Speech by the Governor of the Bank of Albania, Mr. Ardian Fullani
at the meeting with Business Comunity, Local Government and Academic Circles of Gjirokastra Prefecture

Honoured participants,

It is my great pleasure to be here with you today, representatives of local government of Gjirokastra district. Today's meeting follows the other meetings the Bank of Albania has organised in the regions of the country, in line with our objective to enhance and improve communication with the public.

An independent central bank should communicate with the whole society in order to establish appropriate confidence and prestige, in the framework of transparency which facilitates the accountability process.

Besides laws and regulations, which ensure accountability to bodies elected by the people, such as parliament, the direct communication with the public, business and academic circles is an important element.

I believe that the open communication of objectives, ways and means for their accomplishment, improves the efficiency of our work. Avoiding the ambiguity of expectations generally caused by the implementation of "Surprise" policies, the public and businesses are turned from agents that seek to minimise costs of "contingencies" into collaborators backing the achievement of our objectives.

The main purpose of the Bank of Albania is achieving and maintaining price stability. The clear defining of what we understand with price stability constitutes the first important step in the transparency of our communication. A long time from now the Bank of Albania has announced the inflation rate targeted with its monetary policy, presently being 2-4 percent in annual terms. We are trying to institutionalise such a thing further, examining the possibility of adopting inflation targeting regime (IT), on whose focus is precisely the announcing and pursuing of a specified inflation rate. But this new regime is more than just announcing inflation rate in the same way as the Bank, as earlier mentioned, has done so far. It consists also in public knowledge of models and analyses our decision-making is based on and in increased responsibility and transparency in case the target is not met. This will provide a real possibility to the public and businesses to understand the way the Bank responds to economic developments and to judge more accurately the policy pursued. Therefore, it is being worked in some directions, from improvement of statistics basis, preparation of necessary models for inflation forecasting and economy functioning, to legal grounds needed for the successful changeover to this new, modern and transparent regime.

Modern philosophies of central banks' governance attribute high importance to communication. But Bank of Albania's communication is not limited merely in monetary policy transparency for achieving price stability. As much important is the exchange of information with different economic agents to ensure necessary signals for preventing any possible economic and financial crisis. In this aspect, regular contacts with the banking system and businesses are irreplaceable. We may mention here business confidence index and consumer confidence index, which are being processed based on the information obtained in regional level.

Currently we have a positive tradition of periodical meetings with commercial banks on various problems that may emerge or new initiatives the banking system undertakes. Recently, upon the rapid expansion of lending activity characterising the banking system, discussions are focused mainly on credit quality. Year 2005 was associated with an accelerated increased lending to the economy. This rise has been the main source of using funds and of monetary expansion, shifting, for the first time, the budget deficit financing from this role. As of end of November, credit to the economy amounted to around 14 percent of GDP, while the annual growth rates of credit have fluctuated around 70 percent. Credit is channelled in all the economy sectors, indicating the close relationship of businesses with banks. The Bank of Albania estimates that so far the banking system has encountered these rapid developments with a satisfactory degree of assurance. Nonetheless, being the supervisory authority of commercial banks, we feel the obligation to emphasise that increased volume of loans should be in line with improvement of their monitoring capacities in order to prevent credit portfolio deterioration. Therefore, we are taking measures to initiate the establishment of a Credit Information Bureau, which will contribute much to this aspect.

The Bank of Albania assesses that monetary stability and financial one are inextricably related. When there are premises for financial instability, it is followed by monetary instability as well.

Large informal economy continues to be a concerning problem for Albania. It increases significantly the investment and credit risk. Under these conditions, the economy formalization remains a priority task in the programs of measures of government authorities, taking into account the very negative impact it has on fair competition and on fiscal evasion intensity. Informal economy in Albania is presented in various forms that generate crime and corruption; parallel economy, which flourishes and functions in consequence of the lack of formal economy efficiency.

The increased quantity and quality of the banking services, reduced cost of these services, performance of utility services through the banking system and the associating of identity cards with bank accounts and with a postal address, will all impact on economy formalization. The formality is equal to a bank account.

Cooperation with the banking system has been important in our efforts to curtail cash economy, as part of the economy formalization process. The channelling of public employees' salaries through the banking system is over, while we are considering the ways for involving the private sector in this process. The implementation of Real Time Gross Settlement and the Automated Electronic Clearing House systems have dropped obviously the financial transaction cost through banks. In this framework, we also believe that there exist all possibilities for commercial banks to review expenditures related to banking services.

The Bank of Albania, while implementing its policy for a gradual prevention from the mediator's role it provides to households for their participation in primary Treasury bill market, has recently decided on not accepting cash at its window in Tirana. This decision will be applied even at other Bank of Albania windows within first ten days of April.

Misunderstandings of some citizens or media concerning the Bank of Albania's role in Treasury bill issuing process have made inevitable the addressing to some problems related to this process. I would like to clarify once more that the Bank of Albania operates merely as an agent of the Ministry of Finances in Treasury bill issuing.

On the one hand, the Bank evaluates the importance of direct participation of citizens in these auctions, but we think that there exist more efficient ways to carry out this process. The Treasury bill sale through Albanian post office network would be an alternative. The post-office restructuring would bring about many benefits, not only to the process of Treasury bill sale which will always be upward, but also to many other services the banking system may not be flexible enough to provide, for instance emigrants' remittances up to the remotest areas of the country.

The facility of channelling remittances from abroad is another issue for discussion with the banking system. Considerable quantities of money circulate outside banks. More than half of remittances enter the country through unofficial channels. This income constitutes around 14 percent of Gross Domestic Product (GDP), 70 percent of exports and 33 percent of imports. Italy and Greece are the main destinations where Albanian emigrants live and as a consequence they are the main countries the remittances come from. Further increased volume of remittances and their effectiveness are based on the facility of banking system transfer service and on the business environment improvement.

As I have stressed in a similar meeting in Shkodra, our communication with businesses is strengthened a lot through surveys we carry out on the country's economic activity performance. However, I accept that so far this communication has been one-sided, from businesses to us. It is just the time to establish more fully links. Therefore we have considered that the businesses should be the first one to take part in the introduction and discussion of our surveys results. This will be accomplished through periodic meetings in cooperation with chambers of commerce.

Simultaneously, these meetings will serve as a window for more direct information on businesses' current concerns, such as electricity problems of the end of the past year. A considerable part of businesses were obliged to work below the productive capacities. This reflected a decline in production and investments. The restriction of the economic activity owing to electricity disruptions is estimated to have caused lower growth rates by about half percentage point, as compared to its forecasts. To face the difficulties deriving from electricity shortages, most of businesses turned to alternative sources, causing significant cost to their activity. Approximately 57 percent of businesses interviewed, asserted that cost rise fluctuated within 10 - 30 percent. The production sector, above all, is the one that has mostly felt the consequences of electricity crisis, since it had to be faced with additional high cost, because of using other substituting alternatives of electricity production. However, the businesses believe in a recovery of the economic activity within the first quarter of 2006.

Bank of Albania's communication with universities and various academic circles is generally limited in special lectures on monetary policy and financial markets. Appreciating the importance of this communication, we have planned to establish our relationships with universities in a higher partnership stage, through direct involvement of students in questionnaires and analyses the BoA branches carry out. In the meantime, to promote scientific research, we acquainted the public, for the first time during the last week, with the "Governor's award" project.

I believe that the increased and improved communication with all groups of interest, with the banking system, with the business community, local government and academic circles, will positively impact on accomplishment of our joint objectives for a more healthy economy and for more social welfare.

Thank you.