Notwithstanding the positive effects of investment expansion, the domestic demand growth exercises pressure on the overall price rise. In absence of any obvious inflationary pressures on the demand side, it is estimated that the Albanian economy is making use of free capacities without raising the costs and final prices of goods and services. Also, it should be highlighted that part of this domestic demand has been met by rise of imports and trade deficit, thus mitigating the pressure on consumer prices. Supply factors Import prices The Albanian economy is a relatively open economy and therefore, import prices constitute an important element of the country’s inflation. Generally speaking, the economic conditions of trade partner countries of Albania have been favourable during this year, easing the control on supply side pressures and enabling the observance of inflation target. Oil prices Consumer prices during 2006 were influenced by a stressful situation in the interbank oil price market. The impact of this factor, as concerns the intensity of operation in inflation rate, was not uniform, being higher during the first nine months of the year and recording a decline during the last quarter. Exchange rate During 2006 exchange rate developments have dampened inflationary pressures of the supply side. The national currency has been appreciated against the American dollar and has maintained unchanged its position vis-à-vis the euro. The lek’s appreciating tendencies, though weakened in the recent months, have led to the decline of import price in domestic currency.

Although this is a general statement, there may be some truth in it. We, as responsible regulatory authority, recon that over-regulation can kill the initiatives of the financial intermediaries, suppress innovations and market developments. There is, therefore, a clear responsibility for the financial regulators to ensure that financial intermediaries and markets are not over-regulated. It is also understood that regulation should be proactive and supervision should be risk-based and not compliance-based. While these underlying themes are recognized as important elements in financial regulations, it is also significant to note that regulators are compelled to bring in new regulations when market participants are non-compliant, non-cooperative and for not being prudent. This is where market discipline is important in avoiding new regulations. The non-compliance by one important financial intermediary will also lead to all other institutions being subject to regulations to avoid discrimination. In this respect we are democratic and fair. Sri Lanka’s financial regulatory environment There are 3 main financial regulators in Sri Lanka. They are the Central Bank of Sri Lanka, the Securities and Exchange Commission (SEC) and the Insurance Board of Sri Lanka (IBSL). The Registrar of Companies which registers banking and financial institutions is also seen as a regulator but not as a supervisory body. The Central Bank as the apex regulatory authority regulates and supervises about 70% of the financial sector. The IBSL regulates and supervises around 11% of financial institutions, mainly the insurance companies and SEC accounts for about 4% of the system, basically the capital market institutions.