The Bank of Albania’s main goal is to achieve and maintain price stability. The Bank’s governor Gent Sejko discusses how it has been contributing to the economy’s remarkable growth. Through accommodative monetary policy and helping the country achieve EU membership by adapting to European standards, cooperating with European institutions and improving the stability of the banking and financial sectors, its work has led to greater trust in the Albanian economy
What are your most significant achievements as the Governor of the Bank of Albania?
There have been a lot of changes for the better in Albania in recent years. Economic growth has accelerated from one percent in 2013 to around four percent in 2018. Economic growth has been job-rich and unemployment rate has fallen to historical lows. Inflation is low and stable. The Albanian banking sector is liquid, well capitalized and profitable. These positive trends did not come out of nowhere, but were results of many reforms carried out by the government, the Bank of Albania and other actors involved in public policy. We, as a central bank, are in charge of ensuring price stability and financial stability, among other goals. As such, our contribution to the growth of the country is considerable.
What are some of the specific ways in which the Bank of Albania has contributed to this growth?
We have been following an accommodative monetary policy like many central banks in the euro area. We decreased the interest rate to the lowest historical level – one percent – in order to incentivise consumption, investments and employment growth. Indeed, these are the main growth drivers. Lending in the local currency has been growing considerably, and lending to the private sector has been growing at a rate of five percent year-to-year. We have also undertaken structural reforms in the financial sector, such as addressing the non-performing loan (NPL) situation. We used to have a very high NPL rate in the banking and financial sector of around 25 percent, which was alarming. There was a coordinated action plan with the government to address this, including regulatory and legal changes for the banking sector but also judicial reforms, and the results were positive: NPL levels started to drop and now stand at 11 percent. This has had a positive impact on confidence in the financial sector and restored the trust for lending into the economy. As a central bank, we remain committed to ensuring price stability and pushing forward financial sector reform.
What challenges lie ahead?
The high level of “euroization” in the real economy and in the financial sector – almost 50 percent of loans and deposits are denominated in euros – poses challenges to the financial stability and monetary policy transmission. Though FX lending has been declining, it remains high, exposing clients, individuals and businesses alike to FX risks in case of local currency depreciation as the one we have witnessed in the wake of the global financial crises. To address this challenge, we are following a de-euroization strategy. This is a joint effort with other relevant public authorities, in order to tackle every aspect of this phenomena.
The impetus for financial market structural reforms will continue with the aims of reducing vulnerabilities and unlocking the full potential of the economy. We remain committed to continuing the NPL resolution strategy, de-euroization strategy, to deepen financial markets and to invest in the full adoption and implementation of Basel regulation and resolution strategies. Recently, the domestic banking sector is consolidating and the number of banks operating in Albania is reduced to 13 from 16. We expect the recent trend of banking sector consolidation to increase focus, competition and risk appetite.
Regarding negotiations with the EU, what is the central bank doing to move Albania closer to membership?
We, at the Bank of Albania, have been at the forefront of the reform agenda and of the EU integration effort of the country. We regularly contribute to the dialogue and reporting of candidate countries to EU institutions. The European Council granted Albania candidate status in 2014, in reflection of hitherto reforms undertaken. The banking supervision regulatory and methodological framework is undergoing major revisions in conjunction with the EU integration process. Furthermore, our banking supervision is engaged in a self-assessment exercise based on the EBA methodology of equivalence for non-EU countries with prudential supervision and regulatory requirements in the EU. We have improved the safety nets of the financial system, we have in place a deposit insurance agency that is an independent institution cooperating closely with the central bank, and we have a resolution department. We have also amended laws to be in compliance with the EU regulatory framework and are working on the modernization of the payment system. As a central bank, we are a national payment agency and our main goal is modernizing payments. We have completed work on a new payment system law due to be approved by parliament this year.
Does the Bank of Albania coordinate with European institutions?
We have reached an agreement with the European Central Bank to be part of a supervisory college, which was an achievement in itself as there are many changes underway in the financial sector in the euro area. Some large European banks changed their strategy towards the region in the aftermath of the crisis, and we needed to have better coordination with them, but we are not a member of the EU. However, we signed an agreement with the ECB to be part of a supervisory college, so now we can exchange information and have the chance to coordinate better than before.
