PRESS RELEASE
Governor Sejko with Monitor, May 2019

1. Albania’s economic growth last year was close to the 4% potential. Do you consider the growth components as stable and what’s your assessment on the medium and long-term perspective?

As we have continuously emphasized, in our assessment, the prospect of growth in Albania remains positive. Our forecasts, based on available information as well as on analyses and forecast models, suggest the Albanian economy will continue to grow in the medium and long-term horizons.

This conclusion, naturally, reflects our assessment that the bases of development in Albania are relatively solid. Taking advantage of this interview, let me explain in greater detail the underlying indicators and factors of this assessment.

First, our assessment on the economic outlook of Albania is based on the development trends observed in recent years. INSTAT data show that in 2018, for the fourth consecutive year, economic growth has been in positive terms, and has even shown a gradual acceleration trend. Also, available data suggest that growth is broadly based, from the standpoint of both contribution by sector and aggregate demand components.

Second, our assessment of positive prospects for development is based on analysis of the factors supporting them. On this, allow me to highlight three important elements.

• Economic growth is anchored in a stimulating monetary and financial environment, characterized by low interest rates, ample liquidity, and which shows rising lending trends. This environment has reflected the combined impact of monetary stimulus, fiscal consolidation, careful supervision of the banking sector regulation, as well as our efforts to improve the lending environment. It has favoured the expansion of consumption and private investments, as well as the growth of aggregate demand, employment and wages.
• The financial balances of the main sectors of the economy, households, enterprises, the banking sector and the public sector, have improved or are under control. This dynamic suggests that the ability of the Albanian economy to nurture growth and face potential shocks has increased.
• The foreign environment appears relatively favourable, particularly compared to a few years ago, when our two main foreign partners: Italy and Greece were in the grip of the crisis and when the European financial system was very weak. This does not mean that we lack foreign challenges, but - within the parameters of reasonable expectations - they will not have the dimensions and intensity of the past.

In our assessment, the factors set out above are sufficient to warrant optimism about the prospects for economic growth in medium and long-term horizons. However, this does not mean that this development scenario should be taken for granted. Rather, it requires careful attention to economic policies, as well as a willingness to address the potential risks we face.

In this context, I want to underline that fulfilling this forecast will be conditional on the following factors:

• Maintaining the stimulating stance of the monetary policy, and monitoring the intensity of this incentive, so that the interest rate and liquidity in the banking market are suitable for meeting our price stability objective;
• Maintaining the consolidating stance of the fiscal policy, as well as continuing efforts to increase the stability and efficiency of public finances;
• The existence of a favourable foreign environment and, in case of unforeseen shocks, taking timely measures to minimize their impact; as well as,
• Continuing efforts to improve the business environment, and this means further improvements to the legal and regulatory framework, investments in infrastructure and quality of public services, but also the calming of political tension.

In conclusion, I would like to summarize my opinion as follows: the forecasted development trend remains positive, but ensuring it requires maintaining the current stance of monetary, financial and fiscal policies, as well as further accelerating structural reforms.

2. The Bank of Albania has pursued, since 2011, an aggressive accommodative monetary policy, bringing the key rate to 1%. Meanwhile, lending growth rates are still low, with a real growth of 5-6% per year. How do you explain this performance? How will the BoA’s monetary policy trend continue?

The Bank of Albania has, indeed, undertaken a very stimulating course of monetary policy, which has brought the key interest rate to 1%. The purpose of this action was to promote consumption and private investments by reducing their funding costs, easing the balances of borrowing enterprises and households and creating the preconditions for a stable exchange rate. Ultimately, all three of these channels serve economic growth and maintaining price stability, in accordance with our inflation target.

Economic and financial developments in recent years show that the impacts of the monetary policy, with all the issues of its transmission mechanism, are becoming more tangible every day. You have, and rightly so, highlighted lending performance in the economy as one of the main channel of monetary policy transmission.

Regarding lending performance, I think it is appropriate to highlight that this indicator has shown some positive signals in recent quarters.

First, the annual growth rate of lending to the private sector, cleared from the accounting impact of exchange rate appreciation and the write-off of loans from the balance sheet, has registered an upward trend, remaining close to 6% in the first quarter. Likewise, as we have already pointed out, the basis of lending growth is broader, both from the point of view of the foreign currency composition and that of sectoral composition.

