volume 9 volume 9 number 2 number 2 June 2006 Economic Bulletin Economic Bulletin June 2006

E C O N O M J I u C n e B U L L E T I N 2 0 0 6

B a n k o f A l b a n i a

PB Bank of Bank of Albania  volume 9 volume 9 number 2 number 2 June 2006 Economic Bulletin Economic Bulletin June 2006

If you use data from this publication, you are requested to cite the source. Published by: Bank of Albania, Sheshi “Skënderbej”, Nr.1, , Albania Tel.: 355-4-222230; 235568; 235569 Fax.: 355-4-223558 E-mail: [email protected] www.bankofalbania.org Printed by: Bank of Albania Printing House Printed in: 400 copies

 Bank of Albania Bank of Albania  volume 9 volume 9 number 2 number 2 June 2006 Economic Bulletin Economic Bulletin June 2006 C O N T E N T S

Monetary Policy Report on the first semester of 2006, July 2006 7 I Governor’s Speech 7 II Economic developments over the first semester 10 III Inflation performance 23 IV Monetary developments and financial markets 27 V Economic performance over 2006 37 Statistical Annex 40

External sector developments of the Albanian economy over the first quarter 2006 46 I Current account 46 II Capital and financial account 48

Speech by Ardian Fullani, the Governor of the Bank of Albania at the Round Table Discussions on the Establishment of the Credit Information Bureau. Hotel “Tirana International”, 28 April 2006 51

Speech by Ardian Fullani, the Governor of the Bank of Albania Bank of Albania’s statement at the conclusion of IMF Article IV Mission. Ministry of Finance, 11 May 2006 53

Speech by Ardian Fullani, the Governor of the Bank of Albania at the Regional Technical Seminar “Financial Policy Issues of Deposit Insurance Schemes in South-East Europe”. Hotel “Rogner Europapark”, 30 May 2006 55

Speech by Ardian Fullani, the Governor of the Bank of Albania at the conference - Economic Governance in the European Union - organized by the Italian Embassy in Tirana. 5 June 2006 58

The evaluation of foreign direct investment in Eastern Europe developing countries: The case of Albania 60

Bank of Albania’s role in European Integration 75

Foreign direct investment in Albania (fiscal year 2004) 88

Survey on Crediting and Depositing Activity for January-February 2006 106

Bank of Albania news over April-June 2006 119

Legal events over April-June 2006 122

Bank of Albania management, 30 June 2006 127

List of all entities licensed by the Bank of Albania 128

Banks and branches of foreign banks 128 Non-bank institutions 131 Financial institutions not licensed by the Bank of Albania to conduct their activities according to the Supervisory Council Decision No. 26, dated 29.03.2000 “On the exemption of some institutions from applying the provisions of Law No.8365, dated 02.07.1998 “On banks in the Republic of Albania” 133 Foreign exchange bureaus 134 Unions of savings and credit associations 140 Representative offices of foreign banks 141

 Bank of Albania Bank of Albania  volume 9 volume 9 number 2 number 2 June 2006 Economic Bulletin Economic Bulletin June 2006

T A B L E S

Monetary Policy Report on the first semester of 2006, July 2006 Table 1 Some main economic indicators in annual terms (in percentage) 11 Table 2 Oil demand and supply (in million/barrel per day) 13 Table 3 Performance of some domestic demand indicators 14 Table 4 Projection of agricultural production by branches (in percentage) 14 Table 5 Performance of industry sector for the first quarter of 2006 (in percentage) 15 Table 6 Main indicators of electricity balance sheet (in MWh) 16 Table 7 Labour market indicators (in thousand people) 17 Table 8 Growth rates of main fiscal indicators (in percentage) 18 Table 9 Tax and customs revenues (in billions of ALL – progressive data) 19 Table 10 Composition of current expenditures (in millions of ALL) 20 Table 11 Balance of payments, Q1 2005 – Q1 2006 (in millions of EUR) 22 Table 12 Annual inflation rate (in percentage) 23 Table 13 Annual inflation of “Foodstuffs and non-alcoholic beverages” group (in the country and abroad) and the contribution of this group to total inflation 24 Table 14 Annual inflation rate and contribution of “Rent, water, fuels, energy” group to total inflation 25 Table 15 Realization of the Bank of Albania quantitative objectives 28 Table 16 Performance of monetary indicators in May (in billions of ALL) 31 Table 17 Outstanding credit indicators (as a share to total) 34 Table 18 Credit to economy by branches 34 Table 19 Performance of new credit over the years (as a share to total) 34 Table 20 The lowest historical levels of interest rates in ALL 35 Table 21 Difference between Treasury bills interest rates of 12-month and 3-month maturity 35 Table 22 Main macroeconomic indicators 37

Statistical Annex Table 1 Annual inflation rate (in percentage) 41 Table 2 Contribution of basket constituent groups to total inflation 41 Table 3 Performance of monetary indicators (in billions of ALL) 41 Table 4 Performance of NFA indicators by main groups (in millions of USD) 42 Table 5 Performance of NCG indicators by main groups 42 Table 6 Outstanding credit indicators (as a percentage to total) 42 Table 7 Performance of credit for the main branches of economy 42 Table 8 New credit indicators (as a share to total) 42 Table 9 Interest rates at the end of the month and their change compared to previous periods (in percentage points) 43 Table 10 Interest rates and their change in lek deposits and credit market (in percentage points) 43 Table 11 Interest rates of deposits in foreign currency (in percentage points) 43 Table 12 Interest rate spread of deposit – credit in lek and in foreign currency 44

External sector developments of the Albanian economy over the first quarter 2006 Table 1 Balance of payments (in billions of Eur) 49

Foreign direct investment in Albania (fiscal year 2004) Table 1 Foreign direct investment by investing country 91 Table 2 Concentration of the labour force 93 Table 3 Distribution of enterprises by sectors (NACE Rev. 1.1) 94 Table 4 Distribution of foreign capital stock by sectors (NACE Rev 1.1) (in percentage) 96 Table 5 Structure of investment over the fiscal year 2003 97 Table 6 Structural distribution of investment over the fiscal year 2004 by sectors of economy 97

Annex Table 1 Foreign investment in Albania - by statistical region 99 Table 2 No. of Albanian enterprises with foreign direct investment (direct affiliation) - by activity, end-year 2004 100 Table 3 Foreign direct investment in Albania by investing country 2001 - 2004. End-year stock in 000 Lekë 101 Table 4 Foreign direct investment in Albania - by activity 2001 - 2004. End-year stock in 000 Lekë 102

 Bank of Albania Bank of Albania  volume 9 volume 9 number 2 number 2 June 2006 Economic Bulletin Economic Bulletin June 2006

C H A R T S

Monetary Policy Report on the first semester of 2006, July 2006 Chart 1 Annual inflation rates in Eurozone and USA (in percentage) 11 Chart 2 Core interest rates (in percentage) 11 Chart 3 Daily performance of USD/EUR exchange rate 12 Chart 4 Crude oil world prices (in USD per barrel) 13 Chart 5 Contribution of sectors to the sales of economy (in percentage points) 13 Chart 6 Quarterly change of sales in ”Trade, hotels and restaurants” sector (in percentage) 14 Chart 7 Performance of agricultural production and forecast for growth over 2006 15 Chart 8 Performance of sales in construction sector 16 Chart 9 Annual change of construction cost index 16 Chart 10 Performance of sales in transportation sector 17 Chart 11 Unemployment rate over the last five years (in percentage) 18 Chart 12 Structure of budget revenues (in millions of ALL) 19 Chart 13 Structure of budget expenditures (in millions of ALL) 20 Chart 14 Budget deficit by financing resources (in millions of ALL) 20 Chart 15 Performance of current account items, QI 2005 – QI 2006 (in millions of EUR) 21 Chart 16 Foreign trade balance, Q1 2005 – Q1 2006 (in millions of EUR) 21 Chart 17 Performance of revenues, Q1 2005 – Q1 2006 (in millions of EUR) 21 Chart 18 Performance of annual inflation (in percentage) 23 Chart 19 Contribution of main groups to CPI basket (in percentage points) 24 Chart 20 Annual inflation of four main groups in the CPI basket (in percentage points) 25 Chart 21 Developments in monetary indicators 26 Chart 22 Developments in budget expenditures 26 Chart 23 Oil price annual changes and the exchange rate of Lek against the US dollar (right hand) 27 Chart 24 Performance of consumer and production prices 27 Chart 25 Core interest rate performance (in percentage) 27 Chart 26 Annual growth of M3, M2, deposits in Lek and in foreign currency 29 Chart 27 Ratio of currency outside banks to M3 and of deposits in foreign currency to M3 (right scale) 29 Chart 28 Deposits’ interest rates by currency 30 Chart 29 Difference between interest rates in Lek and in foreign currency and deposits’ foreign currency structure 30 Chart 30 Net foreign assets of the banking system (in millions of USD) 31 Chart 31 Budget deficit financing (in billions of ALL) 32 Chart 32 Performance of credit ratio to M3 and GDP (left scale) and outstanding credit annual growth rate (right scale) 32 Chart 33 Credit annual growth rates 33 Chart 34 Treasury bills yield 35 Chart 35 Interbank market interest rates and the monetary policy 36 Chart 36 Lek – foreign currency deposits’ interest spread, in nominal terms 36 Chart 37 Nominal effective exchange rate (NEER) 37 Chart 38 Annual changes in the exchange rate 37

Statistical Annex Chart 1 Real sales indicator (in absolute terms) 40 Chart 2 Annual inflation (in percentage) 40 Chart 3 Contribution of main groups to annual inflation (in percentage points) 40 Chart 4 Cumulative and actual fiscal expenditures (in percentage) 40 Chart 5 Total and primary deficit (in percentage) 40 Chart 6 Current account and trade deficit (in percentage of GDP) 40 Chart 7 Import and export annual growth (in percentage) 40 Chart 8 Monthly trade balance and current account (in billions of USD) 40

The evaluation of foreign direct investment in Eastern Europe developing countries: The case of Albania Chart 1 FDI Inflows, 1970-2004 (in millions of USD) 61 Chart 2 Average regional GDP Growth Rate (2000-2004) 64 Chart 3 Regional Inflows of FDI, 1991-2004, (in millions of USD) 64 Chart 4 FDI Stock By Host Countries In SEE 64 Chart 5 FDI Flows in Albania compared to the SEE average, 1990-2004 (in millions of USD) 66

 Bank of Albania Bank of Albania  volume 9 volume 9 number 2 number 2 June 2006 Economic Bulletin Economic Bulletin June 2006

Foreign direct investment in Albania (fiscal year 2004) Chart 1 Frequency of enterprises establishment over the years 92 Chart 2 Regional distribution of the FDI in Albania 93 Chart 3 Intervals of foreign capital participation 93 Chart 4 Foreign capital stock over the years (in billions of ALL) 95 Chart 5 Foreign capital stock by origin for 2004 95 Chart 6 Performance of foreign capital stock by origin (in billions of ALL) 95

Survey on Crediting and Depositing Activity for January-February 2006 Chart 1 The annual growth rate of deposits in Lek and foreign currency (January 2001 - April 2006) 108 Chart 2 Indices on the performance of objectives’ realization for deposits in Lek 108 Chart 3 Indices on the performance of objectives’ realization for deposits in foreign currency 108 Chart 4 Performance of weighted average interest rate in Lek and foreign currency deposits 109 Chart 5 Expectations confidence index on depositing in Lek and in foreign currency 109 Chart 6 Expectations confidence index on interest rates in Lek and in foreign currency 109 Chart 7 Performance of credit realization index 110 Chart 8 The share of opinions regarding the current risk (on the left) and the expected risk in the future (on the right), in percentage 111 Chart 9 Index performance on current and expected risk 111 Chart 10 Performance of interest rates index by currency 112 Chart 11 Performance of annual inflation rate in years 112

 Bank of Albania Bank of Albania  volume 9 volume 9 number 2 number 2 June 2006 Economic Bulletin Economic Bulletin June 2006

Monetary Policy Report on the first semester of 2006, July 2006

I Governor’s Speech

Economic stability in the country and the positive performance of the world economy have created the adequate grounds for the expansion of the economic activity in the country over the first semester of 2006. The first economic data for 2006 indicate that the Albanian economy has overtaken the consequences of the severe electricity situation and is now following a stable course of economic growth. Starting from year 2005, the economic growth has been mainly driven by the consolidation of domestic demand, which is ever-growingly being sustained by credit to economy.

World economy over the first semester of 2006 has displayed high economic growth rates. Proceeding from these positive developments, the estimates of the international financial institutions project that there will be a global economic growth of about 4 per cent over 2006. Worth mentioning is the fact that the so far problematic regions, Eurozone and Japan, have displayed a satisfactory economic growth. Eurozone has recorded a growth of 1.9 per cent. Consumer confidence and labour market show stability and optimistic expectations. The adequate economic performance and the regeneration of domestic demand have influenced on smoothing the oil price rise effect for the following period. United States economy has particularly displayed high growth rates over the first quarter of 2006, due to the high level of domestic demand and consumer expenditures.

However, the world economic environment contains several disturbing elements, not only to the global economic growth but also to the performance of growth in Albania. In particular, oil price continues to be in high historical levels, partly due to the high economic growth and the rest due to problems in the net of supply. Oil price rise in the international market has been also reflected in the domestic market over the first semester of 2006. The appreciation of the lek against the dollar in the first quarter has controlled the oil price rising pressures in the country. Meanwhile, the exchange rate smoothing effect has been weaker over the second quarter. The monetary policy pursued by the main central banks has had an evident tightening nature, in response to the increase of inflationary pressures opposite the strong economic growth. The monetary policy tightening in Albania has been reflected in the interest rates increase of financial assets in foreign currency, having significant consequences on credit terms to economy by making it more expensive.

Domestic economy has developed under satisfactory rates over the first half of 2006. Considering the available indicators, the 5.0 per cent GDP growth over 2006 is considered an achievable objective, which could be

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even exceeded. The annual growth of sales to economy over the first quarter resulted in about 18 per cent. This growth has been higher than the rates recorded over the last years for this period of the year. Such a performance has been also sustained by the rapid growth of credit to economy. In relative terms, credit grew by 2.5 percentage points to the GDP over the first five months of the year, providing a strong monetary push for the expansion of the economic activity in the country. According to the estimates to date, the sector of industry, in particular processing industry, and the sector of trade, hotels and restaurants have mostly benefited from the economic growth. Despite the 6 per cent slowdown in the sales annual growth rates over the first quarter, construction sector has had a satisfactory performance. It still remains a stable source for economic growth.

Unemployment rate over the first quarter of the present year has decreased to 14.0 per cent from 14.2 per cent, due to the decrease in the number of unemployed by 4 thousand people. State administration efforts for the further formalization of economy and for a more accurate registration of unemployed have influenced greatly on such a change. The structure of employed by public and private sectors of economy has not experienced significant changes compared to the previous period.

Current account deficit deepened in the first quarter of the present year compared to the same period the previous year. Such a deepening came as a result of the deficit increase in the trade balance of goods and services. Characteristic of this quarter compared to the same period of 2005 is the more rapid increase in imports in relation to exports increase, which have covered about 28 per cent of the import volume. Workers’ remittances performance continued to be stable over this period. These inflows grew by about 20 per cent compared to the first quarter of 2005.

The Government’s efforts in pursuing a prudent fiscal policy have been reflected in the overall performance of budget indicators. This is mainly reflected in the growth of budget revenues, while the level of public expenditures, in particular the level of Investment item, was below the projected level for the first five-month period. Compared to the same period the previous year, revenues grew by 13 per cent, while expenditures decreased by 8 per cent. As a consequence, the first five-month period of this year recorded a continuous budget surplus. The revised budget program projected for the rest of the year sets ambitious objectives as far as the enhancement of public investment and the decrease of business tax burden are concerned. Their realization would be a welcome development for the establishment of a stable infrastructure for economic growth and the promotion of domestic and foreign investment. Moreover, we believe that more efforts should be made for a more homogeneous allocation of budget expenditures over the fiscal year.

The first semester of 2006 was characterized by low and stable annual inflation rates. Annual consumer prices rise fluctuated to 1.3-3.1 per cent over this period, while the average inflation for the period is 2 per cent. Inflationary pressures increased over the second quarter of the year, due to

 Bank of Albania Bank of Albania  volume 9 volume 9 number 2 number 2 June 2006 Economic Bulletin Economic Bulletin June 2006

the late impact of seasonal factors and the smoother appreciation of the lek against the euro, the upward trend in the prices of import as a result of inflation increase in Eurozone, and the oil price rise. Moreover, the rapid growth of credit to economy provides certain risks to macroeconomic stability in the medium and long-term period. Under these conditions, the Bank of Albania deemed as appropriate the tightening of its monetary policy and the increase of the core interest rate. It aims at keeping the demand pressures and inflationary expectations under control. According to operative data, the Bank of Albania assesses that the money markets have begun displaying the first signs of reaction toward such an action.

The monetary developments have generally proceeded according to the Bank of Albania projections. Money supply growth was realized as projected in the monetary programme, to the interval of 10-12 per cent. Such a growth has served to the needs of economy for monetary assets, thus not creating inflationary pressures. As emphasized further in the report, the private sector of economy has become the main consumer of the banking system monetary resources, decreasing the so-far dominance of Government borrowing. Outstanding credit marked a growth of ALL 24.5 billion over January – May. This growth is 30 per cent higher than the growth of outstanding credit over the same period the previous year. Annual credit growth rate marked 65 per cent at the end of May. Annual credit growth has had a downward trend since December 2005. Outstanding credit to economy in relation to the GDP is estimated at about 17 per cent in the first half of the year, against the ratio of 14.6 per cent estimated at the end of 2005. Moreover, the higher private sector demand for money is reflected in the evident growth of outstanding credit weight to money supply (M3).

Money supply growth rates over the first semester of 2006 have been close to the historical trend. In May, annual growth of broad money, M3, resulted in 10.5 per cent while M2 aggregate marked a growth of 6.2 per cent in annual terms. Compared to the same period the previous year, monetary expansion rates have been lower. Money supply has recorded changes in both time structure and foreign currency one, orienting towards less liquid assets and foreign currency ones at the same time. In May, the ratio of currency outside banks to M3 was 23.5 per cent against the ratio of 24.5 per cent, recorded over the same period the previous year. At the same time, the ratio of deposits in foreign currency to M3 accounted for 27.6 per cent or 2.9 percentage points higher than the previous May.

