Albania’s Central Bank Warns Government On Deficit
Banking & Finance, Economy, Politics, Top News Thursday, August 27th, 2009Tirana | 27 August 2009 | By Gjergj Erebara
The governor of Albania’s Central Bank, Ardian Fullani, warned on Wednesday that excessive government spending is threatening the country’s macroeconomic stability.
Otherwise, the bank expressed cautious optimism regarding the state of the economy.
In a predicted move, the Bank kept its base interest rate unchanged at 5.75 per cent, hoping to protect the value of the Albanian currency, as the most efficient way to avoid inflation.
“We have few available statistics on the real economy, but we have noted some improvements in business climate in the second quarter, after a sharp drop in the first quarter,” Fullani told reporters in Tirana.
“Despite the light improvement, economic indicators are still lower than the historical average,” he said.
The Bank has expressed its deep concern regarding high government expenditures, but has tried to maintain a level of optimism, in a bid to promote business and public confidence.
Albania suffered a run on its banks in October 2008, in the panic created by the collapse of US investment bank Lehman Brothers. The bank run ended in January, but there has not yet been a significant increase in deposits.
Current funds in the banking system are largely invested in loans or in government bonds, and banks have no available money to invest. This lack of liquidity remains the largest problem, despite strong interventions from the Central Bank
Some experts believe that if bank deposits do not increase in the near future, the liquidity injected by the Central Bank could create a risky macroeconomic situation.
The Bank made it clear that government budget policies will have a crucial role in shaping the Albanian economy in coming months. It urged the government to closely monitor the budget deficit.
The government sharply increased its expenditures from January to July. The rise was largely due to spending related to the June 28 parliamentary elections, and has contributed to the ballooning of the deficit to 40 billion lek (310 million euros).
The government has been unable to raise loans domestically and has, therefore, negotiated an expensive loan on the international market. This, as the Bank of Albania was forced to issue new money in response to the deficit. This led to the depreciation of the lek, which the Central Bank has sought to address by turning to its foreign currency reserve.
“A further deterioration in the current accounts deficit, further depreciation of the lek and the continuation of the expansionist fiscal policy would risk inflation,” said Fullani.
“The Bank of Albania considers that a clearer government position will [positively] effect the current accounts and will allow us to pursue a more liberal monetary policy,” he added. Source: Balkaninsight
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