Second, lending efficiency is increasing, since this is showing a greater orientation towards supporting business investments and housing funding for households.

Regarding the current and future performance of lending, I would like to share with you three short comments.

As any economic indicator, lending performance depends on supply and demand. In our assessment, the current levels of lending are - for the most part - dictated by a still low and often non-qualitative demand for loans. This development is understandable for the cyclical development stage of Albania, where enterprises and households are hesitant in their exposure to banking lending. However, despite this low demand, the supply of banking lending appears relatively conservative. This means that banks have space for a more positive approach to the Albanian business and consumer economy.

As far as prospects are concerned, the Bank of Albania assesses that - in the medium-term - we will have a more dynamic lending performance. This forecast is based on an expected growth of credit demand, continued improvement of the lending environment, but also on the consolidation of the banking sector, which has brought in more motivated actors and is expected to increase market competition

Finally, I would like to emphasize that the Bank of Albania remains very attentive to lending performance. Our concern has always been and remains the fact that lending should answer the needs of the economy, while at the same time being cautious and in accordance with the risk criteria of banks. I would like to remind everyone that banks are the guardians of most of the savings of the Albanian public and, for this reason, the use of these funds must always be cautious.

Aiming at an open and transparent exchange of point of views with the banking sector on this phenomenon, I would like to point out that in the very near future, the Bank of Albania will organize a meeting with commercial banks that operate in Albania to discuss these issues.

As far monetary policy is concerned, I will repeat again, the latest message from the Supervisory Council is that this policy will continue to be stimulating and accommodative in the medium-term, in the interest of supporting aggregate demand and respecting our price stability objective.

3. Despite the significant decrease of NPLs in recent years, Albania continues to have the highest level of NPLs in the region. How big was the impact of NPL write-offs from banks’ balance sheets and how big of a factor did this play in their restructuring? Will you undertake other regulatory reforms to further decrease this ratio?

First, I would like to point out that comparing the non-performing loans ratios of different countries must be done carefully, because the methodology for measuring this indicator is not standardized. When compared, the values of the non-performing loans indicator in different countries may register differences that derive from the methods of calculation and not from the reality of the phenomenon. Let me inform the general public that Albania has used the most rigid definition of non-performing loans, without adjusting their level with the value of collateral or provisions (reserve funds created for losses from loans). At this point, it seems appropriate to highlight that the non-performing loans indicator for the first quarter of 2019, adjusted with provisioned funds, is 4.2%. I emphasize this to point out the fact the level of non-performing loans is not a threat to the soundness of the Albanian banking sector, although it remains important, since it requires time, attention and managerial energy to administer it.

The dynamic of non-performing loans in Albania, the region and beyond, remains the same. This indicator has a clear downward trend, and in Albania this trend is even stronger and more significant than in some countries of the region.

The Bank of Albania has undertaken continuous and concrete actions to reduce non-performing loans. On the one hand, our accommodative monetary policy has helped to improve the balance sheets of borrowing enterprises and households and has increased their solvency. On the other, the Bank of Albania has initiated an inter-institutional strategy, known as the National Plan for Reducing Non-Performing Loans, to address all the factors that contributed to their relatively high level, as well as taking concrete measures to implement its commitments. This strategy aims at addressing the substance of the banking sector’s concerns regarding possession and execution of collateral, facilitating the loans’ restructuring process, as well as improving regulations and technological infrastructure that reduces lending risk. Finally, through our regulatory acts, we have sought to write off from banks’ balance sheets lost loans, which are only part of non-performing loans, aligning our regulation with international standards.

Our analyses show that the downward trend of non-performing loans has been the result of  not only the write-off and restructuring of loans, which in our assessment have had equal impact, but also all the other actions listed above.

In concrete numbers, the NPLs portfolio has decreased by around ALL 71.3 billion (approximately EUR 528 million) in recent years, while the loan portfolio quality indicator registered 11.38% at the end of March 2019 compared to a peak of 24% registered in September 2014.

The lending environment has already improved and lending risk has been reduced: the improvement of economic activity has increased borrowers’ solvency; legal and regulatory improvements have reduced the probability of non-performing loans occurring; and, if they do occur in the future, the amended legal and regulatory framework has facilitated the possession and execution of collateral by the banks.

