These foreign trade developments materialised in deepened trade deficit during this period, resulting in 19.5% year-on-year. Overall, balance of payments developments confirm the frailty of Albanian economy’s external position. Current account deficit, estimated at 11.8% of the GDP in the first quarter, remains high. The Bank of Albania has constantly underlined the need for taking measures to reduce it and ensuring sustainable funding sources by attracting capital inflows, in the form of foreign direct investments. Balance of payment developments were reflected in a relatively stable exchange rate. Under the conditions of a balancing demand and supply, the domestic currency demonstrated stability, slightly depreciating in effective and nominal terms in May. Future exchange rate performance will be conditioned significantly by external economy balances and individuals’ preferences for their financial asset portfolio structure. Public sector expenditures were an important stimulus of economic activity during the first months of the year. In January–May, these expenditures were up by 10.3% year-on-year, while decelerated fiscal income reflected the private sector’s low demand. These developments were reflected in the budget deficit of about 1.7 times higher compared to a year earlier. Expenditure growth slowed down during the second quarter. This behaviour is expected to continue for the rest of the year, conditioned by the commitment to respect the 2011 deficit and public debt target. This fiscal policy approach is expected to be formalised in the July budget revision, which should take into consideration the public debt’s long-term stability.

Inflation’s performance over the recent months was consequent to the balance of two main factors’ opposite actions. On the upward trend, high primary commodity and raw materials prices in world markets were transmitted to the domestic inflation in the form of higher imported inflation. In the short run, this phenomenon also contributed to core inflation, which was up compared with last year. High net inflation rate of non-tradable goods showed that a part of higher commodity prices materialised in second round effects in inflation. Latest developments in inflation affected also the economic agents’ inflation expectation, which, however, remain within the target band of the Bank of Albania. On the downward trend, domestic economy developments continued to provide an environment with contained inflationary pressures. Our assessments on economic activity suggest positive growth rates for the first quarter, although below the potential. Under these circumstances, the Albanian economy continued to be characterised by spare productivity capacities – labour and capital – and negative output gap, continuing to exercise downward pressures on inflation. Similarly, the monetary development analysis confirmed the presence of contained monetary pressures on the domestic economy. Following, I would like to address the economic factors that determined inflation developments and their expected performance. Albania’s economic activity, during the first months of the year, took place in the context of a growing global economy, amid increasing inflation pressures and added uncertainty in financial markets. Global economic activity continued to grow during the first half of 2011, led by rapid expansion of demand in emerging economies.