Speech by Mr.Shkëlqim Cani, Governor of the Bank of Albania, at the Parliament of the Republic of Albania

Publication date: 09.12.2002


Honorable deputies,

The Bank of Albania, since some years ago and onward, submits reports to the Parliament. This reporting is carried out in pursuance of the Bank of Albania legal obligation to be accountable to the Parliament and in pursuance of the Bank's obligations to enhance transparency and reliability. In this framework, today I am going to report to you on the performing of duties required by Law "On the Bank of Albania" The duties of a central bank are numerous and everything it carries out in the favor of the country's economic development is useful. However, today I am going to treat some of the essential duties of the institution I govern.


You have noted this target continuously in the Bank of Albania reports and in my presentations as the Governor. I should emphasize that this target constitutes the main duty of the Bank of Albania and the main element being taken into account while assessing the results of this institution. Any other duty, as required by law, is secondary and shall be carried out in the function of the main target.

Inflation target for 2002 was defined in the same levels with that of 2001. Since the year start, at least two main risks were evidenced for the meeting of inflation target:

  • Energy crisis
  • Achievement of economic growth target, especially of agriculture sector.

In 2002 inflation was published on the basis of the new basket of goods, which had changes in the weight and items of constituent groups and included 41 more articles that were not measured previously. These changes created an additional factor impacting on inflation, which is called "seasonal effect" in the Bank of Albania reports. The experience, either from Albania or from the world, indicates that in such moments of changes of real economy indicator measurement, some unusual fluctuations are created. As the time goes by, the measuring gets consistency and normal calculation performance.

In January 2002 the European currency of 12 countries was launched into circulation. It is stated that this phenomenon impacted on increasing inflation of the Euro area countries that represent the main trading partners of Albania. Therefore, in other unchangeable conditions, the inflation imported through the purchase of goods and services from the Euro area was higher.

Other casual factors, such as the deposit withdrawal from two largest banks of the country in spring of this year, the non-realization of income on privatization and the floods of summer and autumn that damaged the agricultural and animal product and shortened the tourism season, were added to factors known from the year start for the pressures they would exert on inflation rise.

At end of November 2002, the CPI reached to 98.91. At annual level, the inflation rate is 4.1 per cent while its average is 5.7 per cent. Generally, during 2002, two groups with the largest weight, the "foodstuff and non-alcoholic beverages" group and the "rent, water, fuels and power" group have impacted on inflation rate performance. However, significant price movements are felt even in other groups, which have impacted on the overall inflation in certain moments.

Factors that impact on inflation rate are classified as factors with positive or negative impact, with a permanent or temporary impact, oriented to demand or supply, immediate or lagging, on speculative or objective basis.

Among permanent factors that act in establishing the monthly inflation rate is the operation of monetary aggregates and particularly of M1 aggregate that is the most liquid one. The high growth that M1 underwent in February - April, reaching to 29 per cent at end of April, impacted on raising inflationary pressures. Following the problematic situation in the banking system over March - May 2002, the M1 aggregate started to stabilize, reducing the pressure on inflation. So, in October the annual growth of M1 aggregate was reduced by 13 percentage points. The October result is in a better level than the programmed one. While the monetary program had forecasted a M1 growth of 22 per cent, at end of October this indicator resulted to 16 per cent.

Other real monetary indicators are approaching to their trend, indicating a smoothing of inflationary pressures. Data of September and October indicate that liquidity is returning into the banking system, and furthermore, its returning paces are accelerated.

Exchange rate, another factor impacting permanently on inflation, has not exerted strong inflationary pressures after the first half of the year. Starting from May, the symmetric exchange rate movement has impacted on balancing the pressures of exchanging Lek against American dollar and Euro to inflation. In November the exchange rate of Lek against dollar reached to 136.9 from 138.6 it was in the previous month. This appreciation of Lek is felt almost over most of November. In this month, compared to November of the other years, Lek against dollar resulted as appreciated.

Almost the opposite has occurred against Euro. In this month, Lek reached a larger depreciation than in November of the previous year. Compared to October, Lek is depreciated slightly (from 136 Lek/Euro that was the average of October to 137 Lek/Euro the average in November). Even the beginning of December speaks for the same performance of exchange rate: depreciation of Lek against Euro and appreciation of Lek against dollar. Such performance is a reflection of developments in international markets and appreciation of Euro against American dollar, especially after the decision of FED to reduce the interest rates in early November.