Interest rates in the lek deposits market have by and large reflected the neutrality of the monetary policy conducted by the Bank of Albania over the last year. Under the upward tendency of the usd deposits interest rate, the difference to lek interest narrowed to about 1.4 percentage points in the first semester of 2006. In relation to the interest rate of euro deposits, the difference of lek interest fluctuates to about 2 percentage points against about 5 percentage points recorded in 2003. Despite the decrease of differences in interests, the lek has displayed appreciating tendencies against the dollar, while being relatively stable against the euro over the first semester of the present year. In annual

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terms, the lek continues to be appreciated against both main currencies, the dollar and the euro, by about 4.4 and 0.4 per cent, respectively.

The Bank of Albania assesses that the second semester of 2006 will be characterized by the further consolidation of the overall macroeconomic equilibrium in the country. In its monetary programme, wherein the last weeks’ decision for the increase of the repurchase agreement weekly interest rate by 0.25 percentage points has been made factual, is projected an economic growth of 5 per cent. The Bank of Albania has taken all the proper measures to response timely to the needs of economy for money, being cautious to keep the inflationary pressures, generally generated by the growth of domestic demand, under control. In line with the economy demand for credit and with the inflation objective, the Bank of Albania has projected a money supply growth of 13.6 per cent. Similar to the end of the first quarter 2006, special attention is to be paid to the observance of quantitative restrictions deriving from the Agreement with the IMF at the end of the third quarter of 2006.

On the other hand, the Bank of Albania believes that the financial market, as observed following the last decision, shall further perceive duly the signals and decisions of the monetary policy, making a direct contribution to the improvement of the monetary policy transmission mechanism.

The Bank of Albania will continue to monitor prudently the developments in this market, by transmitting the proper signals through operations having an operational nature and through more specific monetary policy decisions, whenever deemed necessary. I avail myself of this opportunity to emphasize that the Bank of Albania will make all its efforts to be an open and communicative institution, by trying to avoid at any case surprise decisions, which only add confusion and uncertainty to the market.

II Economic developments over the first semester

II.1 World economy

Over the first quarter of 2006, world economy was characterized by positive developments. This performance has consolidated the expectations for a global economic growth of over 4 per cent for 2006, for the fourth consecutive year. However, the economic growth continues to be conditioned by certain phenomena, such as the growth of oil demand, which may not always be supported by the productive capacities. This phenomenon, which the global market is evermore being faced with over the recent years, has caused shifts in the equilibrium between demand and supply for this product of primary importance, both in the short and medium term. The frequency of such an occurrence has caused the oil price to bear shocks, which influence on the further performance of global economy and of consumer prices.

Annual inflation rate over the first quarter of the year has recorded a slight decrease in several countries, reflecting by and large the slowdown in the oil

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price rise. Consumer prices annual inflation rate, excluding Foodstuffs and Energy, was relatively low in most OECD countries in April 2006, fluctuating to an average of 1.9 per cent.

GDP-Q1 Unemployment Rate CPI Table 1 Some main USA +5.6 4.6 (June) 3.6 (April) economic indicators Eurozone +1.9 8 (April) 2.5 (May) in annual terms (in Germany +1.6 10.9 (June) 2 (June) percentage) France +2.2 9.3 (April) 2.1 (May) Italy +2.4 7.7 (December) 2.2 (May) Great Britain +2.3 5.3 (April) 2.2 (May) Japan +3.1 4.1 (April) 0.4 (April) Source: US Department of Labor, US Department of Commerce, Eurostat, “The Economist” magazine, July 1-7, 2006

American Economy In the first quarter of 2006, the economic activity in the United States of America increased by about 5.6 per cent, in annual terms. The economic growth was mostly urged by the intensification of domestic demand, particularly expressed in the increase of personal expenses in consumption and investment. At the same time, net exports continued to contribute negatively to the increase of gross domestic product. Under the effect of interest rates increase and energy price rice, in the upcoming period is expected a slowdown in the economic growth.

US inflation rate over the first half of the present year was considerable and mainly influenced by the energy price rise. In April, it accounted for 3.6 per cent. With a view to accomplishing the main objectives, which are to maintain price stability and boost stable economic growth, the FED has continuously increased the core interest rate to the level of 5.25 per cent at the end of June, from 4.25 per cent at the end of the previous year.

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Eurozone economy Real gross domestic product in the Eurozone increased by 1.9 per cent in the first quarter of 2006. The increasing domestic demand was the most critical factor influencing on the economic performance for this period. Despite the fact that the investment growth was limited due to poor climate conditions, consumer expenses intensified. This performance reflected the positive expectations of consumer confidence and the gradual labour market stabilization. The satisfactory economic performance and the regeneration of domestic demand are expected to contribute to smoothing the oil price rise effect and perhaps to a moderate appreciation of the euro for the upcoming period.

Annual harmonized index of consumer prices increased by 2.5 per cent in May, mainly reflecting the energy price developments. Aiming at maintaining price stability in the medium term, the Governing Council of the European Central Bank increased the core interest rate twice over this year. As a consequence, the core interest rate in June marked 2.75 per cent, compared to 2.25 per cent at year ended 2005. The significant growth in monetary aggregates and credit, excess liquidity situation and the economic and monetary analysis reinforce the presence of an increasing risk for attaining the objective of maintaining price stability in the level of 2 per cent over the following period.

Exchange rate Following a slight depreciation at the beginning of the year, the euro continued to appreciate against the usd reaching its peak at the beginning of June with 1.3 usd/euro. At the end of June, 1 euro exchanged with 1.27 usd, being about 7.7 per cent more expensive than at the end of December 2005. Such a performance in the exchange rate is backed by the improvement and positive expectations regarding the Eurozone economic situation, by the increasing attention of markets to American current account deficit, as well as by the expectations for further developments in core interest rates in the Eurozone and America.

Oil price Global oil price continued to fluctuate in high levels. Although characterized by downward tendencies in the first months of the year, oil prices in the international stock markets around mid-semester marked even higher new records. Oil price rise was mainly a consequence of continuous concerns regarding the restrictions in global effective capacities to refine the oil, interwoven with the expectations for an increasing demand in the following period. These developments were also aggravated by the geopolitical situation, speculations in the futures contracts market and by the fear of hurricanes in the Gulf of Mexico.

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According to OPEC, the positive performance of the global economy over the first quarter of the year has indicated that the high oil prices have had a more restrictive effect on the economic growth, compared to year 20031.

However, it is to be confirmed whether this phenomenon will continue to be present in the future. This shade of doubt relates to the most recent developments in the oil price curve, the aggravation of geopolitical factors in the neighbouring or even transit oil production and transportation regions, as well as to the upward tendency of demand for this product.

Table 2 Oil demand and supply (in million/barrel per day) Q1. 2005 Q2. 2005 Q3. 2005 Q4. 2005 Q1.2006 Q2.2006* a-Oil world demand 84.02 82.32 82.79 83.95 84.74 83.50 b-Supply from countries outside OPEC 54.46 54.72 53.83 54.28 54.92 55.28 c- Supply from OPEC countries 29.46 29.90 30.19 29.92 29.68 Balance (b+c-a) -0.10 2.31 1.22 0.25 -0.14 Note: *There are no available data for the supply from countries outside OPEC over the second quarter of 2006 Source: Organization of Petroleum Exporting Countries (OPEC)

II.2 Albanian economy over the first semester

Over the first months of 2006, the economic agents attempted to recover the economic activity slowdown caused by the severe electricity situation over the end 2005. The overall performance of economic activity, represented by enterprises’ sales index, recorded an annual growth of about 18 per cent.

The performance of direct or indirect domestic demand indices over the first months of 2006 signals more positive developments compared to the previous year. Higher growth rates were recorded in Fuels Consumption and Vehicles Import.

Meanwhile, the performance of domestic demand, in quarterly terms, has essentially followed the yearly seasonal developments.

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Table 3 Performance of Annual change Quarterly change Item some domestic demand (in percentage) (in percentage) indicators Fuels consumption 40.0 1.3 Total vehicles import 45.6 -6.2 TV import -13.2 -52.6 Import of washing machines 25.6 -7.5 Import of machinery and equipment 23.2 -12.9 Cement consumption 11.8 -19.6 Source: INSTAT, Conjucture, Q1 2006

Domestic demand growth, supported by the growth of credit stock, is reflected in the increase of imports and in the deepening of both trade and current deficit.

II.2.1 Performance of economy by sectors

Sector of trade, hotels and restaurants Service sector provided the most considerable contribution to the annual growth of sales index, by about 43 per cent of total annual growth. However, the performance of service sector, which mainly comprises the economic activity of trade, hotels and restaurants, did not seem to diverge from the quarterly seasonal developments. It implies that this sector, considering the opportunities in using substitute electricity resources alternatives, has managed to maintain the historical contribution and performance made over the first quarters in the previous years.

Sector of agriculture Following a period of slowdown over the past year, the agricultural production is expected to record a growth of 1.8 per cent over 2006. This growth rate is, however, lower than the average growth recorded over the last three years. Poor weather conditions, in particular over spring, have had a negative effect on the level of agricultural production. According to the most recent projections, agricultural production growth over 2006 will be mainly influenced by the higher contribution expected to be provided by Fruit-trees sub-branch. These projections are based on the expectations for the growth of productivity in this sub-branch. Agro-industry sector is expected to display stable growth rates throughout year 2006.

Table 4 Projection of Item Annual growth in 2005 Projection of growth for 2006 agricultural production by Agriculture 1.6 1.8 branches (in percentage) Animal farming 1.05 1.86 Plants 1.97 0.89 Fruit-trees 1.97 5.08 Agro-industry 5.67 6.00 Source: Ministry of Agriculture, Food and Consumer Protection

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According to estimates, agro-industrial production in quarterly terms was also influenced by the seasonal factor, which exerts downward pressure on production over the first quarters of the year. However, according to the Ministry of Agriculture, Food and Consumer Protection, investments in this sub-branch over the first quarter of 2006 marked a growth of about 35 per cent, compared to the same period the previous year, while the number of employed increased by 1 per cent. These developments signal the expansion of this sub-branch in the future.

Sector of industry and electricity Over the first quarter 2006, the sector of industry displayed signs of revitalization after the unfavourable situation caused by the electricity crisis at the year ended 2005. At the same time, this sector recorded growth compared to the first quarter over the past years. The annual growth of industry sales for the first quarter of 2006 was 23 per cent, contributing to the annual growth of economy sales by about 33 per cent. Despite the presence of the seasonal effect, expressed in the decline of activity starting from the fourth quarter of the previous year to the first quarter of the following year, the period being analysed has been characterized by the lowest quarterly decrease observed in the last five years. This development implies the significant mitigation of the seasonal factor, as a consequence of the companies’ efforts to compensate the losses recorded over the year-end, by intensifying their economic activity over the first quarter of 2006.

Share to total Q1 ‘06/Q1 ’05 Contribution Table 5 Performance of industry sector for the Total industry 100 22.8 first quarter of 2006 (in Extracting industry 8 34.2 2.7 percentage) Processing industry 62 24.1 14.8 Electricity, water, gas 30 17.7 5.4 Source: INSTAT, Conjucture, Q1 2006

According to the data provided by INSTAT, the annual growth of industry sales was to an extent of 65 per cent influenced by the growth in the sales of the processing industry. This sub-branch recorded the highest annual growth from 2002, by about 24 per cent. The extracting industry sub-branch also displayed a positive performance, with an annual growth of 34 per cent. This growth rate signals the revitalization of this type of industry, not very active so far.

Following the annual decline by 8 per cent over the last quarter of 2005, the sales in the electricity, water and gas sub-branch grew by 18 per cent over the first quarter of 2006. However, the data on the production of electricity for the first five months of 2006 indicate a decline in production by 2 per cent,

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compared to the first five-month period in the previous year. This decline in production was followed by a decline of 5 per cent in the quantity of invoiced electricity. Electricity consumption by household consumers over the first five months of the present year has shared about 65 per cent of the overall electricity consumption.

Despite the decreasing total losses starting from February 2006, they increased by 10 per cent over the first five months of the year, compared to the same period the previous year.

Table 6 Main indicators of First 5-months of 2005 First 5-months of 2006 Change electricity balance sheet (in Production 2,686,921 2,632,281 -2% MWh) Import 0 226,248 Total loss 1,076,195 1,184,534 +10% Invoiced consumption 1,549,503 1,473,997 Household consumption 945,722 942,537 -0.3% Source: Albanian Electro-Energy Corporation

Sector of construction The decline in the contribution of the construction sector activity, observed in the last quarter of the previous year, was more significant over the first quarter of 2006. The annual growth of sales in the construction sector is the lowest compared to the growth in other sectors of economy, contributing to the growth of economy sales by only 4 percentage points. The slowdown in the economic activity of this sector, as confirmed by several surveys conducted by the Bank of Albania, was significant when compared to the same period the previous year.

Construction cost index has displayed a downward tendency starting from the second quarter of 2005. The annual index change for the first quarter of 2006 was -0.5 per cent, signalling a decrease in the construction cost.

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At the same time, “Direct expenses” sub-item has recorded an annual growth of 7.4 per cent, due to the oil price rise.

Sector of transportation The revitalization of the transportation sector, observed starting from the second quarter of 2005, continued over the first quarter of 2006. The annual sales of this sector grew by 15 per cent. However, oil price rise may have played a role in the performance of this sector’s nominal sales. Hence, real sales growth rate may be lower than 15 per cent.

II.3 Labour market

The first quarter of 2006 recorded an unemployment rate of 14 per cent, which is lower when compared to the previous quarter or to the same period the previous year. The downward tendency of unemployment has been confirmed by several business surveys conducted by the Bank of Albania. In the context of further economy formalization, Government bodies have intensified the administrative measures over this period. All these elements are considered crucial factors, which influence on the decline in the number of registered unemployed. The number of employed results to be the same as over the first quarter of 2005, while the number of registered unemployed decreased by 4 thousand people. Such a development indicates that a more accurate registration of unemployed has led to a more real estimation of the working age population.

2005 2006 Table 7 Labour market Q1 Q2 Q3 Q4 Q5 indicators (in thousand Total labour forces 1087 1086 1086 1086 1083 people) A. Total of employed 931 931 931.2 932 931 i) in the public sector 176 175.6 175.6 175 174 ii) in private non-agricultural sector 213 213.4 214 215 215 iii) in private agricultural sector 542 542 542 542 542 B. Unemployment (in thousand of people) i) total of unemployed 156 155 154.8 154 152 ii) benefit from unemployment compensation 11.5 11.5 11.5 11.5 11.2 C. Unemployment rate (in percentage) 14.4 14.3 14.2 14.2 14.0 Source: INSTAT, Conjucture, Q1 2006

The structure of employed by public and private sectors of economy has not experienced changes compared to the previous period. About 58 per cent of the total employed is shared by the private agricultural sector, 23 per cent by the private non-agricultural sector and the rest of employed by the public sector.

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Following the tendency of private sector expansion, the number of employed in the public sector has decreased. Over the first quarter of 2006, it decreased by 1.1 per cent compared to the first quarter the previous year. The employed people in the private non-agricultural sector have recorded an increase in their number by about 0.9 per cent, in annual terms. These changes have, to a large extent, balanced one another, causing the number of employed over the periods being analysed to remain unchanged.

Based on the latest estimates of the Ministry of Labour, Social Affairs and Equal Opportunities on the level of unemployment, the number of registered unemployed over May 2006 was about 150 thousand people, out of which 65 per cent is shared by long- term unemployed. The level of unemployment results to be higher in areas of low economic activity, in particular in the north of the country, while the lowest level was recorded in Tirana. According to the same information source, the highest unemployment rate is present among the least educated part of population.

II.4 Fiscal sector

Government’s efforts in pursuing a prudent fiscal policy were reflected in the overall performance of budget indicators. The period over January – May 2006 indicates a satisfactory performance of these indicators, compared to the projected level. This performance is mainly reflected in the growth of revenues, while the level of public expenditures, in particular Investment, remained below the level projected for 2006.

According to the data provided by the Ministry of Finance, by the end of May were collected 101.7 per cent of projected revenues and realized about 87 per cent of the projected expenditures. This has caused the budget surplus to result in about ALL 10.4 billion by the end of May, from the projected deficit of ALL 2.4 billion. Compared to the same period the previous year, revenues grew by 13 per cent, while expenditures fell by 8.1 per cent, recording the highest level of contraction in total expenditures over the last 15 years. As a consequence, the period from January to May has resulted in budget surplus.

Table 8 Growth rates of Average 5M 00 5M 01 5M 02 5M 03 5M 04 5M 05 5M 06 main fiscal indicators (in 98-05 percentage)* Total revenues 14.6 14.8 6.5 13.8 8.5 8.2 13.0 12.2 Tax revenues 32.6 11.3 10.6 45.7 11.1 8.0 15.0 18.1 Local government 48.3 69.2 16.7 247.1 18.2 7.4 (8.8) 58.5 revenues

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Independent 13.1 16.3 11.9 15.1 9.9 12.2 12.5 12.5 budget revenues Non-tax revenues (27.6) 29.2 (14.7) (8.4) (11.8) (2.1) 7.8 6.1

Total expenditures (0.8) 12.7 3.3 8.2 6.6 7.9 (8.1) 8.5 Current expenditures (0.6) 10.2 8.3 10.0 7.7 7.2 (4.6) 8.2 Capital expenditures (6.50) 30.6 (18.9) (4.0) (1.1) 14.0 (34.4) 13.5

Deficit (38.6) 3.4 (12.9) (26.7) (11.9) 5.0 (266.8) (7.8) Domestic financing (35.23 (57.3) 91.9 (25.1) (10.6) 25.2 (390.0) 19.8 Foreign financing (42.4) 82.6 (45.0) (28.5) (13.5) (18.2) (48.9) (12.0) Source: Ministry of Finance, June 2006 Note: *Figures in brackets indicate decline in rates

Budget revenues Budget revenues over January – May 2006 were 13 per cent higher than the same period over 2005. The level of tax revenues reached to about ALL 79.9 billion by the end of May. Customs duties amounted to about ALL 5.7 billion, as such realizing the level projected in the draft budget of the beginning of the year by 104.5 and 110.7 per cent, respectively.

Tax revenues continue to constitute the main source of budget revenues, accounting for about 89.6 per cent of total revenues. Tax on profit and excise revenues have had their best performance in revenues, exceeding the plan by 28.3 and 14.4 per cent, respectively. Among tax revenues, only tax on personal income and national tax did not reach the level projected for this period, being realized by 96.6 and 81.6 per cent, respectively. Moreover, it is observed that local government revenues have altered the upward tendency of the recent year, being realized in the level of 90 per cent.

