The Bank of Albania, as one of the most important independent institutions in the country, has played and continues to play a crucial role in ensuring financial stability, which significantly impacts the nation’s economic and social development. This is achieved through its activities, ongoing reforms, and collaboration with other state and governmental institutions, as well as international financial bodies like the International Monetary Fund (IMF) and the World Bank.

THE REFORMING PATH OF THE BANK OF ALBANIA

The Bank of Albania has undergone a significant transformation through several institutional, structural, legal, and human capital reforms. Key milestones in this process include:

Adoption of a Two-Tier Banking System (1992): This pivotal reform redefined the Bank of Albania's role as the central bank, while other segments of the financial system were converted into commercial financial institutions, primarily state-owned banks.

Reforms Following the 1992-1997 Crisis: After the financial and social turmoil of the early 1990s, including banks burdened by non-performing loans and the collapse of pyramid schemes, the birth of private banks marked a significant turning point. The 1997 amendments to the Law on the Bank of Albania established it as a modern central bank based on contemporary principles. This law empowered the BoA as a monetary authority responsible for issuing banknotes, developing and implementing monetary policy, and serving as the supervisory and regulatory authority for the banking system. It also played a critical role in promoting and developing Albania’s financial markets.

The Bank of Albania is entrusted with ensuring price stability, the cornerstone of financial stability, and developing an efficient and stable banking system that protects citizens' savings and supports investments, consumption, and overall economic growth through lending.

Over time, the Bank of Albania has evolved into a modern European central bank. It boasts a contemporary theoretical and operational monetary policy framework and aligns closely with the supervisory and regulatory standards of the European Central Bank system.

The Bank of Albania is successfully fulfilling its constitutional and legal mission. In particular, inflation during the last decade (2014-2024) has remained at an average level of 2.4%, staying close to the Bank of Albania's target of 3%, thus offering an economic environment with stable prices. This achievement is even more important when considering the numerous challenges faced during this period, such as the sovereign debt crisis in the Eurozone, the pandemic of 2020-2021, and the impact of global price increases during 2022-2023, especially following the start of the war in Ukraine. Additionally, the Bank has played a key role in increasing public confidence in our national currency and banking system.

We are all witnesses to the strengthening of our national currency in its exchange rate against other currencies, especially the euro. The reasons behind this strengthening seem to stem from an increase in the supply of currency in the market, primarily driven by income from tourism, increased foreign direct investment (FDI), remittances (which in the first six months of this year grew by 14.4% compared to the same period last year, reaching a total of €510 million), and informal currency inflows. However, in line with the principles of our monetary policy and the free exchange rate regime, this significant influx of foreign currency into the economy has not translated into rising prices but has been absorbed through the strengthening of the exchange rate.

What are the positive and negative sides of the appreciation of our national currency?

Despite the challenges it has posed to specific sectors of the Albanian economy, the strengthening of the exchange rate has, in this context, been the best way to absorb the increase in foreign currency supply.

First, it has helped to control inflation by preventing the burden of the increased money supply from being passed on to Albanian families and consumers.

Second, it has kept the base interest rate at low levels, avoiding higher financing costs for businesses and fostering the positive lending trends we are currently witnessing. It is worth noting that for over a year now, loans in lek have been the main driver of credit expansion for the private sector. In fact, loans in lek increased by 20% year-on-year in the first six months of this year, while loans in foreign currency saw a slowdown in their annual growth rate, dropping to 5% during the same period.

Third, it has helped to reduce both domestic and foreign debt, improving macroeconomic balances and leading to a structural decrease in financing costs. Specifically, the ratio of foreign debt to GDP has significantly decreased, from 74.4% at the end of 2015 to 46.8% in the first quarter of 2024. Additionally, public debt in 2023 was estimated at 58.9% of GDP, marking a reduction of 14 percentage points over the last decade.

Fourth, the fact that salaries in public administration and most of the private sector are denominated in lek should not be overlooked, as this has had a positive impact on family budgets.

Finally, all of the Bank of Albania's monetary interventions during recent shocks have been timely, well-directed, and of appropriate magnitude, positively supporting the country's economic development. The Albanian economy has experienced solid growth, around 3.5-4%, while unemployment remains at historically low levels of 10.7%. Wage growth in the private sector has been significant, ranging from 12-15%, and both business and banking sector balances have never been more liquid or stable.

Of course, the appreciation of the lek against foreign currencies, particularly the euro, has negatively impacted exporting companies and euro-denominated depositors. However, this monetary development should be seen as generally positive, helping stabilize the post-COVID economy, especially amid the price and inflation crises triggered by the war in Ukraine. In the medium term, depending on external inflation trends and the economy's full adaptation to structural developments—especially in the tourism sector (which generated €2 billion in revenue in the first six months of this year)—and with more effective monetary policies, a new equilibrium in the lek exchange rate may be reached. The de-euroization strategy also needs to be considered, with increased commitment from other stakeholders.

Having said all this, I am confident that the public needs clearer and simpler communication about these economic phenomena, regardless of the "professional jargon" often used by bankers.

