In a longer-term horizon, this is undoubtedly positive. First, it guarantees the health of individual household balances, and second, it creates a sufficient fund of financial savings to boost credit and investments in the country. In a shorter-term horizon, it induces lack of demand and makes economic growth difficult. On the other hand, the Albanian business learned that the domestic market has limited abilities to generate a sustainable economic growth. As a consequence, it is showing a rising interest to industry and agriculture, as sectors that have a better development perspective and a larger market. The above-mentioned situation has important implications for the country’s development pace and macroeconomic policies. First, it implies that the country’s economic growth potential is lower in the medium term. In other words, the transfer of financial and human resources across sectors, acquisition of technologies and modern business practices, as well as exploration of foreign market penetration, need time and determine the economic growth rate. Moreover, this development is faced with an unfavourable external environment, relatively high cost of funds and lack of domestic demand. Recovery of previous development paces takes time. Second, the higher propensity to save and increased risk premia restrict the ability of monetary policy to generate additional demand in the economy by lowering the key interest rate. Global economic developments are optimistic. The euro area and the European currency appear more consolidated due to the ECB’s contribution and nation-wide efforts for fiscal consolidation. However, the optimism is fragile.

For example, the foreign investor’s total holding of Government securities reduced from K1,054.7 billion in the third quarter of 2008 to K446.2 billion by the second quarter of 2009. Similarly, the flow of foreign investments at the Lusaka Stock Exchange switched from a net inflow of $ million during the period January to May 2008 to a net outflow of $ million in the similar period this year. Exchange rate volatility and domestic inflation The global financial meltdown caused a contagion effect to our foreign exchange market and led to volatility in the exchange rate of the Kwacha against major currencies. This unfavourable development was partly a consequence of reduced earnings from copper exports arising from the fall in copper prices as reflected in the lower supply of foreign exchange on the market by mining companies. For instance, the supply of foreign exchange to the market by mining companies declined by 35.7% to a monthly average of US $ million in the first half of this year from an average of US $ million in the last half of 2008. In addition, the weakness of the local currency was a consequence of increased risk aversion to emerging and developing economy financial assets, as stated earlier, attributed to the deepening global financial crisis. In this regard, the supply of foreign exchange by foreign portfolio investors for the purchases of Kwacha financial assets, such as Government securities and domestic company equities, declined significantly, with most non-residents preferring to liquidate their investments and externalising the foreign exchange.