Monetary Policy: Analytical Overview of the Past and Vision Toward the Future

The anniversary of Albania's membership in International Monetary Fund and World Bank, more or less coincides with that of first political decisions taken by Albanian authorities to control main economic indicators, which at the time we are referring to were completely distorted. As most of the participants here might have witnessed, for many decades Albania was cut off from other European countries, including the Central and Eastern European ones because of its extreme centralization and adherence with the principle of self-support.

Consequently, Albania found itself totally unprepared to move into a market economy. This led to the devastation of most of the economy and a considerable decline in living standards. Given these circumstances, Albania was caught up in a deep financial and economic crisis. Years 1985-1992 were the years of a rapid and significant
decrease in production, of deep domestic and foreign macroeconomic imbalances, of a general disorder in management and infrastructure, of the waste of foreign reserves and generation of foreign debt of the country. In
1989 overall production of the country was reduced by half, while both industrial and agricultural production went through a severe decline. Production of grain fell by fifty per cent compared to that of the 80s. Thus, Albania was transformed from a country exporting agricultural and livestock products to one that was at a large extend dependent on emergency aid from abroad.

The situation was immediately reflected on unemployment indicators that increased considerably, specially with regard to industrial sector. As a result, many Albanians started to emigrate mostly in neighboring countries. The
financial situation deteriorated at a fast pace as well. This was associated with increases in nominal wage and large payments to support insolvent enterprises. Tax revenues fell from 42 per cent of GDP in 1990 to 28 per cent
in 1991 and 16 per cent during the first half of 1992. The continuous increase of budget deficit and lack of a suitable monetary policy led to incapability to control liquidity, inflation, and savings as well as to a deeply negative level of real interest rates.

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