PRESS RELEASE - Speech by Ardian Fullani Governor of the Bank of Albania,
During the presentation on the Albania’s economic developments and future challenges, organized by Citigroup London, International Financial Services and the Albanian Embassy in United Kingdom. 18 May 2009

Dear Ladies and Gentlemen!

Let me please begin by giving my thanks to the Albanian Embassy here in London for organizing this event. It is a pleasure to brief you today on the current Albanian trends and developments. Occasions of this kind are important events to match the opportunities offered by an emerging economy with the desire for higher returns of the leading developed countries.

Our macroeconomic progress during the recent years, the sound banking system and our commitment to increase its efficiency are the strengths we bring you today. The sound economic and stable financial situation is achieved via a modern, forward looking approach to monetary management and a responsible fiscal policy.

The macroeconomic success shows the ability of the Albanian authorities to identify priorities in a timely manner and choose to implement sound economic and social reforms. As an outcome, for the first time in 2007, Albania received an independent evaluation of the sovereign risk profile of the country. Moody's sovereign rating assigned Albania B+, which remained unchanged for the year 2008.

In the last couple of years the country has achieved remarkable progress with regard to the business environment. Several data support this conclusion. However I would like to refer to the World Bank Cost of Doing Business Survey which indicates a significant improvement from a rank of 135 to a rank of 86.

At the end of 2007, the Albanian public debt denominated in national currency was for the first time traded in international financial markets.

In the recent years Albania has achieved considerable improvement in the fiscal and monetary management of the country. The application of the 10% flat tax was followed by an impressive boost in tax collection.

Recent legislative improvements have contributed to a better business environment. Some of the most distinguished developments can be listed as follows: simplified taxation system; easier and less expensive tax procedures; better infrastructure for settling tax disputes; introduction of e-tax procedures, reduction of the contribution of social insurance.

It is worth mentioning that a new draft law on the resolution of administrative disputes in the Republic of Albania is in discussion. The law will set up administrative courts that will have substantial competence to adjudicate on decisions issued by the Albanian fiscal authorities.

The integration process has moved forward with two very important events. Albania officially became a NATO member in early April 2009, in the Strasbourg summit, and a few weeks later the official application for the EU candidate status was submitted to the Czech Presidency.

Placed in a very strategic geographical position, recently Albania has become a principal economic, political, and stability factor in the region. Defined by these geo-political considerations we are the linking bridge to the South-East Europe.

The Albanian economy has achieved robust non-inflationary growth during the last decade. Growth is supported by the domestic demand and fuelled by credit expansion.

In general, the country has managed to keep prices under control without sacrificing the growth or its financial stability. The annual economic growth during the last years has been around 6%. Economic activity has increased sufficiently to meet rapidly the growing demand. This has helped to keep price developments under control and inflation expectations well anchored around the Bank of Albania inflation objective. Our target for headline inflation specified as 3% ±1 has been achieved successfully.

Headline CPI inflation has fluctuated around 3% at the end of 2008. Despite e moderate depreciation of the exchange rate during the first months of 2009, inflation pressures have subsided in response to the recent developments in the international markets and economic contraction in our main trade partners as well as a slowdown of economic activity in the country. However, our estimations indicate that inflation broadly will remain within the tolerance zone during the next 12 months.

Our country has achieved constant fiscal consolidation in the past years. The IMF presence has been an important external anchor imposing financial discipline. However due to current ambitious plans to revitalize the road infrastructure, capital expenditures grew contributing to the enlargement of the fiscal deficit in 2008.

The recent increase in infrastructure projects has been financed among other by the incomes realized from the privatization of institutional sectors. This has contributed to keeping the size of government public debt at around 55% of GDP, reasonable by Maastricht criteria's point of view.

The exchange rate of domestic currency is decided freely in the foreign exchange market. The Bank of Albania believes that the free floating regime is an important element of the adjustment process of the potential macroeconomic imbalances.

The Lek has been stable since early 2000s. Moreover it has exhibited a slight and persistent trend of appreciation due to productivity gains and persistent increasing remittances. The exchange rate volatility has decreased continuously since 1998.

However recent development trends, mainly in the foreign sector (reduced remittances and temporary widening of the current account deficit), contributed to the depreciation of Lek. Nominal effective exchange rate lost around 6 percent of its value until the end of April 2009. This depreciation is moderate compared to experiences of other CEE or SEE countries.

Balance of payments data confirm increased confidence in the Albanian economy, mainly reflected in the boom of Foreign Direct Investments which reached to 6 percent of GDP in 2008.

Current monetary policy framework can be considered as an implicit inflation targeting setup and is managed by indirect instruments of monetary policy. Monetary policy signals are transmitted via the decisions of the Supervisory Council of the Bank of Albania for the base rate of the weekly repurchase agreements and continuous communication.

Our natural resources and cheap but qualified labour force continue to be attractive for all European entrepreneurs who want to explore the benefits of globalization. The base of exports ranges from agricultural products to minerals. Albania offers investment opportunities in mining, agriculture, energy, infrastructure and tourism. At the same time, the food processing industry is already experiencing a satisfactory development and provides plenty of room for increased activity. Opportunities in the energy sector range from building new sources to improving the distribution network.

