A story of Continued Recovery
By Genc Mlloja
Albanian Daily News
Published April 18, 2017

The Bank of Albania is of course engaged in delivering a
stable economic and financial environment, as well as in promoting the
development of financial markets. This is an issue of extreme importance to any
potential investor and I think we have done a good job in that regard, says Mr
Gent Sejko, Governor of Bank of Albania in this exclusive interview for
Albanian Daily News. Governor Sejko expresses what he calls "a reasonable
confidence" on the positive trend of Albanian economy. He gives details about
banking system's health, loans situation and the need of de-euroization to a
certain level.  

-Mr. Governor,
thank you very much for the opportunity to have this interview. Three months
have elapsed this year. Would you give an overview of Albania's economic
situation and how is the situation of the banking system for supporting the
expected economic growth as declared by the highest government authorities?

 First, allow me to thank you for the
opportunity given to share with your audience our opinions regarding the
current and expected developments of the Albanian economy.

Regarding the economic situation in Albania, our
analysis of all available economic and financial indicators paints a story of
continued recovery. According to INSTAT, Albanian GDP grew by around 3.5
percent in 2016. The economic growth was broadly supported by strong domestic consumption
and investment, as well as an improved external demand. In sectorial terms, we
see a robust recovery of construction activity, a continued growth of services,
and a more nuanced developments of the industrial sector, with branches exposed
to the decline in external commodity prices suffering whereas the light and
agro industrial branches going strong.

Naturally, as policy makers and central bankers
we should not limit ourselves to the headline story; rather, we should
carefully assess growth drivers, we should be mindful of economic and financial
balances, and we should be attentive to long term trends and challenges. Allow
me to elaborate.

The growth drivers that have underpinned the
continued recovery over the past three years appear to be strengthening. The
external environment is gradually improving; while not exactly rosy, external
demand and external financial conditions are less challenging compared to just
a few years ago. On the external front, the balance sheets of the private and
financial sector agents are improving and their expectations are trending up.
Labor market indicators are also improving, with employment figures increasing
by around 7 percent year-on-year in 2016, while the unemployment rate went down
to a cyclical low of 14.2 percent at the end of the year. Lastly, the financial
conditions are quite supportive of the economic recovery. On account of our
determined and accommodative monetary policy, the financing costs are at their
historical lows while credit conditions have stabilized. Credit recovery
remains still tentative, though credit in Lek increased by around 11 percent
over the last 12 months. Our prudent regulation and diligent supervision of the
banking system has made sure the banks remain liquid, profitable and well-capitalized;
they remain a trustworthy place to invest the savings of the population though
they should do more to finance the ongoing recovery. Further, the consolidation
drive of the public authorities has decreased overall financial risks in
Albania and has both complemented and re-enforced the monetary stimulus
provided by the central bank.

In terms of macroeconomic balances, the Albanian
economy moved a little bit closer to equilibrium in 2017. In spite of severe
shocks during the first quarter, inflation trended up and towards our 3 percent
target during 2016. Furthermore, the current account deficit contracted by
around 7 percent in 2016, whereas public finances scored a primary surplus and
public debt decreased by around 0.7 GDP percentage points.

Regarding the future, I'm reasonably confident
about our short to medium term prospects. Based on current trends and policies,
economic growth should remain at or above current levels over this horizon;
inflation should reach our target by mid-2018; employment figures should
continue to grow and indicators of financial health should improve further.

Fulfilling this projection should require staying
the course of current policies and a further acceleration of structural
reforms. However, given our past history and institutional improvements, I'm
reasonably optimistic about our chances.

Turning to the second part of your question I
would like to give a snapshot the latest trends of the banking industry.

The activity of the financial system expanded
during H2 2016, and its financial indicators remained relatively stable. The
weight of banking sector's assets to GDP increased to 94.9%. Banking activity
was profitable, with appropriate levels of capital and liquidity indicators. In
the activity expansion of the banking sector, the main contribution came from
operations with securities, other investments, and lending, on the asset side;
and operations of treasury and interbank, deposits and own funds, on the
liabilities side. In annual terms, the banking sector increased its net
(creditor) position with nonresidents, lending by 2.5% and deposits by 5.2%.
The nonbank financial segment, maintained its weight to GDP and his activity
was positively contributed by performance of nonbank financial institutions
(involved in lending and payments) and insurance ones. Exposure of banking
sector to nonbank financial segment remains low, but the stability of the
banking sector is crucial for the activity and stability of nonbank financial
segments of the financial system. 

