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. until august, public spending posted annual growth of 5. 2 % in annual terms, while revenues slowed down, growing only by 2. 2 %. budget deficit was all 30. 6 billion as at end - august. foreign demand continues to support albanians economic growth. exports ’ annual growth was 28. 8 % in july. on the other hand, imports continued their downturn trend that had bis central bankers ’ speeches started in the second quarter of the year, increasing by 4. 6 % in annual terms. export uptrend and import slowdown materialised in narrowed trade deficit in july, contracting by 6. 0 % yearon - year. however, the economy ’ s external position remains a structural weakness of the albanian economy, which reflects the need for higher competitiveness of our products in global markets and conditions the effectiveness of stimulating macroeconomic policies. indirect indicators analysis of private consumption reveals its moderate performance. consumption continues to suffer from perceived uncertainty by albanian families, leading to higher saving although aggregate revenues increased. private investment slowed down in this period, but it retained positive growth rates. this is supported by good performance of foreign direct investments, up by 38 % during the second quarter, and higher import of capital goods, which suggest higher private investment in the economy. nonetheless, this hike is conditioned by the fact that many businesses are operating below their production capacities, limiting their needs for new investments. monetary inflationary pressures remain controlled in the medium run. annual growth of money supply, m3, which resulted 11. 2 % in july, retained the average rates recorded last year. money demand was affected by a moderate upward private sector demand for funding. lending to private sector increased by 12. 5 % in july, triggered by the relatively stable increase of lending to private businesses and resurgence of lending to households. although the banking system has eased lending standards, the bank of albania deems that there is still room for further easing, especially as regards credit for private investments. developments in financial markets indicate downward risk premiums and liquidity. in the interbank market, trade volume expanded

further and interest rates dropped, remaining close to the key rate and displaying low volatility. moderate government demand for funding is reflected in refrained upward trend of government bill yields in the primary market. additionally, the yields trend retained its trajectory, showing low inflation expectations by financial market agents. at the end of h1 2011, the situation of the financial system and banking sector was stable. the banking sector, expanded its activity and broadened its share in the country ’ s economy. liquidity situation is good while the deposits by the public increased at satisfactory rates ; they cover more than once the value of credits and borrowing from non - residents is low. data indicate that lending growth rate is improving, but the credit portfolio quality continued to drop. the banking sector retains stable growth rates of net interests revenue and gross operational profit. however, tightened capital requirement to cover credit risk, led to lower net financial results of the banking sector compared to a year earlier. however, financial performance continues to be positive and concentrated. 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 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. our assessments on economic outlook suggest a