Interview with Gent Sejko, Governor of the Bank of Albania, Monitor magazine

1. How did the Albanian economy face the crisis caused by the pandemic compared with the initial assessments and what are some of the reasons why?

Although more than a year has passed since the COVID-19 outbreak, the Albanian economy continues to tackle its impacts. However, the statistics available that cover the pandemic period and the positive turn that key economic indicators have made, allow us to present a preliminary assessment of the situation.

This process serves to critically identify the strengths and weaknesses of our economy and financial system, and to derive the necessary lessons for the future.

At the beginning of 2020, the pandemic put almost the entire world under serious threat, which left deep scars in the socio-economic life. Under the impact of the pandemic, the volume of economic activity in Albania contracted, unemployment increased and the financial soundness of many businesses and households worsened – a similar picture was painted in almost all affected countries.

Although the negative impact of the economic crisis was inevitable, its size was lower than our expectations. Compared with our initial expectations, the Albanian economy experienced a slight decrease in economic activity and employment, a lower number of bankruptcies, a satisfactory stability of monetary and financial indicators, as well as, it maintained good indicators of the banking sector soundness.

In my view, there are three factors which played key roles in this regard.

First, the policies implemented by public policies, which reacted in a timely and persistent manner, provided the necessary support to the Albanian economy. The simultaneous fiscal, monetary and financial stimulus was effective in avoiding the negative impact of the shock. The fiscal stimulus was in the form of temporary tax facilities, supplying sovereign guarantees and increasing current and capital expenditure. It provided a direct contribution to the aggregate demand, by amortizing the decline of the private sector income and by supporting it with liquidity. Also, the Bank of Albania increased the monetary stimulus and temporarily facilitated the regulations governing the banking sector. These measures enabled the smooth performance of the financial markets and established an adequate environment for credit growth. The funding costs remained favourable, the exchange rate was stable, and interest rates remained close to their historic minimum levels. The increase of lending helped Albanian businesses and households to meet their liquidity needs and offered the necessary financial tools for the growth of both consumption and investment. The mobilisation of our measures underpinned domestic demand and safeguarded the monetary and financial stability. The well-calibrated and well-coordinated measures, as well as the speed of response preserved job positions, wages, production capacities and liquidity.

Second, the banking sector gave a substantial contribution to mitigating the impacts of the shock. This undertook a part of the financial burden of the shock, while at the same time maintaining sound indicators of liquidity, profitability and capitalisation. Its stability has been improving, supported by our continuous reforms and measures to address weaknesses, increase liquidity and capital reserves, as well as strengthen the framework of risk management. In parallel with the regulatory measures undertaken during the pandemic period, we consolidated the dialogue with the banking industry, in order to understand operational stability and business dynamics, as well as to address liquidity and credit risks.

Third, the ability of businesses and employees to adapt to the new conditions. The quick adaptation to the new way of working, producing and consuming contributed to maintain business-client and employer-employee relationships.

Overall, due to the action of these factors, the impact of the crises on the economy was less severe and premises exist for a faster and stronger recovery. The stimulating financial conditions, the reduction of restrictive measures due to vaccination, as well as the improved trust on economic agents, have cleared the way for a stable recovery.

However, the pandemic continues to remain a threat for the economic development in the near future and the economy has not fully recovered to the pre-pandemic period. It means that the economy still needs the support of macroeconomic stimuli, but these stimuli should be carefully synchronised, in order to avoid the accumulation of risks over the medium and long-term horizon.

To conclude, allow me to highlight the fact that structural reforms must remain a significant instrument in order to accommodate an efficient reallocation of growth resources, which will enhance productivity growth and the potential of our economy.

2. So far, the banking system has remained stable against the crises shocks, aided also by the support of temporary regulatory measures of the Bank of Albania. What is your assessment regarding the performance of the banking system and the challenges it will be faced with after the effect of these measures come to an end?

The performance of the banking activity in the past 12 months is assessed as satisfactory. The sector has recorded an expansion of activity; strong growth of deposits and a good performance of lending in the domestic currency; quite good liquidity indicators; positive and stable financial performance; as well as adequate levels of capitalisation.

The regulatory measures of the Bank of Albania have helped the performance of the banking sector during this period, but we assess that the highest impact was due to the good financial situation of the banking sector even prior to the earthquake of November 2019 and later the pandemic.