Regarding the banking sector exposure to risks
the Bank of Albania assesses that:

a)  Credit risk decreased during the period,
albeit remaining near the previous year levels. The value of non-performing
loans decreased by 8% and the ratio of non-performing loans decreased during
H2-2016 to 18.3%. The main contribution to this performance came from process
related with loan collection, restructuring and write-off (of lost loans). The
non-performing loans decrease is associated with an improvement of their coverage
with reserve and capital funds, while loan collateralization level remains

b) The Liquidity risk in banking activity is
assessed as low. The low value of loans to deposits ratio, continuation of
deposits growth and the high presence of liquid assets above the minimum
regulatory requirements, show a very good situation of liquidity in the banking
sector in general and by main currencies.

c)  Banking systems assessment and control
of operational risk need further improvement. Although banking reports indicate
an improvement of their coverage with capital to overall operational risks, the
Bank of Albania supervisory activity highlights the need to further improve the
process of identification and report of operational losses in accordance with the
bank activity profile.

Overall, the indices do not show increase in
financial stability risks during the period. The decrease of the banking sector
earnings and the slight decrease of liquidity indicators (which anyway remain
at high levels) are balanced by positive developments in real economy, in terms
of improvement of the economic growth and the financial situation of households
and businesses. The accumulation of risks has weakened due to the contraction
of foreign currency lending, improvement of public debt indicators and the
positive performance of the housing market. On the other hand, the probability
of systemic risk materialization decreased, in the conditions where credit
quality index improved, unemployment decreased and volatility in the exchange
rate has been low.

-Can you tell us a
few words on the cooperation of the Bank of Albania (BoA) and the Executive
Committee of the Albanian Association of Banks (AAB)? Which are the major
fields of cooperation?

Bank of Albania (BoA) has a continuous and
fruitful cooperation with the Albanian Association of Banks. It considers
this close collaboration as an important connection, a bridge between us and
banking industry in Albania including all 16 commercial banks. During the year,
there organized frequent meetings with the representatives of the association
technical committees or other ad-hoc groups to discuss on several regulative
initiatives, for amendments to existing or new regulations.

BoA is thankful to the Association of Banks for
supporting its endeavors through a number of cooperation activities and
projects. The latest event was the celebration of the Global Money Week. Bank
of Albania in collaboration with Albanian Association of Banks and the support
of other institutions such as Ministry of Education and Sports and the Deposit
Insurance Agency conducted a number of well-tailored educative activities for
general public.

BoA has confidence in further strengthening the
productive relationship between these two institutions.

-It is spoken much
on the issue of non-performing loans. Which is the role of BoA to handle that

This is one of main challenges we are facing
recently. I would like to mention few of directions we are working on to
bring NPLs down.

Addressing the non-performing largest
borrowers and out-of-court debt restructuring

In collaboration with FinSAC project of the World
Bank, we have started a project on the issue of non-performing loans, which
consists of two parts:

- Revision of the Bank of Albania guidelines for
the restructuring of loans including international best practice principles
that can be used in solving nonperforming borrowers.

- Development of a cooperation framework scheme
for coordination between banks for providing solutions to borrowers
simultaneously exposed to several banks, specifying among those who can go into
bankruptcy and those that can be settled outside the legal process.

Loan granting based on official financial

Based on national plan for NPL addressing, Bank
of Albania duty is to impose regulatory provisions for the granting of new
loans based only on official or audited financial statements, within the first
quarter of 2018.

Credit Registry

Bank of Albania was engaged to make improvements
regarding Credit Registry. On that purpose, at the end of 2015 there were made
some improvements in the credit registry to enrich the information on the
borrower about the collateral enforcement and loans write-offs. In 2016 another
improvement process has started. With the financial and technical assistance
provided by EBRD it was launched a project for the complete revision of the
credit registry to implement an advanced platform and extended information on
borrowers in the country.

I would also like to emphasize that the level of
NPL dropped down further at 18% on February, and this also thanks to "Plan of
measures to reduce the non-performing loans" undertaken in collaboration with
other national decision-making factors and our international partners, which was
fully fledged only in 2016.

-Speaking of
inflation are you worried about its current level - 2.2 percent or better to
say the decreasing trend during the last years?