However, in our assessment, the double digit level of the non-performing loans indicator is still high. For this reason, we are working, in constant consultation with the banking industry, on other regulatory and supervision measures to further decrease this indicator. In the near future, based on the best international examples and practices, we aim to complete our regulatory framework with principles and guidelines for out-of-court restructuring of problematic clients (where possible), promoting and highlighting the treatment of borrowers in financial difficulties through  structured and efficient cooperation among banks. Certainly, continuing to decrease this indicator requires continuous communication with the banking industry, which the Bank of Albania has done and will continue to do on a regular basis, as it serves to increase banks’ efficiency in better management of loan portfolios.

On the other hand, our attention is focused on long-term preservation of lending quality. This requires due attention from banks in granting new loans, strengthening the non-performing loans recoverability structure, as well as increasing the quality of their internal system for managing credit risk.

4. Last year, in March, the Bank of Albania launched a policy dedicated to de-euroization. What were the concrete effects of your de-euroization policy? Bankers have also stated in their interviews that the Bank of Albania has used all its measures, so more stringent interventions are needed, in cooperation with other institutions, suggesting that large transactions ought to be carried out only in domestic currency. What is your evaluation of these proposals and what additional measures do you expect to be taken in cooperation with other institutions?

The observable effects of our measures, in the framework of a de-euroization strategy, are in line with our expectations but it is too soon to assess its long-term effectiveness. I would like to draw the public's attention to the fact that, since the moment of its launch, the Bank of Albania has emphasized the following:

1. This is not a war against any form or level of use of the euro in the financial system. It does not aim at "elimination” of the euro in the economy or in the financial system, but it aims at the reducing its unnecessary or adverse use.
2. This project is expected to yield its fruits in the medium and long term; and
3. Its effects will become more concrete if accompanied by other measures that are not in the field of the activity of the Bank of Albania. Given the short period during which this project has been implemented, I think it is too early to discuss its effect or its success.

However, since it is in the public’s interest, let me explain once again our position toward the phenomenon of high use of foreign currencies.

High use of foreign currency (euroization) reduces the effectiveness of the stabilizing function of monetary and fiscal policy, and it tends to become a premise for financial stability, in case of large and strong exchange rate fluctuations. This is not a theoretical conclusion; it is an observed reality in many countries in similar development stages, such as Hungary or Poland, and is something for which we and other policy-making institutions are responsible.

More specifically, a high level of euroization reduces the action scope of monetary policy, as long as the latter is unable to control the prices of financial goods denominated in foreign currency.  As well, it causes large fluctuations of the public debt indices, becoming a premise for undesirable changes in the fiscal policy rate. On the other hand, in case of large fluctuations of the exchange rate, unaddressed and unhedged exposure to borrowing in foreign currency hinders the balances of businesses and households, shows unforeseeable transfer of purchasing power between various sectors of the economy, and may damage the balances of the financial sector. All these channels increase the country’s financial vulnerabilities.

Precisely for these reasons, both the European Commission, in the framework of the dialogue process we have for European integration, as well as the IMF, within the framework of ongoing discussions on Article IV, have consistently recommended we adopt concrete measures for the implementation of this phenomenon.

In order to address the above risks, in April 2017, a Memorandum of Understanding was signed between the Albanian Government, the Bank of Albania, the Financial Supervisory Authority and the Deposit Insurance Agency, to increase the use of the national currency in the financial system and in the Albanian economy. This document is known as the Inter-Institutional De-Euroization Strategy. Via this document, its signatory institutions recognize the negative phenomena that is created by the high use of foreign currency, and take concrete measures, in accordance with their areas of competence, to stimulate the use of the lek.

On the basis of this Strategy, the Bank of Albania approved some measures as part of the February 2018 package. These measures included both sides of the bank’s balance sheet.  On the liabilities side, differentiation was made between the reserve requirement rates for foreign currency (increased) and for the Albanian lek (decreased).  On the side of the banks’ assets, higher requirements were made in relation to liquid assets in foreign currency and in relation to raising the awareness of borrowers, for unhedged loans in foreign currency, against the risk of this exposure. These measures entered into force in a phased manner, with the last measure, the change of the reserve requirement rate, coming into force in June 2018.