Budget expenditures have continued to be shrunk during the second half of the year, reflecting not only the absence of banking system liquidity but also the care the Albanian Government is showing to normalize public finances and to meet budget objectives. Inflation performance has been impacted by budget policies. The 10-month plan of budget expenditures is realized to 84 per cent, while the annual realization is at 69 per cent. This has impacted on smoothing the inflationary pressures, particularly starting from April and onwards.

Inflation rate of main trading partner countries of Albania have recorded somewhat higher figures than the expectations, providing impact on imported goods price rise since September. So, inflation in Euro area countries continues to be higher than the forecasting of 2 per cent at annual level, marking a value of 2.2 per cent in November. Both our trading partners, Italy and Greece, result with even higher rates, respectively 2.8 and 3.6 per cent.

Lack of electrical power is another factor that impacts on inflation rate. However, in this year the Government is implementing a more prudent policy for preserving water reserves in order to minimize a grave energy crisis in the forthcoming winter. But, it should be taken into account that the energy crisis of the two latest years has provided its own negative impacts on the production growth, especially on the industrial one, which, in turn, impacts on the price level in economy.

Among the main specific factors operating over this year are:

Favorable political climate, after July of this year, has not impacted on inflation rise in particular and on inflationary pressures in general.

Damages due to floods affected mainly the agricultural sector. The flooded surfaces, as well as damages in stock raising, are estimated to reduce the domestic agricultural product for 2002 and onwards. Therefore, this is regarded as a sufficient indicator, which would impacts on domestic market of country's products, especially in the future. In simple economic words, this is translated into price rise and increased demand for imports of relevant products.

What has the Bank of Albania forecasted until year-end? Generally, December is turned into a critical month for consumer price performance due to speculative price rise, mainly in foodstuffs on the threshold of celebrations. Such performance is assisted even by non-elastic consumer demand. Therefore, the Bank of Albania undertook an awareness campaign to the public, aiming at influencing the reduction of the impact of this element in the market. This campaign was focused on two main directions: (1) cooperation with relevant government institutions for not allowing the turning of market speculation into a prevailing phenomenon and (2) publicity campaign with consumers. The Bank of Albania has assessed that the impact of this negative phenomenon would need at least two years to be diminished because it has been intensified in some years. However, it is evaluated that right from this year the campaign has provided an obvious impact.

This makes us believe that inflation target of 2002 will be met. The monetary aggregate performance has been such that it has smoothed the pressures for inflation rise, due to encountering of the liquidity problems caused by deposit withdrawal and the starting of money returning into the system, at even more satisfactory paces. According to operative data, the most liquid element of money supply has reduced the rate of growth. The deposit interest cutting by system banks, following the base interest cutting by FED and ECB, would lead to further reduction of income on interests of USD deposits. Thus the domestic currency is favored, encouraging increased savings in Lek. The exchange rate performance has been relatively stable and balanced.

On the basis of this scenario it is estimated that inflation rate would result to 3-4 per cent. I should stress that over some years the Bank of Albania has succeeded in achieving inflation target.


The monetary policy is defined in the function of the main target. Given that officially the monetary targeting regime is implemented, the monetary program is compiled by having the annual growth of money supply as its orienting target and the Bank of Albania net domestic assets as quantitative targets. However, the Bank of Albania has advanced further on, laying emphasis on the maintaining of inflation target, so as to enhance its credibility and accountability as an institution. In other words, even if the three above quantitative targets are met, the Bank of Albania does not consider its mission as fulfilled as long as the inflation target is not met.

In 2002, the Bank of Albania adopted a neutral monetary policy initially, and then shifted to tightening monetary policy because of the increased inflationary pressures in economy and the problems in the banking system. The tightening of monetary policy had two goals: to impact on inflation dropping and to encourage the returning of confidence in the banking system, providing increased real deposit interests. So, the Bank of Albania increased the base interest rate by 1.5 percentage points and signaled continuously that the maintaining or further tightening of monetary policy is appropriate.