Plan Annual Table 9 Tax and customs January February March April May % Jan-May plan revenues (in billions of ALL TOTAL REVENUES 16.75 32.72 51.87 69.08 86.74 85.33 101.7 39.1 – progressive data) Tax revenues 15.29 22.24 34.79 46.03 58.93 55.08 104.5 40.6 Value added tax 5.26 10.43 15.65 20.90 27.04 25.55 105.8 38.6 Tax on profit 1.49 3.26 6.06 7.74 9.59 7.47 128.3 52.4 Excises 1.63 3.09 4.61 6.06 8.09 7.07 114.4 40.6 Tax on personal 0.72 1.23 1.93 2.49 3.05 3.16 96.6 36.6 income National tax and 0.94 2.08 3.18 4.40 5.42 6.64 81.6 37.2 other related Customs duties 1.02 2.15 3.36 4.43 5.74 5.19 110.7 40.7 Source: Ministry of Finance, June 2006

Budget expenditures Budget expenditures over the first five months of the year amounted to ALL 76.3 billion or about 86.9 per cent of the level projected for this period.

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Capital expenditures performance over the first months of the year did not adequately support the economic growth in the country. They continue to be realized below the projected level, accounting for 46.3 per cent. From the latter, expenditures covered by domestic financing were realized to the level of 67.8 per cent.

Table 10 Composition of Plan Annual January February March April May % current expenditures (in Jan-May plan % millions of ALL) Total expenditures 16.75 32.72 51.87 69.08 86.74 85.33 87.0 29.5 Current expenditures 11.19 25.25 42.66 59.22 76.32 87.76 93.8 34.1 Personnel 11.08 24.29 39.45 54.88 69.95 74.57 98.7 35.1 Interests 3.67 7.89 12.02 16.26 20.59 20.86 90.3 33.4 Domestic 2.21 3.78 6.41 8.33 10.07 11.16 94.1 35.4 Foreign 2.12 3.53 6.06 7.79 9.41 10.00 57.4 18.5 Operative maintenance 0.08 0.24 0.34 0.54 0.67 1.16 83.0 30.0 expenditures Subsidies 0.27 1.51 3.11 4.72 6.39 7.70 88.4 32.9 Social insurance 0.06 0.17 0.49 0.71 0.84 0.95 97.8 38.7 expenditures Local budget 4.19 8.74 13.39 18.04 22.86 23.39 84.2 25.1 expenditures Other expenditures 0.57 1.41 2.43 3.88 5.36 6.37 92.4 33.3 Source: Ministry of Finance, June 2006

Current expenditures continue to represent over January – May 2006, the largest share of expenditures in the state budget. The latter share about 85 per cent of total expenditures. Personnel expenditures were realized to the level of 98.7 per cent.

Fiscal balance The first five months of 2006 recorded a high level of budget surplus. However, this positive balance has had a downward trend over the months.

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II.5 External sector of economy

Current account deficit in the first quarter of 2006 amounted to EUR 164 million2, compared to EUR 90.2 million recorded over the first quarter of 2005. Deficit deepening in trade of goods and services provided the main contribution to current account aggravation. Meanwhile, the increase of revenues’ positive balance and of current transfers has balanced the negative contribution provided by trade balance. Exchange rate performance3 over January – March 2006 has maintained the tendency of the first five months of 2005, thus not having a significant impact over the developments in the balance of payments.

Trade of goods has recorded a negative balance over the first quarter of 2006, amounting to EUR 370 million, which is about 34 per cent more than the same period the previous year. Compared to the last quarter of 2005, trade deficit decreased by about 18 per cent. Trade deficit reduction in the first quarter of the year is an expected development caused by the cyclic performance of economy, which generally experiences a slowdown at the beginning of the year. The more rapid growth of imports in relation to exports and the growth of transactions’ volume are the distinctive characteristic of this quarter compared to the same period the previous year. Exports managed to cover only 28 per cent of imports over this quarter, which indicates an aggravation in the trade balance. In a long-term perspective, the accumulated balance of trade deficit of goods for the last 12 months (until March 2006) amounted to EUR 1571 million from EUR 1260 million of the accumulated deficit of the last 12 months, until March 2005.

Export of goods for the period of January – March amounted to EUR 464 million or about 10 per cent more than the amount of export of goods recorded in the last quarter of 2005. This amount was 18.8 per cent higher than the same period the previous year. While, import of goods amounted to EUR 829 million. Compared to the previous year, were imported more foodstuffs, mineral products, base material and means of transportation. The growth of import in these commodity groups indicates the positive developments in the sector of production.

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The performance of trade of services was similar to the developments in the trade of goods. Import of services for the first quarter amounted to about EUR 304 million, marking a deficit of EUR 36.6 million. Current revenues grew compared to the year-ended and to the same period the previous year. Revenue surplus amounted to EUR 42 million, with a positive balance in both employees’ compensation group and investment revenues.

Transfers from emigrants, the main item in current transfers, amounted to EUR 199.6 million by the end of the first quarter. This amount contributed to smoothing the trade deficit of goods and services by about 50 per cent. The performance of workers’ remittances continued to be constant over this period. They grew by about 20 per cent compared to the first quarter of 2005, being reflected in the growth of current transfers by 10 per cent.

Capital and financial account recorded a net flow of EUR 92 million over the first quarter of 2006. These flows financed about 56 per cent of the current account deficit. Capital account amounted to EUR 36 million, while the financial account net flow amounted to EUR 56 million, over the first quarter.

Albania’s financial liabilities to the rest of the world decreased by EUR 92 million by the end of the first quarter, which is about EUR 38 million less than the flow of liabilities recorded over the last quarter of the previous year. Despite the total decline of financial liabilities flow, the external debt grew by about 20 per cent over the first quarter of 2006, compared to the previous quarter, while foreign direct investment fell by about 10 per cent compared to the same period. Albania’s financial claims on non-residents grew by EUR 36 million. Developments in the item of deposits and other assets have dominated in the balance of this account.

As a result of foreign assets inflows, the foreign reserve of the monetary authority grew by EUR 15.6 million over the first quarter of 2006, causing it to amount to the level of EUR 1.214 billion. The foreign reserve is sufficient to cover about 4.5 months of import of goods and services.

Table 11 Balance of Q1’ 05 Q2’ 05 Q3’ 05 Q4’ 05 Q1’ 06 payments, Q1 2005 – Q1 Current account -90.2 -188.5 -76.8 -238.8 -164.3 2006 (in millions of EUR) Export of goods 121.5 143.3 133.7 253.2 144.4 Import of goods -398.1 -507.1 -516.1 -306.6 -515.2 Trade balance -276.6 -363.8 -382.3 -53.4 -370.8 Services: Credit 203.8 237.4 270.8 253.2 267.3 Services: Debit -227.9 239.5 -309.9 -306.6 -303.8 Services (net) -24.1 -263.3 -39.0 -53.4 -36.6 Revenues: Credit 36.9 33.9 52.1 45.3 52.4 Revenues: Debit -9.1 -14.0 -8.0 -11.2 -10.1 Revenues (net) 27.8 19.9 44.1 34.1 42.4 Private transfers 166.4 156.6 259.5 219.5 199.6 Government transfers 11.8 10.1 20.8 18.6 16.2 Capital account 35.5 14.6 25.0 24.1 36.0 Financial account 29.7 116.9 -15.5 193.6 55.9 Capital and financial account 65.3 131.5 9.6 217.7 91.8

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Direct investment 45.3 50.3 53.0 63.9 56.7 Portfolio investment -42.8 -5.4 40.9 5.4 4.6 Net errors and omissions 34.6 58.4 66.2 101.3 88.1 Reserve and related items: Reserve assets -9.7 -1.4 -33.7 -80.1 -15.6 Use of IMF credit and loans 0.0 0.0 -4.8 0.0 0.0 Source: Bank of Albania, Balance of Payments Division, June 2006

III Inflation performance

Average annual inflation rate for the first semester of 2006 resulted in about 2 per cent. The period of low and stable inflation until March 2006 was followed by the upward trend of this indicator. May 2006 recorded the highest annual inflation rate for the first semester of 2006. Annual inflation rate in June marked 2.4 per cent. The –1.1 per cent monthly inflation was significantly lower than the rate of -0.5 per cent marked in June 2005, due to the late impact of seasonal factors, which exert pressure over the fall of foodstuffs prices.

2001 2002 2003 2004 2005 2006 Table 12 Annual inflation January 2.2 6.5 0.0 3.3 3.3 1.4 rate (in percentage) February 1.5 7.6 1.1 4.4 1.8 1.3 March 2.9 7.5 1.3 4.0 1.6 1.5 April 3.0 6.5 2.3 3.2 1.3 2.4 May 2.5 4.6 2.8 2.6 2.0 3.1 June 4.0 3.7 2.6 2.9 2.9 2.4 July 5.6 4.2 3.0 3.1 1.8 August 4.1 5.5 3.0 2.7 2.3 September 3.5 5.3 2.8 2.0 3.1 October 1.8 5.8 2.9 2.0 3.3 November 2.8 3.7 3.4 2.2 3.0 December 3.5 1.7 3.3 2.2 2.0 Average 3.1 5.2 2.2 3.0 2.4 2.0 Source: CPI, INSTAT, 2006

Although the deep upward tendency observed over April – May 2006 was somehow smoothed over June, the second quarter of 2006 recorded a higher annual rate than the same period the previous year (+0.6 percentage points). The increase in the annual inflation rate mostly reflected the contribution of the price rise in the agricultural products for this year. The latter is assessed to be a consequence of the reduced supply of the domestic agricultural production in the domestic market, due to poor weather conditions.

The inflationary pressures intensified over the second quarter of the year as a result of the influence of other factors, despite the seasonal

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ones. Smoother appreciation of the lek against the euro, the upward tendency of import prices due to inflation increase in partner countries and the oil price rise over May and June 2006 have all further intensified the influence of pro- inflationary factors on economy.

III.1 Inflation performance by main groups

The contribution of main groups to annual inflation rate displayed a different view over January – June 2006, compared to the previous two years.

Annual inflation of “Foodstuffs and non-alcoholic beverages” group displayed diverse performances over the first semester, in particular over the second quarter, compared to the previous years. Over April and May 2006, this group contributed to total annual inflation rate by about +50 per cent. Over the last two years, foodstuffs prices have exerted downward pressures on the annual inflation rate at the beginning of summer season. Although June partly returned this performance of Foodstuffs group, due to the fall of prices in typical seasonal products, it continued to record a positive contribution of Foodstuffs to annual inflation. This development came as a consequence of the further rise in the prices of other foodstuffs and mainly of processed food.

Table 13 Annual inflation Annual Annual Greece5 Contribution Contribution Italy4 Annual of “Foodstuffs and non- inflation inflation Annual (pp) (pp) inflation ’06 alcoholic beverages” group ’05 ’06 inflation ’06 (in the country and abroad) January -0.7 -0.3 -0.4 -0.2 1.1 1.6 and the contribution of this February -1.2 -0.5 -0.3 -0.1 0.9 2.1 group to total inflation March -1.7 -0.7 0.4 0.2 1.0 2.1 April -2.2 -1 2.5 1 1.0 3.8 May -0.7 -0.3 3.7 1.5 0.9 2.9 June 1.6 0.7 1.9 0.8 - - Source: Bank of Albania; General Secretariat of National Statistical Service of Greece; ISTAT- Italy

“Transportation” group with “Service to personal vehicles” subgroup reflected the high oil price rise, which peaked in May and June 2006. Starting from May 2006, the favourable behaviour of lek exchange rate against the dollar and the euro did not manage to fully compensate the oil price rise.

The contribution of “Rent, water, fuels and energy” price index to total annual inflation rate was positive. Moreover, this index defined the low annual inflation rate over the first quarter of 2006. As expected, the rise of energy prices in the previous year ceased to provide its effect on inflation at the beginning of 2006.

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Annual inflation ‘05 Contribution (pp) Annual inflation ‘06 Contribution (pp) Table 14 Annual inflation January 15.2 3.6 3.6 0.9 rate and contribution of February 9.8 2.4 3.5 0.9 “Rent, water, fuels, energy” March 9.9 2.4 3.2 0.9 group to total inflation April 7.2 1.8 3.2 0.8 May 7.2 1.8 3.8 1.0 June 7.1 1.8 3.9 1.0 Source: INSTAT, 2006

The contribution of other basket groups was relatively low and stable over January – June 2006, mainly manifested by “Hotels, café and restaurants” group.

III.2 Macroeconomic environment and consumer prices

The first part of 2006 was characterized by a positive performance of monetary and fiscal indicators. These factors managed to control the further increase of inflationary pressures, which were most significant over the second quarter of 2006. External economy developments and the negative performance of some indicators related to domestic supply have caused the consumer prices to display an upward tendency. Factors, such as the high oil and import prices, the reduced supply of domestic agricultural products and the smoothing of the lek appreciation against the euro have all had an impact on the consumer price performance over January - June 2006.

Monetary policy January – May 2006 was characterized by a downward tendency of M3 growth rate and of currency outside banks. Meanwhile, lending rates resulted to be high. Unlike the historical tendencies, January – May 2006 experienced

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a monetary expansion, pushed by the private sector demand for monetary assets. This credit is assessed to have influenced on domestic demand growth, being also reflected in the growth of sales. The growth of domestic demand may have had an impact on the increase of inflationary pressures, which are assessed to be higher than the ones experienced over the same period the previous year. This growth of demand by the private sector was somehow balanced by the modest public sector demand. This has caused the monetary developments to have a controlling role on the increase of inflation rates.

Fiscal policy The fiscal policy pursued over the first half of 2006 was a prudent one. Government’s efforts in collecting revenues opposite the expenditures slowdown have resulted in the increase of budget surplus for January – May 2006. In general, it has caused the demand for money to be low, making a significant contribution to the tendency of M3 annual growth. The prudent fiscal policy has influenced on keeping the inflation rate within the Bank of Albania objective for the period being analysed. However, the expected growth of expenditures and of deficit in the second semester of 2006 shall bring the increase of inflationary pressures on economy.

Exchange rate, imported inflation and oil prices The lek continued to appreciate over the first semester of 2006, both against the dollar and the euro. However, the appreciating tendency against the euro was more moderate over April - June 2006. This has caused the depreciating influence on imported products prices to be less present.

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Oil price rise in the international markets was also reflected in the domestic market, reaching its peak at the end of June. This rise was more considerable than the appreciating tendencies of the lek over the last two months of the first semester. Therefore, the risk presented by “oil” factor to domestic inflation over the second quarter of 2006, is considered to be more present than before.

Production and consumer prices The fluctuations in production prices did not have an evident influence on the inflation rate over the first quarter of 2006. The reason behind this divergence may be the fact that the share of domestic production is not determinant in the supply of goods in the Albanian market, as such not having a direct influence on consumer prices. Moreover, a large share of production continues to be re-exported.

IV Monetary developments and financial markets

IV.1 Monetary policy of the bank of albania

Monetary developments and the performance of macroeconomic indicators have generally been in line with the projected tendencies. Money supply growth was carried out according to the monetary programme. Private sector of economy was the main factor influencing on the monetary expansion, while the public sector has generally been characterized by a tightening demand for monetary assets. The net influence has resulted in the maintenance of the money supply growth rate within the interval of 10-12 per cent over the first five months of 2006. Monetary developments have reflected the constant performance of macroeconomic indicators and the growth within the targeted objective of the total level of prices in economy. The Bank of Albania has pursued a neutral monetary policy over the first semester of 2006.

The constant maintenance of the core interest rate began in March 2005, when the Bank of Albania decreased it by 0.25 percentage points. Starting

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from this month, the interest rate applied in repurchase agreements was 5.0 per cent. However, the interest rates in the money markets have maintained slight downward tendencies. The average weighted interest rate of deposits in the system decreased by 0.3 percentage points in May, compared to 4.46 in December. However, the Treasury bills interest rates of 3-month and 12-month maturity decreased by about 0.3 and 1.3 percentage points, respectively, over the first semester of 2006. The downward tendencies are assessed to be a result of the shift of securities’ portfolio to two and three-year maturity. In deposits market, the moderate downward tendency was encouraged by the enhancement of competition and the decline of market concentration among large banks.

The tendencies observed in the performance of interest rates and the developments in the real sector, reflected in the growth of domestic demand and increasing inflationary pressures expectations, have supported the reconsideration of the monetary policy stand in July. The growth of credit to the private sector constitutes a stimulating element for inflationary pressures. Given this perspective, the Bank of Albania increased the repurchase agreement interest rate by 0.25 percentage points. This policy is expected to influence on keeping the upward tendency of the aggregate demand in economy constant and on stabilizing the foreign currency structure of interest rates in credit and deposits’ market.

Moreover, in the context of implementing its monetary policy, the Bank of Albania has observed its operational objectives for the first semester of 2006.

Table 15 Realization of the December ‘05 March ‘06 April ‘06 May ‘06 June ‘06 Bank of Albania quantitative Net international reserve of the Bank of Albania (in millions of USD) objectives6 Objective 1,184 1,117 1,115 1,113 1,112 Actual 1,184 1,215 1,219 1,243 1,237 Difference -- 98 104.0 129.7 135.5 Net domestic assets of the Bank of Albania (in billions of ALL) Objective 82.0 85.0 86.7 88.3 90.0 Actual 76.7 61.8 65.0 62.5 66.6 Difference -5.3 -23.2 -21.7 -25.8 -23.4 Net domestic credit to Government (in billions of ALL) Objective 306.7 314.6 315.9 317.2 318.7 Actual 306.7 300.5 297.1 297.3 -- Difference -- -14.1 -18.8 -19.9 -- Source: Bank of Albania

IV.2 Performance of monetary aggregates

Money supply growth rates over the first semester of the present year have been close to the historical trend. In May, the annual growth of broad money, M3, resulted in 10.5 per cent, while M2 aggregate marked a growth of 6.2 per cent, in annual terms. Compared to the same period the previous year, monetary expansion rates have been lower. Actually, the performance of these

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indicators mainly reflects the demand of the private sector of economy for money. Public sector demand for money to finance the fiscal deficit projected for 2006, is expected to be entirely realized in the second half of the year. Such a development will encourage higher money supply growth rate in the second part of the year.

