the first seven months of the year, being characterised by rapid increase of public expenditure and direct or indirect reduction in some of the taxes. during this period, budget expenditure surged 10. 4 %, whereas budget revenues fell 2. 6 %. this situation was reflected in the budget deficit being 2. 3 times higher than in the same period a year earlier. the deficit expansion supported the aggregate demand in this period ; however, it implies the implementation of a prudent fiscal policy for the rest of the year, under the conditions that space for borrowing in the second half of the year is exhausted. the easing monetary policy, lower demand for borrowing by the public sector, and good liquidity situation in the banking sector have contributed to further cutting of interest rates in july and august. in particular, the interest rate cut was more noticeable on government securities and deposits in lek and less on loans in lek. this development continues to point to bis central bankers ’ speeches the presence of relatively high risk premia in the financial market and illustrates also the conservative lending policies applied by banks. similarly to the experience of many other economies, it reveals that the complete transmission of the eased monetary policy to better lending terms for the private sector remains problematic. on the other hand, the private sector demonstrates elastic demand against the relatively low credit cost, hence dampening the transmission of the monetary stimulus to the economy. under these circumstances, credit expansion to the economy continued to mark low growth rates. as at the end of the second quarter, credit to the economy stood 0. 9 % higher than in the same period a year earlier. in addition to the weak economic activity, the economic agents ’ perception of uncertainty continues to slacken the private sector ’ s demand for credit. nonetheless, in june, the private sector credit recovered slightly, compared to the previous two months. as at end - june, the m3 aggregate was up 4. 5 %, in annual terms. looking ahead, the bank of albania deems that the drivers of economic growth remain weak and uncertain. in particular, private investment and consumption suffer from uncertainties and reluctance of households and business to undertake long - term commitments. furthermore, lending terms, both at home and abroad, remain relatively tight, hence discouraging credit and investment. the performance of these components will determine the economic outlook in the future. in a medium - term horizon, the baseline scenario of expected developments is characterised by weak and below - potential economic growth – in line with the one noted over

capital ) recognize that basel ii does not take into consideration some forms of unexpected losses, for example, higher charge - offs that occur when new products are introduced, information technology systems change, merger integrations occur, and internal control processes occasionally prove ineffective. implementation efforts in the united states the u. s. banking agencies'reaction to the results of the fourth quantitative impact study - known as qis4 - shows how seriously we are taking basel ii implementation. in a statement issued on april 29, the u. s. banking agencies indicated that the minimum regulatory capital changes resulting from qis4 were more variable across institutions and capital dropped more in the aggregate than the agencies had expected. this was the impetus for deciding to delay issuance of our next round of proposals for basel ii. these unexpected results show the continued benefit of conducting periodic quantitative impact studies. they serve as a milestone to help us calibrate the progress of the framework and the bankers as we move to basel ii. we now must determine the reasons for the unexpected results from qis4. do they reflect actual differences in risk among respondents when prior supervisory information suggested more similarity in credit quality? none of the participating banks has completed their databases and models for all of their risk areas. in some cases, this created results that would not be reliable for implementing basel ii. for example, for some portfolios, expected losses reflected only the last year or two of results. thus, the strong credit performance of recent experience was not balanced by higher losses at other points of the credit cycle. were there limits of the qis4 exercise itself? is there a possible need for adjustments to the basel framework itself? analyzing the data used in qis4 is vitally important, because ultimately the success of basel ii will depend on the quantity and quality of data that banks have to use as inputs to the framework. i am sure that those of you working on basel ii - particularly the advanced approaches - are facing the same types of issues in your own countries. for those of you who will be conducting qis5 or similar exercises, i strongly suggest that you include qualitative responses from the participants as well as quantitative data. we are finding this very useful as we review the results and have follow - on discussions with bankers. u. s. regulators expect to provide additional information on the lessons we learn from the qis4 review in the near future. the notice of proposed rulemaking for basel ii will incorporate what we learn from this exercise.