The Bank of Albania has identified some basic indicators to monitor the impact of measures.  These include the performance of deposits’ share in foreign currency, the performance of foreign currency liquid assets, the share’s performance of foreign currency loans, and others. So far, for this purpose, two period reports have been published, the conclusions of which can be found on our website.

What I would rather point out is that, overall, the values of the Euro currency usage indicators diverge from the average values of the indicators for countries with similar economies to Albania. Therefore, we all have to be aware that the effort to increase the use of the national currency in the financial system and the Albanian economy, represents a long-term process that needs to be worked on in a coordinated and ongoing manner.

Regarding the actions that should be taken by other institutions, I think the institutions need to decide for themselves what possible action to undertake. The Bank of Albania estimates that there should be a gradual approach and the object of these measures should be the cases/ transactions/sectors where the use of foreign currency is excessive and unjustified by the economic activity of entities. All the signatory institutions of the Strategy are aware of the need for a joint and coordinated action to be taken. This has become apparent in the ad hoc discussions that took place at the Financial Stability Advisory Council meetings.  The most recent one took place in April 2019. At this meeting, the Ministry of Finance and Economy (MoFE) underlined the importance of giving the necessary priority to this process. As far as we are concerned, within our realm of competence, our institution is willing to be as cooperative as needed.

5. The data of the payment balance show that the current account deficit did not improve much during 2016-2018. What is your explanation regarding the significant appreciation of the domestic currency during this period? What are expectations for the exchange rate performance in the coming period?

The Bank of Albania has presented the conclusions of its analysis of the factors that have influenced the appreciation of the exchange rate. I contend that these conclusions have proved themselves over time and our estimates have correctly informed the monetary policy stance toward the exchange rate.

However, for the interest and respect of the reader, I am summarizing them here.

The strengthening trend of the exchange rate, initiated since 2015, is due to the combined action of two factors: improvement of the balance of economic and financial exchanges with abroad, or payment balance, and reduction of risk premiums in the domestic financial market. Thus:

• The balance of payment has continuously improved over the last three years. This improvement reflects not only the reduction of the current account deficit (see Chart 7), where your interest is concerned, but also the high inflow levels of foreign direct investments. In a general perspective, what is important for the exchange rate is the demand and supply ratio of foreign currency, which is dictated not only by trade activities abroad, proxied by the current account deficit- but also by financial activities, proxied by the capital and financial account of balance of payments. For Albania, trading exchange abroad has resulted in a surplus of foreign exchange inflows in recent years - income from foreign direct investments or other sources were greater than the current account deficit (see Chart 7), which exerted pressure on the appreciation of the exchange rate.

• In parallel, improvement of the soundness indicators of the banking sector and establishment of control over public finances increased confidence in the stability of the national currency and reduced the risk premia to invest in it.

These developments favoured the strengthening of the exchange rate over the last few years, but as we have previously noted, they were not enough to explain its strengthening during 2018. Our analyses have shown that this rapid strengthening is due to specific disturbances in the foreign exchange market - which culminated in creating unilateral expectations for the strengthening of the exchange rate and changes in the behaviour of this market's operators. This also contributed to the rapid strengthening of the exchange rate, with an intensity that peaked in the second quarter of last year. The Bank of Albania provided detailed explanations on these factors and I would rather not dwell on them further.

However, what I find appropriate to say is that the interpretation of the developments were accurate from our part, and this is evidenced by the success that the intervention had in the foreign exchange market. This intervention was driven precisely by the finding that the strengthening of the exchange rate was no longer in line with the fundamentals and that this strengthening could undermine the fulfilment of our objective for price stability. Our intervention, though limited in time and size, was in line with the monetary policy and the exchange rate regime, and managed to calm the market.

Regarding the future of the exchange rate, I must emphasize that - in accordance with the free exchange rate regime in Albania - we are reserved when giving projections. In any case, the medium and long-term performance of the exchange rate is and will remain a function of the demand and supply ratio in the foreign exchange market and not the objective of the Bank of Albania's monetary policy. However, for the readers, I can emphasize that - based on current information - the Bank of Albania sees no inherent reason for strong and fast exchange rate fluctuations.

