Monetary and fiscal policy during 2009 in Albania
2009 was a challenging year for the Albanian economy, in all its dimensions. In response to the global economic and financial crisis, during this year, the following were tested:
– macroeconomic balances of the country;
– the stability of our financial system;
– business models and financial sustainability of the private sector;
as well as the analytical and response capacities of macroeconomic policies.
On a broader scale, the shock that our economy received during 2009 tested the country’s economic development model’s flexibility and its ability to respond to a radically transformed world environment.
The global crisis gave an immediate impact on economic activity in the country. It was accompanied by a reduction in foreign exchange inflows into the current and capital account, a rapid decrease in external demand and a slowdown in domestic demand for goods and services. In response to these developments, the pace of economic growth marked a progressive downturn over the past year but remained optimistic. The performance of the country’s balance of payments was characterized by an imbalance of foreign exchange inflows and outflows.
This imbalance was reflected in the fluctuation of the supply and demand ratios for foreign currency, resulting in the depreciation of the exchange rate in response to the new equilibrium in the foreign exchange market.
Fiscal policy strengthened its stimulus character during 2009, supporting economic activity in the country and increasing the pressure on financial markets. The shock suffered by the financial system created a challenging environment for the full and timely transmission of monetary policy. In these challenging conditions, the Bank of Albania successfully fulfill its legal mandate to maintain price stability in the economy: the annual consumer price inflation resulted within our 3 + 1 per cent target during 2009.
The easing monetary policy of the Bank of Albania managed to create the right economic conditions to maintain price stability. Also, supplying the economy with the necessary liquidity and decreasing costs, stabilized the financial markets and made the right conditions to support economic activity during 2009. The financial system’s performance in the country was influenced by the fluctuation of confidence in our economic system during the first half of the year and the withdrawal of some deposits from it. This development, combined with another set of factors, resulted in lower and higher cost support of the Albanian economy with bank loans.
By its legal mandate, the Bank of Albania’s monetary policy has been designed and implemented to achieve and maintain price stability.
During 2009, the main risks to price stability came from the slowdown in economic activity, fluctuations in the confidence of economic agents, the imbalance of the Albanian economy’s external position, and the depreciation of the exchange rate. Despite these challenges, the Bank of Albania managed to keep consumer price inflation within the target.
The weakening of economic activity and internal inflationary pressures, for controlled inflation in the future and the anchored expectations of economic agents, created space to pursue an easing monetary policy during 2009. This policy materialized in two reductions of 0.5 percentage points of the key interest rate in January and October 2009, which brought the key interest rate to 5.25 per cent and the continuous injection of liquidity required by the market and the economy. Through this prudent monetary policy, the Bank of Albania aimed to create suitable economic conditions for balanced and long-term development.
The reduction of the key interest rate was immediately transmitted to the interbank market’s short-term interest rates, which consequently marked a decline and lower volatility than last year. On the other hand, these movements were not fully transmitted in quantities and rapid in time to the interest rates on loans and bank deposits. As in all other countries, the increase in the liquidity premium, the increase in general uncertainty and the deterioration of the banking system’s financial results were damping factors for the easing measures of the monetary authority.
However, our economic policy and our operations in the interbank market managed to avoid a detrimental contraction of banks’ balance sheets; a bitter experience of many developing countries. The reduction by 1.00 percentage points of the refinancing cost during 2009 has enabled the alleviation of the financial burden of the system’s intermediation activity.
The Bank of Albania has continuously supported the system.