Today, however, the economy is still operating below full capacity, which limits inflationary pressures and is consistent with monetary policy remaining significantly expansionary. Nonetheless, as output gaps close, inflationary pressures will be incubated which must be contained in time in order to ensure that annual inflation will stand at 3% over the two-year policy horizon. Hence, the Board estimates that achieving the inflation target in the projection horizon requires, as has been said in recent months, a progressive normalization of the current significant monetary stimulus. As a working assumption, the baseline scenario estimates that the level of the MPR one year ahead will be similar to the one inferred from private expectations. In the long term, it will converge to its neutral level (figure 8). As usual, the outlined scenario is subject to several risks. Internally, the greatest risks come from domestic expenditure. The baseline scenario considers that a significant part of its current strong expansion is temporary. However, there is a risk that said strength is largely the response to stimulative macroeconomic conditions, which would mean that the downturn foreseen in the second half of this year may not occur, speeding the closing of output gaps. The medium-term impact on aggregate demand of reconstruction works and the funding thereof will have to be assessed continually. In the immediate term, April data and the reaction of economic sectors to the earthquake and tsunami reduces the possibility of a generalized delay in the economic recovery.

With the support provided through expertise and funds, the agreed programme with the IMF has aimed at drawing up an appropriate monetary and fiscal policy mix, correcting fiscal imbalances, improving the balance sheets of economic agents, and implementing an ambitious structural reforms programme, to support the long-term development of Albania. The Bank of Albania assesses that the Arrangement has achieved its major objectives: correcting structural imbalances and setting the country on a steadier path to longterm development. Economic growth has been improving in the recent years, driven – among others – by the combination of the monetary stimulus and fiscal consolidation, reduction of risk premiums in the economy and improvement of the balance sheets in the real sector of the economy. From a longer-term perspective, the structural reforms and the improved business climate should open the way for faster, more balanced and stable growth. In addition, excluding the effects of supply-side shocks, inflation has trended upward recently. The improvement of economic activity, implementation of a prudent monetary policy and a better anchoring of inflation expectations render us confident for the stable return of inflation to our 3% target. Lastly, Albania has made notable progress with regard to strengthening other economic and financial equilibriums. Safety nets in the financial system have been strengthened. The institutional framework that shapes the coordination, design and implementation of measures for safeguarding financial stability has been improved. The legal framework that disciplines contract enforcement has been improved.