Interview of Dr. Shkëlqim Cani, Governor of the Bank of Albania, for ''Top Channel'' Television, on August 24th, 2004.

The Governor of the Bank of Albania, Mr. Shkëlqim Cani, made today an interview for "Top Channel" Television on the impact of oil price rise on the economic growth and the general level of prices. For further details you may read below a supporting material.

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SUPPORTING MATERIAL

Inter-bank market oil price:
August 03 January 04 August 04 Growth Jan-Aug (%) August '03-August '04
32 USD a barrel 33 USD a barrel 48 45 % 50 %

Average retail oil price in the domestic market:
68 Lek/liter 70 Lek/liter 88 25.7 % 29.4 %

Wholesale oil price (ARMO)
54.7 Lek/liter 59.4 Lek/liter 78 Lek/liter 13.1 % 14.3 %

Exchange rate USD/Lek
121 106 101.5 4.4 % 20 %

GROUNDS

The rise of oil demand/consuming in the world economy, particularly from China, India, USA, etc., and the inability to afford this demand because of the tightened supply for the uncertainties among the producing and supplying capacities following the financial problems of the Russian firm "Jugo", Iraq events, and the destruction of oil plants in Venezuela, Arab countries, etc., impacted the rise of oil price in the international market by 50 per cent from January to August of the current year.

Reactions in the international markets suggest the use of free capacities and adjustment of disproportional ratios between demand and supply; however all options, for example regarding interest rates set by central banks, still remain under discussion and open.

IMPACTS & EFFECTS

Oil price rise in the international market affected as well the domestic market, being to some extent smoothed due to Lek appreciation against USD, by 20 per cent since August of the last year and 4.4 per cent since the beginning of the year. Oil might impact in two opposite directions: inflation rise and economic growth slowness. Consequently, it is not easy for central banks to make decisions on their monetary policy. In view to the latest monetary developments, the Bank of Albania estimates that more attention should be given to the possible "shock" on the economic growth than the expected impacts on the Consumer Price Index.

Effects:

*directly (such as on transport) and the sectors that have as input oil in the producing process as industry, agriculture, etc;

*indirectly but having impacts on the rise of cost/price of the products related with oil, such as services, heating, import goods, etc., that at last cause additional cost in the family budget.

EXPECTATIONS

The economic development of the developing countries, Albania included, mostly depend on energetic sources, and the positive performance on electric energy supply will smooth somewhat the negative impact of oil price rise. Though international developments are not highly positive, still it is estimated that oil price rise will continue in medium-term periods, as the expectation that it would be a short-term shock was already surpassed and expectations remain unclear yet. However, for long-term periods the market is expected to turn into the targeted price levels of historical average ($40-44 a barrel).

REACTIONS

It is believed that oil price is established principally from the market and this is to be followed as long as demand and supply indeed do establish the price level. I deem the main possible implications and reactions are the following:

Strategy of the state-owned company ARMO to somewhat neutralize the price rise, but without infringing its statute as a commercial company that operates based on the logic of maximizing profit.
Possible fiscal policies that relate for example with the way of establishing/implementing the excise in the next fiscal practice, but this is a matter on which I am not an expert and it is the Ministry of Finance to decide on it, etc. But at the same time it should be considered if there is room for the falling/saving of oil consumption from the public companies;

Monetary policy. The central bank, through its easing monetary policy during the last the months, tended to smooth to a certain extent the negative impacts in the economy that are expected to appear due to oil price rise. In the monetary policy report it is stated: "the temporary rise of oil price in the international market is expected to have a moderate impact in the domestic market as well, precisely on the rise of prices, either directly affecting the transport group or through the successive links of production as well as in the service sector.

Neutralization/normalization of impact on prices is better in these cases to be performed more gradually in a medium - term period".

Bank of Albania is following with great attention all the developments in the international markets and domestic market, as well as forecasts on the inflation rate in the forthcoming months and by the end of the year, maintaining all the positions of monetary policy. But, in all cases the position of monetary policy will be in respect of maintaining inflation within the two-to-four per cent targeted range.

Competitiveness. Bank of Albania supports the efforts and declarations of the Competitiveness Authority that old monopolies or foundation of new ones of any type, that at turbulent times have their ground of speculation, should be carefully and potentially reviewed. The relevant state structures must follow the developments in the oil market in all links to avoid possible speculations on prices and quality.

The slight deterioration of the balance of payments as it is deemed to result with more foreign currency for the import of approximate oil quantities and other products mainly from euro area that also had known a rise of prices.

Will oil price impact the economic growth?

USA

1. In the present situation, the rising demand in the world economy has impacted the increase of oil price. Oil consumption for the five most developed economies of the world (excluding Germany) is grown on an accelerated basis.

2. The actual oil price was higher in 1979 than today.

3. Oil is less important for the American economy than it was in the past. Data show that oil consumption for unit of real GDP has dropped by 50 per cent in the American and Japanese economies since 1970.

4. Adjustments of the monetary policy in accordance with oil price were applied since 1970.

5. Political tensions in the Middle East area might generate artificial increase of reserves leading to the rise of oil price.

EUROPE

The economic growth of Europe is not affected by the oil price rise. But if oil price remains for a long period at USD 50 a barrel, this might impact by only 1 per cent on the economic growth. The oil price rise has generated the first impacts on the air transportation cost (for example in France) and on some consuming products (for example in Germany) but the potential rise of inflation was smoothed due to the appreciation by about 20 per cent of euro against US dollar (similar with Albania's case).