6. There is always a dissatisfaction among customers regarding the quality and cost of banking services.  We have been informed that the Bank of Albania is working on a new regulatory framework in this regard. What benefits will the citizens receive from this?

First of all, I would like to emphasize that the determining factors of quality, and especially of the costs of banking services, are supply and demand in the market. Being the regulators and supervisors of the banking system, we continuously monitor the correctness and transparency of banks' relationships with customers, and of course we intervene whenever necessary. However, I would like to emphasize that the Bank of Albania is responsible for reviewing compliance to contracts signed between banks and clients, but is not responsible for the value (the price) of a particular product or service. Price determination is an attribute of the market and negotiations between the clients and banking entities.

However, we have recently undertaken some important steps, within the efficiency of the services offered by the market, which aim at further enhancing transparency in the services provided and creating a consolidated framework for consumer protection. Here, I would like to emphasize that we will not replace the role that relevant responsible authorities have in this field, but based also on the recent amendments to consumer protection legislation, the Bank of Albania will have an active and direct role in this regard as well.

In terms of the transparency that banks need to have with their costumers regarding the quality and cost of banking and financial services, the Bank of Albania has drafted several regulations. Regulation no. 59, dated 29.08.2008 "On the transparency for banking and financial products and services”, amended, specifies the minimum elements to be included in bank product contracts, such as the information to be provided to the client regarding loan  agreements, the minimum elements that should be included in promotions carried out by banks, informing clients on changes to working conditions and interest rates, publishing them in the bank premises and on their official website, drafting and adopting a methodology / policy for calculating interest rates and commissions applied for products and banking and financial services. Also, in Regulation no. 48, dated 01.07.2015 “On Consumer Credit and Mortgage Credit", amended, the Bank of Albania determines aspects such as the obligation of banks to present pre-contractual information to the consumer prior to the signing of a loan contract, and the rights and obligations of the client in credit agreements.

During the on-site and off-site supervision process, the Bank of Albania assesses the implementation by financial institutions of the aforementioned regulatory framework, assessing all the above elements. The inspections carried out by the Bank of Albania generally indicate a satisfactory level of compliance by financial institutions with regulatory requirements and obligations.

On the other hand, during 2018, in the field of payments, the Bank of Albania together with the National Payments System Committee took steps for the reformation and modernization of the retail market. Helping the general public to understand more easily, small value payments mean payments made by consumers and businesses in their daily life. In this regard, we are committed to implementing a mid-term strategy (2018-2023), which aims at creating a contemporary and comprehensive retail market, supported by safe and efficient infrastructures, and a wide range of payment instruments and services that meet the needs of financially capable users to conduct payments transactions across the country. Specifically, as a measurable objective, the strategy aims at expanding the population that owns a bank account and at increasing the number of electronic payments per capita.

Achievement of the above objectives is foreseen to be materialized through a series of measures related to the completion and improvement of the legal and regulatory framework.

Finalization of the draft-law "On payment services’’, which transposes the revised European Union directive on payment services (PSD2)’’, is considered to be a very important step in this regard. As we have pointed out in other communications, we deem that the adoption and implementation of this draft law will directly affect the promotion of competition and innovation in the area of low value payments, thus promoting their efficiency and reducing their usage cost. In this regard, I think that the main development is the creation of a competitive environment for the provision of payment services between banks and non-bank financial institutions, allowing the latter to open payment accounts and to issue electronic payment instruments.

However, the work undertaken so far can only be considered a beginning. In the coming period, we will further intensify our efforts, through the draft-law "On the payment account" in the medium term. The draft-law will transpose the European Union’s Directive "On the Payment Account" and is estimated to contribute to the introduction of the "basic account", which has no cost at all or has a minimum cost for customers who do not own an account. In addition, the directive promotes transparency by creating a public register for all committees applied by the institutions and in an easily comparable manner. This development is estimated to further contribute to the current initiative undertaken by the Bank of Albania in this regard.

Without a doubt, legal and regulatory improvements will be accompanied by infrastructure developments, such as instant payment, the National Payment Switch, and the Euro Settlement System for domestic transactions, aiming to deliver impact on the market in the most efficient way possible.

7. Turning to the increase of operational risk, in the aftermath of the events at Rinas airport. Does this affect the financial stability at home, as it has a domino effect on banks' activity, particularly in terms of foreign exchange liquidity investment and the increase of costs in this regard? How is this expected to solve issues related to the transport of money abroad?