Are the any other major goals that lie ahead?
The Bank of Albania has another important purpose: financial education and financial inclusion. We want to get more people and businesses involved in banking, to reduce cash transactions, to reduce inequality and to facilitate business. This is a challenge that we are currently dealing with.
In February, you announced you would hold Albania’s benchmark interest rate at a record low of one percent and continue with a stimulus program tailored to the country’s needs. What are the reasons for this?
Our baseline projections are positive. We expect ongoing and broad-based growth to continue and inflation to reach our target of three percent by next year. The current monetary policy stimulus is needed to support these developments. Our forward guidance states clearly that our monetary policy will remain accommodative in the medium term, although the intensity of the stimulus will be calibrated to the pace and sustainability of the economic activity improvement. The risks to the medium term remain stewed to the downside mainly related to global trade tensions and continued geopolitical instability.
How can German banks and investors play a role in helping the Albanian economy grow?
Germany is our main supporter in the process of EU integration, and our main partner in many aspects, both political and economic ones. Six to seven percent of our trade is with Germany, and around two percent of FDIs come from Germany. These figures are not very high, and we want to increase them. To this end, the Albanian authorities are diligently working to improve the business climate and continue down the path of judicial and other reforms.
On the other hand, it should be recognized that we have a lot of potential as a country. Investment is going to be beneficial, and we need to show our worth to investors: Albania has natural resources, a cheap labor force, and a huge potential in tourism, agriculture, mining and other sectors. It is a priority for us to attract German investors, and I am confident that in the future their numbers will grow. We, as an institution, are open to investment not only in banks but also in non-banking financial institutions.
Last year, Albania issued a successful seven-year bond that attracted many prestigious financial investors. What is the significance of this bond issue?
The latest successful Eurobond issuance was a strong testament to the trust international investors place on the prospects and policies of Albania. The Albanian Eurobond was priced at 3.5 percent on the international markets, markedly lower compared to the pricing on the previous Eurobond issuance. The markets have thus taken note and priced-in the country’s structural improvements since the last issuance and reflected it in a lower sovereign risk premium for Albania. The Albanian Eurobond offer was set at €500 million. It ended up with combined bids at a total of over €1 billion, reflecting the faith the markets placed on this safe instrument and their search-for-yield behavior. The Eurobond issuance made sure the government liquidity needs were adequately met, crowding-in commercial banks’ funding to the real economy and supporting economic activity. Albania’s positive macroeconomic prospects are underpinned by regular International Monetary Fund (IMF) and the World Bank evaluations and this has been reflected in Albania’s sovereign ratings as issued by Finch or S&P.
The lek has been strengthening against the euro this year. Why is that?
The lek has been on a clear appreciating trend since the end of 2015. This trend appreciation reflects improving macroeconomic balances and continued real convergence towards EU peers. As I already mentioned economic growth has been strong, exports have been growing, especially tourism exports and FDI and remittances have been on a rise. In 2018, the rapid appreciation was also driven by large idiosyncratic capital inflow and one-sided market expectations for future appreciation.
The negative effect of the exchange rate appreciation on exports was almost fully counterbalanced by higher purchasing power of unhedged borrowers in foreign currency. On the other hand, the exchange rate appreciation affected negatively inflation and its outlook. To avoid this, we step in last summer by purchasing euros. The strong appreciation pressures experienced over 2018 appear to have subsided and the exchange rate is stable. Our intervention proved to be both well-timed and successful. We have communicated clearly to the market that the use of the exchange rate as a monetary policy instrument is temporal. Our monetary policy framework remains that of inflation targeting with a free floating exchange rate regime.
Do you have any final message about Albania for potential investors?
With a liberalized economy and a positive track record in terms of economic and financial stability – with the ongoing structural reforms expected to cement further this position – Albania offers a favorable investment climate coupled to abundant natural and human resource, low costs and tax incentives. This is a country with a lot of potential in many fields I mentioned above. Investors should come and see for themselves, talk to people, regulators, and find out the reality of the situation.