End of the second quarter indicated the first signs of improved situation. The Banks reacted by increasing interest rates of deposits in Lek, while money started to return slowly into the system. The Bank of Albania interrupted the budget deficit financing, resting to the limit of 5 per cent of average of incomes permitted by law, Lek 6 billion. However, the banking system borrowing from the Bank of Albania continued to pick up and at end of the second quarter it reached to Lek 6 billion.

The improved tendencies of monetary indicators were strengthened over the third quarter. The Lek deposits marked a growth of Lek 4.4 billion during the whole third quarter. According to operative data, at end of October, deposits were practically close to the level of February, prior to deposit withdrawal crisis. The interest of deposits in Lek was increased gradually and continually by about 1.2 percentage points from end of March to end of October, responding to the Bank of Albania interest rise.

Deposits withdrawal and shaking of confidence in the banking system has led to slow increase of money supply over this year. The annual M3 growth rate has been constantly declining over 2002. Starting from April, the real M3 annual growth rate has been below the equilibrium level, approximated by the trend. At end of October the annual growth was 11.5 per cent, getting very close to the programmed level of 10.3 per cent.

This suggests that the level of monetary assets in economy is not a source of inflationary pressures, as long as their real level is under the economy demand. However, the monetary assets are presented as shifted towards those that are more liquid, more easily used as means of transaction. Judging from historical levels, this shifting went on being present over the third quarter and onwards.

Given the liquidity returning into the system, the smoothing of inflationary pressures and the need to support economic growth, under the conditions when economic growth target was reviewed in reduction, following June the Bank of Albania implemented a prudent monetary policy. It held unchanged the base interest rate and the framework of instruments used to inject liquidity into the system. Therefore the Bank of Albania passed once more into a neutral monetary policy position by regarding the scenario of interest rate reduction as unacceptable. The improvement of deposits situation enabled banks to cover the economy demand for monetary assets and to reduce the borrowing from the Bank of Albania. The borrowing of the system from the Bank of Albania declined over this quarter. The injection of liquidity into the system by the Bank of Albania dropped, from Lek 6.6 billion, the maximum level marked in July, to Lek 4.2 billion in September. The improved liquidity position in the system continued even in October and November. At end of November, the lack of liquidity was Lek 1.3 billion from Lek 6.6 billion in July, when the highest level of the banking system need for liquidity was marked.

Money outside banks at end of October was almost Lek 6 billion lower than the figure forecasted in the monetary program. It has been declining during the whole quarter. Compared with June, when money outside banks reached the highest level, Lek 132.7 billion, it was reduced by Lek 5.7 billion. The returning of money into the banking system continued even over November. According to operative data, its level dropped to Lek 125.7 billion, maintaining the same pace of returning into the system with that of four previous months. However, money outside banks has remained the money supply component with the highest rate of annual growth.

Reduction of money outside banks level, commercial banks' borrowing and deficit financing by the Bank of Albania, have impacted even on the decline of base be reduced even during October and November. At end of October, its level was Lek 5.2 billion less than the program forecasted level.

The Bank of Albania has reduced its budget deficit financing, leaving more space to commercial banks in investing their funds. For covering its deficit, the government is covered by borrowing from the banking system, which constitutes 75 per cent of deficit financing. Foreign financing covers the rest of deficit.

The quantitative indicators of the Bank of Albania are met either during the third quarter or during October and November.

Net foreign assets of the Bank of Albania have been always increasing, increasing the difference from their objective. The level of foreign assets during the third quarter is due to growth of the Bank of Albania foreign reserves as a result of exceeding 35 million dollars of IDA project and the growth of foreign currency deposits (mainly on August). According to operative data, the net foreign assets at end of November resulted to 22.2 million dollars higher than the lower target limit.

Excluding March, the level of net domestic assets has been falling, thus improving at satisfactory paces their difference from their target. At end of the third quarter this difference resulted to about Lek 7 billion, while a deepening of this difference is noticed even on October and November. The reduction of domestic asset level is due to continuous reduction of base money and net foreign asset growth. According to operative data, the Bank of Albania net domestic assets at end of November resulted to Lek 14.5 billion lower than the upper target limit.

The third quarter of 2002 has known even the meeting of the target on net credit to government. At end of September 2002 the net credit to government resulted to about Lek 0.3 billion less than the upper target limit.