The theft of cash within the territory of the “Mother Theresa” airport last month was, absolutely, a serious incident. From a short-term perspective, it shocked public opinion and affected somehow the natural transportation of foreign currency within Albania and abroad. This process is necessary and normal to the banking system. Thus, in the first few days after the incident, many clients may have noted that some banks might have hesitated to accept foreign currency.  From a longer-term perspective, the recurrence of such a phenomenon may trigger additional costs to the banking sector, and, even further, to the Albanian economy, as an increase of intermediation costs in the banking sector.

Immediately after the incident, the Bank of Albania undertook regular and particular communication with the Albanian Association of Banks and with individual banks.  Also, important measures have been taken to enhance the security and management of high-level risk in every component of the operational chain of transporting funds to the final destination.

Currently, the process is completely normalised, given the activity of air transportation of monetary valuables has started.

The requirements for management of costs that this process poses to the banking sector will be addressed by an increased focus on efforts to reduce both cash and cash transactions in the economy in general.  The Bank of Albania, absolutely, will have a role in this process, as the chair of the Payment Committee in Albania.

However, it is important to note, that, also as expected, the incident did not affect the stability of the financial system.  Operational risks in banking activity are known, and for this reason they are assessed and managed, in time, through various safeguarding schemes.  In simple words, cash in banks’ windows or vaults, also during transportation is totally insured by the insurance companies with which banks operate in Albania, hence clients do not lose any of their funds.

This process shows that the stability of the system continues to not be jeopardised. However the identification and judgement of the authors of such events, and the taking of all measures in order that such cases are not repeated, are rather important for the future of public confidence, the continuation of the banking sector in the Albania market, and for the messages we want to transmit for the purpose of attaining investments.

We should keep in mind that banks are among the main investors in Albania, and like any investor either foreign or local, normal operation in a safe environment is an indispensable precondition to conduct their activity.

8. How is the banking consolidation expected to affect the performance of the system and the quality of services and products for consumers? How do you see the departure of banks with western capital? In concrete terms, how much interest does the banking system present to investors?

This is also an issue that requires correctness.  First, I would like to remind us all that banking system consolidation is a phenomenon that I have been announcing would occur, since my first days as Governor. This is not a surprise to either the Bank of Albania or to me.  In contrast, consolidation is a rather normal process, which has occurred in many regional countries and in Western Europe.  I think it is necessary.  This process was simply finalised in the last two years, but banks’ efforts towards sale or merger with existing banks have started some years ago.

Second, the main reasons for these developments do not relate to Albania itself or to specific issues/problems of the Albanian economy or Albanian banking system, but are more related to changes in the strategy and business models of European parent groups.  Credit Agricole Bank and Societe General Bank decided to retire from the whole region.  Banks with capital origins from Greece implemented the restructuring plans of parent banks and the strategy decided by ECB.  Some existing banks withdrew from the Albanian market, while others entered and are considering the possibility of increasing their share in the market.

Hence, in 2018 H2 and at the beginning of 2019, some selling and merging transactions took place.  Veneto Bank was absorbed by Intesa Sanpaolo Bank in Albania; the National Bank of Greece by the American Bank of Investments; Balfin Association sh.p.k and Comercijalna Banka in Macedonia took ownership of Tirana Bank; the Hungarian Bank OTP took 100% ownership of the shares of Societe General Bank in Albania; and Union Bank purchased 100% of the shares of the International Commercial Bank.  As a result of these processes, the number of banks was reduced to 14 and is expected to further reduce down to 12 by the end of the year, only after the materialisation of the targeted strategy of Union Bank to absorb the International Commercial Bank (known as the Malaysian Bank) and the completion of the voluntary liquidation of Credit Bank of Albania. 

Nevertheless, the Bank of Albania is aware that these important developments imply challenges, have implications in the structure of the banking system, its competitive aspects and the ownership profile of new banks.  These mergers and absorptions occurred between existing banks. While medium-sized banks are notably dominant, we think that they do bring the promise of an increased competitiveness in the market, improvement of banking activity and consequently an increase of quality in banking services and products. Also, these transactions of merger and re-organisation between existing banks do not essentially change the ownership profile of banks.  While in other cases, the purchasing of existing banks from new shareholders, the Bank of Albania has acted in full compliance with the requirements of the applicable legal and regulatory framework.

