Bank of Albania optimistic about domestic consumption and investments


- 09.03.2011


The Bank of Albania has released an report on the progress of Albania. In the report, it states that in the absence of direct data and based on a number of indirect indicators, the Bank of Albania assesses that the Albanian economy continued to grow during the fourth quarter of 2010.
The economic growth was supported mainly by the external demand for Albanian exports. However, domestic demand has shown lately signs of recovery, as evidenced by the positive trend of bank lending, indirect consumption indicators and improved Economic Sentiment Indicator of the Albanian businesses and consumers.
Consumption and private investment, the two most important components of aggregate demand, experienced a slow progress during 2010. While disposable income of the Albanian consumers is considered to have increased in real terms, high uncertainty and tightened lending terms and conditions by the banking system deterred the domestic consumption.
On the other hand, the Albanian businesses encountered insufficient demand for them to use their full capacities and higher financing costs. This situation has most affected sectors of the economy such as construction, which relies totally on domestic demand and, at a lower extent, other sectors such as industry, which generates most of its activity from external demand. Under these circumstances, investments pace was relatively lower, compared with previous years.
The Bank of Albania considers that domestic consumption and investments will have a better performance during the current year.
Conditions for funding the private sector demand appear improved, while risk premia in financial markets appear lower. Uncertainty for the future should gradually decrease. Additionally, the expected positive influence of external demand and fiscal policy during 2011, are expected to stimulate domestic demand. Correction of fiscal conduct is followed by a lower contribution to the economic growth during 2010. Public expenditure reduced by about 5% year-on-year, while the budget deficit reduced by about 4 p.p. of the GDP.
The Bank of Albania has always highlighted that fiscal stability is a fundamental precondition for a long-term economic growth. In this context, we deem that respecting objectives on budget deficit and public borrowing during 2011 will yield a positive contribution to the country’s economic development. Maintaining relative levels in budget deficit will eliminate a direct negative effect on economic growth, while relatively low levels of public borrowing will have an impact on the control of long-term interest rates and reduction of risk premia in financial markets. These developments were manifested during the second half of 2010 and are expected to stimulate domestic demand during 2011, as well.
External sector of the economy continued to be characterised by a positive, though falling, contribution of foreign demand to economic growth. The correction pace of the trade deficit was slower in this quarter. Trade deficit reduced by 1.2% compared to two-digit correction rates recorded in the first half of 2010. This situation of the trade deficit is determined mainly by the acceleration of imports, which marked a year-on-year increase of 10.8% in the fourth quarter of 2010, recording a growth for the third consecutive quarter. On the other hand, Albanian exports increased by 48.8% year-on-year, maintaining high rising rates.
The Bank of Albania holds that the Albanian economy will find it difficult to maintain the same growing rates of exports during 2011; among other things, this projection reflects temporary factors that influenced on 2010 growth and is in line with the global economy situation and basic statistical effects.
Nevertheless, external demand is expected to generate positive contribution to the economic growth during 2011, as well. Performance of monetary indicators continues to generate controlled monetary inflationary pressures on the domestic economy. Money supply increased by 12.5% in December 2010, reflecting a good performance of deposits in the banking sector during the second half of the same year. Our assessments indicate that monetary expansion is in line with the private sector demand for real money. A good progress of the economic activity and falling risk premia are also reflected on the upsurge of demand for loans by the private sector. Satisfactory parameters of the banking system in terms of liquidity and capitalisation have enabled additional support to the private sector with bank loans. In December, the growth rate of loans to the private sector reached 10.6% year-on-year.
In addition to private businesses, which were the main users of credit funding during 2010, positive signals come from household consumers, whose demand for loans increased during the last quarter of 2010.
Financial markets are characterised by dropping risk premia and liquidity, reflected in a further decline of yields in the primary market and interest rates in Albanian Lek deposits and loans. In the inter-bank market, short-term interest rates remained close to the key interest rate and showed low volatility. Foreign exchange trading in the domestic market was also calm.
The Albanian Lek continued to depreciate in annual nominal terms against foreign currencies, although more slowly compared to 2010.


Source; Bank of Albania