In 2002 the Bank of Albania was facing a very difficult trial. The massive withdrawal of deposits from two largest banks of the country in March- May 2002 created problems on performance of inflation, exchange rate, worsened the liquidity position and the Government financing. It also established such a situation that might have provided grave consequences if widespread in the whole banking system and if extended over a long period of time. Though a detailed and separate report is submitted to the Parliament on this situation, I should emphasize once more that the crisis was coped with well. The panic situation was managed and the returning of confidence in the banking system was being noticed. To ensure such a confidence, the Bank of Albania temporarily withdrew from its main target, adjusting its policy and decisions with the maintaining of banking system stability. In this framework the Bank of Albania injected the necessary liquidity in the market, which enabled the meeting of depositors' s needs of banks and the maintaining of their solvency, as well as their normal performance of state budget expenditures.

The relatively high monthly growth of Lek deposits, following their withdrawal, is due to the returning of money into the banking system, thus being impacted even by Lek deposit interest rate pick up.

The level of Lek deposits in October was Lek 7.1 billion higher than the programmed figure. The growth of Lek deposits is focused only on time deposits, while demand deposits are decreasing during the third quarter. The high difference between demand and time deposits in Lek encourages households and firms to be oriented towards time deposits.

The foreign currency deposits are also increased beyond the forecasting, regardless of the exchange rate stability during the third quarter. Furthermore, the exchange rate effect has influenced the reduction of their value in Lek, by Lek 1.3 billion during this quarter. The returning of that part of withdrawn deposits in foreign currency has influenced on the increase of these deposits. The increase of foreign currency deposits is acceptable either in time deposits or in demand deposits. The low level of interest rates of deposits in foreign currency impacts on this.

The increase of foreign currency deposits has constituted even the basis of net foreign assets growth in the system. The Bank of Albania foreign assets are increased by USD 20 million, while net foreign assets of commercial banks are increased by USD 40.6 million. The growth of foreign assets during the third quarter has constituted approximately 70 per cent of the source of monetary growth during the third quarter.

The improvement of liquidity situation has made possible for the banks to increase the budget deficit financing over the third quarter. The Treasury bill portfolio is increased by Lek 4.4 billion compared with only Lek 1.1 billion during the second quarter. This has covered 70 per cent of the government requests over the quarter. The rest of financing is covered from the financing of households and other institutions. This financing structure has continued even during October - November. The commercial banks have been the main source of financing the deficit with treasury bills. The Bank of Albania has not financed the deficit after April, what is more, it reduced its financing by Lek 6.0 billion in October.


Almost two years ago the Bank of Albania started an awareness campaign to promote banking system lending to economy. Though this campaign was viewed somewhat with skepticism, especially in the face of numerous difficulties and problems that were listed either by the businesses or by commercial banks, we may state today that credit to economy has been performed with satisfactory paces and 2002 and 2003 provide a completely different view.

Credit balance, at end of September 2002, reached to Lek 44.3 billion, being increased by Lek 7.7 billion against end of 2001 or about 1.5 times higher than credit balance growth in the same previous year period.

New credit extended for the nine month period of 2002 reached to Lek 44.2 billion, approximately 1.8 times higher than in the same period of 2001 (71 per cent of it was short-term credit). The extension of credit in medium-term and long-term during January-September of 2002 has had upward trends. Their level as nine-month period reached to Lek 12.6 billion. The lending in such terms reinforces the idea of bank-business cooperation. About 29.3 per cent of the new credit as nine-month period was extended in Lek. Only in the third quarter of 2002, 54.1 per cent of the new credit was delivered in Lek. It is the first time over three latest years that within one quarter the extension of new credit in Lek is higher than that in foreign currency. The level of the new credits is raised significantly, where many banks have doubled them in comparison with January - September of 2001.

During December 2001 - September 2002, the trade sector has continued to remain the most favorable sector for lending. While the preference for construction has reflected a slight increase in the third quarter of 2002, at a time when in the first half of 2002 the demand for credit in this sector was estimated as downward. Lending to real estate purchase has had a growing trend. In consequence of the putting down of illegally - constructed buildings, according to specialists, many businesses have turned to banks for purchasing premises, so as to continue their trading activity.