Based on its role and mission, the Bank of Albania has been rather attentive to these developments and has monitored them step by step.  Further, we will be vigilant to closely follow the management of “new” banks and in this regard we have established the necessary capacities, and we have planned their continuous improvement, for the purposes of fulfilling our mission.  The Bank of Albania will continue to improve the regulatory and supervisory framework, aiming at approximation to the European directives, the best international standards, Basel Committee standards and those of the EU, focusing its work on recent standards related to such aspects as capital adequacy, liquidity risk management, large exposures, the regulation of systemic banks, and the recovery and resolution of banks.

We deem that the consolidation we are going through is a positive step in the history of Albanian banking, and have shown at the same time, that there is interest from various actors in the domestic market.  For example, Societe General Bank, purchased by OTP, a Hungarian Bank, has a good reputation and a dominant position in the region.

9. As an advisor to the Government, what is the suggestion of the Bank regarding reforms to be implemented to ensure stable and comprehensive growth?

Allow me to emphasise, that in compliance with the applicable legal framework, the Bank of Albania is advisor to the Government on issues related to the activity of the Bank of Albania, meaning they are pertinent to the monetary policy or financial markets.

Nevertheless, it does not mean that we do not have our vision on medium and long-term priorities of the country's development. This vision is made public in many cases.

Overall, the stable and long-term development of the country needs further actions in two main directions, which remain complementary in the long term.

The first aspect is acceleration of the potential pace of economic growth.  This “increase of speed” is necessary to make the results of economic growth more tangible for Albanian society, and for more rapid convergence to European Union standards.  It requires further structural reforms in three dimensions which affect economic growth:

• improvement of productivity, through the promotion of competitiveness, fight against informality; investments in education and new technologies, and any instrument which encourages the adoption of advanced technologies and processes of production.
• encouraging investments, that requires, among others things, improvement of the business climate and withdrawal of foreign direct investments; improvement of finance accessing; development of infrastructure and its integration with the regional infrastructure; expansion of markets through the opening of borders and the reduction of barriers in trade.
• improvement of participation and qualification of labour force, through pro-active policies in the labour market.

The second aspect relates to the enhancing of economic growth stability, which implies further improvement of legal and sub-legal frameworks, the strengthening of public institutions which monitor the financial system and public finances, and further improvement of their coordination.

Structural reforms of this nature need time to show their results, while these results frequently are preceded by short-term costs.  For this reason, the Bank of Albania has continuously emphasised that this reformation process of the economy should be anchored in a sustainable and long-term objective, which has a broad political and social consensus, such as the integration of the country into the European Union.

10. A few years ago, the Bank of Albania opened a debate on the review of the economic model in Albania, from consumption and construction to production and export. Do you think that Albania is pursuing the right model of economic growth and do you think there is room to change the model?

The debate initiated by the Bank of Albania was motivated by the structural weaknesses being identified from the shock the Albania economy had after the global financial crisis in 2008-2009.  In more concrete terms, it related to the fact, that, from a sectorial point of view, growth sources were relatively narrowed.  Furthermore, the structure of the Albanian economy was oriented toward domestic market service and relatively less open to export.

I think the debate provided a positive effect in establishing the stimulus for a more general reflection by economic, public and private stakeholders.  We note that a lot of negative phenomena observed prior to 2008 are so far, not present.  The banking sector is more prudent in allocating funds, even more than needed.  Also, managerial attention is more oriented to producing sectors than in the previous decade, while, infrastructure, business climate and the quality of public services have been progressing.

The undertaken structural improvements are a welcomed development, though there is room for further improvements.

Nevertheless, I would like to highlight that our intervention in the growth model did not and does not aim to change the philosophy of the process.  In a free market economy it is the private sector that should take the initiative and take care of the more profitable destination of time, effort and its funds. The role and duty of institutions are to decide and implement the rules of play, promote right competitiveness within certain sectors, establish equal success premises to all sectors of the economy and social levels at large, and to safeguard the economic and financial stability of the country.  Global experience shows this is the sole philosophy which provides guarantees for success in the long term.