Finance and Banking
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.
Data as of April 1992