", Tirana, 17 September 2009.
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Ardian Fullani: Monetary & financial stability policies – lessons from the crisis Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the 8th International Conference of the Bank of Albania: "Monetary & Financial Stability Policies – Lessons from the Crisis", Tirana, 17 September 2009. * * * Honourable Mr. Prime Minister, Dear Governors, Distinguished guests, I feel deeply privileged to open the proceedings of the 8th International Conference of the Bank of Albania entitled: “Monetary & Financial Stability Policies – Lessons from the Crisis”. I hope the proceedings will help the participants better realize the issues facing the global economy during this period and draw the proper lessons. I am personally convinced that the prominent speakers’ reputation is a guarantee in this regard. Before I invite the guests to discuss the features and lessons drawn from the global and regional crisis according to their viewpoints and experiences, allow me to say a few words on this conference. The topic chosen to be dealt with in this conference is at the forefront of the institutions’ agenda, responsible for macroeconomic policies and financial system surveillance at a national and international level. The panic that followed the Lehman Brothers’ failure almost a year ago transformed the turmoil in the U.S. mortgage loan market into a genuine globalwide financial crisis. The integration of the financial markets caused the crisis to spread swiftly, while the vital role of the credit system in free market economies transformed it into a global recession, hitting the East and South-East European countries as well. The experience gained so far has allowed a better acknowledgment of the causes that led to the crisis and the factors that triggered and accelerated its spreading, and a reassessment of the diverse supervisory and regulatory practices. I would like our discussions on the crisis to focus on two directions: what we learnt and what we could not learn from the crisis. Among the numerous aspects debated at length, I would like to distinguish three of them: the dichotomy between the state and the market, the degree of confidence in the forecast models, and the importance of coordinating the pre-emptive measures. With respect to the “state vs. market” debate, I would like to re-stress my unwavering confidence in the market and our commitment as policy-makers to make it operate by the rules and efficiently 24/24. The last few years have witnessed the rapid development of forest models and techniques. Avoiding the tendency to underestimate their high importance to the day-to-day work of every analyst and policy-maker, we have to be aware of the restraints in these models and of the risks arising from the excessive reliance on them. The high cost of coping with the consequences of the crisis makes us aware of the importance of building pre-emptive mechanisms and above all, of the importance of coordinating them at a national and international level. Today, nearly two years after the first signs of the crisis, the global economy and financial market are in a more optimistic situation. The economic recovery has been reflected in improved business and consumer confidence indices, mitigated deflationary pressures, normal functioning of banking and financial systems and higher economic activity growth rates in almost all production sectors. As in the other regional countries, these developments have been present in Albania as well. The last quarters have attested to higher lending to economy, improved confidence in the banking system, relative exchange rate sustainability and the anchoring of inflation expectations. There is now a global consensus that the hardest part of the crisis belongs to the past. This is certainly good news although not sufficient. Time is ripe to consider all the options for the so-called “exit strategy”. The mitigation of anti-crisis measures’ side-effects calls for coordinated, proper and timely actions. Policy-makers need to reassess macroeconomic and financial policy objectives in the light of the most recent positive developments. Narrowing down the geographic extension of my discussion from global to regional, I will briefly dwell on some of the above-mentioned issues. I once told a friend of mine that small open economies, as is the case with the Balkan economies, are net importer of goods, services and crises. The crisis did not originate in the region. It was gradually transmitted as a result of the integration of the region with the global markets and economy and a consequence of the presence of large international banking groups. Our countries are all as similar as they are different. Consequently, the form, outburst and consequences of the crisis were as similar as they were different. The economic and social structure, the level of convergence and integration with the global markets, the legal and institutional norms and the nature of exchange rate regimes in particular, have established the features of the crisis for each country. The experience of the distinguished governors present in this conference will throw light on the above aspects. As regards the Albanian case, the last 12 months have been challenging for the banking industry. Despite the turbulent times, the banking system has in no case shown any signs of panic or confusion. The Bank of Albania considers that the rationale behind is the prudence shown in the recent years with respect to the banking system’s financial stability. The high level of resilience and the quick recovery were a consequence of a number of important decisions. By adopting the new banking law in the Republic of Albania and a range of other monetary policy and banking supervision-related decisions, we have aimed at firming up the macroeconomic balances further and strengthening financial stability. At the focus of the Bank of Albania’s strategy were the good governance and better risk management, improved banking activity transparency to the customer and the strengthening of internal control. This strategy peaked with a large-scale, exceptional and contemporary programme of open and constant communication with the public. I believe that the favourable liquidity and capital situation characterizing the Albanian banking system on the eve of the financial crisis last fall helped to cope with the withdrawal of deposits during September-October 2008. However, the Bank of Albania deemed as necessary the prudent monitoring of the situation and took a number of actions, which alleviated the pressures over the banking system substantially. These actions helped to relax the liquidity situation and they were in harmony with the ECB’s operational response to the crisis. First, an ad-hoc task force was set up. Its main responsibility was and remains the daily monitoring of each individual bank. Our direct conclusion was that the analysis should consider all micro-level aspects, each and every cell of the system and indicators. Second, a number of facilities were adopted for the incessant supply of the system with the required liquidity. The type of auction for the injection of liquidity changed to fixed-price auctions, the collateral base for repo agreements expanded, the use of the required reserve increased from 20 to 40 percent, and the spread between the Bank of Albania’s key interest rate and overnight loan reduced from 175 to 75 basis points. Third, through a special act, the Bank of Albania required higher capitalization of banking activity from the banking sector, adding to the guarantee of the banking sector’s financial soundness. Current financial system developments show that the overall situation in the banking sector has improved constantly. Deposits are back to the banking system, attesting to the improved public confidence. Credit to economy has also shown signs of recovery. Another positive development relates to the fact that lending in the Albanian Lek has increased considerably. The European markets have been performing amid a more optimistic climate. Statistics show that the recovery of the crisis began even before the most optimistic forecast. Distinguished guests, I believe the prominent panellists and the central bank governors of our region will address all the issues related to the crisis and the lessons drawn from it thoroughly. However, allow me to briefly address some issues I believe are of interest to the audience. First, the large-scale globalization of the world economy in the past two decades could not but spread the crisis throughout the world; consequently, there was an immense need for coordinated protection at an international level. In the early days of the crisis, we saw biased actions which led to arbitrage of negative effects. Globalization requires the financial infrastructure to be everywhere similar in shape, contents, and human and technological capacities. It should operate under similar standards and practices and have the proper flexibility to precede the financial novelties. Second, the last crisis calls for the pre-emptive and forerunning nature of supervision and legal regulations in general. I believe a regulatory framework is genuinely effective and successful when it intertwines the simplicity and transparency of a rule-based approach with the flexible and far-sighted characteristics of a principle-based approach. At any case, this is indispensable to make banks accountable, to convince the supervision inspector on the risk characteristics and on the transformation of new different on- and off-balance sheet products, before they exceed a certain threshold in terms of magnitude and exposure. The Bank of Albania is making efforts in terms of identifying the aspects that need further improvement. In this undertaking, we will take into account the similar developments in the region and broader, to preserve the market competitiveness and the convergence in supervisory practices. Third, I believe that the crisis requires the existence of an international institution which should guide the financial stability, assess the systemic risk and determine the quantitative indicators measuring it. In this process, it is important that the regulatory norms be transparent to everyone. At the same time, it should be followed by an accelerated convergence process of the supervisory and regulatory practices according to the financial centres of influence. Fourth, the current crisis confirmed our concern related to the exposure of the Balkan region to a relatively small group of banking operators of vast regional extension. Shocks affecting parent banks would affect one or several regional countries. A similar risk still persists even in the case when one of the branches in the region is hit by a shock. Similarly, the contagion risk is still present. Fifth, I believe the region should scrutinize carefully lending in foreign currency. It is essential to set a better balance between lending in the national currency and lending in foreign currency. To this aim, the nature of the exchange rate regime and the impracticability of central banks in the region to act as lender of last resort should be taken into account. In this context, we should support a stronger role of the national currency in bank lending, making lending in foreign currency more costly for banks if it is not supported by savings in foreign currency. The strong reliance of banks on foreign currency financial resources to support the rapid lending should be addressed and managed timely. Sixth, I think the current crisis will make the financial funds, which for a long time have rushed in numerous forms across all former communist countries of East Europe, scarcer. This situation may have considerable implications for the long-term economic growth rates in the regional countries, which still are in need for foreign financial funds to support their convergence process. Therefore, I believe that the crisis has called for another lesson: the need to draft and implement joint regional programmes and structural reforms to absorb projects and financing lines, which will in turn expand and deepen our joint Balkan market. It is true that after each crisis, macroeconomics as a science has made steps forward. Each crisis represents an event with specific characteristics, dissimilar or partly dissimilar from the previous crises. Each crisis brings in new information, regardless of the intensity, geographic extension or duration. Each crisis fills in a piece of the hard puzzle of free-market economy functioning, helping to a better understanding of the whole. I hope to provide a consensual conclusion if I say that we, the administrators, had the fortune to govern in a time of crisis and that we have a motive to feel privileged – and why not proud – to have coped with the challenge, being witnesses and active players in that regard. Thank you for your attention.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the lecture of the Governor of the CB of the Rep. of Turkey, Mr Durmus Yilmaz, entitled "Current Global Fin. Crisis & Recent Dev. in the Turkish Econ. & Mon. Policy", Istanbul, 24.09.2009.
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Ardian Fullani: Effects of the exchange rate regime Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the lecture of the Governor of the Central Bank of the Republic of Turkey, Mr Durmus Yilmaz, entitled "Current Global Financial Crisis and Recent Developments in the Turkish Economy and Monetary Policy", Istanbul, 24 September 2009. * * * Ladies and Gentlemen, It is my great pleasure to give the greeting speech in this joint meeting, in which our dear and honourable friend, the Governor of the Central Bank of the Republic of Turkey, Mr. Durmus Yilmaz, will address very important theoretical and practical issues related to the most recent global developments, sharing at the same time his experience in Turkey. The global financial crisis hit all the advanced economies severely. It certainly affected the emerging economies of South-East Europe, our two countries are part of. The contraction of global economic growth, the decline in foreign trade, the higher risk premiums, the interrupted functioning of the credit system and the rush to get liquidity affected our economies as well. These economies remain closely related to the Euro area economy through a number of trade and financial channels. The response of fiscal and monetary policies to this crisis is of prime importance; this aspect will be thoroughly elaborated by our dear friend. However, I would like to briefly address an aspect of macroeconomic and institutional framework, which has been an important determinant of the extent and magnitude of the national authorities’ response to the crises: the exchange rate regime. A quick glance at the current developments in the region and broader allows us to draw the conclusion that the countries adopting a fixed exchange rate regime have been affected by the global crisis proportionally higher. Moreover, they have been more constrained in terms of responding to the crisis. By contrast, countries adopting a free floating exchange rate regime have been affected by the crisis more mildly and smoothly, and they have preserved higher independence in their economic policies for the mitigation of crisis effects. Obviously, this is not occasional: the free floating exchange rate regime is an important political, economic and institutional investment of emerging countries. Their sacrifices in terms of building reliable monetary and fiscal policies, enhancing public confidence in the respective currencies and national financial institutions are rewarded with the flexibility this regime provides to macroeconomic policies in coping with the crises. Exchange rate volatility mechanism is precisely a mechanism that allows the economy to absorb various shocks. The free floating exchange rate regime, devotedly adopted by the Bank of Albania, allows the Albanian economy to withstand these shocks at minimum cost. Let us leave this mechanism operate smoothly, without excessive reactions from the market or its agents. Any smooth moves towards the exchange rate equilibrium will be in the Albanian economy’s own interest. Any hasty short-term reactions, like the ones we have been attesting to over the course of the present year and in the early days of this week, bring about individual financial cost to those undertaking them, as well as financial cost to the economy. No economic agent is stronger than the foundations. The high volatility and uncertainty in the foreign exchange market do not have any real base. The euroisation of the economy is a visionary idea, not only for Albania but for the entire region as well, since its final aspiration is the membership into the European Union. It encourages the domestic and the regional market, and the European authorities, to speed up the convergence process. However, convergence in the Euro area is a derivative of continuous structural reforms and strengthening of financial systems, wherein the stability of the currency is of prime importance. There can be no European integration without a longterm equilibrium of the national and European currency. In the long run, the exchange rate will inevitably reflect the sound foundations of the Albanian economy, which are to remain so. The past years’ equilibriums remain real indicators of the potentials of the Albanian economy. In the long run, we remain deeply convinced of the benefits the free floating exchange rate regime brings about. It will be the passport to and the best support to the Albanian economy in its path to European integration. I take this opportunity to invite all the economic agents to consider the benefits, that our national currency provides, impassively, as the best long-term instrument for protecting their savings and as the greatest buffer to wealth volatility. To Albania, the Lek has been, is and will remain a successful currency. The Lek serves as an anchor for all our European initiatives. In the last 17 years, the Lek has managed to withstand the inflationary pressures and the pressures deriving from the foreign markets. Therefore, it should be left alone. It should move freely on its path, concurrent with the market demand and supply. The Lek is the icon of the Albanian economy that will guide us through the European gates. I take this opportunity to invite the media to comprehend this message and transmit it to the public at large. Before giving the floor to our dear friend, I would like to briefly introduce Governor Yilmaz. Mr. Yilmaz obtained his BA in Economics from the City University of London and his MA degree from the University College, University of London. Mr. Yilmaz started to work in the Foreign Exchange Department at the Central Bank of Turkey in 1980. After a long and successful career, Mr. Yilmaz was appointed Executive Director of the Workers’ Remittances (Non-Residents FX Deposits) Department in 2002. One year later, in the Shareholders Ordinary General Meeting held on 7th April 2003, Mr. Yilmaz was elected Member of the Board of the Central Bank of the Republic of Turkey. Having served as Board Member between May 2003 and April 2006, Mr. Durmus Yilmaz was appointed Governor of the Central Bank of the Republic of Turkey on 18th April 2006. Mr. Governor, the floor is yours.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on monetary policy decision of the Supervisory Council of the Bank of Albania, Tirana, 30 September 2009.
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Ardian Fullani: Recent developments in the Albanian economy Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on monetary policy decision of the Supervisory Council of the Bank of Albania, Tirana, 30 September 2009. * * * The Supervisory Council of the Bank of Albania reviewed the Monthly Report of Monetary Policy, at its meeting of September 30, 2009. After getting acquainted with the latest economic – financial developments at home and at the conclusion of the discussions on their expected future performance, decided to keep the key interest rate unchanged, at 5.75 percent. This interest rate is in consistency with the maintaining of inflation close to the Bank of Albania target for a medium-term period. *** The analysis of the latest economic and monetary developments confirmed our expectations for an overall downturn of the economic activity at home and a reduction of the domestic inflationary pressures, for a relaxation of monetary markets and a slowing recovery of financial intermediation, and has also highlighted the still fragile equilibrium of the economic and monetary indicators. The conclusions of our discussions converged to a decision-taking to keep the key interest rate unchanged. The purpose of this position is to further maintain and consolidate the established balances, thus considering the macroeconomic stability as an indispensable precondition for a stable and long-term growth. The economic activity at home is backed up by an improvement of the overall global climate, during the last two months, by attempting improvement signs of lending activity and by the seasonal effect of summer time. Global economy is being characterised by a more moderated downturn of the economic activity at industrialised countries, accompanied with a growth of the world trading activity and low inflationary pressures at global level. Nevertheless statistical data regarding the Albanian economy still remain at low level, the indirect indicators suggest this later is characterised by a positive economic growth, but slower compared to the succeeding years. The low pace of both retail sales and budget revenues increase, the exports slowdown, the lower expansion of lending to the economy and business and consumer’s confidence indexes show that Albanian economy is going through a slower growth phase relative to the one of previous year. This situation is also mirrored on the low inflationary pressures, revealed by the low level of core inflation, which is a proper appraiser of the domestic demand pressures. In August 2009, annual inflation pointed to 2.2 percent, remaining within the targeted band of the Bank of Albania, but close to its lower limit. Seasonal tendency of prices’ behaviour was confirmed to have the same intensity even during this period, by keeping the inflation value at the same rate with that of the preceding month. The average annual inflation marked 2.2 percent, equal to the value of the previous year, revealing the full elimination of the first round effects of the previous year increases in terms of raw material and electric prices. Fiscal policy persisted to be also expansionary during July, notwithstanding at more moderated paces. Budget revenues stood at the same rates of projection fulfilment with the previous months – accounting for 94 percent – while expenditure were met by 98 percent of the projected target, maintaining the same level with the three previous months. This effect provided advantage to the expansion of budget deficit in this period. As we have underscored even previously, the increase of both budget deficit and public expenditure does support the economic activity in terms of a low demand of the economy, but it also is accompanied by the increasing tendency of the public debt interest rates. The increasing review of public expenditures and budget deficit rate is forecasted to preserve this effect even during the remaining part of 2009, while a more balanced fiscal position for 2010 would reduce the pressures on monetary markets, by establishing more spaces for the rise of monetary stimulus. The external sector data regarding second quarter 2009 reveal a further reduction of the Albania trade exchanges with the rest of the world in annual terms. According to preliminary data, these development tendencies have persisted even during July 2009. Exports decreased by 17 percent relative to the same month of previous year. Imports performance incurred the same development declining by about 8 percent in annual terms. External economy developments are accompanied by the maintenance of high trade deficit rates, which affect the imbalance of the demand to supply ratios for foreign currency in the economy. Nevertheless, the maintaining of the exchange rate flexibility, the correcting tendency of trade deficit and the attraction of savings denominated in ALL, as higher interest rates and of low inflation, serve to relaxed and prudential volatilities of the exchange rate and to a strong position of ALL in the short-term and medium-term period. Monetary indicators of July have reflected the more relaxed dynamic of financial intermediation. External sector highlights of the economy have affected the negative paces of the foreign currency component of money stock. However, banking system carried out the intermediation to increase lending in ALL extended to private and public sector with positive paces. Thus, while monetary supply picked up at slower annual paces, about 4.4 percent, M2 aggregate maintained high paces of the annual growth at 9.7 percent as at July. The slowdown of lending pace to economy in foreign currency and the lower supply of foreign currency inflows from external sector have led to a negative annual pace of deposits growth denominated in foreign currency of the system. Lending to private sector increased by 15.8 percent in real annual terms, relative to 17.9 percent in June. Lending to business provided the main contribution on the monthly growth of credit, a constant phenomenon, which this month appeared particularly more emphasised. Credit denominated in ALL maintained the average annual increase rate, by about 28-30 percent, but the slowdown of lending denominated in foreign currency has led to the decline of credit growth pace. The open market operations of the Bank of Albania met the liquidity needs of the banking system. Bank of Albania has injected all liquidity demanded from commercial banks, by preserving at the same time an accurate time structure of this injection. Notwithstanding the improved liquidity situation, yields rates in primary market have persuaded the increasing tendency of the current months. The increase of risk evaluation from banks is mainly reflected in the determination of long-term yields that is confirmed by the rise of 2 and 5-year bonds yields. The performance of new deposits interest rates denominated in Euro and ALL appears stable during July. New credits interests’ rates denominated in ALL have persuaded the decline in July, while this month recorded a tightening of new loan cost denominated in Euro. At the conclusion, by framing the forecasts for a relaxed inflation and within the target set out by the Bank of Albania for the future, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged. This movement is a continuance of the careful monetary policy pursued by the Bank of Albania during the year 2009, a policy which has aimed the transmission of controlled monetary stimulus and the keeping of inflationary expectations close to the targeted band of the Bank of Albania. Recent developments suggest that the expose of inflationary pressures is being shifted in general on the falling direction. The higher transmission of the recent increasing trend of the raw material prices in the world market composes a risk in terms of the increasing direction of consumer prices. The performance of exchange rate, of inflationary expectations and the country fiscal position, shall continue to condition the balance of risks in future. The expected relaxation of these occurrences in terms of a well-stabilised financial environment shall provide the needed spaces for the growth of monetary stimulus in the economy.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Third Open Forum with the banking system in Albania, Tirana, 13 October 2009.
