Speech of Prime Minister Edi Rama at the annual conference of the Bank of Albania “Do crisis change economic foundations in Eastern European countries?” organized in collaboration with the Centre for East European Studies at the Oxford University:

Just as the birth of Christ serves as the dividing line for the two phases of human history, the same major financial crises serve as a separation line between different economic eras.

Although Nobel laureate Paul Samuelson said that what we really know about global crises is that we actually know very little, today we can say with certainty that dealing with the recent crisis tested the implementation of all possible options, policies, conventional and non-conventional ones for policy makers around the world, in countries rich or poor, in developed countries or in developing countries.

In the vocabulary of economists there is always the expression that financial crises are all the same, but no one looks like the other. The manner and speed with which the last crisis expanded, as a domino effect, has defied all traditional views on the self-correcting nature of financial markets, and has brought in the foreground, since many years now, the debate on the role of finance in economic growth.

The World Bank report on South Eastern Europe, where we are included, says that probably no other region in Europe is sensitive anymore to the Euro crisis than countries of Eastern Europe, with very serious challenge for these small economies. Growth prospects of the region depend largely on external factors, including the recovery of external demand, particularly in Europe, and stabilization of international energy prices at current levels.

In fact, after a decade with high rates of economic growth, the region of Southeast Europe was affected severely by the economic and fiscal crisis in the Euro area. Economic activity in Eastern Europe is suffering from weak domestic demand, high unemployment rate, and from the banking systems being loaded with many non-performing loans.

The World Bank report also says that structural challenges continue to be the answer to finding growth in Eastern European countries. In this almost vicious circle lies in a new model of growth based primarily on regional economic integration, on a comprehensive and intelligent economy beyond the boundaries that separate today the region, by defining and even condemning them as economies too small to be self-sufficient. Beyond the way how it was born and spread, the crisis induced also the implementation of some specific policies that were unprecedented in the national and international level.

Monetary authorities in developed countries were the first to apply aggressive monetary incentives, by reducing interest rates and then using unconventionally their own balance sheets in order to inject liquidity. At the same time, decline in production due to the crisis brought the need for countercyclical fiscal policies of such dimensions that could not even be imagined prior to the crisis.

Nowadays, the developed world is dealing with the analysis of the success of unconventional instrument, such as quantitative easing. The Federal Reserve, Bank of England and the European Central Bank recently are trumpeting the success of this instrument, in a world that is still troubled financially, and whose cycles mark both large growth and loss. The crisis showed that market players were not prepared to manage the system that they themselves created. It taught us that the financial market cannot correct itself by market forces, and that central banks should play an even more important role in overseeing the health of the financial system.

National authorities should be aware that in an integrated financial system the power of their local policies is marginal. Therefore, coordination of financial supervision across countries and between different sectors of the economy is very important in maintaining financial stability in an integrated global system which, as indicated by the latest crisis of refugees, puts us face to developments that were unpredictable and unimaginable until a short time ago. The crisis has highlighted the fact that international economic cooperation and integration have become necessary since no country has been able to handle the new challenges in isolation from other countries, given the nature of contamination that all these challenges have.

For the first time at the Vienna Conference on 27 and 28 August, the one that followed the Berlin last year, the countries of this region made a common step to show up with joint plans, in view of the internal integration of their economies, and in view of their integration to the wider European region.

This first step is expression of both the awareness being shaped in the region that this is a situation that cannot be overcome partially, and no country can afford it isolated from the other, and of the conviction that is being created in the European Union that the concerns of countries in our region are necessarily linked to the fate of the region as a whole, and that the performance of each of our countries is very important to the performance of all countries together.

I believe that in this regard, the Government has a merit and its role to play because this is a new approach with an aim at making this region a much more attractive destination for investments where, when someone takes up to invest, they don’t just invest in Albania or in another country in the region, but in a wider economy than the economy of each of the countries.

We are all witnesses to the extraordinary transformation that has occurred in the past two decades from every aspect both in the region and in Albania, as well as to a very deep restructuring process of the economies of the region in view of an organic transformation across the continent, and simultaneously under the inevitable pressure of globalization.

The road to EU membership has contributed as a unique attraction to target reforms and structural transformation that couldn’t be targeted without this path, and which would even be seen as unnecessary, not only to promote economic growth by opening and expanding markets, but also by creating the basis in terms of legislation and drafting of special economic policies in view of a goal that is as aware as it is an inevitable pressure of the transformation process that globalization imposes.

Foreign investment in the first quarter of this year, as the Bank of Albania has certified, have reached 258 million Euros, thus making a jump of 90 million Euros compared with the same period last year. Only foreign companies are 30% more recorded in 2014 than a year earlier. In the first half of this year exports marked an increase of 11.9% compared with the same period a year ago. But these encouraging signs are not enough. We are aware that although Albania withstood the financial crisis and, as the governor underlined, withstood successfully also the threat coming from an escalation of the crisis in the neighbouring country, providing positive growth rates and financial stability, the crisis has highlighted the physiological weaknesses of a system that had actually exhausted the space for further growth.