CPI inflation has undershoot our 3 percent target
over the past few years. In a nutshell, this outcome is a reflection of subdued
domestic inflationary pressures, in turn reflecting weak aggregate demand and
prevailing spare capacity in the economy, as well as low inflation among our
trading partners.

Such an outcome - and given our institutional
mandate of price stability - has conditioned the Bank of Albania to engage in
an unprecedented level of monetary expansion. We have cut our policy to a
historical low of 1.25 percent, we have expanded our liquidity injection
program, and we have made use of forward guidance, as a monetary policy
instrument employed to inform financial market agents and to anchor their

All in all, we have been successful with our
monetary policy. As I explained before, the Albanian economy and CPI inflation
are in a recovery trend, and this is due in no small part to the monetary
policy we have pursued.

Our analysis indicates overall inflationary
pressures strengthened in 2016. We did suffer a severe negative shock to prices
over the course of the first quarter, but the situation was soon reversed and
this rapid recover - in itself - was partly a testament to the trust economic
agents put on our ability to meet our commitments.

So, coming back to your question, yes indeed we
are aware inflation is below target and but I'm confident we will be able to
meet our target within a reasonable amount of time, i.e. within the next year.

-The policy rate has
kept unchanged at 1.25%. Also, BoA's Supervisory Council decided to keep
unchanged the interest rates for the overnight deposit and overnight lending
facilities, at 0.25% and 2.25%, respectively. Do you think that this decrease
at these levels is healthy for the economy in general?

The current level of interest rates in Albania is
indeed at historical lows. You are also correct this level of policy rates is
indicative our efforts to stimulate the economy through the pursuit of a quite
expansionary monetary policy. I would further venture this policy is correct
and absolutely necessary for the Albanian economy and its financial system.

As I explained before, the expansionary turn of
monetary policy across the turn of this decade was instigated by a deficient
aggregate demand and undertaken across the backdrop of a profound economic and
financial crisis amongst our foreign partners. In turn, this situation was
reflected in higher unemployment, in financial difficulties across the private
sector, and in an undershooting of our inflation target. Monetary policy is a
perfect instrument to combat such a predicament, and all central banks faced
with similar circumstances have made heavy use of monetary policy. The Bank of
Albania is no stranger to the book of good economic management.

The intensity of the monetary stimulus in itself
is determined by the depth of the shock and the strength of the transmission
mechanism. I would say that, by carefully assessing both of these factors, we
have come up with the correct answer to the challenges we are facing and, as of
now, we are seeing the concrete positive results of our policies: the credit in
Lek is growing, private sector consumption and investments are picking up,
economic growth and employment are trending up, and inflation is gradually
converging to our target. At the same time, we are not seeing any adverse and un-intended
impact from our policy of monetary accommodation.

I am confident the Bank of Albania has done the
right thing at the right time.

-You have recently
announced a new focus of the institution headed by you, that toward
de-euroization of the Albanian economy. Could you give some details on what
exactly does it consist in? How is BoA planning to address it and what could be
the upsides and downsides of it?

High euroization levels, particularly in the
banking sector activity provide a challenge for the effectiveness of monetary
policy and for financial stability.

In terms of monetary policy, high euroization
level mean that the credit and exchange rate channel of monetary policy
transmission mechanism may not operate well. In terms of financial stability,
the still high level of Fx (euro) loans, particularly of those where the
borrower doesn't have appropriate levels of Fx sources to serve the debt,
represent a significant exchange rate and credit risk, that could materialize
if the economy or the financial system is faced with a shock that causes
exchange rate depreciation. Furthermore, large levels of Fx deposits, expose
the system to Fx liquidity risk, where the ability of central bank to help if
there is a need is more limited. Hence, it makes sense to have regulatory
requirements asking for larger mandatory Fx liquid assets in  banks, in
order to strengthen the capacities of them to deal with such situation should
they occur.

In this regard, BoA has identified several
measures that initially will aim at: providing a difference between deposits
interest rates in Fx and local currency (Reserve Requirement Rate in Fx will
increase, while that in domestic currency will decrease); requiring higher
liquid assets in Fx compared to domestic currency, and improving the awareness
of borrowers for risks related with borrowing in Fx.