Unlike the historical trends, the monetary expansion of January – May is entirely motivated by the private sector demand for monetary assets, while public sector demand has had a neutral effect on the monetary developments. Over this period, credit to the private sector has dominated the performance of monetary aggregates. Total deposits grew by ALL 21.5 billion over January – May or by about 5 per cent of deposits’ stock in December 2005. Over the same period the previous year, deposits in the system grew by ALL 32.7 billion, mainly as a result of a more rapid circulation of the planned annual borrowing of the public sector. The distribution of demand for money over the year tents to influence on the concentration of deposits in quarters, with a high demand for money, and on the situation of the banking system liquidity.

Money supply has recorded changes in both time structure and foreign currency one, orienting towards less liquid assets and foreign currency ones at the same time. In May, the ratio of currency outside banks to M3 was 23.5 per cent against the ratio of 24.5 per cent, recorded over the same period the previous year. At the same time, the ratio of deposits in foreign currency to M3 accounted for 27.6 per cent or 2.9 percentage points higher than in May the previous year.

Interest rates in the lek deposits market have by and large reflected the facilitating tendency of the monetary policy conducted by the Bank of Albania over the last three years. Under the upward tendency of the usd deposits interest rate, the difference to lek interest has decreased from about 7 percentage points in 2003, to about 1.4 percentage points in the first half of 2006. In relation to the interest rate of euro deposits, the difference of lek interest fluctuates to about 2 percentage points, against about 5 percentage points recorded in 2003. The difference in the lek deposits to the euro deposits is mainly due to the decrease of the lek deposits interest to the interval of 4.5 – 4.2 percentage points over this semester.

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The decrease of the lek deposits interest rates to those in foreign currency was accompanied by a shift in the foreign currency structure of deposits, in favour to deposits in foreign currency. The weighted interest rate of lek deposits in the first five months of 2006 was about 2 percentage points higher than the weighted interest rate of euro deposits. This difference was about 6.5 percentage points in 2003. The difference of lek deposits interests to those in usd has reduced from about 7 percentage points in 2003 to about 1.5 percentage point in the first semester of 2006.

The annual growth of total deposits, in absolute terms, was dominated by the growth of demand deposits in the system. The level of time deposits in the last 12 months has experienced a decline by ALL 3.2 billion, while demand deposits have recorded an annual growth of ALL 44.9 billion. As a result, the

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ratio of time deposits to total deposits decreased by 7.6 percentage points from May 2005 to May 2006, decreasing from 77.8 per cent to 70.2 per cent. In December 2005, this ratio was 69.8 per cent7.

May Annual change Annual change Table 16 Performance of 2005 Absolute Percentage Absolute Percentage monetary indicators in May Currency outside banks 138.3 0.1 0.1 7.6 5.8 (in billions of ALL) Total deposits 449.9 4.0 0.9 48.1 12.0 - in lek 287.7 1.5 0.5 17.2 6.3 - in foreign currency 162.2 2.5 1.5 30.9 23.6

Demand deposits 134.2 2.5 1.9 44.9 50.3 - in lek 82.6 1.8 2.2 40.0 94.2 - in foreign currency 51.6 0.7 1.4 4.9 10.4 Time deposits 315.7 1.5 0.5 3.2 1.0 - in lek 205.1 -0.3 -0.1 -22.9 -10.0 - in foreign currency 110.6 1.8 1.6 26.1 30.9

M1 220.9 1.9 0.9 47.6 27.5 M2 426.0 1.6 0.4 24.8 6.2 M3 588.2 4.1 0.7 55.7 10.5 Monetary base 190.7 0.0 0.0 16.2 9.3 Source: Bank of Albania

IV.3 Domestic demand

IV.3.1 Net foreign assets

The banking system foreign assets amounted to USD 2.1 billion at the end of May 2006. Over the first five months of the year, the foreign assets grew by USD 187.9 million. The most significant contribution to this growth was provided by the growth in the net foreign reserve of the Bank of Albania by USD 144.5 million. Foreign reserve growth came as a consequence of the foreign currency purchase by the Bank of Albania, the income from the privatization of the Italian- Albanian Bank, as well as of the euro/usd exchange rate effect. The appreciation of the euro against the usd by about 8.2 per cent has caused the amount of investment in euro, expressed in usd, to grow.

Foreign currency inflows and outflows in commercial banks have resulted in the growth of net foreign assets by about USD 43.4 million, starting from the beginning of the year. This performance is due to the higher growth rate of deposits in foreign currency, compared to the growth rate of credit in foreign currency. The growth of foreign currency liabilities, expressed as credit from non-residents by about USD 36.9 million over this period, has influenced on the decrease of commercial banks’ net foreign assets.

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IV.3.2 Government demand for money

Budget surplus at the end of May amounted to ALL 8.9 billion. Unlike the previous year, the reduction of Government demand for money has resulted in a negative financing of deficit by the banking system. The negative level of domestic financing amounted to about ALL 2.8 billion in May, while Government deposits amounted to ALL 6.1 billion. The planned Government borrowing to be used for the 2006 budget deficit financing is expected to lead to the concentration of Government demand for money in the second semester of the year.

The decrease of the weight of domestic Government borrowing on money supply and of domestic borrowing dominating effect on the time structure of securities’ interest rates continued over this year. The Government continued to issue Treasury bills of three maturities, with a view to extend the securities’ maturity terms. The net effect of the Treasury bills, issued over the first semester of the year, resulted to be negative since their maturity exceeds the issued amount.

The Government issued bonds of two and three- year maturity over the first half of the year, amounting to ALL 6 billion and ALL 3.5 billion, respectively. Part of the domestic financing in May were the revenues resulting from the privatization, which amounted to ALL 2.1 billion8. Fiscal surplus of this semester was invested in commercial banks in the form of reverse repos. Their level amounted to ALL 9 billion in May.

IV.3.3 Credit to economy

Credit to economy amounted to ALL 146.5 billion by the end of May. Over January - May, outstanding credit recorded a growth of ALL 24.5 billion. This growth is 30 per cent higher than the growth of outstanding credit over the same period the previous year. Credit in May grew by 65.1 per cent, which is lower than the annual credit growth rate of 74.3 per cent in December 2005. Credit annual growth has followed a downward tendency since December 2005.

Outstanding credit to economy as a share to GDP accounted for about 17 per cent in the first semester of 2006, compared to 14.6 per cent at the year ended 2005. Moreover, the higher demand of the private sector for money is reflected in the considerable growth of outstanding credit to money supply (M3). The ratio of outstanding credit to M3

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in May accounted for 24.9 per cent or 3.8 percentage points higher than in December. The same ratio was 8.2 per cent higher to May 2005.

The increasing contribution of credit to the private sector to money supply expansion is in line with the tendency projected in the medium-term. This tendency is in line with the enhancement of the banking system intermediary role in economy and is accompanied by changes in the dynamics of monetary developments. Higher credit growth rates against the historical rates are consistent with the expansion of credit base from the banking system to economy.

Over the first five months of 2006 was extended ALL 55 billion of new credit or about 33 per cent more than the previous year. In the structure of new credit is observed the tendency of banks to extend more long-term credit, credit to households and credit in local currency.

Outstanding credit in lek grew by about ALL 1.7 billion over the first five months of 2006, which is about 72 per cent higher than the average growth of the same period the previous year. The annual growth rate of credit in lek was 112 per cent in May. By the end of May, the portfolio of credit in lek accounted for 27.2 per cent of total credit to economy, against the ratio of 25.6 per cent estimated in December 2005. The increase in the share of credit in lek to total credit is a result of the tendency of crediting to households in lek, while the growth rate of credit to business in lek has maintained the downward trend.

Long-term credit displayed positive developments in the first months of 2006. The share of long-term credit to total credit portfolio accounted for 38.3 per cent by the end of May. The extension of credit maturities is one of the main reasons for the high growth rate of credit portfolio. The share of

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short-term credit has had a downward tendency. Short-term credit is applied for by businesses, mainly used to cover short-term needs for liquidity.

Table 17 Outstanding credit indicators (as a share to total) 2005 2006 2003 2004 Q1 Q2 Q3 Q4 March April May Total credit (in billions of ALL) 50.7 69.3 79.0 95.9 106.0 121.9 134.6 140.0 146.5 Credit to households 24.5 30.6 31.0 30.8 31.4 31.6 31.9 31.7 31.9 Credit to business 75.5 69.4 69.0 69.2 68.6 68.4 68.1 68.3 68.1 Short-term credit 46.0 34.0 34.1 33.7 31.6 32.8 32.3 32.0 46.0 Medium-term credit 33.3 36.0 34.5 33.1 31.2 30.3 29.9 29.7 33.3 Long-term credit 20.7 30.0 31.4 33.1 36.9 37.0 37.8 38.3 20.7 Credit in Lek 19.6 19.5 20.1 22.9 23.7 25.5 26.0 26.3 27.1 Credit in foreign currency 80.4 80.5 79.9 77.1 76.3 74.5 74.0 73.7 72.9 Source: Bank of Albania

With regard to the sectoral distribution of credit, is observed the upward tendency of crediting the sectors which need long-term investment, as indicated by the growth of credit for real estates and construction. Consumer credit has also recorded continues growth. Credit to agriculture has remained in close levels as in December 2005. Trade continues to represent the most credited branch of economy, sharing about 19.9 per cent of total credit portfolio.

Table 18 Credit to economy by branches 2002 2003 2004 Q1 ‘05 Q2 ‘05 Q3 ‘05 Q-4 ‘05 Q1-06 May 06 Agriculture, hunting and silviculture 0.8 1 1.5 1.5 1.5 2.4 2.7 2.2 2.29 Processing industry 17 17 17.1 16.7 15.6 13.9 16.8 14.2 13.05 Construction 8.6 10 9.8 11.2 11.2 12.8 13.8 13.0 13.21 Trade, repairing of vehicles 0.4 34 23.3 20.6 19.1 20.0 15.9 19.0 19.90 and household equipment Hotels and restaurants 6 6 8.3 5.2 4.7 4.4 13.0 4.18 4.72 Real estates 9.1 13 9.8 14.7 13.5 13.9 23.1 14.6 15.66 Other 18.1 19 30.2 30.1 34.3 32.6 33.2 32.3 31.2 Total 100 100 100 100 100 100 100 100 100 Source: Bank of Albania

Table 19 Performance of 2005 new credit over the years (as 2004 Q1 Q2 Q3 Q4 Q1 May a share to total) New credit (in billions of ALL) 99.7 22.1 32.8 32.1 32.9 29.5 13.6 Short-term credit 62.54 53.2 47 47.4 48.7 46 42.5 Medium-term credit 22.53 22.4 31 30.3 25.6 29 24.1 Long-term credit 14.93 24.4 22 22.2 25.7 25 33.4 In Lek 32.59 30.1 32.8 30.2 31.4 29 33.8 In foreign currency 67.41 70 67.2 69.8 68.6 71 66.2 Source: Bank of Albania

IV.4 Financial markets, interest rates and exchange rate

The higher level of excess liquidity than the levels recorded in the market in the previous semester has favoured the decrease of lek interest rates over the first semester of 2006. There was a downward trend of lek interest rates, although the Bank of Albania has pursued a neutral monetary policy in the

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first half of the year. The decrease of lek interest rates, in general, is in line with the trend observed in the last years. The decrease of interest rates was encountered in the primary market, Government bonds market and in the repo/reverse agreement market, repo having indefinite prices.

Yield Period Table 20 The lowest 3-month Treasury bills 4.86 February 2006 historical levels of interest 6-month Treasury bills 5.43 June 2006 rates in ALL 12-month Treasury bills 5.72 May 2006 2-year bonds 6.30 May 2006 3-year bonds 7.50 May 2006 1-month repo 5.18 June 2006 3-month repo 5.19 March 2006 Source: Bank of Albania

The low nominal interest rates were accompanied by positive real interest rates, due to the low average interest rate. The decrease of interest rates was followed by the fall in the cost of financial intermediation to economy.

The banking system portfolio in Treasury bills has reduced due to the lower Government demand for this mean of financing. At the same time, the volume of investment in longer maturities – two and three- year Government bonds – has grown, resulting in a growth of ALL 0.7 billion of the banking system investment in Government securities9. Under the excess liquidity in the market, there has been a general downward tendency of the yields, except for three-month Treasury bills, the interest for which has been relatively low. The yields have fluctuated from the minimal value of 4.90 per cent in April to 5.23 per cent in June10.

Over 2005-2006, the primary market has been characterized by the narrowing of the spread between 3-month, 6-month and 12-month maturities.

December 2004 June 2005 December 2005 June 2006 Table 21 Difference between 2.01% 1.73% 1.50% 0.51% Treasury bills interest rates Source: Bank of Albania of 12-month and 3-month maturity11

Unlike the other markets, the interbank market has not manifested a downward trend of interest rates, but it was characterized by their stability and very close position to the core interest rate. The borrowing activity in the interbank market has almost maintained the same intensity as in the second semester of 2005, despite the various liquidity conditions. The average daily

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level of overnight borrowing over the first semester amounted to ALL 0.7 billion, while the weekly borrowing amounted to ALL 0.9 billion. The lowest historical levels of the spread between overnight and weekly borrowing interests were attained in the interbank market over this period.

Apart from the neutral policy of the Bank of Albania and stability in the market, the change of standing facilities corridor from asymmetric to the lowest symmetrical corridor in the history of the use of these facilities has also influenced on this performance13.

Unlike the previous semester, the lek deposits market over the first semester of 2006 has been characterized by the continuous decrease of interest rates at all terms, in particular of 24-month and 12-month deposits. The difference between the interests of credit and deposits in lek has been stable and fluctuated close to the level of 8.0 per cent, both for 6-month and 12-month maturities. This level of the spread is yet high, since it is mainly influenced by the level of risk credit in lek bears. Over the first half of 2006, the interests of credit in lek decreased, following the decrease of lek deposits and Treasury bills interests. At the same time, the interests of credit in foreign currency increased, following the increase of libor and euribor interests and the ones of deposits in foreign currency. Another characteristic of credit market was the narrowing of the spread between the interests of credit in different terms, both of credit in lek and in foreign currency, which testifies the stability of markets and the interest rates expectations.

The interests of deposits in foreign currency in the banking market have increased over the first semester, as a result of the tightening of the monetary policy conducted by Fed and the European Central Bank. The decrease of lek deposits interests on one hand and the increase of foreign currency deposits interests on the other, have led to the narrowing of the spread between the interests of deposits in lek and in foreign currency, which in several cases, reached the lowest historical levels.

The difference between nominal interests of deposits in lek and in usd in May 2006 reached the lowest historical levels in maturity terms of 6 and 12-month, resulting in 1.19 per cent and 1.17 per cent, respectively.

Exchange rate The lek has displayed appreciating tendencies to the dollar, while being relatively stable to the euro

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over the first semester of 2006. In annual terms, the lek continued to appreciate against both main currencies, the dollar and the euro, by about 4.4 and 0.4 per cent, respectively.

The developments in the international foreign currency market have been reflected in the lek to the US dollar exchange rate. Regarding the lek to the euro exchange rate, the developments in the international market were neutralized by the revitalization of appreciating domestic pressures of the lek against the euro. In nominal effective terms, the lek appreciated by 1.3 per cent. At the end of June, the exchange rate of the lek against the usd and the euro was 97.1 and 123.3, respectively.

V Economic performance over 2006

Macroeconomic stability achieved over the recent years has created the proper conditions for a stable economic growth. The Albanian economy has displayed a satisfactory resistance to the problems caused by the shortage of electricity over the end 2005 and the beginning of 2006. Economic growth for 2006 is estimated at about 5.0 per cent. This projection was based on the expected economic activity slowdown over the first quarter (due to electricity problems) and its rapid recovery in the following quarters. Meanwhile, the data on the first quarter show for a high level of economic activity, suggesting that the projection of the economic growth for 2006 may be somehow conservative.

2002 2003 2004 2005 2006* Table 22 Main Real economy indicators (in percentage) macroeconomic indicators GDP real growth 2.9 5.7 5.9 5.5 5.0 CPI annual growth (average) 5.4 2.4 2.7 2.4 3.0 Nominal GDP (in billions of ALL) 624.7 682.7 766.4 836.9 899.7 External sector (in percentage to GDP) Trade balance -25.9 -25.1 -21.7 -24.1 -24.5 Current balance -10.0 -8.1 -5.5 -7.8 -8.1 Fiscal indicators (in percentage to GDP) Fiscal deficit -6.6 -4.5 -5.1 -3.6 -3.8 Domestic borrowing 3.3 2.9 2.3 2.7 2.3 Monetary indicators (in percentage) Money supply growth 5.7 8.7 13.4 13.8 13.6 Credit to economy growth 38.3 31.0 37.1 73.5 51.0 12-month Treasury bills interest rates14 12.0 9.5 8.1 6.9 -- * Projections Source: IMF, Ministry of Finance, Bank of Albania, INSTAT

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Economic growth over 2006 will be mainly based on the increase of economy domestic demand. This growth will push the activity of the private sector, while the weight of the public sector will continue to decrease. Despite the enhancement of economy productive capacities, the preliminary projections and the performance of the first quarter indicate that the growth of domestic credit will be followed by the further deepening of trade balance deficit and of the current account deficit. Reflecting the expansion of imports, this fact should not be considered as disturbing in the short-term, as long as they are oriented towards the import of machinery and raw materials, which in a second period serve to the growth of domestic production. However, one of the challenges regarding Albania’s economic policies over the following periods is the promotion of Albanian exports and the development of industries, which substitute imports. Such a step is crucial to boosting economic growth and enhancing the welfare under constant basis.

In a domestic context, the economic environment over 2006 will benefit from the further consolidation of public finances, reflected in the low level of budget deficit and in the further decrease of domestic borrowing. These developments will sustain the further consolidation of macroeconomic stability, fall of fiscal domination and the expansion of opportunities to support credit to the private sector. Moreover, in a more analytical plan, the revised fiscal packet provides the measures for facilitating the fiscal burden of businesses and enhancing investments in infrastructure. The successful application of this packet implies the growth of economy productive capacities. It will provide opportunities for a wider participation of labour force in production and the absorption of a higher level of investment, which will generate positive consequences to economic growth in the following period.

Through its commitment to maintain the monetary stability in economy, the Bank of Albania will further sustain economic growth framework. In response to further inflationary pressures, the last increase of core interest rate will help to manage the level of inflation, the inflationary expectations and long-term interest rates. Monetary developments, projected in the monetary programme, are expected to provide a positive impulse to the economic activity for 2006. The rapid growth of credit to economy will continue to constitute the most significant monetary development for 2006. In relative terms, outstanding credit to economy is estimated to increase by 51 per cent over 2006. This increase reflects a natural slowdown compared to the rates recorded in 2005, considering the low base this process started from in 2004. However, this process implies a considerable injection of ALL 63.4 billion banking system funds, to support business and economy consumption.