Compared with the year-end 2001, at end of September of 2002, an increase is noticed in lending to "production, supply of electrical power and water". No normal performance of lending to this sector is noted. This related with the periods when electrical power situation was with problems. The lending to transport branch and telecommunication is featured by a constantly falling trend, since according to banks' specialists, it is deemed that the market seems stabilized in this sector.

As a nine-month period over 2002, the following developments associated credit to economy:

  • Short-term credit reached to 48.4 per cent, marking a reduction of 4.6 percentage points compared to year-end 2001. The mid-term and long-term credits have reflected growing tendencies. In relative terms, it is evidenced that 74 per cent of total credit balance growth (Lek 7.7 billion) at end of September 2002, compared with the end of 2001, has derived from the growth of mid-term and long-term credits altogether.
    - Balance of foreign currency credit continues to prevail in the total credit balance (67 per cent of it). The exchange rate stability of Lek and the lower level of interests on foreign currency credit justify the preference to borrow in foreign currency. Also, the foreign currency credit is preferred also due to sensitiveness that prices have to exchange rate fluctuations, which is reinforced more if we consider that most of credit is destined for trade sector. But, the exchange rate risk is present and unavoidable, though it is not characterized by big fluctuations. However, it should be stressed that lending in Lek as a nine-month period has impacted on the credit balance growth as a banking system, at the level of 25 per cent;
  • Credit to private sector prevails, by 97.4 per cent. Credit balance in the public sector as a consequence of repayments has only declined.

We think that regarding the remaining period of 2002, the bank credit in support of economy will not only reach the forecasting in monetary program but it may reach the figure of Lek 10.2 billion, given the average level of monthly credit up to end of September 2002.

The growth of credit to economy is an additional factor, which supports the economic growth. We are more optimistic if we consider that in `2002, unlike in other past years, the weight of long-term credit has started to grow. Furthermore, in the third quarter of the year, more long-term loans are extended than short-term ones. The growth of loan term creates possibilities for financing the productive projects and provides long-term effects to country's economy.

The extension of lending testifies that the Albanian economy even over 2002 will continue to have positive growth rates. Being faced always with difficulties in data on real economy, which would enable the performance of a complete and early analysis of economy performance, I may emphasize in general that in 2002, the economic growth target is reviewed by reducing it. The problems of electrical power are estimated as the main factor. Their impact over at least two years has limited the possibility of growth, especially in industrial sector. Also, the damages caused by difficult weather conditions have reduced the agricultural product growth target.


Currently, the value of gross foreign exchange reserve has reached to 826.6 million dollars. During this year, the gross foreign exchange reserve is increased by about 89.66 million dollars or 12 percentage points in ratio to the level of these reserves at end of the previous year. Among the main factors that have impacted on the increase of foreign exchange reserve over 2002, we mention: the entry from the loans extended by the IMF, IDA, and other international financial institutions at the amount of 91.64 million dollars, a figure of about 51 per cent higher in comparison with the level of this indicator in the previous year; the entry from purchasing foreign currency from the Ministry of Finances and second tier banks by 42.53 million dollars; and 25.07 million dollars of income from foreign currency reserve investment.

The factors that have impacted on the reduction of foreign exchange reserve over the period relate with the effecting of payments to realize government debt service, recording the figure of 41.26 million dollars, the performance of transfers on behalf of the Ministry of Finances and second tier banks by 88.98 million dollars and the selling of foreign currency by 13.81 million dollars to the Ministry of Finances and the banking system.

The average return ensured on foreign reserve investment during 2002, expressed in relative terms is estimated at 3.08 per cent.

During 2002, the policy of foreign exchange reserve management was reviewed and approved as well as work was done in terms of improving the functioning of foreign exchange reserve management scheme. The improvement of foreign reserve management approach, fair assignment of duties and responsibilities, measurement of investment performance according to approaches used by similar institutions of developed countries, remain the final goal. In this framework, an Investment Committee is established and functions at the Bank of Albania, with the participation of administrators and departments' heads, who contribute to analyses on international financial market developments and to the execution of current operations of foreign exchange reserve investment.

In conclusion, I would like to emphasize that the Bank of Albania has always held in the focus of its attention the rigorous reinforcement of its legal duties during 2002 and in the coming years. The mid-term plan, which is compiled to support the Bank of Albania institutional development over 2003-2005, has also determined concrete steps, the accomplishment of which would enhance the reliability of its activity.