According to INSTAT data, Albania’s annual economic growth was 3.4% in the first quarter, supported by the fiscal stimulus of this period and foreign demand for Albanian products. On the other side, private consumption and investments continue to be slow, reflecting cautious consumer behaviour and existence of spare production capacities in the economy respectively. The Bank of Albania deems that economic activity posted similar growth even in the second quarter, with higher contribution of the private sector and downward public sector and foreign demand. Consumer prices were under added inflation pressures during 2011 H1, mainly due to foreign price increase in global markets. Average annual inflation during the first and second quarters of the year was 4.0% and 4.1%, respectively. As regards the consumer basket items, prices of processed foodstuffs had the main impact on the formation of annual inflation. Their contribution to headline inflation floated around 55%, close to this indicator’s all-time record. Inflation of non-food consumer goods, such as oil and other day-to-day consumer goods and services, was an added contribution to consumer price hike. On the other hand, the contribution of non-processed foods to inflation was stable. Gradual upsurge of domestic food products supply during the second quarter, balanced the effect of these items price increase in international markets. Lastly, administered prices and increased excise on some products had an increasing impact on annual inflation, albeit lower compared to a year earlier.

The macroeconomic adjustment and rebalancing was unavoidable and was facilitated over time by the real depreciation of the currency. The shocks disproportionally affected overblown sectors (banking and construction), whereas most of the export base remained intact. Much of the impact of the banking collapse hit countries other than Iceland. Another important reason was the policy responses that mitigated the recession and promoted recovery. Let me now turn to those. The policy responses took two main forms: crisis management during the collapse of the banks and the economic programme developed by the Icelandic authorities in co-operation with the IMF. From at least early 2008, the Icelandic authorities were aware of potential foreign currency liquidity problems at the banks and took action by trying to negotiate swap lines and tap foreign capital markets – in both cases, with limited success. Given the lack of international cooperation, the Icelandic authorities were forced to consider radical solutions when the banks failed. Although they were not necessarily articulated in full at the time, these solutions entailed several goals: to preserve a functioning domestic payment system, ring-fence the state in the case of bank failures, limit the socialisation of private sector losses, and create the conditions for rebuilding a domestic banking system. The adopted solution was embedded in the so-called Emergency Act, which was passed by Parliament on 6 October 2008. The Emergency Act saved the domestic operations of the banking system by creating new banks, which involved carving domestic assets and liabilities out of the old, failing banks.