PRESS CONFERENCES
Speech by Mr. Ardian Fullani, Governor of the Bank of Albania At the Joint Press Conference of the Ministry of Finance, the Bank of Albania and the IMM following the conclusion of the discussions on the fourth review under the IMF-supported program

Dear all,

During the last two weeks there have been intensive negotiations with the IMF mission with regard to the latest developments in economy, inflation, monetary indicators, financial market, banking supervision and monetary policy pursued by the Bank of Albania in the second half of 2007.

At the focus of our discussions were also the Bank of Albania expectations related to the inflationary developments in the near and longer future and the role monetary policy plays in anchoring these expectations.

As we have already informed in the last monetary policy report there has been a slight shift of the inflation rate above the upper tolerance band of 4 per cent. Based on some current developments, mostly supply-side related, it is assessed that the consumer prices performance for the following 12 months may continue to fluctuate around the current levels.

The IMF mission has assessed that the latest decisions of the Bank of Albania on tightening the monetary policy have helped to reduce the second round effects and to keep the inflationary expectations anchored around our numerical objective of 3 per cent.

Dwelling on the factors which have conditioned the inflation performance I would mention the following:

Performance of agricultural products prices

It is now an accepted fact that the domestic agricultural production was largely affected by the long drought, especially in the second and third quarter of the year. Our surveys indicate that the dependence of agricultural production on fuels and energy has increased considerably recently. As a result the hard time the latter have going through has had a direct impact on agriculture. On the other hand, it should be mentioned that the agricultural products prices have also risen in the international markets causing the imported inflation to be present in this period.

Energy crisis

Energy crisis, which has been present almost throughout 2007, was more intensive in the third quarter. The expenses made to provide alternative sources of energy are assessed to have exerted pressures on the costs of production and trading of goods and services. Its negative effects are direct while they may also be indirect implying the extension of this crisis implications in a later period.

Demand in economy

Regardless of the abovementioned factors it should be said that the economy has continued to be characterized by a growing demand which exerts pressure on consumer prices. The growth of demand for some basic Albanian exports, the favourable monetary conditions and the price rise of real estates have created an encouraging environment for borrowing and investment. In more concrete terms, credit to economy continued to grow at high rates during 2007. Credit to businesses grew by more than 50 per cent in August accounting for 16 per cent of the GDP, while credit to households continued to grow by about 70 per cent annually. Exports have also recorded considerable growth, growing by about 28 per cent in January-August 2007. Trade deficit deepening during this period by 4 per cent as a share to GDP does not only reflect the increase of consumption, but also the increase of investment. The import of capital and intermediate goods has increased by about 30 per cent in the first half of the present year. Foreign direct investments have also provided considerable contribution to the economic activity.

Based on the assumption that the abovementioned factors will remain present in the economic reality I would like to underline that the accommodation of inflationary pressures in the future has turned into a real and difficult challenge but not imposible to be faced with.

Assuming that the Government will continue to pursue responsible fiscal policies in the future and believing in an adequate perception and reaction by the market and public at large to the Bank of Albania decisions the inflation risks may be contained.

Considering public communication as crucial the Bank of Albania will continuously inform the public about the risks which may jeopardize the consumer prices stability in order to make it aware of:

- The future inflationary developments;
- The balance of risks;
- The keeping of inflationary expectations anchored around the 3 per cent target.

I would like to underline that the Bank of Albania monetary policy for the near future will continue to be accountable, which is the main tool to prevent short-term risks to consumer prices stability. The role of the interest rate in economy will be proactive aiming to contain the inflationary risks, whose probability to be materialized has increased.

A large part of our discussions focused on financial stability, with special emphasis on the banking system stability. The process of the banking system consolidation continued during 2007. It continues to be well-capitalized and profitable. All the indicators provide evidence for its soundness and I would like to mention the share of non-performing loans which is very low at 3.4 per cent to the total.

However, it would not be too excessive for me to bring into the Albanian public's memory the Bank of Albania's commitment to the system's financial stability and broader. To this purpose, we have recently strengthened banking supervision and have required the banking system greater transparency, better governance and more efficient internal control procedures.

We share the same opinion with the IMF mission that prudence in terms of credit portfolio quality is a constant priority considering its rapid and continuous growth. The growth of credit remains high and it may represent a potential source of risk for the macro and financial stability in this sector.

In conclusion I would like to thank Mr. Bell and other members of this mission for their responsible and devoted work during the last two weeks of their stay in Tirana.