The focus was on easing the prudential measures since their purpose was to alleviate the pandemic shocks for borrowers and in parallel for banks as well. The moratorium on loan repayment deferral and the preservation of the status-quo for the classification and provisioning of restructured loans, allowed banks and borrowers to find the most appropriate alternative to restructure credit and safeguard its quality. Throughout the period of the implementation of the regulatory easing measures, the Bank of Albania has communicated with banks to ensure that they selected the correct loans for restructuring and utilised the opportunity to conduct an effective restructuring process. This was necessary not just to mitigate the initial shocks of the pandemic, but also regarding the performance of credit portfolio quality upon the completion of the regulatory easing measures. To assess the later, the Bank of Albania has collected the preliminary information from banks. Based on the collected data, the banks have issued a heterogeneous assessment regarding the performance of credit quality, but generally expect that in case of an eventual decline of the credit portfolio quality, it will be limited and affordable. Despite this assessment, we have conducted regular stress-tests including scenarios shocks that have a more negative impact on the shocks and assess the capacity of banks to absorb these shocks.

In March 2021, the regulatory easing measures of the Bank of Albania for credit restructuring ended, and its normal addressing is re-established. Next months will show the performance of credit quality. Meanwhile, the Bank of Albania maintains the restrictions on the distribution of banks’ profit as an additional instrument to safeguard the capital position and absorb the eventual additional costs related to credit risk.

The above developments show that the banking activity risks are present, but our assessments of the activity indicators confirm that the banking sector is strongly resilient to withstand them. In parallel, we continue to improve the micro and macroprudential regulatory framework, in line with the best standards in each area, in order to ensure sound banks and a stable banking sector that expands the activity and strengthens support for the economic development of Albania.

3. What is the impact of the consolidation process of the banking system over the past three years?

Over the past years, the banking system has developed quite dynamically. The picture of the banking system has changed significantly, regarding the number of banks as well as the origin or the volume of capital and the nature of activity.

The current situation of the banking system is the result of developments initiated many years ago, when different national and international stakeholders expressed interest to become part of the Albanian banking system, which coincided with the decision of the existing stakeholders to shift the focus. The decision of large banking groups to leave the region had its own effect on Albania, as some banks left due to the decisions adopted by the EU authorities, which limited the presence of some bank branches, mainly of Greek origin, in various South-eastern European countries.

These developments resulted in the current banking system which consists of 12 banks, from 16 which were present at the end of 2017. These changes came as a result of the merging of three banks from three other ones, and the voluntary liquidation of a fourth bank.

The picture on the origin of capital has also changed. The share of the domestic capital in the banking sector assets has increased considerably, accounting for over 30% of the system and is continuously moving upwards. This share is higher if we refer to the credit portfolio, accounting for over 36% of the system portfolio. During the last year, there is an expansion of the banking activity outside the Albanian borders, as two banks which operate in the Albanian market, one of which with domestic capital, are also operating in Kosovo.

With a different picture in our hand, the banking system shows sound financial indicators where the capital adequacy ratio is over 18% for many years now, and the liquidity indicator is also high, at over 44% against the regulatory minimum of 20%. The higher presence of domestic banks has diverted banks’ attention towards the domestic market and credit portfolio has increased by 6% over the last 12 months, while non-performing loans ratio has decreased by 0.4 percentage point over the same period. The financial result of the system in April reached ALL 6.56 billion, with a satisfactory return, as RoA and RoE stood at 1.23% and 11.97%, respectively.

The Bank of Albania has paid attention to the consolidation process given the strategic importance and the importance of maintaining the stability of the banking system. The overview of the situation and the data show a satisfactory consolidation process, as financial parameters are preserved within the prudential expectations, for both economic development and financial stability of Albania. 

4. The share of non-performing loans continued to decrease, despite the pandemic, also affected by the easing measures of the Bank of Albania. When these measures have ended, what do you expect as regards the performance of this indicator? Which are the most affected sectors by the crises and how is this reflected in their solvency to banks?

The indicator of non-performing loans reached 7.88% at the end of April 2021. Despite the experienced crises, this indicator has trended downwards compared with the beginning of the pandemic, despite recurrent fluctuations.

