|Albania Table of Contents
Under the communist system, the government made all investment decisions, allocating monies to enterprises directly from state coffers. Enterprises were permitted only to manage their initial capital stock and were not allowed to dispose of or acquire new capital. Each enterprise redeposited a predetermined sum into the state budget to compensate for the cost of its fixed assets. The financing mechanism failed in the early 1990s because production rates plummeted and state enterprises generated far more losses than gains. As a consequence, government revenues and reserves rapidly shrank. By mid-1991 Albania's budget deficit was equal to almost half of the country's gross domestic product ( GDP--see Glossary). Unbacked currency was issued to finance a large part of the banking system, and inflation soared. Decades of communist-enforced isolation had left few Albanians with an understanding of the pitfalls of complex financial transactions. In 1989 and 1990, according to the Council of Ministers, State Bank of Albania currency traders speculated recklessly on the world spot-money market. Taking on market commitments of up to US$2 billion in a single currency, these traders reportedly marked up losses of as much as US$170 million, a huge figure considering that the country's annual exports at the time amounted to about US$100 million.
The efficient replacement of government plan instructions by consumer preferences in determining resource allocation required the development of a true capital market in Albania. The August 1991 law on economic activity allowed private persons, for the first time since World War II, to finance businesses with lek (see Glossary) investments and foreign currency through the State Bank of Albania, other state-owned banks, and domestic or foreign private banks. Albania joined the IMF in 1991 and thereafter worked to secure a standby credit agreement. In the absence of an effective domestic banking system, illegal money changers and black marketeers met the demand for credit and money-changing services on a bustling Tiranė street corner known locally as "the Bank," where an estimated US$60,000 to US$80,000 changed hands each day.
Albania's government, assisted by specialists from the IMF and World Bank, prepared a two-tier banking system to be governed by laws on the central bank and the commercial banking system. Under the draft banking laws, the National Bank of Albania, a reorganized version of the old State Bank of Albania, would issue and manage the national currency and oversee credit policies. The central bank would also manage foreign-exchange reserves, act as a fiscal agent for the government, maintain a securities exchange market, and license other banks to operate in Albania. The bank would be responsible to the People's Assembly and therefore maintain some distance from the government administration. The country's banking system would include the Albanian Commercial Bank, which took over commercial foreign-exchange transactions from the State Bank of Albania; the Savings Bank; and the Bank for Agricultural Development.
With a branch in every district, 130 rural offices, and 500 staff members, the main source of formal agricultural credit in Albania was the Bank for Agricultural Development. The government separated the farm bank from the State Bank of Albania in 1991. New banking laws excluded the Bank for Agricultural Development pending a parliamentary agreement with parliament. At issue was whether the bank would loan money and set interest rates according to bankers' criteria, the primary one being the potential for timely repayment at a profit, or give special treatment to small farmers and act as a government agent channeling funds to state farms and state-owned enterprises. The farm bank's portfolio included close to L4.0 billion (US$592 million) in bad loans to state farms, dissolved collectives, and state-owned enterprises. A debt-resolution agency was likely to assume responsibility for collection of these bad loans, 90 percent of whose face value had been underwritten by the state. The bank's only real assets were L320 million in loans to individuals and L254 million in deposits.
Source: U.S. Library of Congress