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Ardian Fullani: Developments in the Albanian banking system Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Third Open Forum with the banking system in Albania, Tirana, 13 October 2009. * * * Dear participants, It’s a special pleasure for me to open the proceedings of the 3rd forum of the Bank of Albania’s dialogue with the banking system. Our communication with the market and its top administrators has now turned into a tradition, to share ideas and present attitudes related to developments affecting the banking and financial activity in general. Such meetings are an important instrument that carry out an inter-institutional communication and simultaneously create a window of communication with the public at large. They serve for identifying issues posing a challenge to the overall financial market operation and are a precaution for finding solutions, aiming at coordinating the interests of parties operating in the financial market, with the financial stability strengthening as the final goal. The 3rd forum we are holding today is the continuation forum. Allow me to remind you of the first forum, which, I would label, without any hesitation, as the forum that consolidated the financial stability foundations in Albania. Its conclusions highlighted many pre-emptive measures, which in the course of time, upon global crisis precipitation, resulted of an extremely immune importance. The 2nd forum recorded another salient achievement, having the confirmation of scrupulous implementation by the banking system of all previous tasks and recommendations as the main motif. This forum, which was held on the eve of global turmoil outburst, indicated that the Albanian banking system had significantly increased its resilience. It addressed important matters related to: • Transparency and customer services, • Risks related to foreign currency credit and consumer credit, as well as • Interbank market functions and monetary policy transmission in the economy. Today’s forum takes place in an important moment of the banking and financial system. After a hard year, it seems that the situation is becoming eventually normal. Therefore, I am confident that, figuratively, the third forum will have the consolidation of public confidence in the Albanian banking system as the main motif. Achievements in this regard are not lacking. Statistics show that deposit level is approaching steadily to its prior-crisis level, while ALL credit livening-up is continuing. Dear participants, Today’s meeting is held after some important financial and economic events dictated by the global crisis. Now that the situation has cleared up and has entered into an improvement stage, a thorough analysis is being made about its causes, about public authorities’ reaction and about actions to be taken, in order to raise the global financial system’s resilience. Now, allow me to deal briefly with the main features of this unmatched crisis, and then continue with some arguments on the functioning of the Albanian financial system and some necessary regulations for its further perfection. The crisis originated in the USA through the bursting of the housing bubble, bringing a number of existing problems to the fore. Now, it has become clear that global imbalances of currency flows, affected by irresistible behaviour of expenditures or savings between developed and developing ones, have led in the course of time to extremely easing monetary policies in advanced economies, which have further deepened these imbalances, thus leading to rise in the financial activity risk, while searching for a higher return from investment. Innovations in financial products reflected inside or outside financial institutions’ balance sheets, found the necessary mechanism to conceal the real risk size in the extreme stratification. Management structures’ remuneration policies of financial institutions that were at the heart of the crisis supported the aggressiveness for short-term and unsteady profits on the back of the need for a better understanding of risk, intending a positive performance and long-term investments stability. Several market mechanisms resulted non-efficient to precede developments in some global-wide institutions. Pronounced weaknesses were reflected even in financial market regulatory authorities, who believed that difficulties would be sorted out by a market discipline mechanism or by a greater reliance on internal models of financial industry assessment. Also, it has become clear that the supervisory regulatory authorities have not paid due attention to developments that affect the overall financial system, focusing more on certain institutions’ behaviour. From this viewpoint, it is deemed that actions to monitor the overall price performance of non-financial assets, the way of estimating them and recording them to bank balance sheets have been insufficient to pre-empt unjustified increases and to avert their procyclic moves. All these elements are regarded as conclusions that go beyond certain jurisdictions and require a global response in the context of increased financial integration and ongoing economic globalization. Emerging market economies are affected differently from this turmoil. The crisis shudder hit harder the countries with an economy damaged from macroeconomic and financial policies, with decreased competitiveness, reduced space for financial stimulation, with an unbalanced economic growth or an underlined dependence on foreign financing resources to stimulate an unrestrained economic and financial expansion. In the face of an extremely difficult financial situation, spread swiftly on the entire real sector of the global economy, public authorities of advanced economies took extraordinary actions to ensure financial market functioning and attenuate the financial distress. Through central bank actions, low-cost liquidity was injected into the markets, while governments took extraordinary actions to provide backup capital to financial institutions and to support domestic aggregate demand. Moreover, some emerging market economies, with robust economies and with an upward share to the global economy, have supported the domestic demand through their stimulating policies and have preserved their economic growth, playing an important role in mitigating the global crisis consequences. Along with extraordinary measures taken to withstand the crisis effects in the short run, authorities of advanced economies and international financial institutions have been strongly committed to change the way of global financial system functioning and its regulating superstructure. Many financial market regulation and supervision standards are expected to change, aiming at putting necessary boundaries to financial market dynamism and innovations, in order to ensure system’s stability and its resilience to various risks. In more details, the goals of these changes will be: strengthen the mechanisms that raise financial system stability; duly orient the stimuli that determine decision-making in the financial activity and decrease procyclicality in it. Changes to the regulatory and supervisory superstructure are aimed at strengthening the institutional mechanism, paying greater attention to systemic risks and global-wide financial institutions. Better conditions will be set for supervisory standards convergence and the cooperation among regulatory authorities operating in different jurisdictions will be strengthened. At the same time, the role of international financial institutions will be oriented towards financial crisis management and their resources will be adapted to this end. For many reasons, which converge in ongoing processes of financial integration and economic globalization, no country can pretend to stand beyond these developments. In such a case, what at the very beginning could be perceived as a more relaxing financial environment that would provide a competitive priority, would soon leave the place to recycling of problems that were at the root of this crisis, decreased investors’ confidence and increased financial and social costs for recovery. Naturally, each country will adapt these standards to the degree of current financial system development, its composition and depth, as well as to its outlook. It is important to emphasise that these measures would be insufficient, if not accompanied by more general policies, aiming at diversifying sources that contribute to economic equilibrium growth, financing the economic agents, improving the legal framework of business development and following sound macroeconomic policies. Allow me now to deal with the situation of our financial system and share with you some stances, which we have generally discussed even previously. The stagnant situation of the financial system during the last year was dictated by the banking system performance, because of its weight. The rest of the financial system, represented by insurance companies and other non-bank financial institutions, underwent a good growth. Regardless of this, their share to the financial system remains low. The banking sector was faced with liquidity constraints in the last quarter of 2008 and in the first quarter of 2009. Deposit withdrawal from the banking system was withstood, thanks to liquid assets adequacy, capital availability and Bank of Albania’s intervention to supply the market with liquidity, aiming at maintaining its stability and mitigating any expected contraction of the banking system’s intermediary role. To this end, the Bank of Albania has supported the demand of the banking system for liquidity through open market operations. After cutting interest rate by 0.5 percentage point in January 2009 and mitigating inflationary pressures at home, the monetary policy paid special attention to financial stability, keeping base interest rate unchanged for the whole period. Thus, it was aimed to support the demand for financial assets denominated in the national currency in the short run. At the same time, the Bank of Albania carried out with a strong supervisory regime on banking sector developments. Such a stance supported the efficient management of liquidity situation of the banking sector, oriented credit towards national currency and influenced the maintaining of financial stability parameters and capitalization of activity. The situation entered into a qualitative improvement stage, following the re-starting of the process of public deposit growth in the banking sector. This process, which took place gradually and steadily in the second quarter of 2009, continued at satisfactory paces. During this period, banks acted with due prudence and accountability. Therefore, I would like to avail myself of the opportunity to thank you, the staff you manage, as well as the shareholders of your institutions, for their commitment and cooperation during this period. However, the liquidity situation and the global crisis effects on the real sector of the economy have brought about underlined decline in lending paces and have reversely impacted the credit portfolio quality of the banking sector. Therefore, the financial result of the banking sector, though lower than that of 2008, continues to be positive. It is clear to all of us that the banking sector would face a difficult business climate and needs to adapt in the mid-term. As a matter of fact, a complex interdependence between the economic growth and banks’ financial soundness is noted. Decline of investments and partially of consumption in the economy has been reflected in decreased credit demand. On the other hand, increased premium risk has made banks more tightening in lending standards, showing greater attention to liquidity indicators. The Bank of Albania deems that we may enter into a vicious circle, where non-lending to the economy would result to a prolonged economic slowdown, due to damages in related interests of all stakeholders in the economy, including banks. We think that this situation requires countercyclic operations in a general level. In practice, the banking sector should exercise its role in promoting the development of the economic activity, naturally showing proper prudence. This system is the generator and controller of market economy. Provision of development impulses by acting jointly should be its primary task, while the positive synergies will bring mutual benefits to economic growth and financial stability. The Bank of Albania deems that the banking industry should review the banking activity growth strategies, aiming at their better harmonization with the necessary human, financial and technological resources. Operational risk identification and management remain a priority. In practical terms, this process should aim at placing internal mechanisms to prevent creation of excesses in certain directions of the banking activity, aiming at a better diversification of investments and supporting steadier forms of financing resources. All these require strengthening of internal audit systems, stimulation of structures that assess and manage operational risks in general, bank staff expertise, and establishment of stable relations with depositors and other beneficiaries of banking services through transparency enhancement. In this framework some issues that deserve special attention will be: a) Setting parameters that ensure a better equilibrium between performance of risky assets of the banking sector and financing resources, as concerns type of currency, maturity term, interest rate; b) Setting volumes and certain features of banks’ operational assets that enable maintaining of satisfactory liquidity levels; c) Identifying certain mechanisms that will mitigate the cyclicality in banking activity, particularly in the context of rapid growth of banking activity or in cases of its significant contraction; d) Strengthening requirements for managing extraordinary situations and business continuation; e) Improving structures of management, accountability and performance appraisal and increasing expenditure effectiveness for training, financial stimulation and human resources strengthening; f) Further strengthening of the requirements for transparency to clients, and the regulatory framework for customer protection from likely abusive practices in the financial system. The Bank of Albania will be committed to this process, making use of all necessary human and financial resources, aiming at further improvement of legal, regulatory and operational procedures, so as to create steadier conditions for a balanced banking activity, which remains profitable and carries out the intermediation process in a competitive way over the long run. We are convinced that this reassessment process is necessary, not only to operate in the framework of convergence to international standards, which are changing, but also to act pre-emptively to financial and banking activity risks, which arise from its rapid development. In this process, we will make use of the experience gained during the last months and the directions in which the international standards are changing in this area. We are aware that this process requires constant communication with the banking industry. Also, the identified measures will be taken by allowing the proper time necessary for the banking industry to recover and prepare. As a matter of fact, the Bank of Albania has initiated this negotiating process first of all within itself. Some regulatory acts of supervisory framework, which are being discussed lately, mentioning the draft-regulation “On liquidity risk management”, are prepared by taking into account the above goals. Also, procedures for systemic risk identification and assessment, as well as response to them, are being completed. In this framework and beyond it, the Bank of Albania believes that all the public authorities that play a role in financial market regulation, supervision and development, should be committed to a similar process, having the strengthening of the regulatory and operational framework as the final goal, in order to firm up the long-term financial system stability. To this end, we think that it is necessary to pursue such policies that enable re-establishment and maintenance of balances in fiscal, banking and monetary activity, supportive to a stable economic growth over the medium and long run. To provide a longer-term response to stable economic development, public authorities should speed up to design and implement stronger development policies, which in the medium run enable establishment of a better equilibrium in the contribution of various sectors to economic growth, which raise competitiveness of our economy and make it more formal. To find better development equilibriums even in the financial system, it would be necessary to draft policies that would promote a faster development of the non-bank financial sector and would support creation of capital and debt markets for private entities. Accomplishment of these objectives would preliminarily require strengthening of financial reporting standards; completion, accuracy and improvement of law-enforcement in terms of business relations development; as well as a better protection of creditors’ and consumers’ rights of financial institutions and products. In practical terms, these measures would expand financing resources for economic development, thus relatively decreasing its dependence on the banking sector. Also, public authorities should, through a close cooperation among them, review and improve the framework of measures for efficiently withstanding the extraordinary financial situations, being ready to engage the necessary financial, human and technological resources and carry out necessary legal and regulatory changes. Dear heads of the Albanian banking system, The events we have experienced in these 12 months make us believe that prior-to-crisis economic and financial balances are likely to shift to a new equilibrium. I think that what I just said constitutes the essence of our contribution to the future: Let us do our best to make the economy move naturally towards a new equilibrium. All the institutions, policy-makers, administrators should be committed seriously to setting-up this new hotbed for our economy, so that as the years go by, it becomes attractive, competitive and profitable for every economic agent, either domestic or foreign. Getting away from the pressure exercised by the crisis whirlpool requires much optimism, energy and financial resources. At national level, ensuring steady foreign currency inflows, particularly in the form of foreign direct investments, remains a major priority. I think that the banking system has a prior role to play in this regard. It should be active in identification, promotion and financial backup. Thus the multiplier effect of foreign investments would gain a new dimension. Bailing the country out of the crisis spillovers requires not only energies, but also joint efforts. The irreversible path towards a democratic system of market economy requires financial architecture perfection and the country’s steady economic development in the long run. To this end, the drafting and implementation of wise development policies should be a constant, real and forward-looking priority, in full accordance with the European convergence framework. Only in this way we will harvest all comparative advantages that our country and the region and beyond provide to foreign investors. Let me finally emphasise once more that a well-capitalised banking system is a long-awaited development. However, considering only the regulatory capital is insufficient, I think. What I really think poses an ongoing challenge is the capital of public trust. The latter one is not an output of regulations or banking supervisory practices. It is an output of all actors’ sacrifices. Enhancement of public confidence would lead to more effective mobilization of all financial resources in the economy, addressing them according to free market principles to the benefit of individuals, businesses, decision-makers and banking industry itself. Ultimately, this would be translated into the benefit of the country, giving an additional, real and tangible opportunity to the country’s rapid convergence to the European Union. Thanking you for your attention, I invite you to discuss on these issues.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the International Conference for the 10th Anniversary of the Central Bank of the Republic of Kosovo, Prishtina, 30 October 2009.