In fact, this indicator has trended continuously downwards for many years in a row. In September 2015, the Bank of Albania was engaged in the national plan for decreasing the amount of non-performing loans. This plan included several important legal reforms and initiatives of the Bank of Albania, activities which were fully accomplished by the institutions involved. As a result of this plan, the non-performing loans indicator has decreased by around 12.7 percentage points, since it was drafted. Its effects continue to resonate in the current moment due to the construction of the appropriate infrastructure, which helps banks to administer the portfolio of non-performing loans. 

Related to the management of the pandemic situation, it is important to understand that the measures undertaken did not only have measurable effects on non-performing loans. It was an opportunity provided to banks to alleviate borrowers from settling payments, so that they would improve their internal financial situation through the liquidity created to regain their solvency. A large number of borrowers regained their creditworthiness.

Since the measures were divided into stages, the closure of the first and most important stage, during which the settlement payments were interrupted for a large number of borrowers, was expected to be accompanied by an increase of non-performing loans. This phenomenon showed a much lower materiality and the non-performing loans ratio stood at 8.3% in September 2020, from 8.18% at the end of February 2020. This ratio is trending downwards since September 2020.

Nevertheless, its performance during the rest of 2021 will depend on a series of factors, where the scale of the pandemic crises may extend its effect on borrowers, depending on the restrictions imposed, as well as the developments in Albania and in countries which are economically related to Albania.  

The impact of the crises across the economic sectors is approximately in direct relation to the share of each sector in the credit portfolio. The approach adopted by banks in providing solutions during credit restructuring to adapt business cycles with the new payment arrangements, remains an important factor in this regard.

5. What is your assessment on the deposits performance and in particular lending to the economy in the pandemic year, and what must be done to booster it in the future?

The performance of deposits and loans or - in other words - of both sides of the banking sector’s balance sheet has been one of the positive surprises of the reaction of our financial system during the pandemic.

In figures, banks’ deposits grew by ALL 93 billion or almost 8% during 2020. I would like to highlight that this rapid growth has mostly reflected the expansion of deposits in the domestic currency, which generated over 60% of additional deposits in banks. If we consider a broader historic perspective, the growth of deposits during the pandemic year shows a clear difference from the past, when the increase of uncertainty was rarely accompanied with contraction of savings deposited in banks. These circumstances signal a consolidated confidence of pubic in the soundness of the banking sector and, it is a concrete product of our joint efforts in this regard.

In addition, lending to private sector, excluding the exchange rate fluctuations and written off loans from the banking sector’s balance increased by about ALL 50 billion, or 7.7%, in 2020. As I mentioned previously, the expansion of lending during 2020 was one of the keys to success of Albania in tackling the shock. Furthermore, another positive element is the credit structure, which was based on the expansion of credit in domestic currency (over 60% of additional credit) and the expansion of loans to enterprises (over 70% of additional credit). As in the case of deposits, credit growth during a crises-year is new to our financial sector, and it is an encouraging signal as regards the role that this sector could play in the future, not solely in the support of economic growth, but also in withstanding shocks.   

Looking ahead, I think that credit growth will stand on more solid grounds.

On the one hand, we are seeing an upward trend in the loan demand, especially from enterprises and for investment financing. On the other hand, we have made considerable progress during the past year regarding credit supply. The banking sector presents sound balance sheets; the consolidation process has increased competition and has brought new and motivated stakeholders to the market, while credit risk has structurally decreased, due to the reform that we have undertaken to address non-performing loans. 

To be more precise, allow me to stress out that lending performance would benefit if the same structural issues of the Albanian economy were addressed. In this context, I am convinced that further improving business environment, decreasing informality, increasing competition and business transparency, as well as encouraging foreign investments, will pave the way to a faster and healthier lending.

6. The policy rate is at the minimum levels, while the Bank of Albania has declared that the accommodative monetary policy will continue. How much more space does the Bank of Albania have in order to continue pursue this the accommodative stance of monetary policy? What has been its effect so far and how do you assess the transmission speed of these policies?

As you may well know, in March 2020 we undertook a further easing of the monetary policy, by cutting the policy rate and increasing liquidity injection in the banking sector. The strong monetary stimuli have had a good level of pass-through, which continues to be present during this year as well. Financial markets are calm, liquidity circulates smoothly and risk premia are contained. 

