Ardian Fullani: Economic developments during the second semester of 2004
and expectations for year 2005
Statement by Mr Ardian Fullani, Governor of the Bank of Albania, Tirana, 28 January 2005.
* * *
The second part of 2004 has generated a larger economic activity, marking a certain general impulse,
especially after a relatively quiet start of the year. The acceleration of production growth is reflected
almost in all the economy sectors, while the major objectives of the economy have been achieved in
conformity with the overall programme of the country's economic and financial development.
At international level, this semester coincided with an acceleration of the confirmed tendencies in the
first part of the year, especially with regard to US dollar performance and oil price rise. The Fed
monetary policy has changed the monetary policy tendency, during this period, through some
successive increases of the core interest rate, in attempting to prevent the inflationary pressures in the
economy. On the other side, the European Central Bank, considering the inflation performance and
the strong pressure against the Euro has deemed unreasonable to change the core interest rate,
keeping it at the level of 2 percent for almost a year and half.
Annual inflation in December resulted 2.2 percent, while the average annual inflation was only 2.9
percent. The maintenance of inflation within the targeted range was mainly attributed to the stable
macroeconomic situation, the control of domestic demand of the economy and monetary indicators
stability.
Year 2004 was characterized by the achievement of fiscal objectives in terms of budget expenditures
and budget deficit, and also by a more uniform allocation of fiscal expenditures. Government demand
for loans has been distinguished by a rising level during the second semester, however remaining
within the projected levels. Also, the annual rate of the change of current budget expenditures was
stable. The implementation of a prudential fiscal policy has provided the appropriate conditions to
better control inflation rate.
During the second half of 2004, the Bank of Albania monetary policy has kept an easing tendency,
aiming above all at reducing the borrowing cost in the economy. Bank of Albania has twice cut the
core interest rate, in July and November, by 0.25 percentage points. These cuts have brought the core
interest rate to the lowest historical rate, by 5.25 percent.
The banking system was characterized by an accelerated lending activity to the economy during 2004.
The credit balance increased by LEK 9.2 billion during June-November 2004, being 51 percent higher
than the balance growth in the first semester of the year. Lending to the economy is given an
everincreasing importance in the assets structure of the banking system, constituting a considerable
source of the demand for monetary assets. The credit/deposit ratio increases on a continuous basis,
an indication that positively introduces the function of the intermediation role of the banking system in
supporting the economic development. The balance credit rise marked during the eleven-month period
of the year the value of LEK 15.3 billion, reflecting a rise of 30 percent relative to the yearend of
2003.
The easing monetary policy of the Bank of Albania has helped smooth the appreciation pressure of
the Lek exchange rate. The differences between interest rates in foreign currency and those in
domestic currency incurred a decline during 2004. However, the rising foreign currency inflows on one
hand, and the reduction of imports volume on the other one, have created a temporary difference
between the foreign currency supply and demand during the summer period. This misbalance has
exerted a significant pressure on the appreciation of the Lek exchange rate, fostering the foreign
market volatility. The exchange rate volatility through this temporary rise of foreign currency supply
has imposed the necessity of the Bank of Albania intermediation to the foreign market during the
summer period, towards purchasing the foreign currency.
Though trade deficit increased, the current deficit in the third quarter has been lower than in the
previous quarters, thanks to increased and positive balances of income, services, and particularly
current transfers. The current transfers balance is estimated at USD 295 million, being higher than the
one of the first two quarters, and nearly 44 percent higher than the one of the third quarter of the
previous year. Overall, the balance of payments performance during 2004 was positive. The gross
foreign reserve level, at the end of this period, was estimated at USD 1 billion and 244 million,
adequate to cover 5.1 months of imports of goods and services.
Based on the aforementioned developments, we may conclude that year 2004 contributed generally in
further consolidating the country's macroeconomic equilibrium. Although full data for the yearend of
2004 are not yet available, there is a crystallization of the idea that the primary targets projected in the
medium-term plan on the country's development have been met satisfactorily. According to the latest
estimations, the Albanian economy grew by 6 percent under the conditions of a low inflation rate, far
closer to the bottom level of the targeted band. The structural reforms, through their problematic
concerns, have progressed during 2004.
All this consolidating process has created the premises for a better stability in the future. The
development program of the country for year 2005 already exists, part of which are the primary targets
of monetary policy.
The primary target of monetary policy for 2005, projected in the monetary program, remains the
maintenance of the annual inflation rate within the two-to-four percent targeted range. This target is
supposed to be met through the control of the monetary supply growth at an approximate level with
the nominal growth of GDP, presuming that the velocity of currency circulation in the economy is
stable. In this light, the annual growth rate of money supply for year 2005, projected in the monetary
program, is 9.4 percent. This rate is in compliance with the provided demand of the economy for
money, coming from its real growth by 6 percent.
The Bank of Albania monetary program is designed in line with other policies of the economy, where
its harmonisation with the government fiscal policy is highlighted. The Bank of Albania estimates that
like in the past years, even in 2005, the country's economic development will be in conformity with the
overall development program objectives. The last developments of the banking system consolidate the
optimism that it will fulfil to the best of its knowledge the role of financial intermediation in the
economy. We deem that its consolidation will continue with accelerated rhythms throughout this year,
providing to the large public more credits, more services and more security in the savings conduct.