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Ardian Fullani: Financial supervision and measures to strengthen financial stability Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the International Conference for the 10th Anniversary of the Central Bank of the Republic of Kosovo, Prishtina, 30 October 2009. * * * Dear Governor Rexhepi, Distinguished ladies and gentlemen, It is a pleasure for me to participate in this Conference which is perfectly organized by the Central Bank of the Republic of Kosovo, and to witness the amazing progress this institution has achieved in such a short but intense period of time. The energy and desire of the local staff to contribute to the history of this institution, has been rightly channeled by the vision and experience of several managing professionals that have given a valuable contribution in chairing this institution in the last years. I am sure this story will continue to be a successful one, based on the commitment of the management of the Central Bank of Kosovo to achieve and comply with the best work organizational and efficiency standards, by pursuing a clear long-term policy of investing in the quality of its personnel, and by supporting actions that contribute to maintaining fruitful inter-institutional cooperation. In addition, I want to thank the organizers for giving me the honor to speak in front of you today, regarding a topic that has become so relevant in the last year, following this unprecedented international financial crisis. Given the fact that the causes and consequences of this crisis have been broadly identified and discussed, in the first part of my speech I will focus more on the main findings of the professional discussion that is taking place nowadays to identify a new financial supervision approach. I am sure you will elaborate on these issues further during this Conference. In the second part of my speech, I will try to give you more detailed information on how we at the Bank of Albania are thinking about the future approach of the public authorities and of the financial industry, in relation to necessary measures to strengthen financial stability. Very shortly I want to reiterate what has now become clear to many: the recent crisis was a consequence of wrong incentives which supported unbalanced financial activity development and misconception of risk assessment, pricing and management. Such wrong incentives were present not only to the financial industry and markets, but also to the balance sheet of households, businesses and entire countries. Given the nature, the size and the impact of this crisis, not only to the financial industry and markets but also to the real economy, public authorities in many countries were forced to adopt swift, coordinated and extraordinary measures, both in the area of monetary and fiscal policies. Central banks abandoned almost any restriction and even adopted unconventional measures in providing ample and low-cost liquidity to the financial markets. Governments showed a strong commitment to reduce systemic risk by saving important financial institutions, by providing guarantees for inter-bank lending, by raising the level of deposit guarantees for the public etc. Such measures, most of the times designed as temporary, appear to have been successful in restoring the market confidence and steering the world economy back in the gradual recovery path. Focusing on the financial markets and institutions in the aftermath of the crisis, a number of issues, previously known but many times neglected, have re-appeared forcefully to request a serious and thorough response by the authorities. Many of these issues relate to the financial activity itself, others are connected more with the surrounding economic environment. It can be said now that the supervisory authorities of the financial markets and institutions are partly responsible for what happened. Despite the rhetoric, they failed to properly and timely identify and control the risk in the financial industry. Here one can mention the soft-hand on bank wholesale borrowing that financed the foreign currency credit in a certain jurisdiction, the neglect for the special purpose entities that were created to by-pass balance sheet prudential requirements etc. There are many reasons for this weakness and a number of them, in my opinion, go beyond the legal and resource capabilities of the supervisory authorities to act. On their own, the supervisory authorities were wrong in basing their work on the misconception that strong individual financial institutions are sufficient for the entire financial system stability. By doing so, they missed the negative effects and excesses that arise from the herd behavior of the financial institutions, many times a consequence of the pro-cyclicality that is inherent in the financial activity and the regulatory framework itself. The attention of the supervision was focused on the banking sector, but insufficient attention was given to its interaction with the non-banking financial sector, that by being much less regulated, in the meantime was increasing in size and importance. Also, as part of their general and commending goal to focus their supervisory approach on the most important risk sources of the financial industry, but also as a sign of their objective difficulty to keep the pace with the financial markets developments and innovations, the supervisory authorities relied more and more on the market discipline and on the sophisticated and unclear risk models of the financial industry, that also proved to be deficient. Some times, the structure of the supervisory authorities has proven to be fragmented or too complicated, giving rise to regulatory arbitrage by the market players. Other times, the resources needed to effectively perform the supervisory role have been limited, negatively affecting the supervisor’s performance. But this crisis showed that risk came also from other sources, out of the direct control of the supervisory authorities in a given jurisdiction. For example, the increasing asset prices were fueled by ample liquidity and credit conditions, which were often affected by international developments and financial flows. The borrowing in the international markets by the financial institutions was also affected by increasing fiscal and current accounts deficits, arising due to wrong policies that created imbalances in the saving-consumption behavior of most important economic players in the economy, including the households. It is now a question, whether some of these issues could be addressed by a more powerful role of the monetary policy. Financial integration, among other things, has also contributed in the rapid expansion of the financial activity, and many financial institutions have become too big for a single country. This has occurred at a time when, for the same reason, the “de facto” power of regulation has shifted away from the local supervisors toward their host counterparties. Hence, despite a steady trend of convergence between financial legislation in many countries, there are still marked differences that, particularly at a crisis situation, create strong tensions between public authorities in different countries. A very strong effort by the public authorities in the world to address the abovementioned issues in order to improve the supervisory standards and superstructure is now underway. Both in the United States of America and in the European Union, the creation of special institutions is being envisaged, whose role will be to identify and control systemic risk through a different supervisory approach for financial institutions with systemic importance. At the same time, such financial institutions are expected to become subject of a more stringent regulatory framework in terms of capital and liquidity requirements, balance sheet composition and expansion, and governance relationships. Revising the liquidation procedures for similar financial institutions with cross-border presence is another area that will confront the public authorities in the world with a stronger challenge. The main purpose of the reform of the financial regulatory framework will be to accommodate new incentives that will create a stronger environment for risk management in the financial industry. The main principle here is “prevention is the better cure”. In this regard, the perimeter of the supervision regulatory framework will be extended to include other important non-bank financial institutions and probably the bank holding companies. At the same time, the approach in the regulatory framework is expected to feature more automatic requirements (and less discretionary ones), as it tries to move toward more simplicity and clarity. The move toward simplicity and clarity, will certainly reduce manipulability and enhance transparency and credibility of the banking and financial activity. These changes will be complemented by similar ones in the area of customer protection and market transparency. The regulatory framework of the financial industry is also expected to be less pro-cyclical, as new interesting proposals are being identified to adopt a countercyclical approach for capital requirements, provisioning and accounting. Ensuring responsible governance for the banking and financial institutions is going to be another area of developments. New regulatory requirements and instruments to seek more involvement and higher responsibility of boards of directors for risk management and discourage uncontrolled risk undertaking are being identified. On the other hand, the supervisory authorities will need to strengthen their macro-prudential risk assessment capacities, by focusing more on systemic behaviors of the financial institutions. The central bank is expected to take a larger responsibility in this area, particularly in those countries where it did not use to have a strong supervisory role. Whatever the approach in this direction, the supervisors will need stronger legal powers which will ensure their ability to act in a timely and flexible way. As mentioned also above, procedures for managing distressed financial institutions and for crisis management will need to be revised to ensure stronger and more effective inter-institutional and cross-border cooperation, and in general to better address the potential conflict between ex-ante supervision and ex-post intervention. This important process of financial regulatory reform is not without risks. I believe that the public authorities will pay particular attention to control the tendency for over-regulation, and to avoid a “blind” adoption of the regulatory changes as well as asymmetric/unilateral approach. Regulating more should mean regulating better. Undertaking risks is a natural thing for the financial industry in their valuable role of financial intermediation. Such undertaking of risk, when well identified and properly managed, is useful for increasing efficiency and returns of the activity, two important elements for a viable and solid on-going financial performance. Every country should certainly follow with particular attention the discussion and the changes that are being proposed for the financial regulatory reform, as this process will affect them for sure. In this regard, it is important for the public authorities to start a process that would analyze and assess the impact in their financial industry of the expected and well identified proposed changes. Clearly, the practical adoption of the proposed changes should be driven by the goal for achieving a higher convergence with international standards, but it should be determined by the characteristics of the national or regional financial system, and their development goals. In addition, focusing only at better regulating the financial industry, without addressing other important and probably unsustainable economic developments, is an asymmetric approach that will not deal properly with the risks to financial stability. In this regard, governments, businesses and households, should identify measures and adopt actions to reduce imbalances in their own balance sheets, as this will, on the other side, improve the quality of the financial industry and reduce risk. Dear participants, Let me now focus more on how the Albanian economy and our financial system was challenged by the international crisis, and what are some of the future measures the Bank of Albania believes are important to strengthen the stability of the financial system and of our economy. The recent international crisis showed that at the time of continuing financial integration and economic globalization, small economies like Albania’s or other countries’ in the region, should not count only on some natural protection coming from less developed financial markets and a much lower level of indebtedness from the households and businesses, to compensate over time for potential risks coming from less diversified economic growth, overreliance in remittances, insufficient culture of risk management in financial institutions and other economic agents – in particular for the exchange rate and liquidity risk, and very limited space from the public authorities to introduce anti-crisis financial measures similar to those in the developed countries. Hence, policy measures should address these and other deficiencies to find a proper solution in the medium-term. Such measures should reflect the preference for preventive approaches. In fact, over the last 4 to 5 years the Bank of Albania was vigilant over time to point out areas of the banking activity that required attention from the industry. We have expressed our concern regarding the rapid increase in lending, as we believed that this could negatively affect the credit quality. The composition of the loan portfolio, which is dominated by the euro-denominated loans, has also been identified as a point of concern. Despite the fact that this position is supported by a strong presence of foreign currency denominated liabilities in banks balance sheets and very close economic links to Euro-area countries like Italy and Greece, Bank of Albania has been consistent in its approach to introduce gradually regulatory measures that would discourage rapid increase in lending, encourage banks to lend more in domestic currency and increase transparency toward clients on banks products and services. On the other side, the monetary policy has successfully anchored expectations of very moderate growth in the price level and has supported demand for local currency financial assets by offering sufficient positive real return. As the crisis hit, the first impact in our economy was shown on the balance of payments, reflecting the relationships of our economy with the world. The increase of unemployment and the tightening of financing conditions in the neighboring countries of European Union were followed by the decline of Albanian emigrants’ remittances that live and work in those countries. While the gap between the domestic and external demand was widened, this was accompanied with an increase of current account deficit and the mounting pressure on the exchange rate. At the same time, the banking sector, which heavily dominates the financial system in Albania, reduced its funding contribution to the domestic economy as a response to the increasing demand for liquidity, following the deposit withdrawal from the public and an increasing borrowing demand from the Government. The combined effect of these developments affected negatively the real sector of the economy, mainly the business sector. In the first quarter of this year, business confidence index fell under its historic average, reflecting a more difficult financial situation. The latter was also shown by the lower-thanplanned realization of fiscal revenues as well as by the decline of loan portfolio quality that banking sector has encountered throughout the period. In the short-term, the public authorities took measures to lessen the impact of the global financial crisis in the economy. Through the significant increase of the fiscal expenditures share designated for investments, mainly in infrastructure, the government supplied an important impetus for the support of the real sector of economy to cope with the global crisis effects. The Bank of Albania has also been active to provide liquidity in the interbank market, with the aim to preserve the stability of the banking sector and to lessen the expected decrease of its intermediation role. We removed quantitative limits in the size of the liquidity injections through our week-long reverse repurchase agreements, and extended the maturity of our injection operations up to three months. Following a cut of the policy rate by 0.5 percentage points in January and the subdued inflationary pressures at home, the monetary policy paid an important attention to the financial stability, by keeping the policy interest rate unchanged throughout the period. 1 Through this policy, we intended to maintain strong incentives that would support the public demand for financial assets denominated in the national currency, in the short term. At the same time, along with the Ministry of Finance, the Bank of Albania initiated legislative changes to increase the deposit insurance level, as a necessary measure to restore the public confidence for the safety of their banking deposits. From the supervision point of view, the Bank of Albania established a stronger day-to-day Two days ago, the Supervisory Council of the Bank of Albania, adopted a decision to reduce the policy rate by another 0.5 percentage points, to the new level of 5.25 percent. monitoring of the banking sector developments, focusing particularly in the liquidity situation. This was part of a broader approach that included also changes in the regulatory framework, better analysis through improving stress-test methodologies, stronger communication with the banking sector, increasing number of publications and more presence in the media. We believe that such policies were important for the effective management of the banking sector liquidity needs, provided an orientation of lending in national currency and maintained strong capitalization parameters for our banks. The situation entered into a qualitative improvement phase after the return of public deposits growth in the banking sector. This process, which was developed gradually and in a stable way in the second quarter of 2009, continues with a steady pace. We believe that, after coping with the short-term effects of the international financial crisis and following the improvement of the international economic situation, it is the time for the public authorities at home to initiate a process of assessment for the legal and financial operations framework, with the goal to re-establish appropriate balances in the fiscal, monetary and banking activity, to further sustain a stable economic growth and maintain financial stability. In this regard we consider important for the fiscal policy to take respective correcting measures in order to keep the confidence of the resident and non-resident market agents and investors. At the same time, the monetary policy should assess the possible effects on inflation of the financial incentives it provided to the banking sector and to the economy, and later analyze the possibilities to support the financial intermediation of the banking sector in the economy at a lower cost. To provide a longer-term response to the stable economic growth, public authorities should insist on the compilation and implementation of the strategies for future economic development, which in a medium term shall provide for: a) the establishment of a better balance on the contribution that different sectors give for the economic growth. In this regard, it is important to increase the support for economic sectors with strong growth potential, like agriculture and tourism; b) the increase of our economy’s competitiveness and its further formalization. In this regard, the debate should focus on finding the incentives to increase the domestic production and support domestic savings. Over the time these would improve our current account balance, and improve the availability of our foreign currency assets; c) the expansion of the economic agents’ funding sources. In this regard the authorities should implement policies that support the development of the non-banking financial sector and that sustain the establishment of capital and debt market for private entities. The accomplishment of these targets shall firstly require the strengthening of the financial reporting standards; the completion and improvement of the legal framework for the developments of business relationships and the improvements in the protection of creditors and consumer rights, regarding the financial institutions and products. In more practical terms, these measures are expected to improve the availability of the funding sources for the economic growth, and gradually decrease its dependence from the banking sector; d) the improvement and the completion of the legal and operational framework to strengthen the crisis management capacities of the public authorities. In this regard, the authorities should identify the necessary measures for the prevention, the treatment and the elimination of financial crisis consequences. Bank of Albania believes it is important that each public authority carry out an assessment of its legal, financial, human and technological capabilities, to perform its role in the crisisprone situations. Needless to say, throughout this process, the coordination among the public authorities should be at the highest level. The banking industry itself is required to carry out a process of re-assessment of its development objectives and models for the future, so as to ensure consistent and stable profits. In this regard, the managing structures of the banks are expected to undertake a process with the purpose of: a) re-assessing the development priorities; b) establishing a better balance regarding income sources and focus on cost control; c) enabling a higher specialization of their business and identify competitive priorities; d) achieving a better balance regarding the composition of their assets and liabilities according to the currency, maturity structure, etc.; e) implementing more active policies to approach and maintain the public (customers) close to the institution; f) strengthening the internal audit structure and risks management and research capacities. Bank of Albania is now working with the goal that, within the needed time frame and after properly consulting with the financial industry, to support this process through the introduction of changes in the regulatory and supervisory framework. With this in mind, we shall aim at strengthening the internal mechanisms of the banking activity that incentivize its more controlled and balanced expansion, with adequate characteristics of liquidity and capitalization. At the same time, Bank of Albania shall assess the need for a new supervisory approach for the banks with systematic importance. The transparency of banking activity in its relationships with customers and public in general, shall remain at the centre of our supervisory activity. In general, in this process the Bank of Albania, shall consider the alternations that shall occur in the European standards, by supporting the strong collaboration with other central banks and supervisory authorities. In conclusion, let me point out that the ultimate goal of the new financial regulatory changes that is being identified in the international level is to provide the right incentives, which over time will ensure a more balanced, risk-averse and stable financial markets and institutions activity in the future. On a global and national level, such changes should be complemented by other more general economic measures that should enable an adjustment process to ensure a better alignment of asset and liabilities in the balance sheets of the various economic agents. All this should be achieved, as we still want the social benefits of economic and financial integration. This means the path ahead will witness a continuous and challenging effort to find and strike a new and more appropriate balance between risk appetite and more stable returns by the economic agents, and between short-term national concerns and long-term regional economic and political integration objectives. Once again, I wish to the Central Bank of the Republic of Kosovo, to its management and staff, a successful future! Thank you for your attention!
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the 6th Vienna Economic Forum, Regional Cooperation - Challenges and Chances: "20 Years after the fall of the Iron Curtain", Vienna, 9-10 November 2009.
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Ardian Fullani: Cooling down the liquidity situation in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the 6th Vienna Economic Forum, Regional Cooperation – Challenges and Chances: "20 Years after the fall of the Iron Curtain", Vienna, 9-10 November 2009. * * * The argument the organisers have found is very relevant, particularly when it comes to central banks of the Western Balkan. Actually, as far as I am informed from my colleagues, constrained liquidity (especially in foreign currency) and lending tightening are two fragile points, which may put us in a difficult position in the months to come. This set of two arguments carries over a dual problem: the short-term one, which puts banking system stability at risk, while providing its own implications even on the economic activity and on macro stability in a broader sense. The second problem is related to the financial support of the country’s economic activity in the future, given the recent years, when lending to the economy has constituted one of the main contributors in this regard. So far I deem that we have been effective in short-term management of these problems. Similarly to the European Central Bank and other central banks of the developed countries, we (the central banks of our region) have succeeded in supplying the market with ample liquidity, combining a variety of operational tactics and instruments. It is understandable that it is easier as concerns liquidity in national currency, whereas as concerns the one in foreign currency, at least in Bank of Albania’s case, we did never consider acting as a lender of last resort for providing foreign currency assets to the banking system. On the other hand, we exerted maximum pressure on the parent banks to ensure capital adequacy and sufficient credit lines to their banks, and for the sake of truth, we have found a spirit of cooperation and concrete actions in this regard, without any exception. Today, one year after the onset of the global financial crisis, I would say that all the measures taken by central banks in certain countries of the region resemble to one-another. The Bank of Albania considered as indispensable the prudential monitoring of the situation, taking a number of actions, which significantly dampened the pressure over the banking system. These actions have helped cooling down the liquidity situation and have been in line with the operational actions applied by the European Central Bank in response to the crisis. First, an ad-hoc task force was set up. Its main responsibility still continues to be the daily monitoring of the situation for each individual bank. Our direct conclusion was that the analysis should consider all micro-level aspects, each and every cell of the system and its indicators. Second, a number of facilities were adopted for the incessant supply of the system with the required liquidity. The type of auction for the injection of liquidity changed to fixed-price auctions, the collateral base for repo agreements expanded, the use of the required reserve increased from 20 to 40 percent, and the spread between the Bank of Albania’s key interest rate and overnight loan dropped from 175 to 75 basis points. Third, through a special act, the Bank of Albania required higher capitalization of banking activity from the banking sector, adding to the guarantee of the banking sector’s financial soundness. Making a generalization, I deem that the measures adopted over this period are unusual, extraordinary and contrary to the “constitution” of modern central banks as regards the liquidity, money market and monetary policy transmission channels. However, we well understood the philosophy that “the purpose justifies the ways”. For the sake of financial stability, all the measures taken are justifiable and have proved effective. So far so good. However, I think that the current situation makes the central bank more vulnerable from the viewpoint of monetary policy independence and efficiency. Liquidity by all means, whatever the size, whatever the maturity, and whatever collateral for an indefinite period of time, would damage irremediably the monetary policy and the financial stability in a second round. Preserving balances is more complex, if we take into consideration even the other major vulnerability related to high degree of euroisation (high share of foreign currency component to money supply structure) and lack of convertibility of our national currencies. Taking into consideration even the impossibility of the European Central Bank to serve as liquidity provider to our countries, I would deem that the spaces available to us in the framework of current legal and regulatory aspect have already been exhausted (from the liquidity viewpoint). Otherwise, I would say we have reached a critical point, below which no space for action is left. Let me emphasise that now that the crisis highlighted many “vulnerabilities” of this rapid catching up, the analysis should go beyond just accepting it as valid. This becomes necessary if we take into consideration the designing of a different economic growth model. In this context, I am more and more convinced that the global crisis was a development that advanced in time the need for inevitable steering of many imbalances that our economies accumulated over the last 10-15 years.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on the decision of the Supervisory Council of the Bank of Albania, Tirana, 25 November 2009.