The revised monetary programme frames the impact of the Government fiscal position with the monetary developments in the private sector of economy, as such guaranteeing the accomplishment of inflation objective. According to this revision, money supply is expected to grow in higher rates. In the first half of the year, Government fiscal position has resulted in the neutralization of the expansion effect of credit growth to the private sector. In total, Government demand for budget deficit domestic financing over 2006

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is projected to be almost the same as in 2005, that is, about ALL 20 billion. Public sector demand for money is expected to be fully accomplished in the second half of the year.

According to these tendencies, the revised monetary programme projects a 13.6 per cent growth of money supply. Money supply growth over 2006 is expected to further drive money velocity down. This tendency is projected in the medium-term monetary programme and is in line with the economy transitory developments. This growth is projected to be consistent with the increase of the general level of prices in economy around the objective of 3 per cent, under the conditions of maintaining macroeconomic stability and external equilibrium of economy.

The growth of M3 aggregate, broad money supply indicator, will be controlled through the control of the Bank of Albania operational objectives, Net International Reserves (NIR) and Net Domestic Assets (NDA). According to the objectives stipulated in the IMF agreement and framed in the monetary programme, the administration of these two components of reserve money will assist to the supervision of money supply growth.

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Statistical Annex

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Inflation

Table 1 Annual inflation rate (in percentage) 2001 2002 2003 2004 2005 2006 January 2.2 6.5 0.0 3.3 3.3 1.4 February 1.5 7.6 1.1 4.4 1.8 1.3 March 2.9 7.5 1.3 4.0 1.6 1.5 April 3.0 6.5 2.3 3.2 1.3 2.4 May 2.5 4.6 2.8 2.6 2.0 3.1 June 4.0 3.7 2.6 2.9 2.9 2.4 July 5.6 4.2 3.0 3.1 1.8 August 4.1 5.5 3.0 2.7 2.3 September 3.5 5.3 2.8 2.0 3.1 October 1.8 5.8 2.9 2.0 3.3 November 2.8 3.7 3.4 2.2 3.0 December 3.5 1.7 3.3 2.2 2.0 Average 3.1 5.2 2.2 3.0 2.4 1.9 Source: INSTAT

Table 2 Contribution of basket constituent groups to total inflation December 05 January06 February 06 March 06 April 06 May 06 June 06 Foodstuffs and non-alcoholic beverages -0.8 -0.16 -0.11 0.16 1.03 1.51 0.79 Rent, water, fuels and energy 2.26 0.94 0.93 0.85 0.84 1.00 1.04 Transportation 0.24 0.26 0.1 0.14 0.13 0.23 0.24 Hotels, café and restaurants 0.21 0.21 0.19 0.20 0.22 0.22 0.22 Other 0.15 0.14 0.10 0.11 0.12 0.10 0.11 Total 2.06 1.39 1.33 1.48 2.35 3.10 2.40 Source: INSTAT, Bank of Albania

Monetary Aggregates

Table 3 Performance of monetary indicators (in billions of ALL) May 06 Monthly change Annual change Absolute Percentage 2006 Absolute Currency outside banks 138.3 0.1 0.1 138.3 0.1 Total deposits 449.9 4.0 0.9 449.9 4.0 - in Lek 287.7 1.5 0.5 287.7 1.5 - in foreign currency 162.2 2.5 1.5 162.2 2.5

Demand deposits 134.2 2.5 1.9 134.2 2.5 - in Lek 82.6 1.8 2.2 82.6 1.8 - in foreign currency 51.6 0.7 1.4 51.6 0.7 Time deposits 315.7 1.5 0.5 315.7 1.5 - in Lek 205.1 -0.3 -0.1 205.1 -0.3 - in foreign currency 110.6 1.8 1.6 110.6 1.8

M1 220.9 1.9 0.9 220.9 1.9 M2 426.0 1.6 0.4 426.0 1.6 M3 588.2 4.1 0.7 588.2 4.1 Monetary base 190.7 0.0 0.0 190.7 0.0 Source: Bank of Albania

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Table 4 Performance of NFA indicators by main groups (in millions of USD) May 06 Monthly change Annual change Net foreign assets 2,197.7 51.1 253.2 Foreign assets Bank of Albania 1,569.5 42.8 246.757 ODC 929.0 1.7 31.266 Foreign liabilities Bank of Albania 107.3 1.4 -2.917 ODC 193.4 -8.0 27.731 Source: Bank of Albania

Table 5 Performance of NCG indicators by main groups May 06 Monthly changes Annual changes Net claims on the Government 268.03 -2.8 -13 Bank of Albania ODC 50.95 -2 -5.9 Deposits with the Bank of Albania 217.08 -0.8 -7.1 Budget deficit 6.8 2.1 3.8 Source: Bank of Albania

Table 6 Outstanding credit indicators (as a percentage to total) 2003 2004 Q1 ‘05 Q2 ‘05 Q3 ‘05 Q4 ‘05 Q1-06 May ‘06 Outstanding credit (in billions of ALL) 50.7 69.3 79.0 95.9 106.0 121.9 134.6 146.5 Short-term credit 46.0 34.0 34.1 33.7 31.6 32.8 31.9 32.1 Medium-term credit 33.3 36.0 34.5 33.1 31.2 30.3 30.3 29.7 Long-term term 20.7 30.0 31.4 33.1 36.9 37.0 37.8 38.2 Credit to households 24.5 30.6 31.0 30.8 31.4 31.6 31.9 31.9 Credit to private sector 75.5 69.4 69.0 69.2 68.6 68.4 68.1 68.1 In Lek 19.6 19.5 20.1 22.9 23.7 25.5 26.0 27.1 In foreign currency 80.4 80.5 79.9 77.1 76.3 74.5 74.0 146.5 Source: Bank of Albania

Table 7 Performance of credit for the main branches of economy 2002 2003 2004 Q1 ‘05 Q2 ‘05 Q3 ‘05 Q4 ‘05 Q1-06 May ‘06 Agriculture, hunting and silviculture 0.8 1 1.5 1.5 1.5 2.4 2.71 2.17 2.29 Processing industry 17 17 17.1 16.7 15.6 13.9 16.8 14.22 13.05 Construction 8.6 10 9.8 11.2 11.2 12.8 13.78 13.02 13.21 Trade, repairing of vehicles 0.4 34 23.3 20.6 19.1 20.0 15.9 18.99 19.90 and household equipment Hotels and restaurants 6 6 8.3 5.2 4.7 4.4 13.02 4.78 4.72 Real estate 9.1 13 9.8 14.7 13.5 13.9 23.1 14.56 15.66 Other 18.1 19 30.2 30.1 34.3 32.6 33.2 32.27 31.2 Total 100 100 100 100 100 100 100 100 100 Source: Bank of Albania

Table 8 New credit indicators (as a share to total) 2005 Q1 May 06 Total 2004 Q1 Q2 Q3 Q4 ‘06 New credit (in billions of ALL) 99.7 22.1 32.8 32.1 32.9 29.4 13.6 Short-term credit 62.54 53.2 47 47.4 48.7 44.2 42.5 Medium-term credit 22.53 22.4 31 30.3 25.6 30.1 24.1 Long-term credit 14.93 24.4 22 22.2 25.7 25.7 33.4 Credit in lek 32.59 30.1 32.8 30.2 31.4 27.7 23.8 Credit in foreign currency 67.41 70 67.2 69.8 68.6 72.3 66.2 Source: Bank of Albania

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Financial Markets

Table 9 Interest rates at the end of the month and their change compared to previous periods (in percentage points) Change June 06- Change June 06- June 06 December 06 June 05

Core interest rate 5.00% 0.00 0.00 Interbank market Overnight interest in the interbank market 4.21% 0.01 1.71 Weekly interest in the interbank market 5.15% -0.31 -0.13 Primary market 3-month Treasury bills yield 5.23% -0.18 0.17 6-month Treasury bills yield 5.42% -1.31 -0.98 12-month Treasury bills yield 5.74% -1.17 -1.06 Bonds market 2-year bonds yield 6.4% -1.6 -1.2 Source: Bank of Albania and commercial banks

Table 10 Interest rates and their change in lek deposits and credit market (in percentage points) Change Change May 06 May 06-December 06 May 06-May 05 Core interest rate 5.00 0.00 0.00 Interest of deposits in lek 3-month 3.85% -0.22% 0.20% 6-month 4.46% -0.31% 0.05% 12-month 5.08% -0.49% 0.21% 24-month 5.91% -0.91% 0.16% Interest of credit in lek Up to 6-month credit 12.13% -0.77% -2.47% 6 month – 1 year credit 12.73% 0.57% 2.09% 1-3 years credit 16.28% -1.79% -2.18% Over 3-year credit 12.01% -0.22% -0.22% Source: Bank of Albania and commercial banks

Table 11 Interest rates of deposits in foreign currency (in percentage points) Change Change May 2006 May 06-December 05 May 06–May 05

Fed – core interest rate 5.0% +0.75 +2.00 Interest of deposits in USD 1-month 2.37% 0.01% 0.62% 3-month 2.92% 0.11% 0.85% 6-month 3.27% 0.28% 0.97% 12-month 3.91% 0.35% 0.95% 24-month 3.79% -0.36% 0.41% ECB – core interest rate 2.50% +0.25 +0.25 Interest of deposits in EUR 1-month 2.11% 0.29% 0.44% 3-month 2.38% 0.37% 0.61% 6-month 2.65% 0.45% 0.82% 12-month 2.88% 0.39% 0.92% 24-month 3.07% -0.20% -0.10% Source: Bank of Albania and commercial banks

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Table 12 Interest rate spread of deposit – credit in lek and in foreign currency Spread of deposits interest: lek-usd lek-euro May 05 May 06 May 05 May 06 3-month 1.58 0.93 1.88 1.47 6-month 2.11 1.19 2.58 1.81 12-month 1.91 1.17 2.91 2.2 Spread of credit interest: lek-usd lek-euro May 05 May 06 May 05 May 06 6-month 6.66 2.64 5.48 4.21 6-month – 1 year 1.88 3.46 3.64 4.91 1-3 years 9.72 5.53 10.0 8.31 Over 3 years 3.58 2.84 4.16 3.8 Source: Bank of Albania and commercial banks

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Endnotes

1 Organization of Petroleum Exporting Countries. 2 According to the preliminary data provided by the Bank of Albania, Balance of Payments Division. 3 Referring to the nominal effective exchange rate, calculated by the Bank of Albania. 4 Source: ISTAT; website http://www.istat.it 5 Source: General Secretariat of National Statistical Service of Greece; website: http://www.statistics.gr 6 Quantitative objectives of the Bank of Albania are part of the new PRGF/ EFF 2006-2008, agreement signed between the Albanian Government, IMF and the Bank of Albania in January 2006. 7 The shift to demand deposits is partly a result of Raiffeisen Bank strategy for the reclassification of some deposits in lek from time to demand deposits. 8 The sale of Italian – Albanian Bank shares held by the Albanian Government. 9 Average daily level of excess liquidity in the banking system over the first semester of 2006 amounted to ALL 8.9 billion or ALL 1.1 billion more than the previous year. 10 The ratio of Government demand for financing the deficit with Treasury bills to the banking system supply was 1:1.2, on average. 11 The difference of the spread between minimal and maximal maturities of Treasury bills yields. 12 The percentages in the graph display the latest data in the interbank market and provide the interests in this market at the end of the semester. 13 This corridor was changed in July 2005, from assymetrical (+250/-300 percentage points) to symmetrical (+175/-175 percentage points). 14 End of period.

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EXTERNAL SECTOR DEVELOPMENTS OF THE ALBANIAN ECONOMY OVER THE FIRST QUARTER 2006

The overall balance of payments resulted in a surplus of EUR 15.6 million over the first quarter of 2006. Capital inflows have covered about 56 per cent of the current deficit and have led to the increase of the monetary authority reserve.

The main developments in the external sector of the Albanian economy may be summarized in:

• Intensive activity in the external sector, expressed in the increase of current revenues and expenditures. • Substantial deepening of trade and current deficit. • Considerable growth of workers’ remittances. • Marked increase of financial assets in the form of deposits abroad. • Increase in the assets of the monetary authority reserve.

I Current account

The volume of current transactions has grown by 26.8 per cent compared to the first quarter of 2005, accounting for EUR 1.6 billion. More than 95 per cent of current expenditures were used for the import of goods and services, while the export of goods and services has provided about 60 per cent of total revenues.

Net factorial revenues have grown by about 52 per cent compared to the first quarter of 2005, however, not being able to moderate the high trade deficit. The latter was partly moderated by the current transfers, mainly by the contribution of workers’ remittances, which accounted for about 54 per cent.

As a result of these developments, the current account recorded a deficit of EUR 164 million at the end of the first quarter, which is estimated to be 1.8 times as high as the previous year.

I. 1 Foreign trade

The beginning of year 2006 recorded high volumes of import and export, leading as a consequence to the further deepening of trade deficit. In absolute terms, the overall trade volume at the end of the first quarter 2006 reached to EUR 630 million, which is 27 per cent higher than the same period the previous year. Worth observing is the substantial aggravation of the negative balance by 34 per cent, due to the increase of import by 29 per cent and of export by 19 per cent.

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The significant orientation toward imports has caused them to exceed exports by nearly four times. The upward tendency of goods prices, such as oil, machinery and appliances, transportation means and pharmaceutical products has caused the increase of import expenditures. At the end of this quarter, import accounted for about EUR 535 million or nearly EUR 121 million more than over 2005. Export of goods revenues grew by EUR 23 million, amounting to EUR 144 million.

Obviously, such a growth indicates the fluctuations the European currency has gone through over the corresponding periods, that is, its depreciation of 3 per cent.

According to a disaggregation in harmony with the national accounts system, intermediate goods share almost half of imports (47 per cent), while capital consumer goods have slightly decreased contributing to total import by 11 per cent and 30 per cent, respectively.

Processing industry in the country continues to share the most significant part as far as trade relations with the rest of the world are concerned. The import of raw materials shared 15 per cent of its total, while 70 per cent of export revenues was a contribution of re-exports. Textiles and footwear, which share almost 80 per cent of total exports, slightly decreased by 2 per cent over this quarter. Such a decrease came as a result of the slowdown in the rates provided by this industry, due to the Chinese goods competition. However, their considerable permeation in the Albanian market seems to have slowed the growing rates down, compared to their boom over the previous year.

EU, our main partner, maintains the same share levels to total trade transactions (65 per cent). Italy and Greece remain Albania’s main trade partners by sharing 83 per cent of total export and 46 per cent of total import. Moreover, there is an upward tendency of imports from the regional countries, which over this quarter grew by 50 per cent. Meanwhile, the growth of export toward regional markets has experienced a considerable slowdown, by 6.6 per cent.

I. 2. Developments in other items of current account

Service trade balance ended with a negative balance of EUR 37 million, growing considerably compared to the EUR 24 million deficit recorded in the first quarter of 2005. This deficit was mainly due to the import increase of transportation and business services.

It is now acknowledged that transportation and insurance services follow the developments in the trade activity of goods. The growth in the volume of import has caused the increase of services import of these categories. At the end of this period, the import of transportation and insurance of goods services accounted for 28.1 and 30 per cent, respectively, higher than the same period the previous year.

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The volume of transactions in the travelling services shares 68 per cent of total volume in the service trade. According to the Bank of Albania estimates, at the end of this quarter, tourism ended with a surplus of EUR 12 million, compared to EUR 5 million over the same period the previous year. The increase of Albanian travellers’ expenditures abroad is distinctly lower than the growth in revenues, leading to the increase of the positive balance of this category.

Over the first quarter of 2006, tourism export generated about EUR 199 million of revenues or 38 per cent of revenues more than the export of goods.

This quarter was mainly characterized by tourism for personal purposes rather than for business purposes. This is also observed in the number of citizens entering and leaving the country and in the expenditures carried out by them. Over the first quarter of 2006, the number of foreign citizens visiting Albania increased by 18 per cent, compared to the same period the previous year. According to the estimates for this quarter, a foreign tourist has spent 30 per cent more than the previous year. Meanwhile, tourism expenditures continue to be estimated as growing (by 30 per cent). Albanian residents have spent in their travels abroad about EUR 187 million or as much as 94 per cent of total workers’ remittances. Such a growth of expenditures came as a consequence of the increase by 14 per cent in the number of Albanians travelling abroad, while daily expenditures have maintained the same level as in the first quarter the previous year.

Net revenues are estimated as positive, growing by 52 per cent compared to the same period over 2005. The Albanian economy has continued to benefit from foreign currency resources from the work abroad, and the investment of the banking system foreign reserve in non-resident financial institutions, paying at the same time the interests for the foreign debt. Labour revenues share about 47 per cent of incoming revenues, which are estimated to have grown by 34 per cent compared to the same quarter the previous year. Moreover, revenues in the form of the rate of return on our investment abroad have experienced an increase of 50 per cent.

Meanwhile, about 86 per cent of outgoing revenues are mainly represented by the interest of foreign debt and the investment of non-resident banks’ reserves in our banking system.

Like in the previous years, current transfers were in the form of workers’ remittances. The latter represent a crucial supporting source to the Albanian economy, providing a continuous flow of financing the current deficit. Total workers’ remittances, over the first quarter 2006, were estimated at about EUR 199.6 million, accounting for 10.9 per cent of the GDP.

II Capital and financial account

Capital flows over this quarter resulted in a net flow of about EUR 92 million, making the financing of the current deficit possible by about 56 per

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cent. Capital transfers accounted for EUR 36 million, while the financial account ended with a positive balance of about EUR 56 million.

The financial account position over this quarter is defined in the increase of Albania’s financial liabilities with the rest of the world (by about EUR 92 million) and the increase of our assets abroad (about EUR 36 million). Compared to the first quarter the previous year, financial liabilities net flow was estimated to be 46 per cent higher. Meanwhile, Albania’s financial claims on the rest of the world have maintained the same level as in the previous year.

Albania’s financial liabilities to the rest of the world grew by about EUR 92 million and were estimated to be 46 per cent higher than the same period the previous year. Such an increase has been due to foreign direct investment and foreign debt inflows.

Foreign direct investment flow amounted to EUR 56.7 million compared to EUR 45 million the previous year. Worth mentioning is the fact that capital inflows in the processing and manufacturing industry have played a key role in these investments. The borrowing of long-term and soft loans from abroad, which remain another important factor in the increase of Albania’s financial liabilities with the rest of the world, over this quarter were estimated at EUR 36 million. This increase has mainly financed investment and consumption, being also reflected in the increase of import for consumption and the companies’ need for capital and capital goods. Foreign debt services in the form of the principal and interest payments were estimated at about EUR 15.5 million, accounting for 11 per cent of the export of goods.