By guaranteeing the well-functioning of the financial market, we have enabled the monetary policy to reach the last borrowers, Albanian enterprises and households, in the form of low funding costs and activity refinancing, as well as higher credit volume. Also, the low interest rate environment has not exerted pressure for a stronger exchange rate, which would make our export performance even more difficult. Overall, the financing costs are accommodative and have bolstered the growth of lending to the private sector, which in turn has supported consumption and investments.

Our assessments show that thanks to our monetary stimulus, the volume of the economic activity and inflation are 3.7 and 0.7 percentage point higher, respectively, compared with their hypothetical level if these stimuli were missing during the past four years.

Regarding forward guidance - as usual - is dictated by the need to create adequate conditions to observe our medium-term inflation objective. The Bank of Albania has stated to maintain the accommodative stance of the monetary policy throughout the medium-term horizon. This statement reflects the Bank of Albania’s judgement that monetary conditions shall remain accommodative across this horizon, aimed at boosting aggregate demand, creating new jobs, and increasing wages and profit margins in line with our inflation target.

Put in simpler terms, this means that we will maintain a relatively low policy rate, enabling households and enterprises to take more loans, serve the existing loans with lower costs, and increase consumption and investments. This policy and projections are consistent with our expectations that inflation will return to target within 2022.

Although the economic outlook is positive, the uncertainty about the pandemic still presents risks in the short-term period. In case higher monetary stimuli are needed, we possess the necessary tools to achieve this. A further monetary accommodation can be realised through lowering the policy rate – despite we know that there is less room available in this regard - as well as through applying quantitative easing. In any case, our stimuli will be provided by taking into account a full cost-benefit analysis, the development scale of our financial market, legal restrictions and the need to preserve the monetary and financial stability in Albania.

 

7. You have stated that non-conventional instruments will be used. Could you be more specific as to what instruments are you referring to and when are they expected to be implemented? What is their expected impact to financing the Albanian economy?

As I already mentioned, the current circumstances of the economy and our expectations for the future do not dictate the need for a further increase of the monetary stimulus. The stimulus provided through conventional monetary policy instrument – the policy rate – continues to be transmitted to the economy, ensuring adequate funding conditions to support the continuing recovery of the economy and the return of inflation to target.

On the other hand, the Bank of Albania continuously drafts contingency plans, which allow us to be prepared for every circumstance. These plans include the use of non-conventional monetary policy instruments, if the country would be faced with another shock that causes negative consequences which could not be overcome in the limited conventional space.

Selecting the most adequate instruments takes into account a set of criteria, the most important being the legal framework, the developmental stage of the financial market and the nature of potential shocks. While taking into consideration these dimensions, we deem the quantitative easing as the best option. 

How does it work in practice? The central bank purchases government securities in the secondary market. Such an operation would bring interest rates down for these securities and increase liquidity volume in the economy, encouraging banks to issue more loans. The implementation of this instrument signifies an infinite liquidity injection into the system; consequently it must be used in very specific cases and for short-term periods.

Its use would be appropriate if there is lack of liquidity in the financial markets and/or higher risk premia, which would shift the interest rate curve. Currently, we are not facing any such obstructions in the transmission mechanism of our monetary policy and, as a result, we do not see the need to implement this instrument.

8. The amount of currency outside banks has been increasing in the past years, despite the measures undertaken to discourage the use of cash. How do you explain this increase and what additional measures must be adopted in order to encourage the use of electronic payments?

Currency outside banks increased by about ALL 53 billion in 2020, compared with only ALL 16.7 billion increase in the previous year. However, the acceleration of the increase of this indicator is not an isolated phenomenon, but it reflects the overall tendency of acceleration for all other monetary indicators, such as deposits or credit.

As we highlighted previously, the relatively quick growth of currency in circulation during 2020 was driven by some factors, most notably:

 

• the rapid increase of monetary base in the economy, as a response to high levels of budget deficit and the relatively quick growth of lending during last year;
• the pandemic, which increased the preference of households for cash due to the uncertainty, but also the desire to reduce physical contacts. This phenomenon has been widely observed in other countries. 