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Ardian Fullani: Economic and monetary developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on the decision of the Supervisory Council of the Bank of Albania, Tirana, 25 November 2009. * * * In its meeting of November 25, 2009, the Supervisory Council of the Bank of Albania analysed “The Monetary Policy Report for November 2009”. After becoming acquainted with the latest economic and financial developments at home, and following the discussions related to their expected performance in the future, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged, at 5.25 percent. The Supervisory Council assessed that this interest rate is in line with Bank of Albania’s goal to keep inflation close to the target over the medium run. *** Economic and monetary developments over the latest months are featured by low inflationary pressures. Annual consumer-price inflation for October recorded 2.3 percent, being almost in line with its performance over the last quarter. The steady and low inflation rate has been conditioned by moderate pressures from domestic economy, due to: • Economic activity slowdown during this period; • Low exchange rate pass-through of exchange rate depreciation on Lek prices of import goods; and • Stabilized inflationary expectations. Easing of monetary conditions by the Bank of Albania, through key interest rate cut in October and continuation of liquidity injecting operations have provided appropriate impulses for promoting the economic activity in the future. These impulses, as always, are administered under the conditions of an expected inflation performance close to the threepercent target of the Bank of Albania, and stabilized expectations of economic agents for it. The key interest rate cut by 0.5 percentage point by the Bank of Albania at end-October aimed at strengthening the domestic demand and reviving the lending activity. Its effect on the economy is not fully reflected yet, due to the short period of time and the time lags in transmitting the monetary policy. However, its pass-through to the money market, which constitutes the first link in the transmission chain, is a premise for its reflection to credit cost in a second round. In the meantime, our liquidity injecting operations have been successful in guaranteeing the backup of economy with funds, mainly short-term ones. Allow me to make a more detailed description of the economic and monetary developments during this period. *** At global level, the economic activity has been supported by improved overall economic climate, impacting on the improvement of the global economic activity, reduction of risk premiums and stability of global financial markets. However, the global economy and the European one continue to reflect economic vulnerabilities, which are transmitted to low inflationary pressures. This situation conditions also the pursuit of a stimulating monetary and fiscal policy by keeping interest rates at the historical low and by high liquidity injections. Back to the domestic economy, we should state that the new economic data were insufficient during October. Performance of inflation and of monetary and fiscal indicators, external trade data and consumer and business indices confirm that the Albanian economy continues to record positive growth rates. This growth is sustained by maintaining steady levels of the consumer demand and fiscal stimulus given during 2009. However, available data from the economy speak for an economic activity slowdown during the current year. Foreign demand for Albanian products has decreased, being illustrated by export slowdown along this period, while investments have declined. The steady trend of core inflation and low non-traded inflation rate also indicate the presence of low aggregate demand-induced inflationary pressures in the country’s economy during January–October 2009. This performance has contributed to absorption of shocks generated from traded inflation, due to weakening of national currency’s position in the domestic foreign-exchange market. Inflation during 2009 has fluctuated around the lower limit of the Bank of Albania’s target. Headline inflation in October was 2.3 percent, recording a slight rise in comparison to September, but resting below the record of the previous year. Average annual inflation recorded 2.1 percent, resting at the same level with that of September. Parallel to demand factors, inflation performance is influenced even from the development of several supply factors, such as slight downward trend in the labour cost per unit, reduced import and producer prices, statistical effect of administered prices, thus creating an overall environment with reduced inflationary pressures. Fiscal policy during the third quarter of 2009 has revealed signs of mitigating its expansionary nature. Revenues have recorded a slight rise related to the previous months, while there is noticed a reduction in realised expenditure pace. In annual terms, during the first nine months of the year the budget revenues have recorded a growth of 6 percent, whereas the budget spending has increased by 22 percent. The budget deficit remains at comparably high historical levels, but within the budget limits reviewed lately. To a great extent, this deficit reflects the high level of public capital expenditures during 2009. Public expenditures and fiscal policy have provided a tangible contribution to the maintaining of the economic activity along this period, but they have been associated with increased pressures over the money markets. The Bank of Albania considers that the fiscal policy should continue to be prudent towards these balances in the future, and should take into consideration the long-term fiscal stability while drafting and implementing mid-term and long-term budget plans. External trade was featured by weakening in the trade volume during the first nine months of the year. However, trade exchanges value recorded during September is the highest recorded since 2009. After about three months of constant narrowing, the trade deficit enlarged during this month by about 9 percent in annual terms. Exports dropped by about 18 percent in annual terms, though the lek’s weak position vis-à-vis the Euro is a favourable factor for exports. Imports recorded positive growth rates for the first time since January of the current year. In annual terms, they grew approximately 1 percent, due to positive growth rate of consumer goods import, whereas import of intermediate goods and capital has declined. Monetary indicators of September presented a slower performance of the banking system’s intermediating activity. In annual terms, broad money recorded a nominal growth of 2.8 percent in September, against 4.5 percent in August. Foreign currency credit contraction and intermediation of the public sector credit by nonbanking agents have influenced the slowdown of monetary indicators growth rate. In September, loan portfolio of economy grew at lower rates than in the previous months. Annual credit growth rate decreased to 13.2 percent. The credit slowdown is totally a consequence of foreign currency credit tightening, while the ALL credit increased by 31 percent in annual terms. The major part of the new credit, around 85 percent of it, was absorbed by businesses and was used mainly for meeting the needs for liquidity, whereas credit for long-term investments decreased. Also, household loan portfolio growth decreased, chiefly due to consumer credit contraction. Housing loan to households continues to maintain positive growth rates, remaining at 5 percent in annual terms. Domestic credit intermediation in ALL has raised the need for Bank of Albania’s presence by injecting liquidity. The banking system needs for liquidity have been met through open market operations of the Bank of Albania, preserving an appropriate time structure of this injection. Short-term interest rates in the interbank market have reflected decreased borrowing cost by the Bank of Albania and have been steady. Furthermore, the primary market was featured by agents’ response to loan pricing, reducing the T-bill yield. The 12month yield, which serves as a reference rate in determining other costs, has decreased by 0.15 percentage points during November, down to 9.28 percent. The supply for financing the government demand has been sufficient, without exerting upward pressures on interest rates. Interest rate performance of new deposits denominated in lek and in Euro has also been stable during September, enabling deposits return to the system. In the meantime, new ALL and Euro credit interest rates continue to carry over tightening lending policies by the banking system in general, and fluctuate around isolated preferential policies. After discussions, the Supervisory Council agreed on keeping the key interest rate unchanged. This decision aims at further preservation and consolidation of macroeconomic balances, regarding the macroeconomic stability as an indispensable precondition for the long-term sustainable growth. It also guarantees appropriate monetary support for the economy during this stage of its development. In the future, the Bank of Albania is willing to operate in line with the actual and expected performance of economic indicators. The shifting to the downward side of inflationary risks balance and the consolidation of financial stability and inflationary expectations in the economy will be taken into consideration in Bank of Albania’s future decision-making.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Bank of Albania's forum with representatives of main businesses operating in Albania, Tirana, 23 November 2009.
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Ardian Fullani: The current performance and development prospects of the Albanian economy Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Bank of Albania’s forum with representatives of main businesses operating in Albania, Tirana, 23 November 2009. * * * Dear Ladies and Gentlemen, It is my pleasure to be among you today, to share with you our views on the current performance and development prospects of the Albanian economy. As the most dynamic part of the Albanian economy, your contribution has been tangible in the country’s economic development during transition. Your incentive, your willingness and devotion have brought about tangible results in the country’s development. In a single figure, the Albanian economy performance may be summarized in the growth of above 65 percent of gross domestic product and well-being per citizen during these years of transition. Our development prospect remains as much positive. The country’s macroeconomic stability, the continuation and deepening of structural reforms as well as the geopolitical reality of approximation to developed economies of the European Union, would help in a fuller release and remuneration of your potential and energies. Today’s forum aims to highlight the economic development of the country and initiate a broad public discussion on alternatives of the future economic growth models. Now, let me start by making a brief statement of the latest developments of the Albanian economy, and further dwell upon our viewpoints on the country’s economic development in the future. Economy performance during the crisis The developments over 2009 have indicated that the Albanian economy has been impacted by the recent global crisis, mainly as a consequence of decreased foreign demand and remittances, higher risk premiums, reduced and high-cost financing resources. However, our economy continued to record positive economic growth rate during this period, while the domestic inflationary pressures remain subdued. The country’s economic activity has been sustained by the fiscal stimulus and the preservation of steady consumer demand, while investments and exports have recorded lower growth rate in the first nine-month period of the year. The economic performance over the first 9-month period of the year, albeit positive, attests to growth rate slowdown, reflected even in the gradual slackening of inflationary pressures. In spite of a slight improvement during 2009, the current-account deficit remains high, reflecting high levels of consumption in the Albanian economy and unfeasibility of production capacities to meet it. The fiscal policy has had an expansionary nature during 2009, reflected mainly in increased budget spending, mainly due to rapid growth of capital expenditures. Budget revenues maintained a slower-than projected rate, due to slow-down in the economic growth rate during this period. Consequently, the additional budget spending has been financed through the use of privatization receipts and the higher public borrowing. This policy has exerted pressure over the increase of government debt securities’ interest rates of long-term maturity. Financial markets attested to an improved liquidity situation and agent’s recovered confidence in these markets. The persistent Bank of Albania’s liquidity supply to the money market helped to calm the market participants down and supply the market with funds, which served to the private sector’s domestic currency intermediation. The needs for liquidity in the interbank market have decreased, hence exerting no pressure on short-term interest rates. The prudent monetary policy of the Bank of Albania has helped relieve the tension in the financial market, while the latest base interest rate cut should be translated into greater lending to the private sector. As we have already stated even previously, the Bank of Albania regards the future Albanian economic activity with a prudent optimism. I mean, in spite of the great shock we have gone through, the macroeconomic and financial stability of the country has not been affected. Furthermore, the restoring of confidence in the banking system opens the way to recovery of the lending process and sustaining of the economy with funds. On the other hand, the Bank of Albania keeps on pursuing a prudent stance, because the financial risks on the economy have not been completely overcome. The banking system has still liquidity shortages, whereas the global economy continues to be frail. Therefore, the economic prospect will depend on our joint work and on the performance of global economic and financial markets. Dear participants, In the optics of historical developments and particularly of recent events, I would like to briefly dwell upon several vulnerabilities that we, as the politic, supervisory and regulatory authority, have highlighted, as well as the lessons we should draw and the issues we should address for the country’s further economic development. Lessons from the crisis Right from the beginning, I would like to emphasize that generally, the philosophy of the country’s economic development has been accurate. Market openness and increased competition have made the Albanian economy benefit the fruits of private sector initiatives. The practice of economies based on free market principles has broadly indicated that this sector remains the most efficient engine of the economic activity. This process has been sustained even by the constant reduction of the state’s share to the economy, as well as by its focus on procurement of public goods and infrastructure development. Positive financial market development has generated the necessary funds for supporting investments and consumption in the economy. Though chiefly for historical reasons, our banking system has based its activity on the intermediation of domestic funds of the economy, the recent developments indicated that it remains as much capable in generating foreign funds to provide capital and liquidity backstop to the Albanian economy. On the other hand, the integration of our financial system into the European one has raised the resilience of the Albanian economy to various shocks, of which the latest is still under operation. It has also brought about a necessary expertise in terms of financial and economic business administration, has developed the infrastructure and means of payments in the economy and has helped efficient risk transfer in the economy. In spite of accomplishments, I think the country’s growth model needs modifications and improvements, aiming at enhancing its efficiency and stability. Under the conditions of an economy that requires dynamism for moving from a transition economy to an emerging one, the commitment for a sustainable and long-term development should be the subject of current and future economic reforms, at both, political and institutional level, and enterprise and consumer level. Which are the vulnerabilities noticed in this regard? First, domestic consumption and investments have been the main beneficiaries, while the Albanian economy has not yet succeeded in establishing a competitive export sector, capable of generating steady foreign currency income, which would enable the preservation of external economic balances. From another viewpoint, this development does not seem as balanced in sectoral terms. So, some sectors such as trade, construction and services have contributed disproportionally the country’s development while others, such as agriculture and industry have contributed less. Second, Albanian economy continues to suffer from structural vulnerabilities, which contract its competitiveness in international markets of products and capital. This behaviour is illustrated even by international competitiveness indices compiled recently by the World Economic Forum, where Albania is ranked below regional countries. Some acute problems refer to the need for enhancing education and infrastructure, in all dimensions. Both these problems restrain the attraction of foreign investments and impede the country’s development. Third, efficiency in using the economy funds should be improved even at micro level. This implies the need for improving private businesses’ management and control systems, enhancing analytic and forecasting capabilities, as well as transparency. Allow me to further deal with some of the above-mentioned issues. Stable economic development of the country As we have continuously underlined in our periodical reports, the economic growth over the recent years has been strongly supported by the banking system lending. The growth of banking lending has provided an impulse of about 7 percentage points of GDP in the last five years, making a pronounced and evident contribution to the growth of consumption and investments in economy. Their growth has provided room for expanding the production basis and improving the welfare. However, it has also generated macro and microeconomic imbalances. At macroeconomic level, the high consumption and investments were followed by increasing inflationary pressures and higher trade and current account deficit. These signs of overheating were clear signals that that level of consumption could not be kept for a long time, hence calling for controlling measures by the monetary authority. This is also the key to understand our prudent monetary policy during the period 2006–2008. The institutional investment we have made during these years in terms of consolidating macroeconomic and financial stability was rewarded with a much more moderate and milder impact of the global crisis than in the regional countries. In concordance with the modern philosophy of macroeconomic administration, the Bank of Albania remains committed to not allowing that rapid and short-term economic growth impair the long-term development perspectives of our country. At microeconomic level, the growth of consumption in economy was followed by increased indebtedness in Albanian households’ and businesses’ balance sheets and by overinvestments in certain sectors of the economy. Both these indicators are either at lower levels than in the regional countries, or at similar levels; hence, they cannot be specified as problematic. However, their rapid growth rate creates the idea of a short-term vision of the economic agents, and in particular cases, even avoidance of rationality. Dwelling upon household consumption, the Bank of Albania invites all economic agents to be more forward-looking and realistic in their consumption and savings plans. This invitation does not imply the contraction of consumption or the change of preferences related to it, but merely placing it in the context of long-term plans that equal income and expenditure at a household level. Beyond the time-related dimension, as we have continuously drawn the attention, borrowers should be cautious as regards their loan currency. This implies that the matching of their loan currency with that of their income would be their best protection. In a more pragmatic approach, this advice may be reduced into an appeal for a close consultation with the banking system and the financial market’s specialized agents. The latest global crisis – in particular in the US and England – showed that the impaired households’ balances sheets create room for strong economic shocks and condition the country’s long term growth. On the other hand, it showed that the countries that succeeded in preserving a clear certificate of consumer’s financial soundness, wherein Albania is part of, had a more moderate impact and enjoy good premises for a more rapid growth. In a philosophical approach, the key lesson of the market economy is that all consumption must be paid for. There is no free lunch. Back to businesses and investment loans, whose portfolio is 2/3 of the total banking system credit, my message is the same in principle: expand the time span of your decision-making and foreign investment and base them on detailed and scrutinized business plans’ analysis. What I would like to underline is that this message should be perceived by you urgently, since you have the necessary financial and human resources to be more prudent in borrowing and investments. Time is ripe for the Albanian businesses to avoid the group behaviour, where one business idea is almost automatically followed and adopted by other businesses, without first studying the market size, the competitive advantages, the level of expertise or the financial efficiency of using the funds, according to all the chains a careful and prudent decision-making should go through. The latest tendency for diversifying the Albanian businesses is useful in principle; however, it should not be made to the detriment of specialization and efficiency, or even less without first making the macroeconomic and sectoral analyses. The inter-sectoral performance of the economy is another issue I would like to discuss with you today and which I briefly mentioned earlier in my speech. The country’s economic development has been characterized by a growth and investment model which has favoured the services and construction businesses, compared to the exporting industries or the competitive ones in imports. Although this performance somehow reflects the tendency to perform similarly to the economic structure of developed and advanced economies, it has resulted in over-investments in certain sectors. The economy development cannot be stable if the allocation of funds is not carried out by adhering to the principle of sector productivity and efficiency. The misuse of financial funds impairs the agents and the whole economy, providing severe and long-term consequences on corporate balances sheets and debts, on labour market and on capital and technology allocation among sectors of the economy. To minimize such risks, the Bank of Albania advises you to discontinue the inertial moves in your behaviour and realistically assess the regional and European context in your choices. The competitive advantages of Albania should not be sought only in natural resources, or in meeting of yet unserved demands of the Albanian market, but also in the cheap work force of the country and in its position as a future EU member. The increasing interaction with the banking system would help to clarify your plans and reduce the financial risk, providing you with the opportunity to focus on business risk administration you are specialized in. Completing my discussion related to stable development of the country, I would like to underline that the banking system can and should do more in this respect. The financial system is the brain of a market economy; it determines the expected return and risk of investments in the economy, enabling later on the prioritized use of limited financial funds. Despite its good performance, the Albanian banking system should do more to incorporate macroeconomic and sectoral analyses, and also the country’s financial stability in decision-making. The development of research units within large banks is actually a requirement of the time we are living in. Moreover, more efforts should be made, to increase the support of small and medium-sized enterprises with funds. In addition, a more aggressive marketing of derivative instruments, which will lower the corporate financial risk, particularly of those operating in the export sector, requires a greater attention from the banking system. What I just mentioned will be an important part of the future philosophy of the Bank of Albania in the field of structural reforms in the financial market and in developing and advancing its supervisory and regulatory function in it. Structural vulnerabilities and the need for reform A useful lesson that the Bank of Albania has learnt from the crisis is the need to continue and deepen the structural reforms in the economy. These reforms, not only will create a more appropriate environment for promoting the private entrepreneurship, but will also increase the economy’s resilience to shocks. They also help to absorb foreign direct investments, which are the best support to the country’s development in the medium and long run. However, as stipulated even in the EBRD’s report, Albania is among the few countries that have continued structural reforms even during 2009. In this regard, Albania has lagged behind the regional countries, attracting in total only about USD 1100 per capita of FDI during the 20 years of transitions. In the entire broad framework of reform-related problems, I would like to dwell today upon the need for investments in education and infrastructure. A well-known business maxim is that: Employees are a company’s most precious asset. To the Bank of Albania it signifies that the higher the professionalism, the higher our institutional independence. To a broader sense, this is also relevant for the national economy. Our country’s progress, the convergence with the developed countries of East Europe and even beyond, with the European Union countries, will depend on our level of education. Competition in national and international markets is above all based on the generation of ideas and their use in the final products. Referring again to the Global Competitiveness Index, Albania is ranked the 90th as regards the level of education and high-level training, and only the 109th and 126th respectively at the level of business sophistication and innovation. These vulnerabilities will ever-increasingly become an obstacle for the country’s economic growth in the future, unless addressed on due time. Public reform in the education system and the need for more backup funds should be a priority of every development policy. On the other hand, I consider that the Albanian business can and should do more for supporting the Albanian education. First, the business can and should be more supportive to higher education institutions, at the same time cooperating with them in the area of market research and student training. The economic development history shows that the countries, which have invested in education, are currently in the group of most developed countries of the global economy. Second, I think that more efforts should be made in attracting and absorbing the brain in the administration and management of your businesses. Investing in education, in enhancing professionalism and expertise, is the best investment we can make for the future of our country. Parallel to this, the enhancement of our development infrastructure should be a priority issue. Beyond the road infrastructure development, which rightly is a priority of the public sector, the Albanian business can and should do more in this regard. The use of common business resources to resolve problems in supplying electricity, water and sanitation, and local roads, should be regarded as an effective option of overcoming these problems. Creating differentiated and specialized development areas will open more opportunities to them to benefit from scale economies and common solution of problems. Also, computer and telecommunication infrastructure are sectors, which can and should be addressed more efficiently by the private sector. Business administration and transparency Though I addressed some problems even earlier in my speech, now I would like to dwell briefly upon the problem of administration and corporate transparency enhancement. Corporate administration is the linking bridge between ideas and results. It affects funds usage efficiency and differentiates profitable from non-profitable businesses. In light of this, I think that the above-mentioned issues, the extended time span of investments, their support in market researches and prudent business-plans, the orientation of businesses’ positioning in national, regional and global context, the increase in specialization and professionalization, the fostering of cooperation with the financial system, require ongoing investments in terms of your management. Finally, I think that transparency of your businesses is an aspect that deserves a greater attention. Its enhancement would help first of all the trading and financial transactions among businesses, fostering confidence and decreasing their risk. Also, the long-term and ongoing relation with the financial system is conditioned by reciprocal transparency between parties. Beyond the banking system relations, transparency is a serious obstacle in the establishment and operation of capital market in Albania. In this regard, I think that the Albanian business should be aware of the fact that transparency enhancement and increased formalization are in its long-term interest. Dear participants, Long-term visions are translated into success achieved through work and short-term sacrifices. The Bank of Albania invites you to foster the cooperation in resolving these problems of mutual interest. Thank you!
