Personal loans in 2021 and early 2022, cash reserves and wage indexation

Individuals during 2021 and the first two months of 2022 have benefited from financing with lower interest rates on mortgage loans in lek, while interest rates on consumer loans have appeared stable for both currencies (Euro and Lek).

The following describes moments and explanations regarding money and inflation, as well as the need for orientation towards inflationary shocks, including the possible costs of the state budget.

First, lending to individuals in 2021 and the first half of 2022 …

The higher growth rates of loans to households, supported by both consumer and housing loans, are the news that the economy and the consumer experienced during the second half of 2021. The revival of consumption stimulated even the highest demand for financing of individuals.

The easing of lending conditions by banks, both for businesses and individuals in the second half of 2021 was a commendable incentive and that was understood correctly and quickly by individuals as well. This performance was reflected in the improvement of the macroeconomic situation of the country, the reduction of risk premiums, as well as a more positive approach to lending.

The stability of interest rates on new lek loans, with marginal reductions in certain segments, both for businesses and households was another good stimulus to influence the growth of lending to households. Overall, loan interest rates fluctuated at low levels, confirming generally favorable investment and consumption conditions. This monetary approach of Albanian banks also reflected the growth of consumer credit.

According to the Bank of Albania, the new consumer credit granted in 2021 was ALL 33 billion or close to EUR 273 million. This value includes consumer loans in installments and bank advances or overdrafts of individuals. Compared to 2020, consumer credit showed a high growth, as much as 53.5% more.

Nearly 30% of the loan portfolio for households is consumer loans. The rest of the loan portfolio (65%) is home loans. The remaining part (5%) is loans for education, health, furniture, travel, etc.

Second, the arrival of inflation and the reaction of the individual …

Meanwhile, with the arrival of tremendous inflation in early March 2022, we need to briefly clarify what could affect borrowers, but also banks. For this let’s look at how the parties position themselves during the period when high inflation occurs.

The situation before high inflation

Both lenders and borrowers can benefit from Inflation.

For example, borrowers end up paying lenders money that is worth less than they were originally borrowed, making lending financially profitable for those borrowers.

However, inflation also causes higher interest rates and higher prices and may cause increased demand for credit lines. All of these are to his advantage.

The situation after high inflation

If inflation is rising against the backdrop of a slow-growing economy, this could influence the central bank’s policy of raising interest rates to slow inflation.

But higher interest rates can lead to a slowdown in borrowing as consumers receive less credit.

However, raising interest rates can help lenders make more profits, especially with variable rate credit products such as credit cards.

So how much money can be needed as a reserve to get through the period of inflation shock or wage devaluation and where can it be saved?

According to financial planners around the world, a sufficient amount is recommended to cover 4 to 8 weeks of living expenses and an emergency cash fund that can last three to six months in case wages do not change, or the economy faces another financial disaster.

And money reserves better than in treasury bills can not be saved in our country.

However, the classic formula for saving money does not advise more than half of the total amount of money owned by the family / individual to invest in treasury bills. The rest can be stored in savings or current bank accounts, in pension funds, or trusted government investment funds depending on and comparing them to bank interest rates.

Third, the increase of wages by indexing them according to inflation narrows the inequality and fights to some extent the tendencies of impoverishment of the segments of individuals …

What can the government analyze and react to personal income growth through wage increases?

If wages would increase with inflation, and if the borrower could have borrowed in lek before inflation occurred, then the borrower is profitable.

This is because the borrower still has the same amount of money, but now he has more money in their salary to pay off the debt. This results in less interest for the lender if the borrower uses the extra money to repay his debt earlier.

To pay for more expensive products and services, you may only need a higher salary. The good news is that the labor market is still held strong, as the unemployment rate is close to the record low before the pandemic. But what does not work in this labor market is precisely the inability of employees and the lack of effective pressure from unions to give employees the opportunity and power to demand more money.

Part of the reason why inflation is so high is not because wage inflation is putting pressure on businesses, but because Albanian businesses need to “sail” in the same way as upstream boats. In this case, it has to fight with market inequalities, informality, lack of skilled employees, as well as an unexpanded market outside the borders of Albania.

For these moments, the subsidy and assistance of the state budget are needed. If we calculate that a wage indexation could be done by the budget, as long as employers have no contractual obligation to increase wages, then this value would reach a budget effect of no more than 15 million Euros per month.

An aid package of up to 3-6 months can, in addition to increasing consumption and consumer confidence, serve as a necessary reform for the indexation of wages according to the increase and decrease of inflation. This is tedious work for financiers and tax offices, but very rewarding for employees.

Important to note: The minimum wage increase is currently 6.6% higher than a year ago, compared to food inflation which has passed to 9.3%.