Albania’s financial claims on the rest of the world grew to EUR 36 million. The increase of these financial assets comes mainly as a consequence of the banking system reserve investments in the international market. These assets were in the form of deposits, which increased by EUR 57 million, unlike their decrease by EUR 7 million over the previous year. Such an increase owes to the shift of our banking system investments from domestic to foreign financial markets. Meanwhile, portfolio investments have decreased by EUR 4.6 million, as compared to the increase of EUR 43 million the same period the previous year.

Foreign assets inflows in the form of financial capital were reflected in the increase of the monetary authority foreign reserve by about EUR 15.6 million. At the end of the first quarter 2006, the foreign reserve accounted for EUR 1.214 billion, fully sufficient to cover about 4.5 months of the import of goods and services.

Q-I 2005 Q-I 2006 Table 1 Balance of Current Account -90.2 -164.3 payments (in billions of Eur) 0.0 0.0 Export of Goods 121.5 144.4 Import of Goods -398.1 -515.2 Trade Balance -276.6 -370.8

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Services: Credit 203.8 267.3 Services: Debit -227.9 -303.8 Revenues: Credit 36.9 52.4 Revenues: Debit -9.1 -10.1 Private Unrequired Transfers 170.9 184.6 Official Unrequired Transfers 11.8 16.2 Capital Account 35.5 36.0 Financial Account 29.7 55.9 Direct Investment 43.3 56.7 Portfolio Investment -42.8 4.6 Other Capital* 24.6 -8.4 Net Errors and Omissions 34.6 88.1

Overall Balance 9.7 15.6

Reserve and Related Items Reserve Assets -9.7 -15.6 Use of IMF Credit and Loans 4.6 2.9

Memorandum Items Total Change in Reserves 7.8 10.4 of which: Change due to Exchange Rate 0.4 -5.2 */ Use of IMF Credit and Loans is not included Source of data: Bank of Albania

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Speech by Ardian Fullani, the Governor of the Bank of Albania At the Round Table Discussions on the Establishment of the Credit Information Bureau Hotel “Tirana International”, 28 April 2006

Distinguished participants, Ladies and gentlemen,

First of all I would like to thank the FSVC for their contribution in organizing this meeting. I also thank USAID, the American Embassy, the International Monetary Fund, the World Bank, commercial banks and all other participants for being here today in this round table.

We are all aware of the growth rates of the lending activity by the Albanian banking system during the recent years. During 2005, the outstanding credit increased 57.6 billion leks* or 82 percent, from 19.3 billion or 38 percent in 2004.

Expansion of sound lending is certainly positive for the economic development of the country. What consists sound lending, is very much linked with the ability of the credit institutions (especially banks) in making thoughtful lending decisions, based on a good and solid analysis of the borrower (in a micro perspective) and on well designed and realistic business development goals. Tightening competitive business environment, rapid expansion of credit through introduction of new loan products and the targeting of new borrower categories, the need to, at least, maintain the profit margins and the market share, make it difficult to find the right balance between goal achievements and the quality of the decision-making in the lending activity. Hence, the importance of strengthening the risk management capacities and the prudential requirements, especially in the area of lending, is urgent in a time of rapid developments.

In this regard, the Bank of Albania appreciates the attention banks are paying to credit portfolio quality. On our side, we also have increased our efforts for a prudential and constant supervision in terms of credit risk management.

As in many other things, the quality of information, upon which decisions are made, is paramount. In the lending activity, the information about borrower’s history is critical to minimise the risk of credit activity. The difficulty to get the right information, caused by the increased number of borrowers and the diversity of their categories, is somehow balanced by the developments in the information technology area. So there exist the need and the means to establish a centre for collecting and disseminating credit information for each borrower of the banking system. Such institution would help in enhancing the soundness of banking sector by reducing risk associated to credit expansion. I think this is the right time to establish this information bureau considering the high growth rates of lending and the requests of both the banks and of the Bank of Albania, as the supervisory authority, for qualitative decision-making and loan performance.

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In addition, the so-called Credit Information Bureau will reduce the evaluation cost and the time of processing applications for loans; it will reduce the probability of extending soon-to-become nonperforming loans and will increase credit quality.

So far, there have been considerable and constant efforts made by the Albanian Bankers’ Association for establishing a Credit Information Bureau, but for various reasons the process has not finalised. To overcome many of the technical and structural problems encountered in this process, the Bank of Albania has decided to take a more prominent role in this initiative and set up this bureau, initially, as a unit under its structure. According to this project, the establishment of this bureau, the collection of data into a centralised register, the information management and the provision of the service of giving information to banks, will be mandatory and carried out by the Bank of Albania. Such a project, does not exclude other similar ones, run by the banks themselves.

This centre will serve banks for a better management of credit portfolio and its risk, and will provide to the Bank of Albania an important tool for carrying out more complete analyses of the banking system in general and of the risk- related issues in particular. The establishment of such a function at the Bank of Albania also fulfils the actual need of banks for credit information management, through guaranteeing its accuracy, confidentiality and reliability.

I am confident that banks, as the main beneficiaries of this facility, will support us for a successful accomplishment of this project.

Thank you.

* While the outstanding credit in ALL has grown by ALL 17.5 billion or 128 percent, the one in foreign currency marks a rise of ALL 40.1 billion or 71 percent.

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Speech by Ardian Fullani, the Governor of the Bank of Albania Bank of Albania’s statement at the conclusion of IMF Article IV Mission Ministry of Finance, 11 May 2006

The Albanian economy seems to have recovered after the slowdown caused by the last year electricity crisis, prompting for another positive year with a strong growth. All sectors, in particular services, have enjoyed a period of strong demand. Nevertheless, the demand growth may have also inflicted a deterioration of the external position of Albania as some early estimations of current account deficit show.

In the meantime, inflation has been low which shows that the economy had enough capacities to respond by increasing production and trade. Accordingly, the Bank of Albania has kept a neutral monetary policy stance. This policy is consistent with our inflation forecasts, which show inflationary pressures to be subdued for the upcoming period. However, several possible risk factors are present in our scenario. High oil prices in the world markets, together with higher energy prices, might be incorporated in the cost structure of the economy, giving rise to the so-called second-round effects and increased inflation expectations. Credit expansion, while a welcome and much needed development in our economy might endanger macroeconomic balances, increase inflationary pressures or deepen the current account deficit. At the same time, we cannot exclude the implications that the global tightening of monetary policy is bound to have on our financial markets and our monetary policy. We are carefully monitoring and evaluating how the situation will evolve, in order to take the appropriate measures. The Bank of Albania remains firmly committed to keeping price stability and inflation within its intended path.

Strong credit growth during last year and the beginning of this year could be one reason behind high demand. However, we see credit growth rates not only with respect to macroeconomic stability impact but also in relation to the stability of banking sector.

From a general perspective, growth of credit to private sector has been in line with improvements of the macroeconomic environment in Albania. Looking at the historical performance, higher growth rates of credit stock have been expected as the relation between banks and business has strengthened, and consolidated further. Also, the reduction of the government demand for money has reduced the crowding-out effect of public borrowing pushing banks toward investing in credit to the private sector. As banks are more oriented toward long term maturity credit, outstanding amount of credit stock increases more rapidly.

The so-called “catch-up process”, is another reason behind credit growth, where banks, due to increased competition pressures, stronger internal capacities and improved quality of the borrowers, start using more efficiently their free financial resources. The creditworthiness of companies has improved

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over time but the initial response of the banks, excluding Savings Bank, in increasing the supply of loans accordingly was initially a bit sluggish. As the reputation of companies built up further and the largest bank became active, banks started to be more active to exploit these opportunities. This initial delay followed by the later ‘catch up’ may explain the strong growth of credit. However, as credit converges toward a longer-term equilibrium, we expect to see growth becoming more normal.

To ensure the soundness of the banking sector as its credit activity converges toward a more stable path, the Bank of Albania intends to take several measures of prudential regulation.

• Introduce changes in the Unified Reporting System, to accommodate for increasing needs for information in the lending process. Such changes could contain information about sectoral distribution of loans, their coverage with collateral, their pricing, their maturity and currency composition, consumer loans etc.. • Introduce changes in the regulatory framework to strengthen the requirements for the set up of credit units in the banks and the way they will analyze loan applications. We are going to stress continuously the need for the establishment and the strengthening of credit risk analysis units in the banks, as an important tool in making bank management aware of the risks that their institutions are undergoing and provide solutions to their risk management objectives. • Introduce changes in the regulatory framework to strengthen the requirements for the transparency that banks should have with their clients, regarding making them aware of certain risks that follow lending in foreign currency, procedures for payment of loan prior to its intended maturity etc.. • Introduce changes in the regulatory framework to strengthen the requirements for the liquidity of banks. • introduce changes in the regulatory framework to strengthen the supervisory response and measures (including higher capital requirements for very active banks with deteriorating loan quality in lending), in order to impose better standards in the lending process; • increasing the cost of lending in foreign currency, • and introducing stricter requirements for collateral/loan value ratios are being discussed.

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Speech by Ardian Fullani, the Governor of the Bank of Albania At the Regional Technical Seminar “Financial Policy Issues of Deposit Insurance Schemes in South-East Europe” Hotel “Rogner Europapark”, 30 May 2006

Honoured participants, Ladies and Gentlemen,

It is my pleasure to open the proceedings of this regional seminar on “Financial Policy Issues of Deposit Insurance Schemes in South-East Europe”. I thank the Convergence Program of the World Bank and the Deposit Insurance Agency for the cooperation. I am convinced that this seminar will be valuable for exchanging new experiences and ideas in fulfilling the missions of your institutions.

The Bank of Albania, as the country’s central bank, has as its main target, the maintainance of price stability. Along with this target, the Bank of Albania is exclusively responsible for licensing and supervising commercial banks and some other non-bank institutions involved mainly in micro-credit and in foreign exchange business. The legal and regulatory ground of banking supervision is already complete and we are constantly working on its improvement. Also, the supervisory practice complies with best standards in this direction, aiming at being oriented according to banking activity risk, being efficient and proactive.

The supervisory activity, along with the prevention of extreme cases of insured institutions’ bankruptcy, also carries out the administration of such institutions, in cases when they fail irrecoverably. In this stage, the role and contribution of the Deposit Insurance Agency, until that moment “invisible”, appears with the whole magnitude and importance. It is indispensable, not only in terms of treating depositors that have had savings at the bankrupt institution, but also in the “calming down” effect for all the depositors of the banking system.

In fact, the world experience has indicated that the deposit insurance function of the customers of the banking system is an important instrument in the framework of maintaining the banking system sustainability and keeping public confidence in it. The timely payment of the deposit value at the insured amount, in the case of a bank’s bankruptcy, allows responsible authorities to be focused on the procedures intending the isolation of the case and the recovery of the values of the bankrupt institution.

The activity of responsible deposit insurance institutions has different characteristics in different countries. Their legal framework provides responsibilities that are limited only in the role of the payer of the available fund and other cases, when responsibilities are extended further, up to the recovery of the values of insured institutions that have gone bankrupt. These different characteristics also determine in essence:

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a) The way the insurance institution is established and functions; b) The way the insurance fund is managed and the forms the institution possesses for increasing its value in extraordinary cases, which is the level of the contribution amount by the insured institutions in ratio to the objectives for increasing the insurance fund and for raising the covering capacities; c) Relation to insured institutions; d) The role of the state in the capital of insuring institution; e) Requirements with regards to necessary human resources and objectives on the intended level of personnel’s expertise; f) The way the banks and foreign bank branches are insured; g) The way of determining the payment of the insurance contribution on the basis of insured institutions risk profile, etc.

In general, it can be stated that all these elements depend on:

• The moment the responsible deposit insurance institution is put into function; • The degree of banking market development; • The way of its integration and of banking institutions integration into more developed markets; • The development degree of financial markets in general; • The level of legal and regulatory framework completeness and perfection (not only the one closely related to deposit insurance); and • The level of public education in relation to services provided by the banking industry and by the financial market in general.

The more advanced we are in the above developments, the higher in quality and number are the alternatives that allow the responsible deposit insurance institution a major role in the administration of crises the insured institutions may be faced with.

In fact, besides the “wealth” they provide in approximation of deposit insurance practices in the banking activity, the above changes in the legal framework and in the practices of deposit insurance activity, lay down the need for a more general harmonization, in a regional level and maybe even further. In this way, we would prevent any legal stipulations, which in practice may prove to be nonfunctional or at high cost.

I express my belief that you will use this seminar to find out joint elements in the activity of your institutions, as well as to identify the distinctions. I think it would also be valuable to identify the cases that represent what is regarded as the “best practice” in deposit insurance area. In this way, it would contribute to the achievement of the objective to standardize the regional insurance practices and to create a clearer vision on the insurance activity performance in the future.

The activity of the Albanian Deposit Insurance Agency is new. As such, its capability of operating in extreme cases is not proved yet. Nevertheless,

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efforts are made constantly for fulfilling the necessary legal framework and procedures, covering all possible directions of its activity. Simultaneously, work has been done in terms of organizing the structure, increasing the institution’s staff number and training. Emphasis is laid on the DIA’s cooperation with the Bank of Albania, the supervisory authority, so that the DIA carries out its functions effectively. The forms of this cooperation are numerous, but all of them should be first consolidated under normal conditions of the banking system activity. The main elements of this cooperation are:

• Exchange of information on supervisory practices and observance of regulatory requirements by the insured entities; • Organization of joint trainings in getting acquainted with respective functions; • Acquaintance with and discussion on manuals and procedures requiring the commitment of both institutions in certain cases, and the testing of these procedures.

The Bank of Albania and the Deposit Insurance Agency are working on enhancing this cooperation constantly.

A number of legal and regulatory alterations that are being prepared in parallel by both our institutions, and the exchange of information, as well as more frequent contacts between both institutions serve to this purpose. It is aimed at adopting best practices in this area, and at implementing the recommendations given by specialized assessments of international financial institutions that assist this process.

Allow me to state once more that the Bank of Albania is completely committed to provide all the necessary assistance for strengthening the capacities of the Deposit Insurance Agency in Albania, in view of its very important mission.

I wish good proceedings to this seminar.

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Speech by Ardian Fullani, the Governor of the Bank of Albania At the conference - Economic Governance in the European Union - organized by the Italian Embassy in Tirana 5 June 2006

Dear colleagues,

It is my pleasure to be here today to share some thoughts on governance issues related in particular to central banking.

The environment in which central banks and financial market authorities operate has undergone major changes in the past decades. Globalisation and progress of information and communication technology mean new challenges in achieving their objectives. To overcome these challenges, the central banks need to rethink their strategies and restructure accordingly in order to succeed and preserve their sound reputation in this changing environment.

This process would consist in: changes of the legal framework, - organisational restructuring, which may include changes in the way the bank is governed by the board and committees; - improvements in accounting practices, supervisory and human resources standards; - and several other changes.

Albania in the last decade has become part of this wind of change and in meantime we have recognised the importance of good governance for central banks and supervisory agencies. Having realised this need, the Bank of Albania has taken the appropriated steps to restructure. So, we are aiming to move to a more formal inflation targeting over the medium term. Accordingly, we have initiated steps to improve our governance structure and strengthen our analytical capacities. On the governance matters, the open forum that took place last year with top experts from all around the world touched upon many issues regarding the implementation of inflation targeting. However, as pointed out by many of these experts the appropriate model of internal governance is far from being a precise formula. The lecture of Ms. Lucia Quaglia today will touch on this point and help us understand how some institutions are implementing good governance, and consider lessons to be drawn from international comparisons.

Furthermore, let me say a few more words on the second important objective of our bank, the banking system stability. A lot of work has been done to encourage the development and consolidation of a sound banking and financial system. I could mention here a few recent measures supported by our bank, such as: the setting up of a credit information bureau, the analytical development of the deposit insurance scheme, improvement of the bankruptcy framework and collateral enforcement, and strengthening of bank regulation and supervision, which will also assist the Government’s anti-money laundering efforts. The international organisations, in particular the IMF, are providing precious technical assistance to the Bank of Albania to support the implementation of the institutional development program for banking

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supervision developed by the Bank of Albania. In the wake of the privatisation of the largest bank, the financial sector in Albania is finally showing welcome dynamism and the BoA is stepping up prudential vigilance.

As for the globalization issue, the Bank of Albania is committed towards institutionalizing the cooperation between central banks in the region. Judging from the meetings organized so far with some of the regional banking authorities, this initiative is progressing well. However, I believe there is scope to enhance regional cooperation further, which would enable us to exchange experiences in the field of banking supervision and best governance practices in the Southeastern Europe, which I understand, is also part of Ms. Quaglia’s future research agenda.

Let me conclude by wishing you a productive day.

Thank you.

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The evaluation of foreign direct investment in Eastern Europe developing countries: the case of Albania*

Abstract

The global foreign investments experienced a sharp increase during 1995- 2000, and have been falling from 2000, almost with the same speed. This trend is determined by the falling investment into developed countries, while developing countries continue attracting more flows of foreign capital. Within the developing countries the distribution of foreign investment is uneven, and some of them find more difficulties in attracting foreign investors, than others.

The paper analyses the evolution and distribution of foreign direct investment in the South Eastern European countries compared to the Central Eastern European ones, focusing particularly on Albania. Foreign investment is considered to play a very important role in the economies’ reconstruction of these countries during their transition from central planned to market economies.

In this paper, Albania’s resources and potentials, as well as its weak points are analysed, in order to define their impact on the current situation of inward foreign investment, and provide with possible future strategies to improve it.

I Introduction

During the last decades, there have been increasing levels of Foreign Direct Investments (FDI) going to developing economies, and since 1989, also to countries in Central and Eastern Europe. FDI in the transition economies of Central and Eastern Europe has been studied frequently lately because of the relative newness of these markets and the importance of FDI for the region’s growth and development. It has long been recognized that the benefits of FDI for these countries can be significant, including knowledge and technology transfer to domestic firms and the labour force, productivity spillovers, enhanced competition, and improved access for exports abroad. Moreover, they are a preferred method of financing external current account deficits (which is quite high for countries in transition), since FDI flows are non–debt–creating. Therefore, despite some negative effects that FDI might have in the host countries, for the Central and Eastern Europe countries, FDI is considered a very important resource to help their reconstruction and their transition into market economies.

