Critical analysis of the Quarterly Monetary Policy Report 2024/IV of the Bank of Albania

The Bank of Albania’s report for the fourth quarter of 2024 presents an optimistic picture of the Albanian economy, highlighting a decrease in inflation, GDP growth, and improvements in financial markets. However, a deeper and more critical analysis, in relation to the reality of the Albanian economy, reveals several issues and challenges that are not fully addressed in the report.

Inflation and Monetary Policy: Is the decrease in inflation a success of monetary policy or an external effect?

The Bank of Albania presents the decrease in inflation as an achievement of monetary policy, citing key factors such as the normalization of interest rates and the stabilization of market expectations. However, a deeper analysis shows that the decrease in inflation is mainly the result of external factors, such as:

• Decline in global food and energy prices: Imported inflation has significantly reduced, directly impacting living costs. This would have occurred regardless of the Bank of Albania’s monetary policy interventions.
• Strengthening of the Lek: A temporary positive effect? The significant appreciation of the Lek against the Euro has helped reduce imported inflation. However, a rapid overvaluation of the national currency harms exports and sectors dependent on international competitiveness.
• Core inflation remains high: Despite the overall decrease in inflation, living costs for basic services such as rents, utilities, and transportation have remained high. This suggests that the decrease in inflation has not been uniformly reflected in consumer expenses.

▶ Critical stance: While the Bank of Albania takes credit for the decrease in inflation, the reality is that this process has been more of a passive effect of global developments. Furthermore, lowering the base interest rate does not necessarily guarantee sustainable economic stimulus if not supported by increased investments and sustainable fiscal policies.

Economic Growth and Employment: The reality beyond the figures

According to the report, the Albanian economy recorded a growth of 4.1% in the second quarter of 2024, driven by investments and private consumption. However, some aspects of this growth deserve a deeper analysis.

• Construction sector and tourism as artificial growth drivers: Economic growth continues to rely mainly on construction and tourism, which are not sustainable sectors for long-term growth. Construction is driven by remittances and real estate market speculation but does not bring real productivity. Tourism brings foreign currency in the short term but remains a seasonal and uncertain sector.
• Unemployment and emigration: Why is there a lack of labor force? The report does not mention the significant impact of massive labor force emigration on the labor market. While wages have increased, this has not resulted from productivity growth but from the lack of qualified labor. Businesses complain about the lack of workers, while youth emigration continues at high rates.
• Lack of growth in productive sectors: Sectors such as agriculture, industry, and technology remain underdeveloped and with low productivity. The Albanian economy remains dependent on fragile sectors, without building a sustainable productive base.

▶ Critical stance: Economic growth is concentrated in unsustainable sectors, while the problems of emigration and lack of labor force are not seriously addressed. An economy that grows without strong productive foundations is fragile and exposed to external shocks.

Credit and Financial Stability: A silent risk?

The report mentions a strong increase in credit to the private sector (16.8%), considering this a positive signal for the economy.

But is this a sustainable indicator?

Let’s take a closer look.

• Increase in credit for construction and consumption: Most of the credit growth has gone to the construction sector and consumer loans, not to productive sectors. This can lead to an overvaluation of the real estate market and excessive debt risks.
• Interest rates and their effects: Lowering interest rates is an appropriate stimulus policy, but it will not bring positive results if businesses do not have real access to financing for productive projects. It remains problematic that small businesses still face difficulties in obtaining credit, while lending favors large sectors such as construction and energy.

▶ Critical stance: An economy that relies on credit to drive growth can create financial problems in the long term. The Bank of Albania should more closely monitor where lending is going and intervene to avoid the creation of a bubble in the real estate market.

In conclusion, we believe that we are in a transitional economy without a clear strategy and still with a short-term visionary approach.

The Bank of Albania’s report presents an optimistic picture but does not address some key problems of the Albanian economy:

• Economic growth is based on construction and tourism, while productive sectors remain weak.
• Emigration is reducing the labor force and impacting the labor market, creating a shortage of qualified human resources.
• Monetary policy has helped stabilize inflation, but its impact is limited in relation to global developments.
• The increase in credit may bring new financial risks if not channeled towards productive sectors.

Albania needs a new development strategy that focuses on innovation, production, and improvement of the labor market, beyond short-term monetary and fiscal policies.