The overall economic growth rate, before the first stages and after the crisis, was halved thus reflecting the situation in the Eurozone and the difficulties in the energy sector. What we observing constantly, and which should make us all not just reflect – because I believe that the phase of reflection is guaranteed, – but act in a more unified way, is the fact that the crisis actually brought fully to light the businesses of domestic production with all their weakness as non-formalized structures that do not guarantee a normal ongoing and ambitious accreditation of the banking sector.

In fact, today we are at a time when despite the substantial progress made in relation to bad loans – we should not forget that bad loans have only increased for 7 years in a row and touched the ceiling of 25%, which constituted both a serious threat and the highest peak in the whole region exhausted by the crisis, today we have reached the lower level of 20%.

It is very clearly that in order to go below, a structural strengthening of the businesses in Albania is required, a transformation of the mentality and of the way businesses in Albania are structured and ready to access banks, because actually we are at a crossroads in this regard.

Banks are ready with liquidity, but domestic business is not ready to be up to the challenge of being well-structured and to motivate with credible projects their lending requirements.

In fact I believe that despite, I guess, the naturally imperfection of responses that we have chosen to answer the questions in front of which the crisis has put us, Albania has entered the process of redesigning the model of its economic development and of the transformation of its economy’s nature, aiming an economy that is oriented by a much more sustainable domestic production and by exports.

The trade sector, as well as the manufacturing sector have consistently increased their influence on credit for businesses, while it is very clear that there are two sectors that are regarded as attractive to the financial sector; agriculture and electricity.

Despite major structural changes that have happened in all these years, it is still clear to everyone that agriculture is one of the most important sectors of the Albanian economy, and actually the sector with the largest contribution to the national economy by 22%. Therefore, seeing this sector as a strategic sector, as a sector with great potential of internal transformation and for transforming the country’s economy, we are focused on promoting systematic and aggressive growth, production development and formalization of businesses in the agricultural sector, and the increase of production capacities through financial investment, as well as through training and development of human capital.

In fact we are on the eve of opening a new innovative program in agriculture, thanks to the support, not only moral, of the governor and of BoA, but also to the understanding with second level banks to create the conditions for a much broader access to credit for investment in agriculture starting from next year, by establishing a state guarantee fund for them.

However it is clear that economies are very complex and very dynamic systems developed by social systems and behaviours of people who populate these systems, and if we want to give an example, we can see this clearly in this new transformative phase determined by the operation against informality. Figures of only 45 days are impressive, not in terms of success, but in terms of a large quantity of data in order to analyse in depth in what social system and system of behaviours we have lived for years in relation to the economy, and what transformation can bring to the economy the social transformation of this behaviour system, in relation to the obligation of everyone to contribute according to what the law has established, in relation to their income.

On the other hand it is very clear that the financial crisis has taught us how important it is for a country to focus on policies aimed at sustainable and long-term growth based on reliable sources of growth. Our economic model of many years was based on two sources, although it was clear that they would not be there for a long time, remittances and the boom in construction. Meanwhile, reliable sources of growth remain largely unaddressed and unused by long-term development policies.

However, today it is clear that wherever we look, the convergence towards the EU remains the main subject of every model and every method to ensure long-term growth and sustainable economic growth.

On the other hand we believe that today, since it is BoA’s annual conference, is the day to say that BoA continues to play successfully an extremely important role. It continues to be a very strong guarantor of a financial stability that, despite threats, has proved to be stable and on the other hand continues to be a very reliable reference point, which is not very common in a country like ours.

Finally I want to emphasize that as a government, we support and will support on an ongoing basis every effort that would lead to further lowering the level of bad loans, as a need to repair the defects and deficiencies in the system of lending.

But at the same time, as I said, other factors also need to act harmoniously, primarily businesses, in order to modernize and to restructure in view of more demanding requirements of banks when it comes to crediting.

However reforms take time, and visible results require hard work, sacrifices and a challenging level of patience over time. We have started an operation in a broad front, and I believe that we are still at a time when the operation continues, and we cannot ask the patient to run.

But what is certainly true is that we are creating conditions to address high potentials of growth that our country has, not merely as a country but as a key point in the region, and in view of the awareness that it is such not only here but also in other countries of the region, for an integrated market, in order to not only increase the welfare level of our nation but also to be tomorrow much more protected from threats of openness and globalization which, as the recent financial crisis showed, are much stronger – though not immediate, but escalating in time – for the most vulnerable areas in terms of their structure and in terms of their economy as it is the area of our region.

Many thanks for the invitation!