In Albania, foreign direct investment has been an important driver of the economic growth, and it has changed during years in forms and figures. However, Albania belongs among the least developed countries of the region, and the ones that have attracted proportionately less FDI during these years of transition.

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The main objective of this research is to investigate and answer the following questions:

• How has the change in the market conditions in the post-communist countries of Eastern Europe influenced the foreign direct investments there? • What has been the empirical evidence of FDI trends and developments in these countries? • What is the case in Albania concerning foreign direct investment compared to the other countries in the region? • What conditions does Albania’s investment climate present? Which are its competitive advantages to drive foreign investments? • How can these advantages be used and what else is needed for Albania to become more attractive to foreign investors?

II Global trends in FDI

According to the World Investment Report 2004, (UNCTAD, 2004a), from a global point of view, inflows of foreign direct investment (FDI) declined in 2003 for the third year in a row.

However, this was prompted again by a fall by 25% in the FDI flows to developed countries. Meanwhile flows to developing countries rose in 2003 by 9%. Not only are developing countries attracting a bigger share of inward FDI flows, at the same time they are starting to act in the international market as sources of outward foreign investment. Multinationals from developing countries are becoming a force in the world FDI market (UNCTAD, 2004a).

The overview of The World Investment Report 2005 (UNCTAD, 2005) shows that the share of global inflows of foreign direct investment (FDI) going to developing countries continued to increase by 40% in 2004, whereas FDI to developed countries dropped by 14%. This meant the highest share of FDI (36%) going to the developing part of the world since 1997. The “Prospect for Foreign Direct Investment” prepared by UNCTAD (2004b) foresees that the global FDI flows are likely to increase during the period 2005-2007. Even concerning the Central and Eastern European, the survey results also indicate bright prospects for the medium term (2006-2007).

III FDI and Eastern Europe: Theoretical framework

There is considerable literature on foreign direct investment in transition economies in general, and those of Central and Eastern Europe in particular.

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The two main focal points of the researchers have been the analysis of the determinants of foreign direct investment, including studies of the relation between investment climate and FDI, and analysis of the impact of FDI on the economy.

III.1 The impact of FDI in Eastern Europe

The inflows of foreign capital in general have been, and still are, crucial for the reconstruction of the Central and Eastern Europe region (especially for the South Eastern Europe), and its reintegration into the world economy. “Without massive inflows of foreign capital, successful transition [from planned to market economies] in Central and Eastern Europe is unlikely” (Schmidt, 1995). In an economic survey of Europe in 2005, it is argued that of the various types of capital flows, foreign direct investment is generally considered to be the most desirable. A country may gain the benefits from FDI without also being dependent on net capital inflows or increasing its net external debt. (UNECE, 2005)

The belief that foreign direct investment has a positive impact on economic performance is relatively well established. FDI is reported to affect key macroeconomic indicators, such as the gross domestic product, the balance of payments and employment.

III.2 The Determinants of FDI in Central and Eastern Europe

There is a general agreement on the main determinants of foreign direct investment in central and east European transition countries (Lankes and Venables, 1996; Resmini, 2000). These factors include mainly: low cost but qualified labour, natural resources endowment, the long-term market potential, progress in transition reforms, host market size, gravity factors and economic and political stability. Clearly, the absence or bad performance of such indicators would be a deterrent for FDI in the respective country.

London and Ross (1995) adopt a theory of global capitalism, which contends that developed countries’ investors seek more vulnerable and less costly Third World labour. The authors argue that labour control and labour cost are key determinants of FDI, net of level of development.

The studies published by OECD (1994) and EBRD (1994) have challenged the ‘low wage–assumption’ considerably. The general conclusion of EBRD (1994) was straightforward: “Most striking perhaps is the predominance of market access among factors of importance to investor decisions […] Factor cost advantages are clearly rated as less important than the market access in all surveys....” The results of the OECD (1994) study, that evaluated the investment climate in the Central and Eastern European countries and the New Independent States of the former Soviet Union, are very similar. The key motive for FDI was to gain market access (44%) and labour cost was of secondary importance (only 9%).

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The investment climate has a significant impact on foreign direct investment inflows and is particularly highlighted in the literature when comparing the good performance of advanced central European transition countries and the weak performance of Balkan states, which are less advanced in transition reforms.

Foreign investment policies may also facilitate or deter investment inflows. Those Central and East European transition countries with active national policies on FDI provide incentives to foreign investment through tax breaks, establishment of free economic zones, and prevention of double taxation. In countries with passive policies, FDI is discouraged through the requirement of extra investment permits or registration, restrictions and barriers. However, Dunning (1994) argues that it is not simply a question of liberalization of investment policies or of offering foreign investors generous fiscal incentives, but equally, if not more important, there is a need for governments to both create and sustain an economic and social environment, in which both domestic and foreign firms can compete effectively.

IV The countries and the background

According to the dictionary of modern politics (Robertson, 1993), Eastern Europe was until the collapse of Soviet power, defined politically rather than geographically. Broadly, it consisted of those countries, which fell under communist rule in the aftermath of the Second World War (Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania and Yugoslavia). Even fifteen years after the downfall of communism, Europe is still described in papers and studies with the same geographical partitions that were used during the Cold War. Often the countries in economic transition of the Eastern part of the Europe are divided into two groups: Central Eastern European countries (CEEC), which (not including the Baltic states) consist of: the Czech Republic, Hungary, Poland, the Slovak Republic and Slovenia; and South Eastern European countries (SEEC), which include: Albania, Bosnia- Herzegovina, Bulgaria, Croatia, FYR Macedonia, Romania and Serbia and Montenegro. This research refers to the latter classification.

The communist inheritance has had two important dimensions for Eastern Europe. First, the socialist ownership structure placed industry, services, and agriculture mainly in the hands of state. Second, after forty years the communist economic system failed to sustain itself, leaving utter industrial collapse, financial distress and chaos, and very low living standards.

The transformation of the former centrally planned economies began in Poland and Hungary, which were the first countries in transition to democracy and also the first ones to benefit from the international community’s involvement in their process of transition through assistance and advice (Lavigne, 1995). Southeast Europe has been the least developed region of Europe. The economies in the region started the transition from very weak positions; political uncertainty was high, institutions were weak and civil societies were

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fragmented. Macroeconomic performance has been erratic, heavily influenced by civil strife and war during much of the transition period. These countries have weaker relationships with the EU and are lagging behind the CEE countries in terms of progress in transition.

However, the Balkans are narrowing the gap. The region of Southeast Europe accounts for slightly above 2% of the world’s gross domestic product in purchasing power parity terms, and a similar share of the world’s population. Yet, despite the global slowdown, it remains one of the most dynamically growing regions with a respectable GDP growth, which has outpaced growth in both global and EU from 1999 to 2004.

V The FDI development in the region

The South Eastern European countries as a group have attracted far less FDI than the countries in transition of Central Europe during the year 1990 to 2004.

Nonetheless, it seems that the SEE countries are catching up with their neighbours. In terms of flows, in South-East Europe, FDI inflows started to grow after 2002. Led by large privatization deals, these inflows nearly tripled, to $11 billion in 2004.

Within the SEE group, Romania, Croatia and Bulgaria remain the main actors in attracting FDI flows. At the end of 2004, they had the biggest proportion of the total FDI stock in the Balkans, leaving the less developed countries: Albania, Bosnia and Herzegovina, Macedonia and Serbia and Montenegro with a total of almost 20 percent of FDI stock to split between them. However, even in these countries, there is a growing tendency of FDI flows in the last 4 years.

Hunya (2004) explains the different FDI trends by the different types of FDI the two regions receive. In Central Europe, privatisation-related FDI is basically over and the local market is controlled by foreign investors that invest mainly in export-oriented projects in existing companies or in greenfield

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establishments. The main export market, the EU-15, did not expand in the past few years and the overall investment activity of the multinational enterprises was low. Meanwhile, the FDI in SEE has had a different pattern. The progress achieved over the past couple of years in terms of economic transformation has translated into lower investment risk and increasing interest from foreign investors. Increased volumes of FDI have been brought in the region by the governments’ increased efforts to privatise large companies, utilities and banks but they have rarely gone into export-oriented projects.

V.1 Sectors, source countries, and incentives for FDI in the region

As to the distribution of FDI by sectors of economy, most of the FDI in SEE countries concentrates in manufacturing, financial services, telecommunications and trade.

The data analysis from EBRD (2004) show that the FDI in SEE is concentrated in the manufacturing sector and especially in the steel production. (Bevan and Estrin, 2000; Hunya, 2004)

The financial sector is another important sector in the SEE where foreign involvement has been increasing during the 1990s. The privatisation of the banking sector was carried out in all these countries in recent years.

The tourism sector has attracted some foreign investment in Croatia and Bulgaria. Lack of restructuring, uncertainty over the property rights on land and poor quality infrastructure are among the key deterrents to foreign investment in this sector. (EBRD, 2004)

In terms of source countries for FDI, both the CEE and the SEE countries have attracted mostly their western European neighbours. The main source of FDI in the region has been the OECD countries, which account for over 90 per cent of FDI inflows in Bulgaria, Croatia, and Romania. (Broadman et al, 2004). The geographical and sectoral analysis made by EBRD (2004), also shows that most FDI comes from EU countries, such as Italy, Germany, Austria and Greece, especially in the western Balkan region.

In relation to the policy environment to support FDI, the countries of SEE have a certain degree of trade liberalisation. Albania, Croatia and the FYR of Macedonia are already members of the WTO, while Bosnia and Herzegovina and Serbia and Montenegro are in the process of acceding. Moreover, as explained by the European Commission (2004), the five above mentioned countries enjoy duty-free access to the EU market, thanks to the asymmetric Trade Measures granted since the end of 2000.

As far as the regulatory framework is concerned, all countries of the region have an appropriate FDI legislation. Foreign Investment Promotion Agencies exist in Albania, Bosnia and Herzegovina and Croatia, while

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internal Free Trade Zones have proliferated in all countries and offer many potential incentives to foreign investors. Restrictions on foreign ownership exist and concern sensitive sectors such as land property (e.g. the FYR of Macedonia) or agricultural land (e.g. Albania, Croatia). (European Commission, 2004)

VI Albania

VI.1 FDI development in Albania

FDI flows continue to be an important component of private sector development and a prerequisite for the economic development of Albania. In the past years, FDI flows have been an important source of foreign capital to finance the current deficit of Albania as compared to other sources like the external debt.

Albania’s economy has become considerably more hospitable to foreign investment in recent years. The foreign investment levels in Albania have fluctuated in the past few years; however, they are generally low by regional standards, especially when compared to the SEE countries, that also started from level zero of FDI in 1990 and almost under the same political and economic conditions.

Looking at the figures of the FDI flows during these years of transition, it is evident that there was a growing tendency of foreign capital in Albania, since the beginning of transition up to 1996.

It should be emphasized that during 1995-1996, the pyramidal schemes were flourishing, and that might have strongly affected foreign investments. Immediately after the crisis of 1997, foreign investments dropped by 50% compared to the best years 1995-1996. The image of Albania after the institutional and social chaos had much to regain. The Kosovo crisis was another factor during 1999 (although, a regional factor that caused a drop in flows of FDI throughout the region) that had an impact in discouraging the foreign investments.

This simple analysis shows that Albania’s difficulties in keeping alive the image of a stable political area have been a huge impediment for many foreign investors (for whom political stability, which means primarily institutional stability, is a key premise for investing) from investing in Albania. It seems that the instability and the lack of rule of law, internal or regional, has been the main barrier to foreign direct investment in Albania, because as for the level of liberalization of economy and appropriate legal framework, Albania has made quite an impressive progress. But this proved not to be enough when institutions are weak and unclear about their role.

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The privatisations have had the main role in the FDI flows during these years. A significant example was the privatisation of the largest commercial bank, the Savings Bank of Albania. In mid-April 2004, the Austrian Raiffeisen Zentralbank (RZB) took over 100% of the shares for the price of USD 126 million, which was 37 percent of the total annual flow of FDI for 2004.

By the end of 2004, almost all state owned small and medium enterprises were privatised. The Government is now working on the privatisation of other strategic objects, such as the AlbTelekom (the only landline phone provider in Albania), and KESH (the Albanian Energy Corporation).

VI.2. Investment climate

VI.2.1 Opportunities and incentives for foreign investors

In a study undertaken by OECD (2003), based on questionnaires, individual meetings, dialogue and peer review in the SEE countries, the review ‘Motivations of foreign investors for investing in Albania’ states:

“… almost all of the interviewed answered that they try to have a dynamic evaluation of the country’s advantages and disadvantages. They think that the advantages of the country are becoming stronger. They believe that the process of stabilisation and association with Europe and implementation of free trade agreements will improve the situation considerably.” (OECD, 2003, page 51)

Despite the difficulties and challenges, Albania is a country that does offer opportunities to foreign investors:

• Tourism Albania is a country rich in tourism resources, including mountains, valleys, forests, rivers and lakes. Being a Mediterranean country, it has special geographical and geological features, with varying landscapes mixed with one another. Landscapes range from typical Mediterranean in West and South West, to mixed ones in the central areas, to steep mountains in the inner part of country. Its Adriatic and Ionian coastlines are endowed with beautiful beaches. There are many inland lakes, natural lagoons, reserves, hunting grounds and SPAs. Also, Albania has an ancient history and culture. In the long run, tourism could be one of the main attractions for foreign investors, but currently Albania lacks the proper infrastructure to facilitate significant investments.

• Oil and minerals Albania is endowed with natural resources including chrome ores, coal, nickel, copper, oil and gas. It is the only country in Europe with substantial reserves of chromium and before 1990 it was the world’s third largest producer of chrome ore. Both the oil and mining industries are export oriented.

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According to INOGATE (Interstate Oil and Gas Transport to Europe Programme, funded by the EU), Albania has estimated recoverable oil reserves of about 550 million tonnes, offering large export capacity. According to the Albanian Foreign Investment Promotion Agency (2004) Albania’s proven natural gas reserves are estimated at 3.316 billion cubic meters. The country has gas industry centres on 11 fields with an annual capacity of 69 million cubic metres. However, output is much lower and imports are required to meet domestic needs. Albania is the only country in Europe, which is not connected to an international gas pipeline. Options are under discussion to remedy this, including links to Italy, Greece or FYR of Macedonia.

• Manufacturing The manufacturing sector has attracted a large number of small joint ventures in food processing, textiles, shoe making and wood processing, mainly with Greek and Italian companies. The textile industry offers plenty of opportunities for foreign investors and accounts for some 38 per cent of exports, with shoes accounting for a further 21 per cent (as of 2001). Forestry is a traditionally important industry, with local wood processing industries throughout the country supplied by relatively cheap local inputs of raw materials. The sector offers opportunities in saw milling, plywood and reconstituted panel making, parquet, joinery and furniture making. (EBRD, 2001)

• Agriculture Albania enjoys natural factors that support agriculture, such as its climate and geography. Primary products include vegetables, livestock forages, corn, fruit, vineyards and olives. Albania has the potential for a competitive agro processing industry. Albania’s agricultural commodities include: horticulture (mainly tomatoes), olives, grapes (used primarily in the production of a local alcohol, raki), dairy products, livestock, and herbs (particularly sage, of which Albania is a significant global producer).

• Low cost skilled labour The education system in Albania is well consolidated throughout the country. Recently, there have been implemented well-known postgraduate programmes such as MBA, IFG, and Magistracy. Statistical data about students that have finished their studies abroad (especially in European and North American universities) show a very good preparation of them as well. Albanians are distinguished for their ability to speak different foreign languages, such as English, Italian, Greek, French, German, and Spanish. One of the advantages that Albania offers for attracting foreign direct investments is the low labour cost for this highly skilled workforce. Different studies have shown that wages in Albania are one tenth of those in Italy. The average monthly salary in Albania for 2004 was just over EUR 114 per month. (KPMG, 2005)

VI.2.2 Deterrents of FDI

In almost all the business surveys or research work related to constraints to business development, find as the most critical factors the issues related to the legal and regulatory framework and infrastructure. (Xhepa and Agolli, 2004)

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• Infrastructure Poor physical infrastructure, including transportation and communication create a barrier to business and economic development. Although recent steps have been taken to improve the transportation infrastructure, Albania has a limited network of roads, generally in poor conditions, very few railway lines, and no reliable public transportation. Though there is no regular commercial air service between domestic destinations, it is possible to charter a small plane or helicopter.

• Corruption and non - transparency Corruption and a general lack of transparency are persistent challenges to democracy in Albania and to multinational enterprises that might invest there. Although it is not as problematic today as it was in previous years, corruption continues to obstruct economic and social development. It can make obtaining licenses a very long, and/or costly process. Bribery is a common practice. Based upon public perception, the most corrupted institutions in Albania are the customs, the police and the public health system. Transparency is further inhibited by the fact that much commercial activity in Albania remains outside the formal economy.

According to TI 2004 index (which ranks countries in terms of the degree to which corruption is perceived to exist among public officials and politicians), Albania scores 2.5 out of 10 (10 means highly clean and 0 means highly corrupted). It is one of the 60 countries (out of 146 countries) that scores less than 3 out of 10, indicating rampant corruption. (Transparency International, 2004)

• Informal economy In a report prepared by the OECD - Investment Compact for the Ministry of , it is argued that “The informal economy is an important contributor to employment and production in Albania but also fiscal and regulatory evasion and, as such, is a hotly debated issue.” (OECD, 2004, pg.9) However, this ‘contribution’ comes with significant costs in terms of lost tax revenues, lack of employee protection and unfair competition among enterprises. There are optimistic estimates that suggest that one-third of total economic activity is informal, while higher estimates range from 50 to 60 per cent of the economy. The estimation of the OECD in the above-mentioned report was that informal production over the last 5 years contributed between 24 - 28% of total gross value-added.

VI.3 External policies and Government’s involvement

Albania benefits from one of the most open trade regimes among transition countries. Import tariffs are among the lowest in the region, coupled with very limited non - tariff barriers, and several regional free-trade agreements are in effect. (IMF, 2005)

FDI promotion is a strategic objective of the Government. In this regard, the Government has pursued:

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• The establishment of a legal and regulatory framework with incentives for foreign investors (some of the legal incentives include: equal treatment of foreign and domestic investors; full profit and dividend repatriation (after taxation); funds from the liquidation of a company may be repatriated.) The use of arbitration as a means to resolve international commercial disputes is well articulated in the Albanian law and Albania is party to the International Court for Settlement of Investment Disputes (ICSID). • The minimization of investment risk: Foreign investments in Albania are fully protected by law. They cannot be nationalised, expropriated or subject to any other measure, except in special cases provided by law, such as public interest, etc. Albania has also signed the Convention of Multilateral Investment Guarantees Agency (MIGA), the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Geneva Convention on Execution of Foreign Arbitral Awards. • The improvement and enhancement of Albania’s image as a credible FDI destination; • The establishment of an independent and credible institution to appeal tax issues and cases with.

