Economic and financial challenges: prospects of Albania. Ardian Fullani Governor of Bank of Albania...

Economic and financial Economic and financial challenges: challenges:

prospects of Albania. prospects of Albania.

Ardian FullaniGovernor of Bank of Albania

Athens October 2009

Wednesday 19 April 20232

Preview

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


Policy FrameworkInflation is the final objective From Monetary targeting (intermediate

targets: M3) to Implicit inflation targeting (Two pillar strategy with leading indicators: Forecasted inflation and M3 growth)

Open Market operations Weekly Repo. Rate

Reserve requirements Free floating exchange rate.

Exchange rate acts as shock absorber.


Long Run Quest for StabilityEmphasize and focus on long run sustainable

equilibrium: 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.


Vulnerabilities Before Crisis

Consumption led growth due to fast

credit expansion.

Increasing fiscal deficits.

Growing trade and current account

deficits.

EU main trade partner.


Crisis: Channels of Transmission and Economic Impact

Foreign and domestic demand slows. Remittances slow. Deposit withdrawals. Liquidity problems for banks.

Credit stops; Private investments & consumption suffers.

Exchange rate depreciates. Agents realize the problem of borrowing in foreign currency.

Commodity prices drop prevents automatic adjustment of CAB. Depreciation is not passed to prices and inflation stays within

the Bank of Albania objective.


Bank of Albania 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 Increase capital expenditure

Privatization and foreign commercial borrowing; Aggressive borrowing in domestic markets with signs of crowding

out.

Crisis: Policy Response


Crisis: Policy ResponseShift focus toward financial stability Open market operations:

Change the form of Repo auctions from fixed amount to fixed price; Extend the average maturity of Central Bank liquidity injection; Reduce the margin of overnight lending from + 175 bps to + 75

bps; Expand the range of collateral: from TBiIls with up to 1 year

maturity to securities with days to maturity up to one year; Increase the daily use of the required reserve from 20 to 40

percent.

Exchange rate interventions: Reduce extreme exchange rate volatility and other market

imperfections, while domestic agents adjust to new equilibrium.

Encourage banks to credit the economy.


Policy Response and Economic Impact

Inflation stays low. Aggregate demand slows down;

Deflation in the commodities prices offsets

the FX depreciation on inflation.

Government deficit grows.

Yield curve Steppes with possible

crowding out effects.


Short Term Outlook (Growth prospects)

0

1

2

3

4

5

6

7

8

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

Yo

Y g

row

th r

ate,

%

May

June

INSTAT

September


Short Term Outlook (What factors could support recovery?)

0

1

2

3

4

5

6

7

8

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

Yo

Y g

row

th r

ate,

%

Euro/Lek

Exports

INSTAT

Outlook

Investment


Long Run Implications: Possible Structural Effects

Monetary policy Slower growth in M3 due to reduced velocity (less

credit in foreign currency). Less credit demand due to portfolio rebalancing and

bank tougher standards. Fiscal policy

Larger and persistent fiscal deficits. Difficult refinancing. Emergence of twin deficits.

Financial Stability Rebalance of saving & consumption behavior in favor

of domestic currency.


Long Run Policy Implications

Structural shifts (Unit root vs. mean reverting) in: Structure of credit Structure of money World GDP growth

Monetary policy implications of future developments in GDP, and money supply Implications for transmission mechanism and monetary

policy reformulation (monetary indicators).

Structural reforms needed in several areas.

Economic and financial challenges: prospects of Albania. Ardian Fullani Governor of Bank of Albania...

Documents

Transcript of Economic and financial challenges: prospects of Albania. Ardian Fullani Governor of Bank of Albania...