PRESS RELEASE
Speech of the Governor of the Bank of Albania, Mr. Ardian Fullani, held in the meeting with the members of the Economic and Financial Commision, Tirana International Hotel, April 6 2005

Dear members of the Economic and Financial Commission,

I am here today, making my first appearance as the Governor of the Bank of Albania, to share with you the assessment of the bank regarding the economic developments for 2004, to present our point of view on the future perspective of the Albanian economy, as well as to present other crucial aspects of the bank activity during this period. Bank of Albania is an institution, which plays a crucial role in decision making with regards to economic and financial policies, as well as to the creation and preservation of the financial stability in the country. For this purpose, in the name of this institution which I govern, I welcome every opinion, comment or suggestion with regard to the past, the present and the future of the institutional development, monetary policy and banking supervision.

ALBANIAN ECONOMY DURING 2004

According to the assessment of the Bank of Albania, the development of the Albanian economy during 2004 has been in line with the objectives of the strategy for the economic development of the country. The Albanian economy is supposed to have been increased with 0.6 percent in real terms, thus preserving the average pace of development during the last 5 years.

The growth of the Albanian economy continues to be generated by the dynamic development of the private sector. The sectors that have contributed mostly in preserving the annual growth are: Services, Construction and Transport, which have contributed roughly 75 percent of the general economic growth. Even though the demographic changes during the last years, make it difficult to give a clear statistical picture of the movement of labor force, the unemployment rate is estimated to have decreased from 15% by the end of 2003 to 14.6% by the end of 2004.

The economic investments during 2004 have been at the same level compared to 2003, thus making up 25.4% of GDP. These investments are represented mainly by private investments, which make up about 80% of the total investments. The financial sector has always supported this development through the increase of crediting and the range of the services offered. The credit to the economy has increased roughly 34% during the last two years and it has been accompanied with increases in the long term crediting also.

The fiscal indicators show that the fiscal policy during 2004 has been sound, in line with the Medium term Budget program for the period of 2004 - 2006. In terms of GDP, the budget indicators are similar to the indicators of 2003, where can be highlighted the stable budget deficit at 4.9%. These indicators have remained below the forecasted levels of 2004 budget, thus presenting the need for a more cautious follow up of its two main phases: its design and implementation. Capital expenditures remain a problem which deserves a great attention in the future, given their importance to the development of the country's infrastructure capacity.

The economic situation in the country has been favorable with regard to the foreign transactions. Current deficit had a significant decrease compared to two previous years, thus reaching 5.3 % of GDP. This development is the outcome of the decrease of the trade deficit, which dropped at 21% of GDP in 2004, compared to 23.4% of GDP in 2003. Foreign reserves in Albania are enough to cover roughly 5.2 months of imports of goods and services.

The year 2004 has been distinguished by appreciating pressures of Lek, due to the macroeconomic stability of the country, the increased confidence on the domestic currency and due to the increasing of the seasonal effects. Compared to one year ago, Lek appreciated by 7.2% towards EUR and by 15.7% towards the USD. According to our estimation it is believed that the main factors in LEK appreciation must be looked in: the continual consolidation of the economic stability; interest differential between lek and other currencies; the consolidation of public finance and budget deficit which has dictated a low demand of the government for money; and the stable remittances.
Even with the late positive developments, the economic growth and macroeconomic stability of the country, are parameters, which we believe cannot be treated as resolved issues. The high trade deficit requires the need for stable and long term financing sources, especially attracting foreign direct investments.

The fiscal policy should continue to preserve its positive contribution in strengthening the macroeconomic stability, which is expressed through the reduction of budget deficit, the increase of revenues and establishing priorities in accordance with National Strategy for Economic and Social Development in conducting expenditures. We believe that the development of the financial sector should be balanced in all its segments, which requires the completion of the privatizing process and the harmonizing of supervisory and regulatory legislation, in accordance with the best practices of the developing countries.

MONETARY POLICY AND INFLATION DEVELOPMENTS

Bank of Albania has fulfilled its objective in controlling the 2-4% inflation margin. The annual inflation rate by the end of 2004 was 2.2% while the annual average rate was 2.9%.

The favorable developments during 2004 have established a positive environment for inflation control. Two crucial macroeconomic policies, monetary and fiscal policy, have contributed towards economic stability, thus preventing pressures on inflation rate. Budgetary spending during 2004 has been relatively stable throughout the year, thus preventing the increase of inflationary pressures in respective periods of time. Domestic credit to government was 2.0 of GDP during 2004 compared to 2.9 % in the previous year.

The conducted monetary policy during 2004 has maintained the same easening pace followed during 2003. Bank of Albania decreased 5 times the repo rate during 2004, with 1.25 pp a total effect. The loosening monetary policy has been in line with the inflation developments of 2004 and the positive expectations for inflation in the near future. It is worth mentioning that these developments have been perceived correctly by the public, which is anchoring its inflation expectations in line with Bank of Albania explicit inflation objective. This has been reflected in the interest of the public to deposit their savings in Lek, thus creating appreciating pressures for Lek.

