Bank of Albania / Pandemic deepened the crisis during the second quarter. Albanian economy shrank by 2.5%, while unemployment increased by 11.4%

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The Albanian economy was under the strong effect of the pandemic during the second quarter. These consequences are still present. Reducing domestic and foreign demand and limiting productive and service activities in the country have led to declining production, rising unemployment, and financial difficulties for Albanian businesses and households. However, the country's banking sector remains healthy and financial markets appear relatively calm. Governor Sejko stressed at the press conference where he presented the analysis and decisions of the Supervisory Board of the Bank of Albania.

Full statement

The Supervisory Council estimates that the progressive opening of the economy, the facilitation of social distancing measures as well as the stable monetary and financial environment of the country, create premises for the gradual recovery of economic activity in the coming quarters. However, the balance of risks remains shifted downwards.

At the end of the discussions, the Supervisory Council assessed that the current mix of fiscal, monetary and financial policies provides the necessary stimulus to support economic growth and return inflation to target.

The Covid-19 pandemic has dealt a comprehensive blow to the Albanian economy. Its consequences have already begun to be reflected in the available statistical information.

According to Instat data, the Albanian economy shrank by 2.5% in the first quarter of this year, reflecting the decline in exports and investment. Also, labor market data show that the Albanian economy lost about 17000 thousand jobs in this period, while the unemployment rate increased to 11.4%.

Indirect data from the second quarter suggest that the shock has been further strengthened. Exports of goods shrank by 33% during the first two months of this quarter, in response to declining foreign demand and barriers to circulation. Also, imports decreased by about 30%, signaling a rapid slowdown in consumption and investment in the country, while budget revenues shrank by about 30% in the first two months of the quarter, reflecting the overall decline in economic activity.

Against this background, inflation increased slightly in April and May. Its average rate jumped to 2%, mainly due to temporary supply shocks in this period.

The Bank of Albania estimates that the future performance of the economy will depend on the duration of the consequences of the pandemic and the reaction of domestic and foreign economic agents to them.

The baseline scenario of expected developments is built on the assumption of avoiding a second wave of the pandemic and gradually reducing it to the complete disappearance of its consequences. In this scenario, the Albanian economy is expected to record a significant decline for 2020 and relatively fast and steady growth rates in the future. Economic activity in the country is expected to mark the peak of slowdown in the second quarter, to continue to remain in negative territory in the next two quarters, and to return to growth in 2021.

In line with this scenario, inflation is expected to stay close to current levels in the second half of the year. Further, this indicator is expected to record a gradual increase over the next year and return to target in its last quarter.

This economic performance will be supported by an accommodating mix of economic policies.

The fiscal packages undertaken so far have helped mitigate the effects of the crisis. The Bank of Albania expects a Budget review for the second half of the year, a review which is expected to result in a higher fiscal deficit. As we have said, fiscal policy must play a primary role in addressing the challenge we are facing. The prudent and temporary growth of public debt is an acceptable compromise to mitigate the impact of the shock on the economy and to support the country's monetary and financial stability.

In parallel, the Bank of Albania has adopted easing monetary and financial policies.

  • The reduction of the key interest rate to its historical minimum as well as the increase of liquidity injections, have enabled the control of risk premiums and have kept interest rates low.
  • In parallel, the regulatory measures we have taken have encouraged the temporary postponement of loan installments for customers in difficulty as well as the restructuring of loans for customers who display solid business prospects but short- and medium-term financial difficulties. Also, these measures have aimed to increase the use of electronic payments and have enabled the normal supply of the economy with physical money.

In response, financial markets appear relatively quiet. The cost of financing the private sector is close to its historical minimum, the exchange rate is stable, while the banking sector continues to show good indicators of liquidity and capitalization. In particular, the non-performing loan ratio dropped to 8.1% in May, marking a further decline compared to the previous quarter.

The Supervisory Council estimates that the banking sector is exercising its function of shock absorber in the economy. This sector has continued to lend to the private sector of the economy, especially that of businesses. Credit to the private sector continued to increase in April and May, an increase which was mainly present in the business sector, supporting the latter with the liquidity needed to cope with the crisis. Also, the banking sector has borne a part of the financial cost of the shock, further easing the burden on the public and private sectors.

Encouraging the continuation of this role, the Supervisory Council notes that the banking sector cannot and should not bear the financial burden of the shock alone. In this context, the public sector has and should play a primary role, through increasing fiscal stimulus, as well as the private sector, through increasing financial prudence and operational efficiency

At the end of the discussions, judging by the projections of the baseline scenario and the balance of risks around it, the Supervisory Board assessed that the current monetary policy stance is appropriate. For this reason, he decided:

  • Leave the key interest rate unchanged at 0.5%;
  • Leave interest rates on overnight deposits and loans unchanged at 0.1% and 0.9%, respectively.

Monetary policy will continue to remain accommodative throughout the forecast horizon.

However, the Supervisory Board deems that the balance of risks continues to remain at the bottom. In particular, downside risks arise from:

  • Return in the form of a second pandemic wave;
  • Creating problems in the mechanism of transmission of monetary policy, in the form of rising interest rates and financing costs of the private sector, in the form of deteriorating bank credit supply, or in the form of strong fluctuations in other market indicators financial.

The Supervisory Council notes that the possibility of materialization of these risks has been mitigated, which reduces the need to increase monetary stimulus and the use of unconventional monetary policy instruments. However, the materialization of these risks would require further easing of the monetary policy stance and, potentially, the use of unconventional instruments, always in accordance with the legal framework that outlines the activity of the Bank of Albania.

 

 

 

 

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