GOVERNOR'S STATEMENT
Increase of electrical power and bread prices - possible impacts on inflation and public reaction

The Bank of Albania is watching attentively the recent developments regarding the reaction of the public, public institutions, non-profiting organizations and media against the expected increase of electrical power and bread prices, article bearing a significant weight in the Consumption Price Index basket.

Maintaining the general price level under control and an inflation rate in the interval of 2-4 percent, are the main responsibilities and objectives of the Bank of Albania, being the central bank of the country, and this is the reason why the Bank of Albania is making a public declaration thereof.

The first thing to be noticed is the positive reaction of the public towards the general price increases, a reaction that the Bank of Albania has been expecting for a long time now from the Albanian public, as such positive experiences are already acknowledged in developed economies.

During its campaign against the speculative rise of prices, the Bank of Albania had required apart from other entities, the commitment of the taxation organs in tracing the speculative rise of prices. Contrary to the support shown by the media and non-profiting organizations and the general understanding by the public, the taxation organs were rather reluctant and we had to wait for the recent events of expected price increases to see their commitment.

I. Expected rise of the bread price

The bread and the electrical power are vital articles for Albanians and as such they require proper attention from the public actors who are supported by the taxes and have to serve the public.

In the framework of its transparency with the public and meeting its legal obligations as financial adviser of the government, the Bank of Albania would suggest:

- Competition Protection Agencies should consider the existence of potential monopolies in the import and trade of wheat and flour - they should aim at reducing monopolistic influences and stimulate competition;

- Fiscal bodies should observe the continuous price speculations, even in the case of wheat products; one of the ways would be collecting taxes and impeding price speculations and tax evasion.

- Standard and quality control authorities should pay attention towards the observance of national and international standards of products by verifying the observance of weight standards and real prices, in the case being, the bread.

The Bank of Albania certainly seeks the well-understanding of the whole market actors, state organs and that of the public, as prices in the market economy are set by the market itself and market liberalization reforms are indispensable. However, these reforms have to be combined with the role of the state in protecting its citizens, as well as with policies either already known or anticipated ones in the framework of commitments with international institutions, focusing on Stabilization-Association Agreements with the European Union.

II. Expected rise of the electrical power price

Considering the following points: the status as defined by law of the public companies Albtelecom and KESH (Albanian Electrical Corporation) as limited liability enterprises and market economy-oriented companies;  their monopolistic position in the market and administered pricing in the respective areas; significant impacts on the consumption goods basket, telephone and electrical prices and public reaction, the Bank of Albania believes that these developments, not positive towards inflation, emerged from the slowdown of structural reforms of this last decade and to the abrupt administered rise of prices.

III. Expected impacts on inflation.

In 2003, Albania had the lowest fix line telephony prices compared to the member countries of the European Union. However, their rise in December was quite of a sudden and transparent. The Albtelecom price reforms could have been gradual and not a spontaneous or surprise development on the eve of its privatization. Thus, referring to the INSTAT report "surprising" developments were registered during December in the Consumption Price Index indicator, when Albtelecom decided to increase the telephone prices by 68.8 percent. This gave its impact with a 0.7 percentage point in the monthly increase of the consumption price index. The Bank of Albania became fully aware of this unexpected increase bearing considerable impact on December 2003 inflation. It is rather early to announce the exact figures of inflation rise due to the increase of bread and electrical power prices. Nevertheless, the Bank of Albania believes these impacts are unavoidable and not to be neglected.

From the experience the Bank of Albania has in watching and controlling inflation, our considerations would be: ? --Referring to the rise of the administered electrical power price, we believe that it would give its impacts on two aspects:

The first impact, reflected directly on inflation, is impossible to be estimated as long as the new prices are not officially published, though it is known that the electrical power payment occupies an average of 3.84 percent of its expenses. However, the improvement of CPI calculating methodology since October 2003 is expected to reflect better the impact of the announced increase of electrical power price.

At a second stage, the impact of the increase can be transmitted to the prices of goods and services, where the electrical power constitutes one of the essential elements of their overall cost. This impact is estimated to be transmitted within the first two-three months, once the application of the new prices has started.

On the other side, the Bank of Albania, has always drawn the attention against the invigorated speculative climate during the noisy announcement of expected rise of prices, when prices surge unreasonably from the additional costs the rise generates.

The expected increase of the bread price, which is liberalized a long time ago, is another point of concern to the future inflation. Undoubtedly, it will bear direct impacts on the total inflation. Considering the fact that its consumption occupies only 4.37 percent of the average in the Albanian families' budget, and then the rise of the bread price would have an immediate impact on inflation.