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Opening remarks by Mr Ardian Fullani, Governor of the Bank of Albania, at the workshop "On building capacities for policy design and implementation", Tirana, 3 December 2009.
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Ardian Fullani: On building capacities for policy design and implementation Opening remarks by Mr Ardian Fullani, Governor of the Bank of Albania, at the workshop “On building capacities for policy design and implementation", Tirana, 3 December 2009. * * * Dear participants, It is a very great pleasure for me to open the proceedings of this two-day workshop, entitled “Building Capacities for Policy Design and Implementation”, organised for the first time in Albania by the Bank of Albania, in co-operation with the Center of Excellence in Finance (CEF), Ljubljana, with support from the European Commission, European Central Bank, and International Monetary Fund. Welcoming you here in Tirana, allow me to express my gratitude for the excellent work done by the CEF in the course of these years, to the benefit of our region. Since our Washington meeting last April, the effects of the global crisis increased their presence in our region; however, as I have already emphasised even earlier, they did not immediately concert to full blown economic and financial problems. The extension of crisis effects to the real economy, to the budgets of governments and to financial sectors of the region, was mitigated by sound macroeconomic policies pursued in the recent years and by the availability of International Monetary Fund funding on an unprecedented scale, in coordination with support from the European Commission and the EBRD. Due to this intervention, and mostly due to prudential policies pursued by the central banks with regard to financial stability and financial supervision, the region prevented not only twin crises in our banking systems and foreign exchange markets, but also any kind of meltdown. Nonetheless, this crisis has been a wake-up call. We agreed on this in our meeting last April, in Washington, among senior policy-makers from the region and from EU and IFIs. Now that we have managed to prevent the crisis, we must start the evaluation of the collateral damage of our response to the crisis. In this respect, it is very important to asses not only the long run sustainability of our region’s equilibrium, but also the effectiveness of our short run response. It is crucial to plan and implement our future moves intelligently for its reversal in line with new normalities. While we are not out of the woods yet, it is important to make sure that the past year’s fiscal appetite that characterised our region does not become part of this new normality. Actually, we need to do some deep thinking about aspects of our policy regimes – starting with the design of monetary policies, continuing with the way they are anchored and the building of due capacities for a greater effectiveness of monetary policy in the future. That is why we agreed to put in place today’s workshop, as part of a continuing process of reflection and reform. In our discussions here in Tirana, we will begin with questions of policy design, which are fundamental to set the stage for the later topics we will come to. We have suggested in advance several questions that may help stimulate the discussion, covering some of the key questions that are certainly left in my mind, as a practitioner, after navigating through the crisis so far. The issues of policy design include the questions how much room for manoeuvre there has been to use discretionary macro policy measures; how far fiscal policy in future should build up a buffer against macro-financial risks; how far national monetary and prudential regimes have been able to shield us from turbulence; and whether we now see a need to attract new kinds of capital flow – perhaps to change the growth model in the region. This discussion of policy design will bring us to our second issue. It concerns the role of external anchors for monetary policy. One point of consensus in our Washington meeting was that we need to revisit some aspects of this anchoring process, and the way it interfaces with countries’ efforts to build up their own internal anchors over time. There are several questions about the future role of external and internal anchors. They include some reflection whether there is a need for more co-ordination and synergy between our policy dialogues with the IMF and the Commission; how the Commission’s fiscal surveillance (through Economic and Fiscal Programmes, Pre-Accession Economic Programmes, Convergence Programmes) can be deepened and serve more as a commitment device; how far there are lessons to learn about monetary anchors and prudential coordination mechanisms for the EU accession of our region; and how we – including the external actors – can foster stronger domestic anchors in various forms, ranging from medium-term fiscal frameworks to more effective policy co-ordination mechanisms. Finally, we will turn to the issue of capacity-building. This is a question on which we agreed, at this workshop, to already provide some operational input to the CEF as it develops its work programme in this area. There is a long lead-time in the effectiveness of capacitybuilding, although fortunately the CEF had already taken the initiative a few years ago to ramp up its contribution in areas such as financial stability and policy co-ordination, so it has a head-start. In the field of capacity-building, we need to consider: what are the top priorities, and where are the gaps to be filled through initiatives in terms of training workshops, technical assistance, and cross-country exchanges of experience. This will bring us to look carefully at the design and implementation of fiscal policy, among others, and the way policies come together through domestic co-ordination processes. And we also need to identify the needs in the areas of monetary and prudential policies, where the CEF’s member countries have urged it to continue expanding its activities. This is a full agenda, and I am sure it will not be the last time we get together to exchange views on these issues. I believe strongly that we stand to gain immeasurably from considering these challenges on a regional basis. We can learn from each other’s experience; we can engage at times in a joint dialogue with the external actors in the region; and perhaps our political leaders can find some opportunities to launch reform initiatives in parallel – for example, in developing structural reforms to help promote a flow of new capital to, and within, this region. In this spirit, I look forward to very fruitful discussions – now in Tirana and in the future!
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the conference "The western Balkans: overcoming the economic crisis - from regional cooperation to EU membership", Brussels, 9 December 2009.
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Ardian Fullani: The western Balkans – from regional cooperation to EU membership Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the conference “The western Balkans: overcoming the economic crisis – from regional cooperation to EU membership", Brussels, 9 December 2009. * * * During the last 20 years the region has undergone significant structural changes, which have fueled economic incentives and economic growth. In the early stages of transition a fast and significant transformation in the labor and later in the capital market reoriented all factors of production toward more productive sectors. This contributed to higher total factor productivity and consequently fast economic growth. The final stage of transition was dominated by a robust financial deepening process fueled among others from EU based capital inflows. This financial intermediation busted credit growth and consumption yielding to absorption led growth model in the region. In the aftermath of crises our policy choices are limited. From a broad prospective the region should chose a new philosophy, different from the boom-bust model of the last decade. I strongly believe this must be the focal point of the Regional Policies. The current crisis pointed out several problems in our growth models. The so called catching up process was a model of unsustainable consumption behavior rather than sustainable long run equilibrium. Despite the overall fiscal consolidation and relatively high rate of growths, it resulted in increasing macroeconomic imbalances mostly evidenced in the fast enlargement of current account deficits. From a micro analysis point of view that was reflected on unsustainable financial position of enterprises and households balance sheets, lead by persistent fighting for market share in products and services in the banking system. It is for that reason that hard gained achievements attained during the last 15 years in eastern Europe, got reversed within one week. Today, one year after the eruption of the financial crisis, I have to affirm that all the measures undertaken by central banks of countries in the region resemble one another. Generally speaking, in my opinion the measures adopted during this period are of an extreme nature; they are unusual and go against the “constitution” of the modern central bank with regard to liquidity, money market and monetary policy transmission channels. However, we have embraced the philosophy that “the end justifies the means”. Nevertheless, I think the central bank has become more vulnerable in terms of independence and monetary policy efficiency. Providing liquidity in any case, in any quantity, with any maturity and accepting any kind of collateral would definitely damage the monetary policy, with potential second round effects on financial stability. If central banks in the short run shift their focus from the primary objective to supporting economic growth at any cost, it would indirectly create premises for long rung economic imbalances. The current polices pursued by both monetary and fiscal authorities should not be considered as a new normality. While the global economy is adjusting toward a new equilibrium, solid macro-prudential long run policies should replace current stimulating efforts. Therefore the challenge for our economies in the long run is to address current problems and the inherited ones based on a new model of growth, based on: (i) higher savings and investments, aiming toward a contained consumption matched by domestic production; (ii) persistent FDI inflows oriented toward tradable sectors; (iii) regional cooperation. Let me briefly share with you some of my thoughts on the importance of this last remark, namely regional cooperation. Following arguments illustrate the benefits of cooperation, at several levels: • From a development point of view, increased cooperation and integration on a regional level creates a greater scope for economies of scale. This would increase incentives for local and foreign investors to undertake big investment project that would not be profitable otherwise. A related advantage would be increased specialization of our economies, leading to a higher economic performance. • On a policy level, coordinated macroeconomic policies, legal and prudential frameworks, would tend to improve the allocation of resources and to prevent beggar-thy-neighbor policies. This race to the bottom type of philosophy would not benefit the region as a whole. • From a strategic point of view, our region is in competition with several emerging regions on a global scale. It’s not sufficient any more to be the best guy in the village; especially when there are an increasing number of villages on a global scale, with an ever increasing number of clever guys. • From a convergence point of view, the sharing of experiences would avoid costly errors, while coordinated policies and steps would make a stronger case for a faster EU integration. We should demonstrate that the region is fit to enter the club, by firstly adopting the rules of the club among ourselves. In a more technical and concrete approach, the efforts of the public authorities in our region to achieve a real and meaningful cooperation should consider the followings: First, the mentality of the societies in our region should change. It is noted that this region has a history full of conflicts and many other disputes. It is now up to the young generations and to the people with an open-minded approach in our region, to find solutions and to promote behaviors that will build our future path toward Europe. Second, the commitment to full integration with the European Union, should serve as a solid platform for cooperation, and as an anchor for pursuing sound policies and coordinated structural reforms. Third, a very important precondition will be the strengthening of countries domestic anchors, specifically in the form of medium-term fiscal rules, fiscal councils, or embedding fiscal constraints in countries’ constitutions. Fourth, the legal basis that supports such international cooperation should be fully in place. It is important that such cooperation be guided from a set of consolidated principles with regional relevance. Fifth, there is urgent need for policies that would encourage stronger inward FDI and other non-bank flows. The region’s growth model might need to be more self-reliant, emphasizing domestic savings, better mobilization of labor resources, and a much greater role for the traded good sector as an engine of growth. Dear participants, Let me conclude by pointing out that our region offers an interesting combination of countries, languages, culture and geographical composition. Analyzed individually, it is difficult to think that our economies generate substantial incentives for foreign investors, particularly for strategic and technologically advanced investors, able to use the advantages provided by the economies of scale. Moreover, the cost associating different strategic projects at a national level would be higher for our still lagging economies. I do believe that there is plenty of room to establish a joint regional market and our duty is to make utmost use of it. There are still a few gaps in the region with respect to infrastructure, energy, tourism, financial architecture, mining and agriculture. Out task is to jointly identify missed opportunities, to jointly incorporate those into realistic business plans and to jointly present these regional projects in a contemporaneous way to private investors and supranational agencies, to benefit their political, financial and technological support and finally ensure a stable growth model. On a national level, there is still the need for deep structural reforms and all efforts should be made for them to operate in a concerted way across the SEE region. I believe that the European Union structures should closely orientate, monitor and assess this process. This is the only way to steadily convert our countries into highly productive economies, attractive to foreign investors against the backdrop of favourable labour cost. This all makes sense once we fully re-dimension our educational capacities, particularly in technology and other areas where we could discover and explore advantages compared to other economies. Instead of looking at each other merely as competitors, we should approach the regional cooperation as a non-zero-sum game, where each country has to gain in partnership. Summarizing, this process calls for risk adverse macro and development policies; well coordinated policy mix; stronger cross border co-operation, and concerted efforts – perhaps harmonized and motivated across the region – to deepen the quality of structural reforms. Structural reforms targeted to improving the business environment will help foster new capital inflows and strong and sustainable growth. In this respect (and in the light of the last crisis lessons), countries can make better use of the EU fiscal surveillance process as explicit policy commitment devices. Candidate and potential candidate countries on one side and the EC on the other have the opportunity to transform this surveillance process (possibly enhancing it with an analytical input form IMF) into an efficient foreign anchor.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on monetary policy decision of the Supervisory Council of the Bank of Albania, Tirana, 27 January 2010.