First, monetary policy and price stability help create the necessary savings in the economy at low cost. These savings, most of which are held in banks, act as financial capital for lending to businesses and individuals.

Secondly, effective supervision and regulation of the banking sector are essential for a healthy, trustworthy, and efficient banking system, which ensures that these savings are efficiently transformed into loans.

Thirdly, the development of the payment system and the establishment of complementary credit infrastructure, such as the Credit Registry and non-bank financial institutions, help reduce credit risk, which in turn lowers borrowing costs.

The results of these efforts are evident. The Albanian banking system currently holds around 1,545 billion ALL in deposits, with 1,237 billion from families and 308 billion from businesses. In relative terms, compared to the size of the economy, these figures rank among the highest in the region. Additionally, the banking system has issued loans totaling 738 billion ALL, with 447 billion going to businesses and 291 billion to households. The majority of business credit supports key sectors that are also driving forces behind the growth of the Albanian economy.

SUPERVISORY ROLE OF BoA, GUARANTEE FOR THE COUNTRY'S FINANCIAL STABILITY

The Bank of Albania exercises supervision over the country's financial system through fees set by the Law on the Bank of Albania and the Law on Banks. As one of the Bank's two main pillars, its primary objectives are to ensure the financial health of licensed entities, ultimately aiming to prevent crises and protect depositors. This involves monitoring market developments, promoting market discipline through increased transparency in banking and financial products and services, and fostering fair competition with equal treatment of participants.

Additionally, the Bank's supervision has increasingly focused on the non-banking financial system, a relatively new sector in Albania. Challenges in this market have been addressed in a timely manner through several regulatory acts, the development of an inter-institutional plan, and legal updates—particularly in civil and commercial law—affecting credit contracts issued by non-banking institutions. These changes clarify the rights and obligations of all parties involved, including fee use and execution. Ongoing reforms include amendments to the law on the Bank of Albania, as well as enhanced cooperation with international financial institutions.

On the other hand, the measures taken to remove and/or suspend licenses for some microcredit institutions and enforcement for misapplication of legal and regulatory acts.

Also, the deepening of financial education, with simple and legal language, should be intensified further, in order for creditors in particular and citizens in general to recognize and know their responsibilities in credit relations.

FINANCIAL STABILITY AND NATIONAL SECURITY

In every country, the sustainability of financial stability is a matter of national security. Financial stability doesn't imply the absence of failures within financial institutions, but rather the system's resilience in managing these events without major disruptions, ensuring that depositors are protected. Risks are inherent in the operations of financial institutions and markets. If these risks are not properly identified and addressed in a timely manner, they can undermine the performance of financial institutions and erode public trust in the banking sector and financial system stability.

Banks, at their core, rely on trust. If the financial system becomes unstable, citizens may fear for their savings, businesses may struggle to access financing, and both consumption and investment could decline. This could deter foreign investment, increase pressure on the exchange rate, and potentially lead to economic contraction and inflation. Such a scenario also impacts public finances, often resulting in higher levels and costs of public debt.

In extreme cases, a country facing significant macroeconomic shocks and urgent financing needs becomes more vulnerable to internal social unrest and external pressures. This instability can potentially pave the way for populist political movements that offer unrealistic, short-term solutions, exacerbating the situation. Developing countries are particularly susceptible to these developments due to structural vulnerabilities in their economies, financial systems, social frameworks, and levels of financial literacy, as well as issues related to law enforcement and political stability.

Moreover, with the rise of digital technologies and social media, the potential for disruptions in a country's digital infrastructure—especially in its financial system—has grown, increasing the likelihood of creating stress in these critical areas.

This situation is linked to cyber-attacks, which may be motivated by private profit or, at times, political agendas. In an era of rapid digital advancements, such attacks can disrupt the operations of targeted entities or corrupt sensitive public data. Additionally, the proliferation of social media enhances the likelihood that opinions regarding economic and financial developments will circulate quickly—often based on misunderstandings or inaccurate data, sometimes disseminated intentionally to sow uncertainty among families and individuals.

In these contexts, it's crucial for financial institutions to bolster their protective measures for critical digital infrastructure. Public authorities overseeing the country's digital framework and the stability of the financial system must collaborate closely to establish protective mechanisms. This includes ensuring transparent, clear, and regular communication with the public about facts and truths regarding economic and financial matters.

Therefore, in the case of our country, awareness of the importance of maintaining financial stability should be paramount. This responsibility primarily falls on the authorities legally tasked with licensing, regulating, and supervising the financial system, including the Bank of Albania, the Financial Supervision Authority, and the Deposit Insurance Agency. However, the functioning of the financial system should not be viewed in isolation from broader economic developments, financial markets, and supporting infrastructure. In this context, the commitment of the government and its various agencies is both necessary and essential.

Moreover, it is the duty of legislators to clearly define, in relevant laws, not only the mechanisms for accountability among public institutions but also the frameworks for effective cooperation between them to ensure financial stability and national security.

*Prof. Dr Anastas Angjeli is a member of the Academy of Sciences, economy expert, former Minister and MP, founder and president of the Mediterranean University of Albania