How healthy keep the economy the monetary and fiscal policies?

An increase in the costs of the sectors that develop the Albanian economy will be a test of their sustainability in 2023 and beyond.

There is a growing fear not only in Albania, that the influence of the global energy system, the abuse of large economies at the expense of small ones, as well as geopolitical influences threaten competition and increase trends for declining well-being and impoverishment of the social periphery.

It is not only prosperity that is at stake, but also the health of the unstable democracy.

Already in Albania, the inflation of energy products (fuels) is spreading to the rest of the economy, still strongly influencing an acute dilemma for the Bank of Albania (BoA) to raise the interest rate to control prices.

If the crushing action on the free market, that of price control, which is going too far, then this policy means that the livelihoods of the financially weaker citizens exposed to borrowing and maintenance costs will continue to be destabilized, but no less agriculture, seasonal products and economic activities with debts will continue to be damaged.

If the crushing action on the free market, that of price control, which is going too far, continues and further, this policy will continue to destabilize the livelihoods of the financially weaker citizens exposed to borrowing and maintenance costs, but not less will affect agriculture, seasonal products. and economic activities with debts.

The loss of economic momentum through fiscal policy is making the country poorer compared to the objectives that have not been met and installing a pattern of declining economic power. Compared to the trajectory of the economy, according to Gross Domestic Product (GDP) before Covid-19, Albania has reacted worse than any other neighbor.

The government should give up the budget routine as it is today and respond with the appropriate subsidies in an escalated situation, dominated by the stronger economies in trade relations with Albania.

Borrowing money is getting more expensive. But saving is becoming more profitable. Here we do not mean only the financing of public debt with treasury bonds that buyers buy.
And this situation gives us alarming signals, that the country may be on the verge of a recession.

However, in many things that are happening now, it seems that the Bank of Albania has a significant influence on all of this.

Cumulative effect [1] of interest rate hikes in 2022 has a bigger impact on the wallets of individuals and businesses than they may realize, and more interest rate hikes could be on the way[2].

It will be really difficult to find loan products with low interest rates and it will be much more difficult to pay back the loans taken earlier, but which have already increased the interest rate, i.e. the payment installment.

But, based on an increased role of BoA to help the economy continue without problems, even though it seems to be monitoring some of the economic indicators, such as unemployment, consumer prices and gross domestic product (GDP), it is still expected that this institution to take additional actions to counter-react on these three indicators that are showing signs of heating up

BoA should adjust its monetary policy to encourage (not discourage) people and businesses from borrowing, spending and investing.

Although this year, BoA has tried to fight rising inflation by raising interest rates, the point is that the tightening is not working as intended so far and has had a piecemeal effect on the entire economy.

Inflation is still high and interest rates are rising, putting borrowers in a difficult financial situation. This may have the effect of slowing demand and spending for both consumers, but it also affects businesses.

The cost of borrowing which is high has greatly increased the loan installments. This has strongly affected the fixed income group people to face a very critical situation due to the increase in the amount to be paid.

It is clear that the biggest purpose of the increase in interest rates by BoA is to slow down economic activity, as a lesser damage compared to the increase in prices which is considered as the biggest damage. But the problem he has to face with the economic slowdown is where is the tipping point that should not be exceeded.

And in the event that consumption continues to decrease as in the period of Covid 19, but unemployment will also increase and evasion will not decrease, then the breakeven of monetary policy should not expect further deterioration, but should be ready for implementing various anti-crisis scenarios.

Even in the case when inflation will begin to decrease to a stabilized level, this should be the beginning of a policy for an increased monetary circulation for BoA. This approach can be done both through the direct monetary offer in function of the debts that the government has to Albanian citizens and businesses, but also through the reduction of interest rates for borrowers.

The entire interim policy framework should resemble loose monetary policy, or expansionary policy that increases the supply of money and credit to generate economic growth.

This policy makes more sense than schemes copied by banks belonging to economies with no similarity to Albania. BoA should adapt the implementation of an expansionary monetary policy to reduce unemployment and stimulate growth in difficult economic times.

Meanwhile, if the government fails to coordinate the fiscal policy (together with the reduction of informality) with these monetary measures[3], then all this modeling mentioned here results that had no effect.

Lack or problematic of coordination between monetary and fiscal authorities will result in lower overall economic performance.

We, as a civil expertise and the experts of business organizations and beyond, must monitor this situation in aid of accountability based on the analysis of the transparency of governance, teaching the argument of how healthy the monetary and fiscal policies are keeping the economy.

[1] increase in quantity or an amount by successive additions
[2] https://www.bankofalbania.org/Tregjet/Normat_e_interesit/
[3] Fiscal policy affects aggregate demand through changes in government spending and taxes and levies. These factors affect employment and household income, which in turn affect consumer spending and investment.
Monetary policy affects the money supply in the economy, which affects interest rates and the inflation rate.