What I think it must be avoided is the fact that the high growth of cash in the economy has not been to the expense of deposits. As I said above, the latter increased by around ALL 93 billion in 2020, providing sufficient funds to the banking sector for financial intermediation.

Beyond these factors, I would like to emphasize that the high presence of cash in the Albanian economy is also favoured by its structural features, such as the informal economy, the degree of financial education, and the relatively high concentration of population in the rural areas. In my view, these issues should be addressed through structural reforms in the payment systems, continuous education of the population, as well as constant improvement to the fiscal administration.

The Bank of Albania continues to remain an institutional actor that invests towards enhancing financial literacy and improving the payment system.

9. Following the approval of the new law on payments drafted by the Bank of Albania, what is its expected effect on the payment system in Albania? How competitive is it?

Payment services are an integral part of the payment systems and as such are continuously on the focus of the Bank of Albania. Also, being one of the core financial services, they are considered first instrument, but also quite significant for enhancing financial inclusion.

In this regard, as it has been previously expressed in public communications, the Bank of Albania and the National Payment System Committee, have undertaken a reform since 2018 for the modernisation of retail payments market in Albania, materialised in the National Retail Payments Strategy (2018-2023). The main goal of this strategy is to encourage the financial inclusion of the population (from 40% in 2016, to 70% in 2023) and the use of electronic payments (achieving 10 cashless payments per capita by year 2023, from 4.3 in 2016), by developing a modern and inclusive retail payments market in Albania.

The Law “On payment services” is considered one of the most important measures undertaken to fulfil the reform and to achieve the abovementioned objectives. First, by presenting the new actors and services as well as re-dimensioning the current activity of non-bank financial institutions that offer payment services and transfers. The Law is assessed to strengthen competition in the payments market. In order to make our expectations even more tangible in regards to competition boost, the Law creates an environment which aims to adjust the regulatory requirements between banks and non-banks, by providing all the necessary tools to operate on equal grounds in the area of payment services and especially of electronic ones. This competition will naturally create more efficient services costs as well as regarding the convenience of use for the general public.

In addition, the presentation of two innovative activities – the initiation of payment services and account information – besides innovation promotion, is deemed to encourage competition even further. To put it into simpler language, the services offered by the fintech companies encourage the use of electronic trade, a quite important national objective of, which enables alternative easy to use online payments at low costs. Alongside the payment initiation service, account information services allow clients and businesses to have a global perspective on their financial situation, as well as to consolidate their various accounts that they might have with one or more banks or payment institutions. It is important to highlight that while serving the purpose of using these services, the law lays down the so-called open banking concept, which is one of the innovations of the payments market on an international scale.

Furthermore, other significant issues regulated by the law include the consolidated framework for consumer protection, by creating conditions for transparency, and the rights and obligations of parties. Also, the law stipulates the establishment of a specific unit to address disputes outside of court, which have a significant impact on the consumer protection framework. Building a consolidated consumer protection framework is even more significant for a market lacking a very developed financial education and inclusion.

The Bank of Albania and the market are supporting all the above-stated legal and regulatory developments and will continue to do so, including infrastructural developments. Here, I would like to mention the payment settlement system in euro within Albania and the rather ambitious medium-term projects, such as the Instant Payment and National Switch.

The operationalisation of the payment settlement system in euro within Albania, a project that is already towards its finalisation, aims at enabling Albanian citizens to carry out euro payments within Albania with very low costs and within a much shorter timeframe as compared to the current process offered by the corresponding banks. This project is also assessed to have very positive effects as regards the management of cash in euro by banks.

On the other hand, the Instant Payment/National Switch Project aims to create a national platform that through the reduction of payments cycle and innovation, encourages payments remotely. The reduced costs as well as improvements to the efficiency of the services used will contribute towards this goal.  

10. The Bank of Albania will put into circulation two new banknotes of the new series: 1 000 Lekë and 10 000 Lekë. When will these banknotes be put into circulation? Why did the Bank of Albania decide to add the 10 000 Lekë denomination in the new series of banknotes and what could you reveal more about this banknote?

The new banknotes of the denomination 1 000 Lekë and 10 000 Lekë are expected to be put into circulation at the end of June 2021. The printing of the new 1 000 Lekë and 10 000 Lekë banknotes is part of a multiannual work effort of the Bank of Albania to issue the new Lek banknotes series and to guarantee the supply with cash to the economy at any moment.

