Governor of the Central Bank of the Republic of Kosovo, Fehmi Mehmeti is attending the Regional Summit of Finance Ministers, Governors and Tax Administration Directors being held in Becici, Montenegro.
This year’s summit topic is “Region’s Financial and Monetary Stability Ten Years since the Crisis Outbreak”.
In his speech to the attendees, the CBK Governor, Fehmi Mehmeti said that the global crisis has imposed changes on central banks agendas.
Governor Mehmeti has pointed out that while Central Banks of developed countries are currently facing the challenges of monetary policy accommodation following the facilitation during and after the global crisis period, for the Central Bank of the Republic of Kosovo, which has a very limited monetary policy as the result of unilateral euroisation, the main challenge is maintaining financial stability.
"At present, we have a very stable financial sector and continuous improvement of its role in serving the country's economic development. Non-performing loans in the Kosovo banking sector represent only 2.9% and the capital adequacy ratio is about 18%. However, we are aware that shocks to the banking sector often come from outside the banks, i.e. from the economy, and in this regard, we must be very careful that banks can cope with the potential shocks that may face in the future. Another challenge for us is the need to increase the central bank impact in macroeconomic developments in the country. With a limited monetary policy, our ability to influence more directly in macroeconomic indicators such as inflation, economic growth or even unemployment is quite small. We will try to address this challenge to a certain extent through the development of macroprudential policy, but this also represents a challenge itself, given the early stages of its development in other countries also," Governor Mehmeti said.
Since Kosovo uses the euro as the official currency, monetary policy changes do not have any direct impact on Kosovo, due to the fact that Kosovo's main trading partners continue to be Eurozone and regional countries with currencies that maintain a stable exchange rate against the euro.
Governor Mehmeti said that the greater part of the loans and deposits in the Kosovo banking sector are denominated in Euro currency, therefore, the sector is well protected from exchange rate risk.
"Interest rates movements in international markets do not have significant impact, because the main source of financing Kosovo's banking sector is domestic deposits, while the credit portfolio consists almost entirely of loans issued within the country’s economy. Similar to the Eurozone, Kosovo has also faced low inflation rates, even deflation, in recent years. Low prices prevail in international markets did not leave without consequences our economy, affecting negatively especially the exporting industries. However, the beginning of international prices recovery in the last period has rapidly reflected in our exports, leading to the increase in the value of mineral and base metal exports, which represent main categories of Kosovo exports. Interest rates on deposits and loans in recent years have marked a sharp decline. Currently, the average interest rate on loans is about 6.6%, compared to 11% five years ago. Significant impact on the decline of the interest rate on loans had also the fall in interest rates on deposits, which also dropped to a very low level. Currently, the average interest rate on deposits is about 1.3%, compared to the average of 3.5% recorded five years ago. "
According to Governor Mehmeti, the CBK has devoted a particular care to the financial stability by developing supervisory capacities and restarting the application of a risk-based approach supervision.
"Knowing that micro-prudential supervision alone is not considered to be sufficient to prevent banking crises, we have developed the framework of Macroprudential Policy and have functionalized the Advisory Committee for Macroprudential Policy responsible for macroprudential policy. In Kosovo, the external sector exposure effects are mostly manifested in the current account balance of payments. More specifically, the effects of external shocks are reflected through remittances as well as import and export prices. Also, the exports demand is undoubtedly an important channel, but given the fact that their value still remains low, the difference in external demand is not yet largely reflected in Kosovo. Similar is the situation with foreign direct investments whose value is relatively low and consists mainly of retained earnings of foreign companies operating in Kosovo and the investments of our diaspora in real estate. In a similar situation is also the banking sector with the greater part of placements within the country's economy, while deposits collected domestically represent country’s main source of financing. "
At this Summit, the Governor of the Central Bank of Kosovo, Fehmi Mehmeti asked all regional counterparts to increase the cooperation between the central banks through various forms, such as exchange of personnel for sharing their knowledge among central banks or cooperation in developing joint projects that can be used by two or more banks in the region.