According to assessments made by the Bank of Albania, there exist some long-term factors whose operation has influenced on appreciating the Lek’s value: •  Constant consolidation of the country’s economic stability. •  Interest rate spread between the Lek and the foreign currencies. •  Consolidation of public finances and budget deficit, dictating a low government demand for monetary assets. •  Stable remittances by Albanian emigrants working abroad. In the meantime, during 2004 the exchange rate performance was also impacted by specific factors of the year. Specific factors relate to starting of tourism earlier than in the previous years, rise of agricultural produce and decline of demand for agricultural merchandise imports, impacting on the supply and demand for foreign currency in terms of the Lek appreciation. Also, the international foreign exchange market developments are reflected in our foreign exchange market. The euro appreciation versus the dollar over more than a year is reflected in the reduction of the dollar’s value even in our country, though no strengthening of the euro is observed. During 2004, the dollar was depreciated by 7.5 percent against the euro in the international market. During 2004, the Bank of Albania intervened in the foreign exchange market in terms of purchasing foreign currency, in an effort to prevent large exchange rate fluctuations reflected mainly during the summer and end-year period. Financial markets Growth of deposits in Lek, in the presence of a low government demand for monetary assets, created premises for increasing banks’ liquidity and extending interbank market activity.

Low inflation rates made real interest rates rest close to historical levels, regardless of nominal interest rate cut. This has impacted on maintaining high annual growth rates for time deposits in Lek. The main features of money market over 2004 were the market activity intensification and interest rate cut. 2004 recorded rise of weekly and monthly interbank transactions. Under the impact of easing monetary policy, the interest rates in all markets continued the downward trend of the previous year, reaching the minimum historical levels at end of 2004. Besides the easing monetary policy of the Bank of Albania, these trends have also reflected the enhancement of competition in the banking system, due to the Savings Bank’s privatization. The banks’ supply to invest in government Treasury bills has been larger than the amount issued in the primary market, being reflected in pressures for constant yield cut. Therefore, the Treasury bills yield gradually dropped during 2004, reaching the lowest historical levels at end of the year. 2004 testified a strengthening of banking system interest in investing in longer-term securities, such as two-year bonds. The weight of two-year bonds in the securities portfolio of the banking system rose to 6.1 percent over 2004, from 2.4 percent at end of 2003; whereas that of quarterly Treasury bills dropped from 9.2 to 2.8 percent. Albanian authorities aim at capitalizing this positive development of financial market in terms of further increasing the maturity term and structure of domestic public debt.