Ardian Fullani: Recent economic and monetary developments in Albania
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on
the Monetary Policy Decision of the Bank of Albania Supervisory Council, Tirana, 31 August
2011.
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Today, on 31 August 2011, the Supervisory Council of the Bank of Albania reviewed and
approved the Monthly Monetary Policy Report. Based on the analysis of Albania's latest
economic and financial developments and following discussions on their performance
outlook, the Supervisory Council of the Bank of Albania decided to leave the key interest rate
unchanged at 5.25%. The Supervisory Council holds that the actual monetary conditions are
appropriate for meeting the inflation target and for continuing to stimulate the economic
activity.
Let me now proceed with an overview of actual and expected economic developments and
main issues discussed at today's meeting of the Supervisory Council.
Annual inflation in July was 3.6%, following the downward trend noted in the second
quarter of the year. Consumer price performance continues to be under the pressure of rising
prices in global markets, although lower than in previous months. Annual inflation was
primarily formed by the contribution of processed food prices, most of which are imported.
Decline of the annual inflation rate reflects the downward contribution of unprocessed foods
as a result of increased supply of domestic agricultural products, a seasonal development,
which in July 2011 appeared to be stronger than a year earlier. On the other hand,
regulatedprice goods and non-food goods had a low and downward contribution to this month's
inflation.
In line with Bank of Albania's expectation, controlled inflationary pressures by the domestic
economy, as well as anchored inflation expectations created a favourable environment for a
rapid reduction of imported inflation effects.
Consumer prices during 2011 were mainly affected by supply shocks, materialised in higher
prices of imported goods and some products subject to excise, or with regulated prices.
These effects appeared to be more moderate in July; in the absence of sudden shocks, they
are expected to decrease further in the months ahead. Below-potential economic growth
continued to generate controlled inflationary pressures on the demand side. Hence, core
inflation stopped increasing and is set around the Bank of Albania's target of 3%. Moreover,
stabilisation of inflation expectations of economic agents and the prudent policy of the Bank
of Albania regarding their anchoring are reflected in moderated second-round effects on
inflation.
(Following, I will describe in more detail economic highlights defining the inflation
performance and their expected development.)
Although in an unfavourable external environment characterised by added uncertainties in
our trade partners, the Albanian economy continued to grow during the second quarter of
2011.
In the absence of direct data, the Bank of Albania deems that economic growth during this
period is similar to the one recorded in the preceding quarter, thus remaining below Albania's
potential growth rate. Economic activity relied on the public sector and external demand,
although more moderately than in the first quarter of the year. In the meantime, the private
sector demand appears sluggish, also conditioning our projections for economic growth for
the rest of the year.

Private investments continue to be slow, compared with their historical rates and
the country's needs for quantitative and qualitative production capacities. This
The expected easing of funding terms during the second half of the year as well as the
decline of perceived uncertainty by businesses and individuals are expected to be
accompanied by the somewhat more positive performance of private consumption and
investments in this period.

Stimulating nature of fiscal policy during the first half of the year is reflected in a
positive contribution of public expenditures to economic growth. For the first seven
months of the year, public spending increased by 5.9% in annual terms. Moreover,
performance of fiscal revenues was slow, reflected in their annual growth of 2.3%
during this period. This behaviour of income and expenditures is materialised in a
higher budget deficit than a year earlier. Fiscal impulse to the economy was
consistent throughout this period. It showed tendencies of moderation during the
second quarter, which are expected to strengthen further during the rest of the year,
in conformity with the revised budget of 2011.

Contribution of foreign demand to economic growth was lower during the second
quarter of the year. Trade deficit in the second quarter was 20% higher compared to
a year earlier.
Our exports shrank by about 2.8% year-on-year for this period, a reflection of reduced
exporting of energy, which is a volatile component in exports. Despite this development, the
core basis of exports continues to maintain more sustainable growth rates. On the other
hand, continued their annual growth, albeit at a lower rate compared to the first
imports
quarter of the year.
Aggregate demand performance triggered economic activity growth but was inadequate to
fully utilise Albania's output capacities. Developments in the labour market seem sluggish
and do not have premises for emergence of stable inflationary pressures.
Signals from economic information are confirmed also by the monetary indicator analysis.
In June, annual growth of M3 aggregate was 11.8%, around average rates of the past
12 months. Our assessments show that the expansion of monetary supply is in line with the
performance of the economy's demand for monetary assets.
In June and throughout the second quarter, the public sector demand for funding was high, in
line with the intensity of the fiscal activity during that period of the year. Furthermore, the
private sector demand for funding continued to be moderate. Lending to private sector
posted annual growth of 11.6% in June, in line with the second quarter's performance.
Financial markets are characterised by a serene environment with contained risk premia.
Interbank market experienced increased trade volume; interest rates were close to the key
rate and had low volatility. In the primary market, government's demand for funding is
reflected in the increased yields of government securities. However, the trajectory of yields
retained its trend, showing low inflation expectations by market agents.
As regards the economy's performance outlook, our projections and assessments suggest a
continuation of economic growth, in terms relative to those of the first quarter. Composition of
aggregate demand is expected to be different to the one of the first half of the year: private
sector of the economy is expected to be more vivacious in the second half, while the
contribution of the public and external sectors are expected to be more moderate. Size and
speed of the private sector recovery shall define the stability of economic growth in the
future. In spite of assessments for increased aggregate demand, economic activity in Albania
is expected to remain below its potential, thus conditioning the continuation of spare
capacities in the economy in the period ahead. Subsequently, inflationary pressures
originating from the aggregate demand are expected to be contained. In addition, foreign
prices effect is expected to be more moderate in the upcoming months while inflation
expectations of economic agents continue to be within the target band. Consumer price
inflation is expected to continue its downward trend in the next months, gradually
approaching the Bank of Albania target.
Taking into consideration the information above, the Supervisory Council concluded that
inflationary pressures in the medium term are contained.
In the absence of abrupt shocks, inflation is expected to drop further and stay within the
target band of the Bank of Albania during the time span of the monetary policy action. Risks
distribution remains overall symmetric: slower than projected economic growth would lead to
a rapid reduction of inflation, while a further consolidation of imported inflation could keep
inflationary pressures high for a longer time.
At the end of discussions, the Supervisory Council concluded that the monetary
conditions remain appropriate for meeting the medium-term inflation target and
decided to leave the key interest rate unchanged at 5.25 %.
In the near future, the downward inflation trend and shift to the downward section of the risks
balance may establish the premises for a revision of the monetary policy. In any case, the
future its future position shall factorise the new information obtained, aiming to adopt
monetary conditions to respect our objectives.
The Bank of Albania remains fully committed to anchor inflation expectations in accordance
with its inflation target and to support sustainable and long-term development of the Albanian
economy.