In light of the poor consumption and investment levels, which have reflected in the decline of imports by 8.1% during this period, this tendency has improved the external position of the Albanian economy further. BIS central bankers’ speeches  1  Albania’s trade deficit shrank 32.5% in January. The developments in the external sector of the Albanian economy reflected in improved foreign currency demand and supply ratios, contributing, in turn, to a stable exchange rate. The Albanian government pursued an accommodating fiscal policy in the first two months of 2013, expressed in the increase of public expenditure and widening budget deficit. Budget expenditure increased at an annualised rate of 1.3% in January and February. This increase was reflected in both current and capital expenditure. Amidst the sluggish economy, budget revenues continued to contract, registering an annualised fall of 0.8% over the months under review. This performance of public expenditure and revenues increased the fiscal deficit by about 5.1%. Reflecting upon the expected economic and financial developments, the Bank of Albania has been pursuing a stimulating monetary policy. Through the constant key rate cuts and liquidity injections into the banking market, the Bank of Albania has aimed at ensuring more appropriate monetary conditions to meet its inflation target in the medium-term period. The financial market evidences low liquidity and inflation pressures, which, in turn, have enabled the pass-through of monetary easing into the money and primary market.

Aggregate demand, in particular, remains sluggish and insufficient to generate full utilisation of production capacities, hence exerting no pressures on producer prices, profit margins and, consequently, the final prices of goods and services. As we have constantly pointed out, below-potential economic growth is and will remain a key factor driving the low inflation. In parallel, global prices, liquidity situation in the Albanian economy and financial markets, and economic agents’ inflation expectations have not and are not expected to generate strong inflation pressures in the medium-term period. Indirect information on the performance of the Albanian economic activity in the last quarter of 2012 suggests sluggish growth. Aggregate demand was primarily driven by the higher exports, while the private domestic demand provided positive, albeit low, contribution. On the other hand, public sector expenditure shrank, hence making a negative contribution to the growth of aggregate demand. There is scarce information on economic developments during the first quarter of 2013. However, the analysis of available indirect data suggests that aggregate demand remains sluggish and economic growth below potential. Economic activity has been mostly driven by the external demand and a higher fiscal stimulus, while the contribution of consumption and private investment remains low. The latter continue to suffer from the uncertain outlook, the lower increase in disposable income, the spare production capacities, and the relatively tight lending standards. These factors have been reflected in Albanian households’ increasing propensity to save and businesses’ reluctance to invest. External demand and the favourable weather conditions increased Albanian exports by about 34.6% in January.