The weak inflation pressures by fiscal policy, the good managing of the money supply and the appreciation of Lek have created the environment for a moderate growth of the consumer prices during 2004. Bank of Albania believes that this favorable situation will continue even during the next year. This situation it will be supported by favorable monetary conditions and by the controlled domestic demand. Judging upon the available information and the lack of shocks phenomena, consumer prices (annual changes) for 2005 are expected to remain within 2-4% Bank of Albania's inflation objective. The controlled level of inflation has preserved a positive real interest rate of the lek, despite the continuing decreases of the nominal interest rates in their historic minimums. The positive real interest rate has raised the public confidence on depositing their savings in the banking system, thus, further lowering the relative level of currency circulating in the economy.

BANKING SYSTEM DEVELOPMENT

At the end of 2004 there is a satisfactory financial situation of the banking system. There are positive revenues for 2004, about 5.11 billion lek or 0.66 billion leks higher revenues than a year before. The higher net result isn't due only to the increases of banking system's assets but also to productivity increases of the assets and the capital. This is reflected in the high values of the profit indicator (RoA and RoE). The qualitative loan indicator (the ratio of non performing loans to outstanding loans) is 4.2 % compared with 4.6 % in 2003. A lower level of this indicator shows an improvement in the loan quality and a limited exposure of the banking system to credit risks.

The supervisory process has tried to be proactive and continuous in assessing banking activity risk. As part of the tasks from Supervisory Development Plan, a document designed in collaboration with World Bank, there is the "Operational Policy of the Supervision" document where the supervision rules of the banks are defined.

During 2004, banking system in Albania has been characterized by dynamic developments in the increases of the number of the banks operating in the market as well as wide spreading of the banks in different regions in the country. There were 16 banks at the end of 2004, from which 2 of them are fully domestic owned and 14 others are foreign owned. A further consolidation for the banking system it was the approval of 100% transferring the ownership of Savings Bank to Raiffeisen Zentralbank, as a final step to privatize this bank. Also, a second bank with fully Albanian capital entered in the Albanian market, Banka Popullore sh.a and an application for another bank, owned fully by Albanian capital is received. Recently, this application has been initially approved according to the conditions set in the law "Depository banks in the Republic of Albania".

OTHER ACTIVITIES OF BANK OF ALBANIA

During 2004 there were no changes in the Bank of Albania's legislation. In the meantime, there is in process the revising of the law "Depository banks in the Republic of Albania", aiming further improvements in banking system legislation, in line with the country's perspective of joining the EU.

In the previous fall, Bank of Albania renewed some of the members of the Supervisory Council (7 members) and elected new administrators for this institution. This process did not affect the normal activities of the Bank of Albania, this being an indicator of the BoA consolidation.

Inter-institutional cooperation has been another aspect that has characterized the BoA's performance. Bank of Albania has been open and ready to design and implement programs for the development of the country, has offered counseling to government on economic affairs as well as has been an active part of all negotiations with international parts.

On the other hand, I stress that we've organized meetings with different parties of economic interests which has helped us to better understand the weakest points as well as to clarify the participants on these meetings for the advantages and the mutual profits.

We have determined to keep on our efforts for further cooperation with national and international bodies even for 2005. In this aspect, we are working on to finish on time the project of small payments and to continue with another project with World Bank for creating a loan information register. In the mean time, we are keeping under pressure the banking system not just to spread geographically, but also to increase the quality and the inventory of the payment instruments.

Honorable members of the Commission,

At the end of my speach, allow me to highlight once again the willingness of the institution I govern, to fulfill all the obligations as stated from the Republic of Albania Constitution and from the law "On Bank of Albania". We willl reach this by further improving the monetary policy and monetary operation framework as well as by deepening our knowledge about the functioning and interdependent relations that characterize Albanian economy. I believe, 2005 it will be a successful year on the research work, especially on increasing the forecasting power on inflation developments and on improving Bank of Albania's management. I would like to quote that our policy outlook remains that of adopting inflation targeting, which imposes us serious engagement on the cautious assessment of the required preconditions. In this regard, we will run the entire respective thesis, for which we need the support and the understanding of the Assembly and other state institutions.

I would like to guarantee the Albanian Assembly that our latest steps as well as the expected ones are in line with our national outlook for a faster integration with EU.

It is clear for us that there is no real integration without financial integration. Our country needs more revenues, more political stability, and more cultural and social integration. Of course, financial integration is of such importance as well. In addition, I believe that the role of the institution I govern, the banking system role and the financial sector role are very crucial and the challenges ahead are a lot.