“The BoA expects Albania’s growth trend to continue in 2016”
FIAA: What are current economic indicators telling you about the state of the economy in Albania?
Mr. Sejko: Economic growth was 2.98 % in the third quarter of 2015. Our estimate of growth for the full year 2015 is 2.7 %, compared to 2.0% in 2014 and 1.3% in 2013. For 2016 we forecast growth above 3.0%, which means a moderate growing trend. This is positive for Albania, especially considering the current difficult economic environment in the region and the eurozone.
What are the drivers behind the improved growth that you forecast for 2016?
We expect growth in foreign direct investment and domestic investment; we expect improved lending conditions to boost lending by banks and by financial institutions; and we expect an improvement in the general economic climate internally and externally.
Greece has been more stable recently. We are seeing some foreign direct investment coming to Albania due to tax increases in Greece. Meanwhile, the drop in remittances coming from Greece is compensated by remittances from other countries; remittances grew 5% in 2015 despite the eurozone crisis.
Of course these are signs of a modest recovery. But even growth of 2.5% or 3.0 % is not enough; we need to have growth of around 5.0% for people to really feel the change. Being cautiously optimistic, we believe the current growing trend shows we are on the right path.
Is there any impact from Italy?
Overall we do see a moderately positive impact from Italy. The economic climate is difficult in Italy just as it is in the eurozone, so lots of small and medium sized Italian businesses are coming to Albania. They see advantages in Albania such as a cheap labour force, well trained people and Italian language skills. We are expecting more foreign direct investment from Italy in 2016.
At the same time a lot of Italian and Greek companies operating in Albania are not exporting as much as before to their home countries because their economies are struggling. However, these companies are managing to shift their exports towards other European countries.
How do your policies reflect the current economic climate and what is the outlook for these policies?
As the central bank, we are the institution responsible for price stability, which is the main aim of monetary policy. But we are also responsible for the country’s financial stability. The stability of the financial system is crucial because of people’s bank deposits.
In terms of monetary policy, the central bank is pursuing a policy of monetary easing. The main instrument that the central bank has is interest rates. We have decreased interest rates drastically in the last 2—3 years, just as all European central banks have done; they are now at 1.75%, the lowest level ever. This policy is already working: Lending in Albanian lek has increased from 20% of the total to over 40%. We will continue following this easing policy in the future in order to incentivise lending and drive economic growth.
What are you doing to strengthen financial stability?
First, we are co-ordinating action to reduce the level of non-performing loans in Albania. This action plan consists of restructuring some loans and closing others that have no future. Latest data shows the level of the non-performing loans dropping below 20% — around five percentage points less than its peak. We expect that declining trend to continue in 2016 and beyond.
Through banking supervisory regulations we are trying to provide incentives for higher lending by commercial banks, without influencing the regulatory capital and the liquidity of the banks, to not jeopardize the health of the banking system.
Albania’s banks are well capitalised: The average capital adequacy ratio is more than 16%, well above the 12% required by the central bank. At the same time, we have a loan to deposit ratio of almost 50%, so there is a lot of liquidity in the banking system.
We want this liquidity to be used in lending to promote economic growth. But on the other hand we have a high level of non-performing loans and we want to regulate the market so that banks favour good projects. We are trying to keep the balance between monetary policy and financial stability.
What more can be done to promote growth in Albania?
We have a positive growth trend, but we need to change the Albanian economy from a remittance based economy to a production driven economy. This is easy to say but not easy to do. It needs financial reform by the central bank, structural reform by the government — to fight bureaucracy and corruption– and judicial reform. There are challenges ahead but we are confident that 2016 will be a better year.