We understand that the process is complex and
challenging. Trying to decrease euroization levels only at the banking sector
(financial system) without providing similar incentives for the real economy
agents, is not sufficient and could prove not successful. Hence, together with
MoF and FSA, through an MoU that will be signed shortly, a more strategic
long-term approach on de-euroization will be followed, where the authorities
will coordinate and gradually introduce measures in their areas of competence.

This approach doesn't aim at "zero" level of
euroization for the Albanian economy. This would be completely unrealistic and
economically counterproductive. What we are aiming for is to stop and reduce
the euroization in the Albanian economy and its financial system, over the
medium to long term, to levels that markedly reduce exposure to risks and
improve the capacities of the authorities in discharging relevant macroeconomic
policies. We believe, that, if macroeconomic stability in the country is
maintained and the authorities show consistency in such approach, the measures
that will be taken will achieve the goal of lowering euroization levels to more
appropriate ones.

-With regards to
the attraction of foreign investments. Which is your estimation for future,
given the fact that Albania is in an electoral atmosphere? Which is the role
that BoA can play in this direction?

Incoming FDIs have been high in
Albania. They have averaged above 7 percent of GDP over the past 4 years, and
they increased a further 10 percent in 2016, reaching close to 9 percent of
GDP. That is noticeable source of external financing and we can only be pleased
about that.

There are a couple of reasons why
FDIs are highly prized in a developing country like Albania. First, they
represent a capital boost to our economy, increasing investment, production
capacity, employment and know-how. Second, they are a non-debt creating flow,
and as such less volatile to shocks.

As a converging economy, the Bank of
Albania has constantly spoken of the need to attract FDIs. To our view, there
are at least three preconditions the country must meet in order to be
attractive to foreign capital. First, it needs to offer a stable political,
economic, and financial environment. We should not forget FDIs are mostly
private capital and they are extremely sensitive to any source of uncertainty.
Second, the country needs to offer a good business prospect, not only over the
short to medium term but also - and especially - over the long term. Third, the
country has to offer a business friendly environment, meaning predictable legal
and judiciary practices and efficient public administration. Albania has made
good progress over the past years in fully or partly meeting these
preconditions, though we should not think we have completed our job.

The Bank of Albania is of course
engaged in delivering a stable economic and financial environment, as well as
in promoting the development of financial markets. This is an issue of extreme
importance to any potential investor and I think we have done a good job in
that regard. Most of the external assessment of strengths and weaknesses of
Albania, do categorize economic and financial stability as a plus, and this
would not have been possible without our full commitment.

-Some incidents
have happened in which robbers have stolen great monetary values. What measures
is the BoA taking and with which order and law enforcement you cooperate to
prevent such incidents? And secondly have they created insecurity in the
banking system in Albania?

First, I have to say that what this was a very
complex and specific typology of crime where Bank of Albania's involvement is
limited. Our role mainly consists on providing certain guidance on how minimum
standards should be adopted, including insurance policies of monetary values.

On the other side, regarding the transportation
of monetary values, where the criminal activity has been focused mainly, BoA
has defined as obligatory for the commercial banks to insure monetary values
while transporting (insurance companies has to be licensed by the Albanian
Financial Supervision Authority). Regarding physical security, the legal
provisions provide that banks will have to employ services of Private Physical
Security Companies which by virtue of law are licensed and supervised from the
Albanian State Police.

We have continuously asked from the commercial
banks to report to State Police, all the problems related to daily activities of
the security companies they employ.

However, considering the robbery episodes that
took place, I would like to mention that recently we have made some revisions
and adapted the regulations concerning transportation and storing of monetary

BoA has also proposed to the Ministry of
Interior, some amendments to the normative acts, which regulate the
transportation of monetary values in Albania.

In close cooperation with the State Police, we
have proposed a set of minimum obligatory standards that have to be applied
during the transportation of monetary values. Amongst other things, the draft
stipulates clear specifications on the class / category of armored vehicles,
including the characteristics and armor levels of the vehicles that will be
used for transporting monetary values. Those standards reflect the same as
those applied within EU.

Finally, I would like to come back to the
explanations I gave you at the beginning regarding the solidity of the banking
system. The banking system in Albania is safe and sound. Few episodes as
described herein, apart from the momentary impact in the public opinion, could
not undermine our rigorous efforts undertaken from BoA, in the context of
financial health and public confidence on the banking industry. However
together with other public and private agencies we are working earnestly to
avoid such criminal episodes in the future.

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