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Ardian Fullani: Recent economic and financial developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on monetary policy decision of the Supervisory Council of the Bank of Albania, Tirana, 27 January 2010. * * * The Supervisory Council of the Bank of Albania, in its meeting of January 27, 2010, dwelt with the Monetary Policy Statement for the second half of 2009, analysing in detail the performance of monetary and economic indicators for the second half of 2009, as well as the macroeconomic projections and the balance of risks that may associate them in the coming month. At the end of the analysis, the Supervisory Council of the Bank of Albania decided to keep unchanged the key interest rate of repurchase and reverse repurchase agreements, at 5.25 percent. The Supervisory Council assessed that this interest rate is in line with Bank of Albania’s goal to keep inflation close to the medium-term target. *** The Albanian economy has just left behind a difficult year. The deep global economic crisis was soon felt even in Albania, testing the foundations of the economy: the financial stability and the macroeconomic balances. However, the good initial state of our economy and the proper response of macroeconomic policies helped to successfully cope with this test. During the first three quarters of the year, the Albanian economy ensured a positive growth, thus preserving the financial stability and the key indicators of macroeconomic stability: price stability, public debt level and balance of payments sustainability. The global economic and financial crisis, which was significantly intensified during the first half of the year, put in question the financial system sustainability, the macroeconomic stability and the long-term development prospects of the world economy. The determined response of public authorities, increased coordination of economic policies and keeping open the world trade channels, helped preventing any negative economic spirals. The latest data on the global economy indicate a recovery of economic activity in the third quarter onwards. The monetary and fiscal stimulus packages resulted successful in terms of stabilizing the global economy. However, the sustainability of global economic growth will remain fragile, as long as the economic activity continues to rely on significant monetary and fiscal stimuli. In particular, the public debt sustainability, which is burdened by fiscal stimulus bill to exit the crisis, is becoming a more and more aggravated problem for many countries. In this complex situation, choosing the right moment for withdrawing the economic stimuli will have a decisive importance in the future economic performance. In a more structural aspect, the recent crisis is expected to leave visible traces in the economic development. In a long-term horizon, it seems that new economic and strategic balances are being determined, thus re-dimensioning the poles of global economic growth. In a medium-term horizon, the global economic growth rate is expected to converge in a lower balance than the one that has prevailed over the last two decades. This slowdown may be accompanied by economic and social problems for those countries, which would not know how to figure out their relevant implications. In a short-term horizon, discussions on the state’s role in the economy, on economic development and growth patterns, on the philosophy and appropriate practices regulating the financial markets, will dominate the political round-table debates. In particular, the economic growth model will be a sensitive topic for economies significantly affected by the crisis, including many Eastern European countries. Promoting competitive advantage and increasing competitiveness in global markets will be the subject of discussions and intended reforms. Turning to domestic economic developments, the analysis of available indicators shows that the Albanian economy has had a positive economic growth during the first nine months of the year. However, these indicators suggest that the growth rate was characterized by a progressive slowdown during 2009. Such performance was conditioned by reduced foreign demand and slowed domestic demand, in the presence of a tight liquidity situation, financing restriction and increased uncertainty. According to preliminary data from INSTAT, the economic growth for the first nine-month period of the year was 4.9 percent, against 7.8 percent recorded for the same period of the previous year. In sectoral terms, the sectors that benefited most from the economic growth are the services and construction ones, while the industry sector underwent a more problematic performance. The positive growth rate has been supported by the fiscal stimulus, while consumer demand and the contribution of external sector to the economy have been relatively stable. At the same time, private investments have declined. Consumer demand has been supported by a slight rise in employment and wages, while the mortgage and consumer credit contraction, as well as reduction of remittances have given the reverse effect. Private investments have been contracted, as a consequence of limited financing resources, reduced lending support by the banking system and limited access to international capital markets. Increased uncertainty, slowed progress of the final demand for their products and reduced capacity utilization rate have impacted on such performance. Effects of domestic economic slowdown and the global economic crisis have appeared even in the foreign trade. Foreign economic activity is characterized by a simultaneous decline in both, exports and imports of goods and services, thus impacting significantly on the economic growth for 2009. On the other hand, fiscal stimulus, injected mainly during the first half of the year, has contributed to rapid increase of budget spending and public debt. The economic growth below the potential has created an environment of generally reduced inflationary pressures. The annual inflation for December recorded 3.5 percent, while the average annual inflation rate was 2.2 percent. Both these indicators are in line with Bank of Albania’s target on price stability. The economic activity slowdown, low main products prices in the world markets, low monetary expansion in the economy and controlled inflationary expectations offset the inflationary pressures coming from exchange rate depreciation during 2009. The upward inflation trend during the last quarter of 2009 was expected by the Bank of Albania. It was formed mostly by transitory factors, which are not expected to generate steady inflationary pressures. In particular, this performance was influenced by rising food prices, which reflect the lagging effect of exchange rate depreciation, international markets conjunctures and structural problems of the Albanian market. These factors are expected to exert inflationary pressures during the first half of 2010, possibly added by expected reduction of agricultural products supply, as a result of the flooding that has lately occurred. However, stable core inflation trend and low inflation rate of non-traded goods confirm that inflationary pressures exerted by domestic demand are moderate. In the absence of other supply shocks, the slow progress of domestic demand, low growth of monetary supply and anchored inflationary expectations, are premises for keeping inflation within the target in the medium run. The Bank of Albania pursued a prudent monetary policy during 2009, creating a suitable environment for a balanced development of the economy and for keeping inflationary pressures under check. In the presence of downward inflationary pressures and steady expectations, the hints for slow domestic demand in the next period have motivated the progressive growth of monetary stimulus during 2009. The Bank of Albania cut the key interest rate by one percentage point, down to 5.25 per cent during this period. It also steadily increased liquidity injection, according to banking system needs for liquidity and the economy demand for funding. Concerning liquidity injection, the Bank of Albania has made use of the entire range of monetary policy injecting instruments, facilitating at the same time the access to and easing the cost of operation of the banking system with the central bank. Also, in the presence of the exchange rate depreciation, such policy has brought about easing monetary conditions, serving the promotion of the economic activity. However, the pass-through of easing monitoring policy on interest rates of banking products has been limited, due to liquidity constraints of the banking system and weakened demand of the public sector for funds. On the other hand, the banking system itself has been reserved with regards to lending, as a result of the increased risk in the economy and performance of loan portfolio quality. The alleviation of these problems would help to more fully transmit the monetary policy and enhance its effectiveness. The country’s external position continues to be characterized by a high and upward current account deficit. During the first three quarters of the year, the deficit was fully covered by capital and financial account inflows, resulting in increased foreign exchange reserves of the Bank of Albania. However, the inflows have been significantly favoured by privatization receipts and by public sector borrowing. Both these items are limited in time and size, making necessary a steadier correction of the external position of our economy. This correction should aim at covering the trade deficit with stable funding resources, in the form of foreign direct investments and promoting export industries in branches that may constitute a competitive advantage for Albania. However, short-term developments in foreign trade for October to November show a somewhat different performance compared with the first nine months of the year, testifying a modification of the trends observed earlier. Thus, the country’s exports fell in annual average terms by about 7.4 percent, recording a slowdown in comparison with the average decline by about 19 percent during the first nine months of the year. On the other hand, imports recorded an annual average decline of 17% per cent over these two months, compared with the average annual decline of 7 percent recorded in 2009. These developments contain encouraging signs for sustainability of the balance of payments in the short run Fiscal policy had an expansionary nature during most of the year, being materialized in a budget deficit of 6 percent of GDP. The increase of budget deficit reflects both the action of automatic stabilizer in the form of decreased revenues, and the intended countercyclical character of fiscal policy, through increased wages and capital expenditures. The country’s economic activity slowdown has dictated a slow pace in budget revenue growth, especially after the first quarter of the year. In late November, the annual growth of budget revenues was only 2 percent, almost entirely reflecting the low pace of generating the tax revenues. On the other hand, public expenditures have maintained high growth rates, accounting for 16.4 percent in November. The budget deficit reached ALL 65 billion in November. The deficit has been mostly financed through foreign borrowing and privatization receipts, dampening the pressures in the domestic financial market Rapid growth of expenditure and budget deficit during 2009 has further increased the public debt level, accounting for 58 per cent of GDP at the end of November. The Bank of Albania deems that the future budget policy orientation towards fiscal consolidation, aiming at reducing the public debt, is now a prerequisite for the macroeconomic stability in the country. As we have constantly stated, the public debt reduction will mitigate the pressure of the public sector on the financial markets, creating more room for the private sector. Consolidation of public finances will also lower the risk premiums in the economy and will raise the monetary policy effectiveness. Monetary supply slowed down further in the second half, reflecting to a great extent, the ever lower credit growth. Annual growth of private sector loan portfolio slowed down to 10 percent in November. Unlike the first six months of 2009, when credit growth curbing was more affected by the tightened supply, in the second half of the year the credit performance was dictated by decreased demand for loans. The economic activity slowdown and uncertainty about the future, in the face of still tightening lending terms by banks, have guided the economic agents’ decisions to postpone the investment plans and to less finance consumption from borrowing. However, monetary developments confirm an improved situation of deposits during the second half of 2009. The change in depositors’ behaviour, in the context of measures taken to prevent the spread of global crisis effects, and the foreign currency inflows in the form of remittances during summer, have contributed to stabilizing the liquidity situation of the banking system. Financial markets were characterized by a more relaxed situation during the second half of the year. The banking system continued to be featured by liquidity constraints, which were remedied by central bank liquidity injections. Improved liquidity situation due to increased deposits in the system and fostered certainty in the market created a suitable environment for transmitting the monetary policy signal to the interbank market. The key interest rate cut at the end of October is followed by reduced yields on government securities, after the upward trend characterizing them throughout the year. In the meantime, the Bank of Albania, in accordance with time lags that characterize the monetary policy transmission mechanism, expects and requires that the key interest rate cut be transmitted to credit markets. *** The Supervisory Council’s Decision on keeping the key interest rate unchanged aims to further maintain and consolidate the macroeconomic balances, considering them as a necessary prerequisite for a sustainable and long-term growth. It also guarantees the proper monetary support for the economy under this stage of development. In the future, the Bank of Albania remains willing to operate in line with the actual and expected performance of the economic indicators and in accordance with its principal objective.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on monetary policy decision-making of the Supervisory Council of the Bank of Albania, Tirana, 24 February 2010.
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Ardian Fullani: Review of the Albanian economy in 2009 and outlook for Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on monetary policy decision-making of the Supervisory Council of the Bank of Albania, Tirana, 24 February 2010. * * * In its meeting of February 24, 2010, the Supervisory Council of the Bank of Albania analyzed and approved the Monetary Policy Monthly Report. After being introduced to the latest economic and financial developments at home, to their projections for the future and the expected balance of risks, at the end of discussions, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged at 5.25 percent. * * * The performance of global economy attests to the ongoing improvement of economic activity. The majority of advanced and emerging economies experienced economic growth over the course of the second half of 2009. The growth in global trade activity, the undisturbed financial markets’ developments and the improved confidence indices reflect and bring about more optimistic future expectations. In particular, the financial system stability and the progressive improvement of its balance sheets are promising signs for greater support to the economic activity. The improved global economy was coupled with upward inflation rate trends, owing mainly to the recovery of demand and higher primary commodity prices. However, the low capacity utilization at global level is projected to rein in the inflationary pressures in the medium run. The frail economic growth over 2010 will be at the forefront of policymakers’ agenda. Moreover, it will condition the preservation of monetary and fiscal incentives during this period, albeit at more moderate rates. As far as the Albanian economy is concerned, the latest available information suggests that domestic demand contracted further in the last quarter of 2009. Private investments contracted over the course of the year 2009, owing to the slower domestic and foreign demand, the low capacity utilization, the deteriorated business confidence and the tight lending conditions. In addition, consumer confidence indices, retail sales and consumer goods’ imports signal the further slowdown of private consumption in the last quarter of 2009. This slowdown reflects a more moderate increase of available income, lower support by the banking system for consumer and mortgage loans and increased public uncertainty over the future. Consumer expectations for the future suggest that the contribution of private consumption to economic growth will be low over the next two quarters. Economic activity at home has been sustained by high fiscal stimulus during 2009; however, budget projections suggest that the fiscal stimulus will fall off in 2010. Foreign demand posted positive performance for the last quarter of 2009, featuring lower trade deficit during this period. However, given its relatively small share of the GDP, the impact of this correction to the economic growth of 2010 is projected to be moderate. Annual inflation marked 3.6 percent in January while average annual inflation rate increased to 2.4 percent. The annual increase in consumer prices was in line with the Bank of Albania’s target for inflation in January, standing at the upper limit of the tolerance band. The upward inflation trend in January owes mainly to the higher food prices following the latter’s rise in the global markets and the lagged effect of the exchange rate depreciation. The contribution of other consumer price basket items to inflation, albeit upward, was still low. The latest energy price rise effect on February’s inflation is expected to contribute by 0.5 percentage points to the annual inflation rate. The Bank of Albania assesses that the performance of the Albanian economy has yielded balanced inflationary pressures. This is also confirmed by the performance of core and non-traded inflation, whose rates marked 1.4 and 1.7 percent, respectively, in January. These trends suggest that the inflationary pressures exerted by domestic demand are weak, while the increase of inflation over the last months owes mainly to supply-side factors. The Bank of Albania considers that these factors will only affect temporarily and their pressures on inflation are expected to gradually dampen in 2010. The same performance seems to be also expected by the main economic agents, whose inflation expectations remain anchored close to the Bank of Albania’s target. The Bank of Albania has been pursuing a prudent monetary policy over this period. The increase of monetary stimulus in economy, without prejudice to macroeconomic stability and keeping the economic agents’ expectations stable, was the major focus of our policy. Our decisions have in particular aimed at providing adequate monetary conditions for the observance of the inflation target in the medium run and smoothing out the Albanian economy’s way to more stable economic and financial balances. This philosophy will continue to guide our decision-making in the period to follow. The latest data on Albania’s external position cover only foreign trade. The analysis attests to the annual narrowing of trade deficit by about 17 percent in December. In annual terms, exports of goods increased 27 percent, while imports declined 10 percent. The relative coverage ratio of imports with exports increased to 23 percent. Despite this performance, the external position of the Albanian economy remains a concern as long as it is characterized by a high current account deficit. The shift of deficit to more stable levels will be at the forefront of the country’s economic policies in the medium and long run. As we have continuously stated, fiscal policy was counter-cyclical throughout 2009, underpinning the trend that began in 2007–2008. Budget deficit amounted to ALL 79.9 billion in 2009, reflecting at the same time the accelerated increase of budget expenditure and slowdown of fiscal revenues. Budget expenditure increased 8 percent in 2009, while revenues grew only 2.7 percent, in part owing to the gradual contraction of economic activity. The Bank of Albania considers that fiscal policy should prioritize the measures required to guarantee the sustainability of public debt. The increase of the latter during 2009 and the higher sensitivity of the financial markets to this indicator, call for the reliable commitment of fiscal policy with respect to its long-term sustainability. Therefore it is crucial to reach the projected fiscal balance through the conditioning of the fiscal expenditure carried out by the budget revenues’ collection rates. On the one hand, this policy implies a smaller fiscal stimulus for 2010, but on the other it will lower the risk premiums in economy and provide more room for borrowing in the domestic financial markets of the private sector of the economy. The latest monetary developments attest to the low growth of broad money and lower banking intermediation in lending to the public and private sector. However, the banking system’s liquidity indicators seem to have become more stable. In annual nominal terms, money growth was 7 percent, similar to November’s growth rate. Deposits grew for the second consecutive month, owing to a large extent to the increase of time deposits. Relative to the previous year, private sector lending grew 11 percent in nominal terms. In real terms, it grew by only 4 percent. The growth of lending owes mainly to the higher lending to business for liquidity purposes. By contrast, household loans continued to contract in annual terms. Despite the improved lending activity in December, its annual growth rate remains low. The slow lending performance owes to the high risk premiums materialized in tight lending conditions, and to the economic agents’ uncertainty for the future, materialized in low demand for private sector credit. The exchange rate depreciated further in January, albeit at lower paces than in the previous month. In nominal effective annual terms, it depreciated 8 percent in January. Monthly developments attest to the slight depreciation of the ALL vis-à-vis the Euro and the USD. The Bank of Albania considers that the balance of factors affecting the exchange rate seems more stable for 2010. The Bank of Albania continued to inject the required liquidity in January in order to buttress its interest rate cut move and the relaxation of monetary conditions in October 2009. These injections were followed by the decline of interest rates in the interbank market, the decline of the Government T-bill yields and the downward ALL loans and deposits’ interest rates. The interbank market attested to the further increase of trading volumes signalling the efforts for a more effective liquidity management by the banking system. The recovery of lending will substantially condition the performance of the Albanian economy over the following period. Its recovery will push the demand for borrowing by the economic agents and at the same time will provide more favourable lending conditions by the banking sector. The Bank of Albania has taken the proper measures in this regard, supplying the banking system with appropriate liquidity and taking the necessary measures to lower the borrowing cost. However, it expects a more complete reflection of these measures by the banking system. We believe that, without prejudice to the best and prudent lending practices, there is room for a more encouraging behaviour of the banking system in terms of boosting consumption and private investments in economy. * * * After discussing the current and expected economic performance, the Supervisory Council of the Bank of Albania concluded that the inflationary pressures will mount in the short term; however they are expected to quickly fall in the medium term. The slower money growth, the low domestic demand, the moderate growth rates of economic activity, the low capacity utilization by businesses and the stable inflation expectations will balance the pressures exerted by the exchange rate and higher administered and foreign prices. The Bank of Albania has been carefully monitoring the economic and financial situation in the regional countries and their expected performance in the future. The possible implications for the Albanian economy through the trade and financial channels remain at the focus of our analysis. Considering the economic situation and political realities in the Euro area’s economy, we conclude that the transmission of these concerns to other economies will be contained. Moreover, the Bank of Albania believes that the Albanian economy enjoys firm macroeconomic balances, sufficient to cope with all potential shocks over our economy. In conclusion, the Supervisory Council decided to keep the key interest rate unchanged at 5.25 percent. This decision helps to maintain and consolidate the macroeconomic balances further, considering macroeconomic stability key precondition for a stable and long-term growth. It also serves to anchor the inflation expectations and guarantee the adequate monetary support to the economy at this stage of development. The Bank of Albania remains committed to act in concordance with the actual and expected performance of economic indicators. The shift of the inflationary risk balance downward, the strengthening of financial stability and inflation expectations in economy will be carefully considered in the future decision-making of the Bank of Albania.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Seminar "Albania - sustaining macroeconomic stability in a challenging external environment", Tirana, 4 March 2010.
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Ardian Fullani: Albania – sustaining macroeconomic stability in a challenging external environment Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Seminar “Albania – sustaining macroeconomic stability in a challenging external environment”, Tirana, 4 March 2010. * * * Dear Mr Bell, Dear Minister, Dear participants, It is a great pleasure for me to welcome you to this seminar and to attend its proceeding. This seminar and its topics are very coherent and dwell upon very important issues for the economic development of Albania and of all emerging economies. They explicate the topics that the economic authorities are faced with, as a consequence of macro and microeconomic side effects of the global financial crisis of the financial markets and the real economy. Generally, the policies undertaken by authorities in the light of the country-specific conditions proved to be successful. Fiscal expansion and easing of monetary conditions according to respective needs turned out to be successful in avoiding the turning of the crisis into depression, like that of 1930. In Albania’s case, these stimuli helped preventing the economic events that characterize the financial crisis and mitigated the adverse effects that the global economy gave on the Albanian economy. Though the crisis effects continue to exert their influence on the world-wide economy, it’s time to reassess the situation and the economic policies. Generally, the current period in the world economy coincides with the correction stage, which is reflected in a lower economic growth and new balances in production, trade, services, financial intermediation, exchange rate and household budgets. In itself, these new balances do not represent a new stage or evolution of the crisis. They represent a sustainable equilibrium under new circumstances. Distortions in financial markets and lack of rationality in consumer behaviour are assessed as the main triggers of the crisis, because their level during the bubble blowing were not in line with the long-term sustainable equilibrium of the economy. Consequently, the idea to continue the economic stimuli, to speed up production, consumption and financial intermediation at the same rates and with the same instruments would be similar to the financial markets stimuli during the pre-crisis period. In other words, pursuing the same policies under current conditions and the new equilibrium would cause major economic and financial imbalances over the medium run, which would damage the economy rather than helping it. Precisely from this viewpoint, it is important that we now start to think about and cooperate for finding and implementing policies that would guarantee macroeconomic and financial stability at home. From the above viewpoint, the nature of stimulus policies at present and in the future should aim at minimizing the costs of side effects that the expansionary policies have caused in the course of years. A very important place in this direction is occupied by reduction of debt created during the fiscal expansion, and reduction of its cost. In this framework, all the fiscal authorities should work not only for avoiding the creation of new debt, but also for settling the debts in arrears with maximum efficiency. Debt exit strategies, including also the replacing of the expensive debt in arrears with a new cheaper debt, are very important and welcomed. In current conditions, when there is a high probability for further debt growth, the policies to sustain the economy by expenditures is restricted from the incapability of the economy to generate economic growth. Shifting the focus of discussion to the reality of our economy, in order to maintain the debt level and the macro-financial stability, it is necessary to restrict expenditures in accordance with revenues. The latter depends directly on Albanian economy revenues. Therefore, it is very important to encourage the economic development and to direct the financial resources to those directions where the Albanian economy provides its competitive advantage. This would enable the substitution of imported consumer goods with domestic products whenever possible and efficient. The purpose is to encourage production not only for domestic consumption but also for exports in traditional markets and products and in new ones. This objective is a necessity, not only from the short-term and mid-term perspective, but also from long-term one. The strategies for debt management and reduction (debt restructuring) are not only part of the macroeconomic policies. They should be extended to every cell of the economy, whenever the microeconomic balance sheets have been burdened by debt. The restructuring and the resumption of lending activity can not take place without leaving aside the sick and bad part of the balance sheets. Currently we are confronted with exchange rate correction. This automatic adjustment of consumer and producer behaviour in terms of consumption, savings and investments, has been an indispensable process in line with the new equilibrium. However, it is insufficient; therefore, it should be accompanied by correction of fixed asset prices in accordance with the new wealth balances. I would like to emphasize that the equilibriums of a balance-sheet, either fiscal, private or household one, are guaranteed by simultaneous and equal changes in its both sides. Banks and businesses should work together to identify and separate the sound parts from the problematic ones. If the current restructuring strategies lack the potential for improving the sick part, then perhaps it is the due time to pass to a new strategy that treats both parts of the business as separate from each other. This would enable an optimal solution in each specific case versus a unified refinancing strategy that was implemented so far. Clearing the lending activity would bring about shifting of the new credit from inefficient refinancing to new development possibilities and economic growth, where the savings-investment balance is in equilibrium. This issue relates not only to the performance of the banking system and the financial stability of the country, but also to the ability of the economy to grow in the future. As I have also mentioned in other events, both the macro and micro factors that encouraged rapid economic growth in the recent years, are no longer present in the global and national economy. The new equilibriums we are living with show that the rapid consumption-driven growth models and credit-based growth models will no longer be present in out economy. This is true owing to supply and demand factors, since the rapid consumption- and creditdriven growth has aggravated the savings – investments balance sheets of agents in the economy. Consequently, there should be found a new long-term economic growth model, capable of absorbing the financial resources, particularly the foreign ones, and generating an economic growth. The first step in this regard is the identification of the competitive advantages that the Albanian economy generates and the acceleration of structural reforms in the Albanian economy in the light of these priorities. It is a pleasure that our timely discussion topics and activities are in line with the agenda of this activity. Thus the IMF provides a valuable contribution to our economy through discussion of these topics. Furthermore, through this activity, the IMF enhances the transparency throughout the Albanian economy regarding the economic development vulnerabilities from the IMF viewpoint, thus participating in the country’s economic debate. I would like to emphasize the latter, because I find it particularly important with regard to the difference between scientific contribution and that of political economy. The IMF comes to Albania as a participant in this debate with four scientific papers, whose results are based on available and reliable statistics, identified economic models and conclusions based on wellgrounded assumptions and analyses. Each of these elements is clearly explained in the working papers that will be discussed today. These elements altogether make the work replicable (controllable), open for discussion, and assign credibility to the results and inferences. These materials represent good grounds for discussing issues of great importance to the Albanian economy. In contrast, today the bulk of economic discussions and analyses in Albania are based on a different criterion: that of listening and discussing. Analysts and economists focus mainly on the transmission of conclusions of their economic thought. They neglect the important discussion of data sources, the identification of theory references (by author or by year), or the assumptions made while applying the models on whose bases the results are obtained. This working model of “speak and listen” has dominated the economic analysis outside institutions. This model lacks two essential elements, the “read and write” ones. Economic comeback focuses only on television media, while all the economic policies of the Bank of Albania are based on the analysis and research papers with theoretical and empirical character and on economic indicators database. All these elements of decision-making are transparent to the public because they are published in electronic formats on the Bank of Albania’s website, and are simultaneously available in printed forms as separate working papers or summarized in volume forms. All this information is free of charge and is made available to the public as a public good. Consequently, analysis and comments on the nature, direction and speed of economic policies should start from, and address to these studies in order to discuss them. It is true that any analysis and critique starts from an economic hypothesis, but before the discussion becomes public, it is necessary that the validity of the null hypothesis is tested. This process should be documented in a working paper or article, because if the hypothesis or the model or data used are not appropriate in the analysis in question, then the conclusions are partial in the best case or make no sense in the worst case. Honestly, I hope that today’s activity would help in establishing a model or a culture of debate or analysis from the perspective of a third party. Everyone can benefit from the discussion, which is a necessary good for any institution that designs and implements policies of economic, environmental, social or any other nature. And this happens only when the content and the form of discussion is not determined by individual definition of the phenomenon, but by its detailed theoretical and empirical explication as required by the economic science standards.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Joint Press Conference of the International Monetary Fund (IMF) mission, the Ministry of Finance and the Bank of Albania, Tirana, 9 March 2010.