Allow me to note here that one of the main responsibilities of the Bank of Albania is to provide the economy with cash, both in value as well as in structure. The printing and issue into circulation for the first time of the banknote with the highest denomination, 10 000 Lekë, represents the adoption of banknotes structure to: the structure of prices and wages; developments of payment system; and other indicators related to handling currency. 

This note with the highest denomination accompanies the economic developments of the country and according to all reviews, fulfils the market demand to include it in the structure of our banknotes that are legal tender. The introduction and issue into circulation of this note will enable a better and more efficient circulation of cash, supporting the existing structure of currency in circulation, and at the same time reducing costs of production, storage and distribution, thus strengthening the efficiency of the Bank of Albania in cash management and issue.

Furthermore, the presence of the new highest denomination in the structure of the Albanian banknotes increases the efficiency of the Bank of Albania in managing a strategic stock, which is more responsive to the increasing demand of the market for cash.

Despite developments in other payment means, for example electronic, currency in circulation continues, year after year, to trend upwards, which reflects the continues demand of the economy for cash as a payment means. The Bank of Albania carefully plans to fulfil the market demand, both in normal situations as well as in atypical ones. The latest COVID-19 situation is an actual example in this regards. In this period, the demand of the economy for cash jumped up. Thus, in 2020, currency in circulation has increased by ALL 52 billion or three times more compared to 2019. Also, in the first five months of 2021, an increase by ALL 10 billion was registered. Meeting the market demand for cash is supported through ensuring and planning the adequate amount of cash stock at the Bank of Albania, which serves as a guarantee both for the present and the future.

The theme of the new 10 000 lek banknote includes the national flag and the anthem, as well as the portrait of the national renaissance poet, Asdreni, who was nationally recognised as the author of the “National Anthem” of Albania. His verses together with the National flag are symbols of the Albanian identity since the Declaration of Independence. Similar to all the other new denominations, this banknote has advanced security features of, produced with cutting-edge technologies, , which facilitate the identification for the public, increase trust in the national currency and render falsification more difficult.

11. What are the main challenges to our economic recovery after the pandemic?  What must be done to encourage a sustainable development which is oriented toward innovation and higher value added?

The challenges faced by the institutions occupied with the drafting and implementations of economic policies are twofold.

Looking into the future, in the short horizon we must ensure the sustainability of economic growth and the full recovery after the pandemic shock. This will require, in general terms, a stimulating combination of economic policies in the medium-term horizon. The adequacy of this combination shall be reviewed continuously, as regards intensity as well as composition. Strengthening the sustainably of the economic growth should be accompanied by a gradual re-orienting of the fiscal policy towards the consolidation of the public debt, which would entail an increase of the relative share that monetary policy possesses as an instrument for economic support.

Over the longer-term span, the Albanian economy would benefit from the acceleration of structural reforms, in the direction of increasing the speed and sustainability of economic growth. The Bank of Albania has continuously repeated this call. In this regards, it is appropriate to emphasize that the diagnosis on the scale of development of the Albanian economy, its ability to generate domestic investments and attract foreign ones, as well as its ability to compete in the global market, are public and transparent.

With a view to address our structural weaknesses and develop our strategic advantages, I surmise that a complete and comprehensive programme of reforms must be oriented on three main goals:

• first, to further develop the physical and digital infrastructure of Albania, as well as its connection with the regional and global economies;
• second, to continue improving the business environment, reducing informality, promoting competition, decreasing the political and economic risk premia, as well as improving contractual guarantees;
• third, to grow investments in education and health, gear the school curricula towards professional education and IT degrees, in order to enhance the qualifications of the labour force and to positon our country at a higher degree in the value-added diagram.

I think, that Albania is currently addressing these three main priorities, but we must come to terms that we are in the midst of a regional and global competition, which we cannot lose. In this context, I think that our structural reforms agenda must be guided by clear priorities, have stable political and social anchors, and possess the required flexibility in terms of operational instruments.

Concluding, I should point out that that all these measures must be complemented by preserving a stable monetary and financial environment, which has been and will remain the primary objective of the Bank of Albania.