PRESS RELEASE
Meeting of the Supervisory Council of November 4, 2004

The Supervisory Council of the Bank of Albania, in its meeting held on November 4, 2004, after reviewing the proposals of some departments, decided to approve the following:

1. Bank of Albania's view "On the economy situation during the third quarter of 2004"

Governor's speech

After a first quarter somewhat "sluggish", the Albanian economy has experienced a recovered pulse of economic growth in the following months of 2004. The economic growth is performed in respect of maintaining and consolidating the country's macroeconomic stability. The nine-month period of the year was characterized by an inflation rate meeting the Bank of Albania target, creating the appropriate premises towards further adaptability of the monetary policy followed by the Bank of Albania. This policy is backed also by developments in the monetary indicators where it is worthy mentioning, inter alia, channeling of currency in the system, liquidity stability, interest rates, etc. Furthermore, even the fiscal indicators reflected generally a satisfactory performance within the programmed framework. Incomes, expenditures and budget deficit have been performed according to the schedule planned at the beginning of the year, whereas the balance of payments was stable and unemployment slightly declined.

Based on the data we dispose of, an economic invigoration was noticed mostly in the second quarter in the sectors such as industry, services, and particularly in the construction sector, after a slow performance of this sector in the first quarter. The volume of sales increased by 19.6 percent during the second quarter compared to the first quarter of the year and by 4.4 percent compared to the same period of the previous year.

In the meantime, even the agriculture sector experienced optimistic developments, reinforcing the confidence that the initial forecasts on the annual growth of this sector are possible to be realized. Likewise, transversal indicators suggest a growth in the economic activity. The consumption of electric energy by the non-households increased by 15 percent during the first semester of the year compared to the same period of the previous year, whereas lending to the economy marked a rapid growth during 2004.

According to the economy sectors performed up to now we may say that in the following months of 2004 the economic growth of 6 percent shall be, as projected, an attainable goal.

During the first half of 2004, the volume of current transactions in Albania was higher than a year ago. The current account balance sheet recorded a value of USD 208 million or about -5.4 percent of GDP, remaining almost on the same levels as the previous year. The capital and financial account recorded net capital inflows estimated at USD 266.5 million, thus closing the first semester of the year by a capital inflow significantly higher than a year ago. The foreign currency inflows through current and capital transactions increased the net foreign reserve instruments by USD 132 million.

The third quarter was characterized by low inflationary pressures. The inflation rate has dropped gradually, within the two-to-four percent targeted range, at the end of the third quarter. The average annual inflation has declined as well, reaching 3.1 percent as of September. The increase of domestic agricultural products impacted significantly the consumer price performance during this period. This makes the rising demand during the summer period be supplied with domestic products, offering generally lower prices than those of imports. As a consequence, unlike the previous years, the contribution of "Food and non-alcoholic beverages" group in total inflation was negative during the third quarter. The impact of oil price rise in the international markets has been relatively weak towards the inflation rate because of the insignificant weight this article has in the consumer price basket and Lek appreciation. The general macroeconomic conditions: monetary situation, economy demand and fiscal situation have been kept under control, contributing positively to the maintenance of price stability. Liquidity situation has been stable, interest rates, though being dropped, have continued to influence the increase of Lek deposits and channeling of currency in the banking system. On the other hand, the moderate increase of money supply has satisfied at best the rising demand for money, a seasonal specificity featuring this period.

Like the preceding part of the year, Bank of Albania monetary policy showed an easing trend during the third quarter. A moderate inflation rate and optimistic forecasts on it have suggested a further reduction of the base interest rate. In response to these developments, the Bank of Albania has cut the base interest rate by 0.25 percentage point as on July 28. The cut was made in compliance with the well-known policy of Bank of Albania to maintain the economy at lowest level of interest rates, being consistent with the target of price stability for a mid-term period. After this reduction, the base interest rate has reached 5.5 percent, the lowest one ever applied in the Albanian economy.

Though nominal interest rates were reduced, the low inflation rate and stability of inflationary expectations of the economy on it, made the real interest rate be rather higher, maintaining the savings deposit interest in the banking system. As a consequence, liquidity structure continued to move towards long-term monetary assets: deposits and Treasury bills. The deposits channeling in the system raises the economy potential for domestic investments, for lending to the economy and for financing of the bugdet deficit. The attractiveness of interest rates in Lek in comparison with those in foreign currency, alongside a rising supply of the foreign currency during the summer period, has exerted pressures on Lek appreciation. The third quarter marked a strengthening of the appreciation pressures against the Lek exchange rate, mainly due to big inflows of the foreign currency during that period. Under these conditions, the Bank of Albania has intermediated in the foreign market through purchasing the foreign currency, withdrawing its excess of supply and injecting Lek liquidity.

The Bank of Albania intermediation in the foreign market brought about the injection of liquidity in huge quantities in the economy and along with the foreign currency inflows have impacted a higher increase of money supply. This increase of supply has satisfied the demand of the economy for monetary assets. The demand of the government for monetary assets has continued to be covered almost totally by the domestic financing through Treasury bills and government bonds.

In the meantime, the financing of the production sector of the economy was characterized by a rapid growth during 2004. Lending to the economy against GDP has recorded a growth on a continuous basis, reflecting a higher commitment of savings to the financing of the economic activity. At the end of August 2004, the credit balance amounted to Lek 60.9 billion (7.3 percent of GDP). Also, an increase of the number of banks engaged in the lending market is particularly frequent. In the meantime, following the latest developments accomplished in the banking system, adequate conditions were established for a significant invigoration of the crediting to the economy by the banking system.

The developments accomplished up to now in the country's economy brought about rather positive expectations for 2004 and behind. The main targets on the development of the country for 2004 seem to be met in accordance with the provisions of the mid-term programme of the country's economic development. Under these conditions, estimating particularly the actual and expected developments on inflation, the Bank of Albania deems appropriate to ease on a continuous basis the monetary policy, that is to ensure a great support for fostering the economic activity.

2. Cutting the interest rate of the repurchase agreements and reverse repurchase agreements

The Supervisory Council of the Bank of Albania, in its meeting held on November 4, 2004, decided to cut the base interest rate by 0.25 percentage point. After this change, the interest rate to be applied to weekly auctions of repurchase agreements (Repo) shall be 5.25 percent. This rate constitutes a new historical minimum of the base interest rate in Albania. Cutting of the base interest rate was decided after a general analysis on the Albanian economic situation and, particularly, on the inflation indicators. The Albanian economy has shown significant progress of the economic growth and improvement of the employment indicators, after a first quarter somewhat slow. The economic growth is performed under the conditions of a general macroeconomic stability: bugdet deficit, current account deficit and monetary indicators have been stable during that period. Also, inflation was on moderate levels during 2004, approaching to the minimum limit of the Bank of Albanian targeted range during the last quarter. The Bank of Albania forecasts show that inflation will be slow even in the following period.
Analysis on the monetary conditions in the economy showed that there were spaces for a further easing monetary policy. This policy is consistent with the one followed up to now by the Bank of Albania, whose objective was always the maintenance of the most appropriate monetary conditions that are in compliance with the inflating targeting. Further reduction of the Lek borrowing cost in the economy will encourage the Lek crediting, will impact the reduction of the public debt service cost and will ease the Lek appreciation pressures. Also, such a step will have positive impacts on the increase of the demand of economy.

3. In this meeting some other decisions related to the Bank of Albania activity have been examined and approved.