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Ardian Fullani: Recent economic developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Joint Press Conference of the International Monetary Fund (IMF) mission, the Ministry of Finance and the Bank of Albania, Tirana, 9 March 2010. * * * Honourable Mr. Minister of Finance, Honourable Mr. Bell, Honourable participants, During the last two weeks we have had an intensive dialogue with the IMF Mission, which visited Tirana in the framework of periodic consultations in terms of the observance of Article IV. During these discussions there is appraised the good performance of the Albanian economy during the past year and there is also emphasized the need for pursuing prudent economic policies, designed and implemented in the context of strengthening the macroeconomic and financial stability. Also, special attention has been paid to the need for ongoing structural reform that will support our long-term economic growth. The Albanian economy has recorded a positive economic growth during the past year and has successfully tackled the direct and indirect shudders of the global economic crisis. Moreover, the Albanian economy has passed the test, by maintaining the domestic economic and financial balances, which serve as a prerequisite for a sustainable and long-term growth. Thus, inflation rate fluctuated around 2 to 3 percent during 2009; the country’s external balances have shown correction signs, while the Albanian banking system remains robust and well-capitalized. However, the economic growth rate slowed down significantly during 2009. The global economic crisis, which deeply affected all countries of the region, was accompanied by slowed exports, reduced remittances and other foreign currency inflows, increased uncertainty and slowed credit growth. Although 2010 is expected to be accompanied by a gradual improvement in the world economic environment, many of the factors that negatively affected the Albanian economy will continue to be present even during this year. The stimulating fiscal and monetary policy helped supporting the economic activity during 2009. However, fiscal trajectories and the need for long-term stability suggest that the Albanian economy can not rely for a long time on fiscal stimulus. Against this background, in 2010 a more conservative fiscal policy is necessary and is welcomed by the Bank of Albania. In a medium- and long-term horizon, we are of the opinion that fiscal sustainability should be ensured through a clear and prudent fiscal rule. Under new circumstances, the economic growth should be based more on boosting the private sector of the economy and bank credit plays a key role in this regard. The good financial health of our banking system and the progressive improvement of liquidity conditions and risk premiums in domestic and foreign financial markets are encouraging developments. The easing of monetary conditions and the liquidity injections by the Bank of Albania have supported and will further support this process. However, the reactivation of credit activity remains a challenging goal, which would require encouragement of the final demand and generation of business plans valid for bank financing, reduction of real and perceived risk in the economy, review of development strategies and commercial banks’ lending policies, as well as reduction of cost and non-cost elements in lending. All these factors are envisaged to gradually improve throughout the year; however, they will remain far from the pre-crisis levels. Bank of Albania’s monetary policy will continue to be prudent, chiefly oriented towards achievement of inflation target. The recent upward inflation trend might have been motivated by temporary-action and limited-intensity supply factors. The Bank of Albania has envisaged that the exceeding of 4 percent inflation rate will be for a short period of time and will not be followed by steady inflationary pressures. Our projections show that consumer price inflation will fall gradually towards the 3 percent targeted rate during 2010. However, we remain committed to taking all appropriate steps to ensure this performance and meet our legal mandate for price stability in the economy.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the international conference "Responsible Finance in Albania", jointly organized by the Bank of Albania, the Kreditanstalt für Wiederaufbau (KfW) Entwicklungsbank and the European Fund for Southeast Europe (EFSE), Tirana, 23 March 2010.
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Ardian Fullani: Responsible finance in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the international conference “Responsible Finance in Albania”, jointly organized by the Bank of Albania, the Kreditanstalt für Wiederaufbau (KfW) Entwicklungsbank and the European Fund for Southeast Europe (EFSE), Tirana, 23 March 2010. * * * It is with great pleasure that I open the proceedings of this important forum entitled “Responsible Finance”. This concept is being ever-increasingly mentioned in the discussion topics and macro finance debates, in particular following the 2008 events. Participation in this forum pushed me to find an accurate definition for this concept. “Responsible Finance” can be summarized as practices that are designed to create a fair balance of interests between a finance institution and other stakeholders. In fact, my search made me realize that this concept may perhaps best describe in a single designation the wide-ranging efforts of the Bank of Albania in the last 3–4 years with respect to banking and financial supervision, monetary policy and public education. Responsible finance is an encompassing topic that affects and should be applied by all financial market players. It implies a phenomenon that goes beyond prudential supervision since it is a necessity to guarantee both the financial and macroeconomic soundness of an economy. This philosophy cannot be reduced merely to the best business principles and practices but it also summarizes the desire and goal to assist the poor groups of the population and remove poverty by providing more affordable borrowing and prudence that guarantees their economic success. Responsible finance focuses on guaranteeing the system’s customers’ rights, however the requirements and practices of responsible finance are first and foremost a guarantee for the soundness of financial institutions and therefore of the entire financial system. Responsible finance at the Bank of Albania has focused on three main directions: Banking supervision Transparency and accountability Education First, responsible finance cannot be understood as a phenomenon and responsibility to be left to the market players’ own initiative. It should be grasped not merely as a right but also as an obligation of all market players. If you agree to this principle, then you should be an advocate and promoter – indeed, this is the position of the Bank of Albania as far as this is concerned. From a central bank’s point of view, responsible finance begins with sound supervision of the banking and financial system. It constitutes an obligation for the central bank to provide the savers with the right of having financially strong financial institutions and to ensure that the latter conduct their operations in line with the best business principles. The Bank of Albania has paid particular attention to financial stability by exerting an effective risk-oriented supervision on the institutions it licences and supervises. Moreover, effective supervision also encompasses the importance given to the promotion of competition and protection of customer interests. And last, but not least, the principle of responsible finance has been applied through prudential banking supervision and preservation of financial stability, harmonizing monetary and fiscal policy. This principle has been considered as an integral and essential part in the monetary policy decision-making and harmonization with fiscal policy. Hence, the Bank of Albania guarantees that its monetary policy does not impair the financial soundness of banking and non-banking institutions and that of individuals; by contrast it supports these financial market players by making them part of the decision-making process. Allow me now to dwell upon the monetary policy decision-making transmission process to the public. This process is crucial to guaranteeing the maintenance of macro finance balances in an economy. In view of this, the Bank of Albania has committed to the economic and financial education of the public, viewing the undertaking of some concrete initiatives for the establishment of financial culture in the Albanian society as a necessity. However, this task cannot be performed alone; guaranteeing the balances requires the co-operation of the financial system, the private sector and the public at large in order for them to respond to the decision-making efficiently and rationally. The last two years’ events have pushed many people to discuss the consistency of efficient market theories and the ability of economic agents to be rational. Although it is yet too soon (and more time is needed) to make a full analysis of the causes behind the crisis, I have to bring to your attention some key elements that impaired the individuals’ ability and later on the markets’ ability to be efficient and rational. This is not to analyse the crisis but to understand the implications for responsible finance. It holds true that all stakeholders failed in terms of their decision-making and they made wrong, irrational and inefficient choices. But it also holds true that almost all borrowers did not have complete information on the types of credit they were borrowing or the financial instruments they were purchasing, or they were unable to understand the financial implications of their financial and monetary commitments. They were also pushed to believe that the housing prices were going up and that financial risk had ceased to exist. Unfortunately, it cannot be said the same for banks which pushed people to borrow these types of loans. Did they explain to their customers that the interest rates were only extended in time and they were not forgiven, that prices swing and that they do not remain stable? Did they provide all the necessary information? If the answer to a few of these questions is “no”, then the agents did not have the entire information available to make rational choices. And when this happens, the entire economy and the financial system along with it are severely hit. Against this backdrop, transparency does not only represent an obligation to the customer’s right to know each and every detail of a transaction, but also an obligation to the soundness of the entire financial system. Lack of transparency encumbers the transmission of information and consequently, it does not guarantee the proper conditions for the agents to be rational in their decision-making. Therefore, transparency and responsibility are needed. In order to enhance banks’ transparency to their customers in Albania, the Bank of Albania has approved the Regulations “On the minimum requirements for disclosure of information by banks and branches of foreign banks” and “On the transparency of banking and financial products and services”. I would like to note that the lack of transparency does not only appear in the form of intentional concealing of information or simply as a result of negligence, but also as a result of wrong selection of tools and means of communication. The disclosure of information in the most prompt, the best, the most efficient and the most comprehensible way is a responsibility for all market players, both for the institution to the customer and the customer to the institution. In this regard, it is with pity that I note that microcredit advertisements may be only found on the mileage boards or the amateur graffiti that smudge the national roads’ borders – the largest part of this information being the name of the institution. These institutions should build a clear communication strategy with the public with respect to the products they offer, the lending terms these products are offered, and – what is particularly important – their objectives. Transparency should entail their competitive advantages against universal banks as regards the lending terms and the assistance they are able to provide considering their loan portfolio well-management. Responsible finance means that the donors should choose the best and most skilful partners to be involved in this activity, and exert their pressure so that the institutions they allocate their funds in guarantee the transparency and information required not only in memos and reports, but in the market, where it is evident and transparent for the target groups. Efficient market decision-making also needs the central bank’s transparency and responsibility, therefore the Bank of Albania has paid a great deal of attention in this respect. However, we are well-aware that transparency in information and decision-making represents a necessary but not a sufficient condition to guarantee an efficient response in economy. It often occurs – in particular in our economies – that financial illiteracy becomes a significant hindrance to market efficiency, since the economic agents may not be able to accurately interpret the information and communication of the decision-making authorities and may respond to these decisions unpredictably. This situation is similar to giving the people the appropriate tools to carry out a certain job without showing them first their function or how to operate with them. Consequently, there is no responsible finance without education. Using this reasoning, we perceive education as an obligation of governmental and academic institutions to respond to the public right to educate. Market efficiency and rationality may be guaranteed only if the entire economy (not only the economists) enjoys a minimum level of economic education. Being educated implies comprehending and interpreting the information and responding to it, however this does not necessarily mean being able to resolve every economic and financial problem by yourself. Being financially educated means knowing when it is necessary to address to the expert (the economist) in order to make better choices, after being convinced of his transparency and responsibility. This means financial responsibility in the form of an obligation to personal and social right for a long-term economic and financial prosperity. This education should not be only limited to the institutions (universities or financial system) because we do not need only economists. Economic and financial education should be addressed to the entire public in the form of a public good for all the economic agents in all possible ways. As I noted above, we have tried to educate our public through some concrete initiatives such as the publication of educational booklets, the launch of educational programmes for students, training seminars for journalists, high school teachers of Economics and social workers. In this regard, the Bank of Albania has been always active not only as regards the public education, but also in its search for partners, because when it comes to financial education there is room for everyone, in particular for the academia. It is for this purpose that we have recently established the Banking Research Institute as an opportunity for co-operation with the academia. The Albanian public lacks the weekly economic-related columns in the press, the educational classes, the public lectures, the professional assistance to the public and other similar. These are normal activities of the academia and the educational institutions in a developed world, since their primary purpose is to create public goods for the society. Social return or the social impact have now become an ever-increasingly important objective for profit-seeking financial institutions, while in our economy education is only limited to the strict and traditional classroom teaching. Analyses and comments almost always approach the criticism, and very rarely – not to say hardly ever – they approach explaining and interpreting a certain economic phenomenon. Against this backdrop, responsible finance goes beyond the financial system’s boundaries; it stretches to all the players that can and it is their responsibility to guarantee it in all possible ways. I invite all the interested players to co-operate in order to guarantee financial responsibility, providing an active contribution according to their role in economy.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on monetary policy decision-making of the Supervisory Council of the Bank of Albania, Tirana, 24 March 2010.
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Ardian Fullani: Recent economic developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on monetary policy decision-making of the Supervisory Council of the Bank of Albania, Tirana, 24 March 2010. * * * The Supervisory Council of the Bank of Albania, in its meeting of 24 March 2010, analyzed and adopted the Monetary Policy Monthly Report. Given the latest economic and monetary developments at home, their projections in future and after assessing the balance of expected risks, the Supervisory Council of the Bank of Albania, at the conclusion of discussions decided to leave the key interest rate unchanged, at 5.25%. After the heavy shock incurred over 2008 and during the first six months of 2009, the world economy has entered into a recovery stage of the economic activity, stimulated by the expansionist monetary and fiscal policy. The main central banks continued to follow an easing monetary polices with the purpose to sustain lending market and to guarantee the economic stability growth. The end of economic recession is accompanied by the invigoration of inflationary pressures, thus reflecting both statistical impact related to the performance of basic commodity prices, as well the demand growth in the world economy. The performance of financial markets was stable and the main indicators of risk are stabilized at lower rates. Notwithstanding, the attention of financial markets is dominated by the increase of uncertainty in terms of fiscal stability of some euro area countries. This is reflected on the increase of Government securities yields of these countries, as well as on the enhanced sensitivity of investors against fiscal developments. The economic activity is assessed to have recorded a progressive slowdown of the growth pace, these last six months. The latest indicators of real economy, as sales’ indicators, the monetary and confidence indicators, signal further hampering of the economic growth during the fourth quarter of year 2009 and in the early months of 2010. The stoppage of investments from the major part of businesses, the low exploitation of capacities, the decrease of capital goods’ import, and the low increase of loans for investments, reveal a slower performance of private investments even in the early months of this year. On the other hand, the more moderated growth paces of employment and wages, the shrinking of consumer loans, the weak performance of retail sales, as well as the indices on the increase of consumers’ preferences for savings, show a hampering even of the current and expected consumer in the short-term period. External sector of economy has manifested positive signals during January, characterized by an exports’ growth of 30 % and a tightening of trade deficit by 13%. This welcomed development remains however insufficient to direct the Albanian economy on the path of the persistent economic growth. The high fiscal incentive transmitted over the first three quarters of 2009, has affected the increase of public debt at 59.5 percent of GDP. The upsurge of current and capital expenses over this period, financed by the expansion of the state deficit and the growth of public borrowing, affected considerably the economic activity, however in a short-term. Through the twice cuts of the key interest rate and the ongoing injection of liquidity, the monetary policy of the Bank of Albania manifested also a simulating character over 2009 and during the early months of 2010. The monetary conditions at home, under the presence of the exchange rate depreciation during this period, have progressively provided ground to the aggregate demand. However, monetary conditions have been and continue to remain in line with the medium term and long term stability of prices at home, serving also to the well functioning of financial markets and to the maintenance of financial systems stability. In terms of the respond to the easing monetary policy and to the decrease of risk primes in economy, monetary indicators show improvement signs during the two first months of 2010. A decreasing trend of currency outside banks is materialized and a correspondent growth of deposits in the system. The resulted improvement of liquidity indicators of banking system and the reduction of the demand for funds of public sector are followed by the decrease of Government securities yields. The exchange rate also appears relatively stabilized, reflecting a slight correction of foreign trade indicators and of the country current deficit during the last two quarters. This correction has also affected the establishment of more steady balances of the demand and supply for foreign currency in this period. Notwithstanding these encouraging developments, lending activity at home remains far from its potentiality, responding to the lower demand for banking loans and the tightened lending conditions as applied from banks. Lending to private sector marked an annual growth of 4% in real terms, providing an annual growth of 7.8 percent of monetary supply in January. All denominated credit continues to rule the lending activity, which mainly covers the businesses’ needs for circulating capital. January 2010 embodied a particularity, that is the improved state of the banking system assets denominated in foreign currency, has started to be mirrored on the growth of credit denominated in foreign currency. Notwithstanding, the stable increase of lending should be assisted by the re-activation of the demand for loans and the parallel easing of lending conditions as applied from the banking system. Bank of Albania deems that banking system should reveal more visionary in assessing potential sectors of economic growth and to take a more active role in encouraging the economic activity. Annual inflation in February 2010 pointed to 4.4%, exceeding by 0.4 percentage points the upper limit of the Bank of Albania target’s tolerance. The annual average inflation pointed to 2.6%. The recent developments of inflation have reflected the statistical impact of the comparison to a relatively low prices base in 2009, the more full transmission of exchange rate depreciation on consumer prices and the administrative increase of energy, since January 2010. The later factor provided an effect of about 0.5 percentage points on inflation level, being the main reason of exceeding the level of 4%. On the other side, the increasing tendency of food goods inflation is owed to the global conjuncture of goods prices, which is revealing a gradual monthly increase since the half of 2009. Our analysis recommends that the increasing trend of inflation owes mainly to supplying factors, which are estimated to manifest an uneven nature and a short-term action in time. The Bank of Albania expected these developments, being factorised on our projections regarding inflation and communicated timely and in terms of transparency to the public. In medium term period, the growth under potential of the Albanian economy owing to the slowdown of the domestic and external demand, shall establish an environment of low inflationary pressures, which are expected to balance the pressures deriving from the supply direction. This assessment is also supported by the sustained developments and at low historic rates of the long-term component of non-tradable goods inflation, as the most directed transmission of inflationary pressures generated from the internal demand in economy. The rates of both key inflation and of the non-tradable goods in February pointed to 1.1 and 2.3%, respectively. Throughout the discussions on the current and expected economic developments, the Supervisory Council of the Bank of Albania concluded that the inflationary pressures balance in medium term horizon is in line with the Bank of Albania inflation target, notwithstanding the latest tendencies of consumer prices’ inflation. The assessments regarding the demand slowdown and the increase of negative production gap, the more controlled development of exchange rate and, the equilibrated expectations of economic agents about inflation, are factors which shall condition the development of inflation within the target of the Bank of Albania. At the conclusion of discussions, the Supervisory Council decided to leave the key interest rate unchanged, at 5.25 percent. This decision guarantees the appropriate monetary conditions on the preservation of the medium term inflation target. Bank of Albania, regarding the future, remains ready to operate in line with the real and expected performance of the economic indicators. In particular, its decision shall factorise the maintaining of inflationary expectations being anchored around the objective of the Bank of Albania regarding inflation, stability of financial system at home, in terms of maintaining and further consolidating the macroeconomic balances. In this view, Bank of Albania assesses that the recent correcting tendencies of the balance of payment indicators are encouraging developments for the long-terms sustainability of the country financial indicators. On the other hand, Bank of Albania deems that this sustainability would be assisted by the application of a cautious fiscal policy, which should already factorize the long terms soundness of fiscal parameters in its decision-making process.