Meanwhile, Albania's strategic focus towards the improvement of its transportation infrastructure calls for an increased public-private participation in building new roads and ports. Of course, as I mentioned above, Albania offers outstanding opportunities for investing in coastal, alpine, historical and cultural tourism due to its Mediterranean location, rich ethnographic heritage as well as its variable climate and geology.

The business culture is very adaptive. English is a well spoken language among young generation. Albanians like to invest in their education. There is a fresh supply of bright qualified young professionals educated in UK and other European universities. They have developed western style working habits with their education and are viable factors in your quest to expand in the Balkan region.

I mentioned the region on purpose. Albania is not the lonely and isolated island of ridiculous economic experiments anymore. During the last two decades it has transformed itself into a flexible and competitive free market, open to the modern developments of globalization. It has learned to position itself accordingly, and benefit from international developments in the region. Albania is geographically located in a key east-west intersection.

Speaking of the financial system our goal is to maintain a sound, liquid and profitable one. At the end of 2008, the Albanian banking system consists of 16 private banks. Privatization of the banking system ended 5 years ago with the privatization of the Savings Bank by Raiffeisen Bank. After the privatization of Savings Bank in 2004, the percentage of private-owned banks increased to 100% and over 90% of the shareholder capital is foreign-owned.

During the recent years, the credit extended by the banks to the private sector and individuals has increased substantially. This of course has been a factor in support of the economic growth and investments in the country.

The banking sector stands at the forefront of the foreign direct investment and integration process. It represents one of the most successful investment opportunities in Albania and has greatly benefited from the presence of some of the biggest financial groups in Europe. My reference to integration does not refer only to the presence of foreign capital, but also to the capacity of the banking system to intermediate and complement European initiatives and investments in the Albanian economy. These banks have the necessary reputation, ability and infrastructure to serve as partners for foreign investors.

Yet, the banking system alone is necessary but not a sufficient condition to promote economic prosperity and distribute resources to the best possible uses.

The distribution of the financial market in Albania is skewed toward universal commercial banks. The likes of mutual funds, hedge funds, pension funds and investment banks are inexistent.

The Bank of Albania and other financial market authorities are pushing to create the right incentives to promote investments in these segments. We believe that our financial system market has not yet exceeded all opportunities. Taking advantage of this event, I would like to invite the British companies to include Albania into their investment map.

Dear ladies and gentlemen,

Global developments have dominated the agenda of the decision-makers worldwide. So far our economy has shown admirable resilience. Both macro and financial stability are in place and the banking system remains liquid.

However the effects of the international financial crisis have appeared in the Albanian economy since the last quarter of 2008. The first consequence was the deposit withdrawal reflecting the free fall of public confidence in the banking system. Limited understanding of the real problems, reinforced by calls from emigrant relatives in Italy and Greece which instigated some degree of panic among the public are believed to be the main causes behind the deposit withdrawals in mid-October 2008.

Another apparent consequence has to do with the reduction of foreign exchange inflows, in the form of remittances and exports of goods and services tightening the overall financial conditions in economy and consequently putting pressures on foreign exchange rate.

At this point the Bank of Albania started to evaluate the situation in order to prepare for second round effects that would come as a consequence of liquidity constraints and the world while in economic recession. The Bank of Albania has been communicating its concerns regarding the indirect impact of the financial crisis, pointing out potential second round effects that will become stronger during 2009:

• We expect that liquidity constraints will slow down credit growth and economic growth.
• The expected slowdown of our exports as well as a decrease in the prices of commodities will widen the trade deficit. In addition, further contraction of remittances will also contribute to an increase in the current account deficit.
• However we believe the free floating exchange rate regime will provide an effective tool for adjusting consumption and therefore imports.
• The Bank of Albania will not intervene to fix any price in the market. As always, the central bank will try to avoid any sharp and significant market distortion.
• The fiscal deficit is expected to increase due to an expected negative impact of economic activity on government revenues and their financing due to limited liquidity in domestic and international markets.
• Our analyses indicate that economic activity will slow down significantly, however it will remain positive.
• Stress tests show that due to a slowdown in economic activity and the observed exchange rate depreciation, as well as the statistical effect of slower credit expansion, further deterioration of the loan portfolio quality is expected. However, this will remain within manageable limits and is not expected to pose serious threats to financial stability.

As a main conclusion, the Bank of Albania short-term objective clearly shifted toward preserving stability and minimizing second round effects without completely losing sight of inflation developments, which were however on the lower side.

Dear participants,

The year ahead will be a difficult one. Many challenges lie ahead. The mixture of the financial crisis with the world while in economic recession is an unprecedented event. My country, Albania, is part of this global picture as well. So far we have managed to maintain both macroeconomic and financial stability. We will remain committed to preserving these achievements.

Thank you for your attention. I will be happy to take questions.