The capital adequacy ratio followed a downward trend, even though it remains clearly above the minimum level required by the regulatory framework. Analysis of resilience to various shocks and risks indicates that credit risk is the primary source of banking sector risk. Furthermore, the banking system is more protected from direct market risks, but it continues to be exposed to the effect, on credit quality, of undesirable exchange rate and interest rates fluctuations. Therefore, in its supervisory capacity, the Bank of Albania requested commercial banks to timely and properly identify non-performing loans, establish relevant reserve funds and take determined action to recover loans through execution of collateral. These actions, combined with reduced operational costs, would establish gradually the conditions for a positive and stable financial position, which would support better the banking sector’s need for capital. In a shorter term, the Bank of Albania has requested the banking sector to strengthen activity capitalisation, through increased shareholders capital. The Bank of Albania has oriented and monitored this process closely, so that it takes place in compliance with the development strategy and relevant risks performance. The process to strengthen capitalisation indicators in the banking sector includes creation of adequate capital above the required minimum. The 2  BIS central bankers’ speeches  process continues in line with specifications that the Bank of Albania has discussed and communicated with the banking sector. As a result of this measures, the banking sector would remain stable and establish conditions for its higher contribution to Albania’s economic growth.

Furthermore, the seasonal effect of domestic agriculture production supply was stronger this year, leading to further reduction of food items annual inflation. During 2011, consumer prices in Albania were subject to supply shocks, materialised in high imported prices. This effect was more moderate during July–August and, in the absence of sudden shocks, it is expected to subdue even further in the months ahead. Moreover, second-round effects are contained, under the influence of controlled expectations of economic agents on inflation. The domestic economic setting produced controlled inflationary pressures. Aggregate demand slowdown led to spare capacities of production factors and controlled long-term inflationary pressures on the economy. Therefore, core inflation was 2.9% in July, showing a downward trend, and was close to our inflation target. New economic data obtained in September are scarce. Following our earlier analysis and based on new available information, the Bank of Albania deems that the Albanian economy continued to grow during 2011. Economic activity relied primarily on public spending and exports surge, while the private sector demand had a slow positive performance. Consumption and investments were supported by crediting, but their upsurge is conditioned by hesitation to spend. Following the revised budget, the fiscal behaviour during the last two months is characterised by lower spending pace and lower budget deficit increase. Fiscal stimulus was present in the first quarter, while in the following months the fiscal policy was more contained, which is reflected in lower annual deficit increase.