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Economic and financial challenges:
prospects of Albania.
Ardian Fullani
Governor of Bank of Albania
Athens October 2009
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Policy Framework & Long run Quest for
Stability
Addressing domestic external vulnerabilities
Crisis hits region
Channels of transmission
Economic impact
Short term outlook
Long run implications
Tuesday, 23 May 2017
Policy Framework
Inflation is the final objective
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From Monetary targeting (intermediate targets: M3)
to Implicit inflation targeting (Two pillar strategy
with leading indicators: Forecasted inflation and M3
growth)
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Open Market operations
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Weekly Repo. Rate
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Reserve requirements
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Free floating exchange rate.
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Exchange rate acts as shock absorber.
Tuesday, 23 May 2017
Long Run Quest for Stability
Emphasize and focus on long run sustainable equilibrium:
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Prudent monetary policy, aiming to preserve macroeconomic
stability and promote savings in the economy.
Free floating exchange rate.
Encourage fiscal consolidation and policy coordination (Fiscal
Rule).
Approve New Banking Law and Repurchase Agreement Law and
the respective regulatory framework.
Establish a continuous dialogue with the market participants.
Improve commercial bank governance, transparency and internal
control and Better risk management.
Warn banks and take regulatory measures against fast credit
growth, especially in foreign currency.
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Tuesday, 23 May 2017
Vulnerabilities Before Crisis
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Consumption led growth due to fast credit
expansion.
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Increasing fiscal deficits.
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Growing trade and current account
deficits.
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EU main trade partner.
Tuesday, 23 May 2017
Crisis: Channels of Transmission and
Economic Impact
Foreign and domestic demand slows.
Remittances slow.
Deposit withdrawals.
Liquidity problems for banks.
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Credit stops;
Private investments & consumption suffers.
Exchange rate depreciates.
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Agents realize the problem of borrowing in foreign currency.
Commodity prices drop prevents automatic adjustment of CAB.
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Depreciation is not passed to prices and inflation stays within the
Bank of Albania objective.
Tuesday, 23 May 2017
Crisis: Policy Response
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Bank of Albania
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January 2009 Repo Rate cut 50bps;
Provide all needed liquidity in domestic currency;
Contain exchange rate volatility and agents emotional response to
market fluctuations;
Increase efficiency and Micro management in the foreign exchange
market;
Downward economic forecasts for economic activity;
Share information with other supervisory authorities aiming to
coordinate and customize policy response in line specific market
conditions.
Fiscal
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Increase capital expenditure
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Privatization and foreign commercial borrowing;
Aggressive borrowing in domestic markets with signs of crowding out.
Tuesday, 23 May 2017
Crisis: Policy Response
Shift focus toward financial stability
 Open market operations:
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Change the form of Repo auctions from fixed amount to fixed price;
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Extend the average maturity of Central Bank liquidity injection;
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Reduce the margin of overnight lending from + 175 bps to + 75 bps;
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Expand the range of collateral: from TBiIls with up to 1 year maturity
to securities with days to maturity up to one year;
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Increase the daily use of the required reserve from 20 to 40 percent.
Exchange rate interventions:
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Reduce extreme exchange rate volatility and other market
imperfections, while domestic agents adjust to new equilibrium.
Encourage banks to credit the economy.
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Tuesday, 23 May 2017
Policy Response and Economic Impact
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Inflation stays low.
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Aggregate demand slows down;
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Deflation in the commodities prices offsets the FX
depreciation on inflation.
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Government deficit grows.
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Yield curve Steppes with possible crowding
out effects.
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Tuesday, 23 May 2017
Short Term Outlook
(Growth prospects)
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INSTAT
5
4
September
3
2
June
1
May
10
20
10
Q
2
20
10
Q
1
20
09
Q
4
20
09
Q
3
20
09
Q
2
20
09
Q
1
20
08
Q
4
20
08
Q
3
20
08
Q
2
0
20
08
Q
1
YoY growth rate, %
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Tuesday, 23 May 2017
Short Term Outlook
(What factors could support
recovery?)
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7
INSTAT
Investment
5
Export
s
Euro/Lek
4
3
Outlook
2
1
11
20
10
Q2
20
10
Q1
20
09
Q4
20
09
Q3
20
09
Q2
20
09
Q1
20
08
Q4
20
08
Q3
20
08
Q2
0
20
08
Q1
YoY growth rate, %
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Tuesday, 23 May 2017
Long Run Implications: Possible Structural
Effects
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Monetary policy
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Fiscal policy
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Slower growth in M3 due to reduced velocity (less credit in
foreign currency).
Less credit demand due to portfolio rebalancing and bank
tougher standards.
Larger and persistent fiscal deficits.
Difficult refinancing.
Emergence of twin deficits.
Financial Stability
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Rebalance of saving & consumption behavior in favor of
domestic currency.
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Tuesday, 23 May 2017
Long Run Policy Implications
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Structural shifts (Unit root vs. mean reverting) in:
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Structure of credit
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Structure of money
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World GDP growth
Monetary policy implications of future developments in
GDP, and money supply
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Implications for transmission mechanism and monetary policy
reformulation (monetary indicators).
Structural reforms needed in several areas.
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Tuesday, 23 May 2017