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Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the 4th Bank of Albania Forum with the Albanian Banking System, Tirana, 14 April 2010.
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Ardian Fullani: Overview of Albania’s economy and banking sector Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the 4th Bank of Albania Forum with the Albanian Banking System, Tirana, 14 April 2010. * * * Dear commercial bank managing directors, Dear guests, I would like to welcome you to this periodic meeting, which aims at providing a platform for the exchange of ideas and presentation of viewpoints related to the developments affecting banking and financial activity in general, and which are focal to the financial system’s stability. Yesterday the Supervisory Council of the Bank of Albania approved the Financial Stability Report for the year 2009. This is the third issue of the Financial Stability Report and it is my pleasure to state today that now we do have a consolidated product, which aims at being in full compliance with the best standards. The conclusions derived from this report confirm that the Albanian banking system experienced an unusual liquidity situation in 2009 and has now entered a period of full recovery. The satisfactory growth rate of deposits, in particular over the recent months, attests to the restoring of public confidence in the banking system. Moreover, the conclusions of this scientific research confirm that the Albanian banking system is sound and stable and provides full guarantee for the mobilization of the public savings and their channelling into boosting economic activity in home. I avail myself of this opportunity to invite all participants in this meeting, the decision-making and governmental authorities, the media and the public at large to address to this report. Only in this way you will better understand the current situation, the achievements made so far and the challenges to be faced in the future. In what follows, I would like to provide an overview of the economic situation at home, and later dwell upon the banking sector’s present situation and outlook for 2010. Credit quality and banks’ transparency to their customers are two issues I particularly chose to focus on. According to INSTAT’s preliminary assessments, Albania posted a positive economic growth of 3.3 percent during 2009, despite the impact of the international financial and economic crisis. The financial system, dominated by the banking sector, was stable and the fiscal and monetary stimulus mitigated the difficulties of the real sector of the economy. This growth rate is very close to the early 2009 projections made public by the Bank of Albania. Among the factors that boosted economic growth over the course of 2009 we can mention the public authorities’ measures to rapidly restore public confidence in the financial system and the banking sector, and the monetary and fiscal stimulus provided through the cut of the key interest rate, the injection of liquidity and the increase of public expenditure. Among the factors that led to lower economic growth rate we can mention: the trade balance deficit sustainability; harder times for the entrepreneurship due to lower foreign demand and contraction of banking sector lending; and lower dynamics in household consumption. Banking sector’s assets grew to ALL 886.3 billion, posting an annual growth of 6.3 percent relative to year-end 2008. The performance of the financial system’s financial resources, revenue and capital was affected by the international financial crisis and its impact on Albania’s real economy. As far as the banking sector is concerned, the decline of public deposits terminated at the end of the first quarter, and their return to banks progressed at stable rates during the rest of 2009. However, the changes in the liquidity situation, the exchange rate devaluation and the difficulties encountered by the real sector of the economy gave rise to slower lending and deteriorated loan quality. As at end 2009, lending, including the accrued interests, accounted for about 50.8 percent of total banking sector’s assets or as much as 40 percent of GDP. In the meantime, the ratio of non-performing loans to total loan portfolio rose to 10.5 percent. The need to increase the reserve funds for coping with the credit risk from banks led to the decline of the banking sector’s financial result, which however ended positive for about ALL 3.5 billion. Business capitalization was adequate during 2009, as a result of lower high-risk bank investments, injection of new capital by the shareholders and the preservation of a net positive result. As at end 2009, capital adequacy ratio was 16.2 percent. The public authorities took several measures in 2009 to support the financial system and the banking sector in particular. Among these measures, I could mention the approval of the law which increased the insurance amount of public deposits, and the decisions of the Supervisory Council of the Bank of Albania to limit banks’ exposure to foreign banking groups and to suspend the allocation of banks’ profit in 2008 and 2009. Along with these decisions, during 2009 a number of other Bank of Albania decisions taken since the last quarter of 2008 continued to be implemented. These decisions related to the establishment of more facilitating conditions as far as the provision of liquidity in the interbank market is concerned. The Bank of Albania decisions in January and October, which cut the key interest rate by 1 percentage point to 5.25 percent, contributed further to increasing the banking sector’s opportunities to provide liquidity at a lower cost. Economic development at home during 2010 will be supported by a more favourable global economic situation, which will provide a better setting for foreign investments and will better boost the demand for the Albanian exports. In the domestic economy, the developments noted during 2009 as regards the increase of budget deficit and domestic debt, the lower banking sector lending, and a more rigid situation in production and consumption, need to be addressed through quick and decisive actions and in the course of an adequate time span. It is therefore indispensable to keep the budget deficit for 2010 under check and at levels that guarantee the observance of the targets outlined in the Medium-term Macroeconomic Framework as regards budget deficit and public debt level. The consolidation of public finances, reflected through the restoring of budget deficit’s downward trend is of great importance in terms of the decline of its financing cost. It will also lead to improved liquidity situation in the financial market, releasing more financial resources into the system, the use of which will boost the private sector lending. The entrepreneurship and households need to assess the expected outlook of the Albanian economy for 2010 realistically. This period should be used by the entrepreneurship to control the costs and take the necessary measures for restructuring the activity in order to enhance the efficiency. In general, these actions of the fiscal authority and the private economic agents are in the short-term necessary to provide a more adequate environment that will enable the undertaking of other measures for increasing the contribution of production to economic growth and increasing the domestic savings in a longer-term. During 2010, the banking sector will expand its activity at higher rates than in 2009, however less than the average long-term annual growth. The expansion of activity will likely be more rapid in the second half of the year. As regards the financial resources, the banking sector will benefit from the stable growth of public deposits. The growth of ALL deposits will continue to be supported by the more stable savers’ flows, the positive real return and the expectation for greater exchange rate stability. The growth of foreign currency deposits will reflect the seasonal performance, hence being higher during summer. The maturity structure of deposits is not expected to display any significant changes from the present situation; however the average maturity term of deposits is expected to be higher in 2010 relative to 2009. The extent of this change will be determined by the performance of depositors’ income and the stimuli set by banks to orient the structure of savings. The Bank of Albania will continue to provide the necessary liquidity to the interbank market. As far as the financing lines and shareholders’ capital are concerned, the Bank of Albania will continue to require from banks that they maintain the necessary amounts not only in order to carry out a normal banking business and comply with the regulatory framework requirements, but also in order to support the recovery of banking business at well-controlled risks. With regard to bank investments, the Bank of Albania expects higher lending rates by the banking sector in 2010 relative to 2009, with the largest part of growth expected to take place in the second half of the year. In terms of risk assessment, in the short-term, the banking sector’s financial situation has benefited positively from the following developments: a) Substantial improvement of liquidity situation against a background of public confidence recovery and stable deposit growth. It is assessed that during 2009, the annual growth of public deposits was 7.6 percent, rising to ALL 694.3 billion. Presently speaking, the deposit level has exceeded that of end September 2008, prior to the beginning of the deposit withdrawal. The growth rate of public deposits would have been higher if the situation in the real sector of the economy had improved and the banking sector lending had recovered. b) Lower growth rate of the banking sector’s risk-weighted assets. During 2009, the growth of the banking sector’s risk-weighted assets reduced substantially, owing mainly to the much lower growth rate of lending and the lower expansion of banking business in general. In fact, during 2009 the banking sector increased lending by about 13.2 percent, compared to the growth by about 35.7 percent in 2008. It is assessed that ALL loans grew about 23 percent, while foreign currency loans grew about 9 percent. However, in real terms, the real growth of foreign currency lending was negative. c) The devaluation of the national currency exchange rate during 2009 is assessed to have been at a reasonable rate and extent, providing the banking sector and other economic agents with the necessary time to take adequate and protective measures. There are great expectations for a stable exchange rate during 2010. However, the movements in the exchange rate against a background of a flexible regime are normal and should be an expected phenomenon by the economic agents and which they should be prepared for. In the medium term, the banking sector should cope with the impact that the loan quality performance has on its activity. Lending grew by about 13.2 percent in 2009. ALL lending provided the major contribution to the overall growth, supported by the gradual increase of public deposits and the injection of liquidity by the Bank of Albania. Lending in foreign currency was stagnant, against a background of reduced availability of free foreign currency funds by banks and limited demand for loans as a result of the exchange rate devaluation. Another reason for the slowdown in lending owes to the more cautious lending policies adopted by banks against a background of higher credit risk resulting from the higher difficulties in the real sector of the economy. More specifically, the ratio of non-performing loans rose to 10.5 per cent at year-end. Its rise persisted in the early months of the present year though at a slower rate. As a result of the deteriorated loan quality, the entire banking sector has doubled the respective reserve funds, hence providing a negative contribution to the banking sector’s financial result. The latter was in 2009 half as much as the value in 2008 and had a greater concentration. The Bank of Albania has for long been vocal as regards the recovery of lending, which will not only boost the economy and customers, but also the banks themselves. The economic setting definitely remains challenging and the return to the 2008 lending growth rates is unrealistic, indeed undesirable. But we do believe that there exist opportunities – particularly in terms of the deposit growth performance – that the growth of lending will be better in 2010 relative to the previous year. Based on the early months’ survey carried out by the Bank of Albania for this purpose, the same expectation seems to be supported by you as well. However, though the recovery of lending is a desirable development, it should be carried out on the basis of a prudential analysis, monitoring carefully the loan quality performance. In more practical terms, it is necessary that banks fully reflect the size of non-performing loans for the existing loans and create appropriate reserves for covering the risk of loan losses. As far as non-performing loans are concerned, banks must identify customers with temporary and surmountable problems, and should set up policies that provide support to these customers in exchange to additional elements that hedge the bank against such credit risk in the future. As regards the customers assessed as having low creditworthiness, banks should without hesitation follow the procedures for the execution of the collateral and other forms of collateral, in order to recover as large as possible amount of credit. The entire decisionmaking in this process should be clear and documented, and should be based on the analysis of specialized bank structures. Without carrying out this process first, the implementation of general regulatory measures for a temporary sorting out of this problem would result premature and indeed counterproductive. With respect to new loans, taking into account the experience of banks faced with loan portfolio problems, there should be a better sectoral distribution and a more reasonable balance between public and private investment projects, between customers representing business or household undertaking, between the forms of lending in ALL or in foreign currency, etc.., orienting lending in order to reduce the exposure to more problematic forms and the concentration of lending in general. Assessing first of all the borrowers’ creditworthiness and lending safety, the Bank of Albania considers that there is sufficient room for commercial banks – depending on their size and opportunities – to support the SMEs with more lending and provide greater funding opportunities in ALL. In addition, the monitoring of the loan quality performance will necessarily require the prudential monitoring of the situation at individual banks, which may display a different performance from the average of the sector. The performance of loan portfolio quality will continue to exert pressure on banks’ financial result. In this context, the prudential monitoring of banking activity capitalization rates is of great importance, despite its current sufficient levels. I would like to note that this is another process that puts to test the capability of banks’ managing structures in managing the situation carefully, with integrity and professionalism. Moreover, this process requires from banks’ shareholders, who increased their investment and profit value during the credit “boom”, to stand by banks in order to meet their eventual needs for capital or other forms of financing. Allow me now to touch upon another issue, which I consider paramount and that relates to banks’ transparency to customers. Despite the overall improvements in this regard I would like to focus on banking service-related issues. The Bank of Albania has received frequent complaints from citizens, regular or casual users of banking services, in relation to the costs that banks apply for the services they provide. It comes out that in many cases citizens are left with no options as regards the obligations to the bank for the service provided to them, without first being notified of the reason and size of obligation. In other cases, the user of the service cannot find the necessary and convincing explanation from the bank about the “why” of the obligation and the way the latter is calculated. I cannot exclude here the cases when the problem stands in the limited financial understanding of the citizen himself; however it seems that the work of the banks’ staff to ensure transparency to the customer is superficial and at times deficient. In a broader and technical concept, the method the costs are determined by banks for the services they provide remains unclear. Based on a recent analysis made by the Bank of Albania on the level of various commissions applied by the banking sector, it results that the banks have not made any documented cost analysis for the services they provide to the customers and have not set up any methodology for setting the respective commissions/fees. Moreover, there are not any standards of the form, composition and designation of the commissions for similar services in different banks, hence making it difficult for the customers to make any interbank comparison and raising the confusion among the public. In addition, the transactions between customers of different banks are penalized by the relatively high commissions, hence burdening the making of payments through banks and providing undesirable consequences for the performance of cash in economy. Regarding the way the commissions are set, banks are guided by the competitive institutions in the market and there does not seem to be any active and visionary banking services development policies, supportive to the increase of the number of users that may easily become potential bank customers. It is not accidental that the income from banking service commissions accounts for only 5.5 percent of their total income. According to us, it shows that banks are not active in using all their potential for raising their income through competitive policies in this area. I avail myself of the opportunity to require your utmost commitment to address this issue aiming at making a thorough improvement in this regard. The Bank of Albania will examine the possibility to require through the regulatory framework the setting up and implementation of documented methodologies for banking service commissions, as well as to encourage the establishment of a standard for the presentation/disclosure of commissions and the way they are monitored. Dear commercial bank managing directors, The Bank of Albania has constantly shown that it is a responsible and visionary institution. Withstanding the difficult situation was not merely casual. Our measures and actions of the last four years, pre- and post-crisis, were paramount. We are evaluating the measures and actions that will characterize the months to follow at the same level of responsibility. I refer, inter alia, to the so-called exit strategy, which refers to the gradual withdrawal of extraordinary political and regulatory measures established in order to withstand the effects of the crisis. Noting that the liquidity situation in the banking system has improved and public confidence has restored, the Bank of Albania has started to implement the exit strategy. More concretely, in the beginning of the present year, the Bank of Albania changed the form of its main refinancing instrument auction from fixed price to limited amount auction. It is with pleasure that I inform you that this change has been comprehended well by the market, given the stable interest rates in the interbank market. Similarly, the securities’ market responded positively with the 12-month T-bill interest rates going down by about 1 percentage point in 2010. As part of this strategy, the Bank of Albania has restored the relationships of bank investors with the profit on their investment in Albania to normal levels. Resetting the free movement of capital regime, besides being an obligation for Albania in the framework of the international conventions, provides a positive impact on Albania’s perception as a reliable destination of investment and on pushing the entry of foreign direct investments into our financial system. Moreover, along with the development of the banking system, the increase of the interbank market’s role and the enhancement of our political and analytical institutional capacities, the Bank of Albania is planning to improve our system’s refinancing operations. We are assessing the possibility of changing the operational objectives from quantitative to qualitative ones, expressed in the form of short-term interbank market interest rates. In my speech I tried to touch upon the issues that the Bank of Albania considers that constitute our near and distant future objectives. However, I would like to highlight once again what I consider as constituting our major challenge for 2010. The economy needs to be financed in order to ensure a stable development. Financial intermediation is the purpose of banking activity. To this purpose, I once more draw your attention to be more active in this regard. The return of deposits has now provided room for the recovery of lending to the economy. The motto of the banking system for 2010 will be: every added deposit in ALL should be converted into a new ALL-denominated loan to the economy. In conclusion, taking advantage of this forum with the banking system, I would like to address to the Albanian public at large as well. The last crisis that hit the world economy highlighted an important element of the philosophy that characterizes the day-to-day life of every nation. Regardless of the similar recipes applied by individual nations, what is noticeable was the appeal on public’s national awareness and the patriotic response of the latter. I avail myself of this opportunity to make this appeal to the Albanian public, which with the rational behaviour shown so far, has shown that it is prudent and responsible. What I would appeal once again is simple. We should have: more confidence in our currency; more confidence in our banking system; more confidence in our analysis and conclusions; more deposits mean more loans; more loans mean more prosperity. After all, this is the real convergence with the European Union. In conclusion, I would like to note that the year 2009 was a relatively hard one for the banking sector. Although the year 2010 is expected to be a better one, some banking activity-related issues such as loan quality, its recovery, the shareholders’ commitment to providing more support to the banking activity and the strengthening of risk management structures require your utmost attention. The Bank of Albania remains committed to acting in full compliance with the legal and regulatory framework requirements that establish the norms for the conduct of banking activity. Therefore, your co-operation and professionalism are particularly important to this process.
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