Albania has signed several bilateral agreements on the promotion and protection of reciprocal investments. It also has double taxation treaties with many countries and participates in several international economic organizations. Moreover, to help Albania provide financial security for private sector entities investing in the country, the World Bank has established a Political Risk Guarantee Facility (PRGF). The PRGF is administered by the Albanian Guarantee Agency (AGA) and enterprises involved in production are eligible to apply for guarantees (excluding tobacco products, alcohol and armaments).

An Albanian Economic Development Agency (AEDA) was established by the Government in August 1998 to promote investment and exports. In 2002 the Albanian Government established another agency, the Albanian Foreign Investment Promotion Agency (ANIH) with the mission to promote and increase foreign direct investment in Albania and create a more favourable business environment.

VII Conclusions and recommendations

VII.1 Summary of findings

The figures analysed show that during 1992-2004, the South East Europe countries have benefited only sporadically and in limited ways from the flow of foreign capital and know-how. The main flows of FDI in these countries have been linked to privatizations. Foreign capital has been invested mainly in manufacturing, financial services, telecommunications and trade, and has come mostly from EU countries. The whole region offers rich resources in

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tourism, however the FDI in these field is very limited (main exception being Croatia).

Regarding Albania, these 15 years of transition have been characterized by a series of crises that have affected the economy sharply. However, over these last years, Albania has experienced considerable GDP growth, low inflation and exchange rate stability.

The country has great potential to attract FDI in various sectors (manufacturing and agro-processing, tourism and other services, agriculture, etc). Nevertheless, it ranks among the countries that have attracted less foreign capital within the region, recording levels of FDI far lower than its real potential. The foreign investment in these years has mostly come as a result of privatisation on small, medium and big state-owned enterprises, and has focused on intensive labour industries. The main source countries of investment have been the closest neighbours, Greece and Italy.

The low level of FDI inflows and stock in the country points to the fact that there exist serious barriers to investment that relate to the overall political and security developments in the country; the instability and the insufficient progress made in the transition process and structural reforms; corruption and unfair practices; poor condition of the physical infrastructure; frequent changes of regulatory framework; administrative barriers; the existence of a significant informal economy.

VII.2 Possible recommendations and policy implications

To reach the country’s potential of inward FDI flows, the Albanian authorities should pursue their efforts to improve the business environment. One of the most important actions that the government can take to promote the foreign investment is that against the FDI barriers, in order to improve Albania’s investment climate and the foreign investor’s perceptions of it.

To start with corruption, a main problem affecting not only FDI, - in terms of facilitating the foreign investments, unnecessary regulation (that can be a basis for bribing or corruption) can be eliminated, and the ones that remain should be more transparent and accountable for.

The legal framework needs strengthening, and not much in terms of legislation itself rather than in terms of application of the law and of transparency related to it, to regulation and procedures.

Reducing the size of the informal economy would not only help improving the economy in the macro view, but it would eliminate an obstacle faced by legitimate businesses, that is the unfair competition.

Infrastructure (including energy and water) needs a solution if foreign investment in all areas of Albania is to be promoted. Increase of public

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investments in infrastructure is not the only solution; attempts can be made to attract foreign projects in this area by offering special incentives.

In terms of tax regulations, Albania has already double taxations treaties with many countries. However, were there more foreign investments to be attracted, these treaties should expand with other countries, which are big players in the international markets, such as the Western Europe (e.g. U.K.), and USA.

Finally, the Albanian Government might encourage the development of particular geographical zones within the country that represent investing opportunities, instead of trying to make the whole country more attractive. Such zones can be industrial, or tourism ones (like the coastal areas, for example). Developing such zones might require significant investment and resources; however pilot projects can be taken in consideration, and then be adopted if they work out.

* Endrita Xhaferaj: Specialist, Banking Supervision Department.

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References

ANIH, (2004), An Investor’s Guide to Albania, Albania: Albanian Foreign Investment Promotion Agency Bevan, A. A. and Estrin, S., (2000), The Determinants of Foreign Direct Investment in Transition Economies, WDI Working Paper No. 342 Broadman, H. G., Anderson, J., Claessens, C. A., Ryterman, R., Slavova, S., Vagliasindi, M., and Vincelette, G. A., (2004), Building Market Institutions in South Eastern Europe: Comparative Prospects for Investment and Private Sector Development, Washington D.C.: The World Bank EBRD, (1994), “Economic Transition in Eastern Europe and the Former Soviet Union”, Transition Report, United Kingdom: EBRD Publication Desk EBRD, (2001), Albania: Investment Profile 2001, [online], Available at: EBRD, (2004), Spotlight on south-eastern Europe: An overview of private sector activity and investment, London: EBRD European Commission, (2004), The Western Balkans in transition, Occasional Paper no. 5 [online], Available at: Hunya, G., (2004), Foreign Direct Investment in South-East Europe 2003- 2004, Vienna (WIIW): Vienna Institute for International Economic Studies IMF, (2005), Albania – IMF Country Report, No. 05/89, Washington D.C. IMF Publications INOGATE, (no date), The Republic of Albania – Energy, [online], Available at: KPMG, (2005), Central and Eastern European Country Snapshots, 2005, KPMG Central and Eastern Europe Ltd Lavigne, M., (1995), The Economic of Transition: From Socialist Economy to Market Economy, Hampshire and London: Macmillan Press Ltd Lankes, H.P. and Venables, A.J., (1996), “Foreign direct investment in economic transition: The changing pattern of investments”, The Economics of Transition, Vol. 4, Issue 2, page 331-47 London, B. and Ross, R. J.S., (1995), “The Political Sociology of Foreign Direct nvestment: Global Capitalism and Capital Mobility, 1965-1980”, International Journal of Comparative Sociology, Vol. 36, no. 4, pp. 198- 219 OECD, (1994), Assessing Investment Opportunities in Economies in Transition, Paris: OECD OECD, (2003), National Treatment of International Investment in South East European Countries: Measures Providing Exceptions, [online], Available at: OECD - Investment Compact, (2004), The Informal Economy In Albania: Analysis And Policy Recommendations, OECD and CEI Publication Resmini, L., (2000), “The determinants of foreign direct investment in the CEECs: New evidence from sectoral patterns”, The Economics of Transition, Vol. 8, Issue 3, page 665-689 Robertson, D., (1993), A Dictionary of Modern Politics: A guide to the

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complex ideology and terminology which surrounds the world of politics, 2nd edition, London: Europa Publications Limited Schmidt, K. D., (1995), “Foreign Direct Investment in Eastern Europe: State-of-the-art and Prospects.” in Dobrinsky, R. and Landesmann, M. (eds.), Transforming Economies and European Integration, Aldershot, UK: Edward Elgar Transparency International, (2004), Transparency International Corruption Perceptions Index 2004, [online], Available at: UNCTAD, (no date), Statistical Databases, [online], Available at: UNCTAD, (2004a), World Investment Report 2004: The Shift towards Services, United Nations UNCTAD, (2004b), Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations 2004-2007, United Nations UNECE, (2005), Economic Survey of Europe 2005, Geneva: United Nations Publications Xhepa, S. and Agolli, M., (2004), Small And Medium-Sized Enterprises Development, Tirana: ISB & ACIT Publications

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Bank of Albania’s role in European integration*

I Introduction

On June 12 2006 the Republic of Albania signed the Stabilisation and Association Agreement with the European Union, which will enter into force following its ratification by the Albanian Parliament, the parliaments of the EU Member States and the approval by the European Parliament. The agreement aims at drawing Albania closer to the EU by providing reciprocal rights and obligations and creating mechanisms for working closer together in the areas of common interest, having as final goal, the full integration of Albania into the European Union.

The Stabilisation and Association Agreement provides the main political, economic and institutional requirements needed for full integration of an applicant country into the European Union, as already enshrined in the “Copenhagen Criteria”1:

• Stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and, protection of minorities. • The existence of a functioning market economy, as well as the ability to cope with competitive pressures and market forces within the Union. • The ability to take on the obligations of membership, which include the adoption of the acquis communautaire within the domestic legal system and its proper implementation and enforcement by the administrative and judicial bodies.

During the implementation of the SAA, the Republic of Albania has to demonstrate not only that it shares the same values of the European Union, but that it also has sufficient capacity to make a reality of the obligations agreed-upon in the Agreement.

The Bank of Albania’s obligations under the SAA include the areas of macroeconomic stability, the freedom to provide services (financial services), movement of capital and the approximation of Albania’s legislation to that of the EU.

II Macroeconomic Stability

The European Commission has set out its methodology to assess the progress of associated countries towards meeting the Copenhagen economic criteria in its Annual Reports2. The criterion for the existence of a functioning market economy has to be met at the latest by the time of signing the accession treaty. Meanwhile, the second element of this criterion - the capacity to withstand

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competitive pressures and market forces within the EU – can be met after the accession.

The existence of a functioning market economy, as set out in the Copenhagen Criteria, requires that3:

• macroeconomic stability is achieved, including adequate price stability, sustainable public finances and external balance of payments; • equilibrium between demand and supply is established by the free interplay of market forces; prices as well as trade are liberalised; • there are no significant market barriers to market entry (establishment of new firms) and exit (bankruptcies); • the legal system, including the regulation of property rights, is in place; laws and contracts can be enforced; • broad consensus exists about the essentials of economic policy; • the financial sector is sufficiently well developed to channel savings towards productive investment.

The association between the European Community and Albania, set out in the Agreement, provides for the establishment of close cooperation in the economic and monetary areas, which aim at facilitating the reforms and the economic integration of Albania into the EU.

III The obligations deriving from the SAA in the area of financial services

One of the aims of the Stabilisation and Association Agreement is to develop gradually a free trade area between the European Community and Albania4. It is for this reason that the Agreement reflects the four freedoms of the Internal Market, a frontier-free area in which, the free movement of goods, persons, services and capital is ensured.

The establishment of the Internal Market in the area of financial services intends the removal of any discriminatory treatment with regard to the establishment and to the provision of services by credit and other financial institutions, within the territory of the Community. The removal of barriers between Member States aims at increasing competition among national markets in financial services and reducing the price of these services to the consumers. Based on the relevant provisions of the SAA, banking and financial institutions5 can pursue their business in the territory of Albania or that of the Community, through the right of establishment and the freedom to provide services.

III.1 Establishment

Under the SAA, establishment is understood as the right of Community banks and other financial institutions to take up economic activities by means of the setting up of subsidiaries and branches in Albania.

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Pursuant to Article 50 of the SAA: “Albania shall facilitate the setting-up of operations on its territory by Community companies and nationals. To that end, it shall grant, upon entry into force of this Agreement: as regards the establishment of Community companies treatment no less favourable than that accorded to its own companies or to any third country company, whichever is the better, and; as regards the operation of subsidiaries and branches of Community companies in Albania, once established, treatment no less favourable than that accorded to its own companies and branches or to any subsidiary and branch of any third country company, whichever is the better”.

Thus, the Community companies established in Albania will be granted either “national treatment” or “most-favoured-nation treatment”, whichever is the most favourable. Granting national treatment to Community banks and other financial institutions means the prohibition of discrimination based on nationality (place of formation) and the creation of a level playing field for Community and domestic institutions within the national market6. It follows that, Community banks and other financial institutions will be subject to the same laws, rules, and administrative practices as their Albanian counterparts.

At the same time, the Parties to the Agreement shall not adopt any new regulations or measures which introduce discrimination as regards the establishment of Community or Albanian companies on their territory or in respect of their operation, once established, by comparison with their own companies.

III.2 Supply of services

The Stabilisation and Association Agreement guarantees the right of Community banks and other financial institutions to pursue their business in Albania, without having to be established. Pursuant to Article 57 of the SAA: “The Parties undertake to take the necessary steps to allow progressively the supply of services by Community or Albanian companies or nationals which are established in a Party other than that of the person for whom the services are intended”.

In contrast to the right of establishment, which will be effective upon the entry into force of the Agreement, the liberalisation of trade in services is envisaged as a gradual process. In this regard, 5 years after the entry into force of the SAA, the Stabilisation and Association Council7 shall take the measures necessary to implement progressively the liberalisation process, while taking in account the progress achieved in the approximation of their laws.

The Agreement also provides for the establishment of cooperation between Albania and the European Community, focused on priority areas related to the acquis communautaire in the fields of banking and financial services. The Parties will cooperate with the aim of establishing and developing a

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suitable framework for the encouragement of the above-mentioned sectors in Albania. This cooperation will focus on the operational aspects of improving the financial sector, as well as on improving the supervisory framework and will include the offering of technical assistance and training.

The provisions of the Agreement relating to the establishment and the supply of services are fully addressed in the draft banking law, prepared recently by the Bank of Albania. Pursuant to the provisions of the draft law, the Community banks may provide banking services in Albania only through a branch, for which licensing will be applied in the same rules as for the Albanian banks. As far as Community banks’ subsidiaries are concerned, they are considered as Albanian banks in all aspects, therefore there is no limitation regarding to their establishment and provision of services.

III.3 The prevention of money laundering and terrorism financing

Pursuant to Article 82 of the SAA: “The Parties shall co-operate closely in order to prevent the use of their financial systems for laundering of proceeds from criminal activities in general and drug offences in particular, as well as for the purpose of terrorist financing”.

In this regard, the role of the Bank of Albania, as the regulatory and supervisory body of the banking system in Albania, is to strengthen the supervision of banks’ international activities as well as the cooperation with the Community supervisory authorities in monitoring the activities of EU branches and subsidiaries established in Albania. A precondition to the effective functioning of this cooperation is the establishment of a comprehensive regulatory framework for the exchange of data between the Albanian and the foreign supervisory authorities as regards the supervision of banking activities, in their own jurisdiction.

The regulations governing banking secrecy may become an obstacle to the exchange of information across national borders between the branches of foreign banks established in the territory of Albania or of the Community, the Bank of Albania and the supervisory institutions in the Member States. For this reason, it is necessary that banking secrecy regulations facilitate the cross-border flow of information, while guaranteeing at the same time the confidentiality of the information transmitted.

IV Movement of capital and current payments

The free movement of capital in the European Community, besides economic goals, serves as a precondition for ensuring the functioning of the free movement of goods, services and people, while achieving the efficient functioning of the Internal Market.

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In the Commission’s view, there are three categories of operation concerned by the progressive liberalisation of capital movements8:

• capital operations: operations, such as commercial credits or direct investments are linked to the exercise of the other fundamental freedoms of the Internal Market; • operations in financial market securities: the liberalisation of financial securities, such as bonds or shares, requires a single financial market at European level; • operations involving financial credits: the liberalisation of operations involving financial credits and operations relating to money market instruments is necessary for the establishment of a unified financial system.

The Stabilisation and Association Agreement, in Article 61, provides only for the liberalisation of capital operations, which constitute the first phase for achieving the total freedom of capital movements between the European Community and Albania. On the other hand, the liberalisation provided for by the SAA includes only two of the aforementioned categories, more specifically the liberalisation of capital operations9 and of the operations involving financial credits10.

In contrast to the Treaty Establishing the European Community, where capital and payments are treated in the same way, the Stabilisation and Association Agreement provides for the full liberalisation of current payments and the progressive liberalisation on capital movements11. This means that all restrictions on current payments between the European Community and Albania shall be prohibited.

This distinction is supported by the European Court of Justice, according to which: “…it is not necessarily the case that every physical transfer of financial assets constitute a movement of capital”. After examining the relevant Treaty provisions, the ECJ concluded that current payments are transfers of foreign exchange which constitute the consideration within the context of an underlying transaction, whilst movements of capital are financial operations essentially connected with the investment of the funds in question rather than remuneration for a service12.

It should be mentioned that the acquis in the field of movement of capital does not take in account such a distinction, by treating the movement capital and current payments in the same way. For this reason, the full adoption of the acquis in this field would make the distinction provided by the SAA irrelevant.

In conclusion, we may say that implementing the obligations of the Agreement on the movement of capital and current payments means the abolishment of present administrative barriers for control and authorisation of capital movements. In this regard, the Bank of Albania, in cooperation with the Council of Ministers, is the responsible body for the establishment of a

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legal and administrative framework for the implementation of the Community legislation in this field, especially regarding the safeguard clauses in the case of serious economic and monetary difficulties.

V Approximation of laws and law enforcement

The adoption and proper implementation of the acquis communautaire in the domestic legal system is perhaps the most important criterion for the European integration of the associated and candidate countries. Pursuant to Article 70 of the Agreement, “Albania shall endeavour to ensure that its existing laws and future legislation will be gradually made compatible with the Community acquis. Albania will ensure that existing and future legislation will be properly implemented and enforced”.

The acquis communautaire, which will be adopted in the domestic legal system, includes the primary EU legislation (the founding Treaties and the international agreements to which the Union is a party), the secondary legislation (regulations, directives, decisions, and recommendations), the decisions of the European Court of Justice and of the Court of the First Instance, the Community policies and the general principles of justice in the European Union.

This approximation started on the date of signing of the Agreement, and will gradually extend to all the elements of the Community acquis. During the first stage (5 years from the entry into force of the SAA), approximation will focus on fundamental elements of the Internal Market acquis as well as on other important areas, i.e. financial services. During the second stage, Albania will focus of the remaining parts of the acquis.

V.1 The approximation of laws in the area of financial services

As mentioned above, the functioning of the Internal Market in the area of financial services includes the freedom of cross-border provision of services and the abolishment of all legal and administrative barriers to the establishment of branches of credit and other financial institutions within the territory of the Community.

The Internal Market in the banking is based on these fundamental principles13:

• essential harmonisation in all Member States of the laws and practices governing access to banking activity; • home-country control, which means that a bank operating in other Member States will be supervised by the authorities in the country of origin; i.e. the country which has issued the single licence and in which

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its registered office is located; • mutual recognition by the national supervisory authorities of the laws and regulations in the countries of origin of the banks operating on their territory.

On the other hand, the provisions of the Stabilisation and Association Agreement seem more restrictive in this regard, by providing only for the granting of “national treatment” (non-discrimination) to the Community individuals and companies, a concept which constitutes just one of the types of restrictions to the freedom of establishment or the freedom to provide services. The reason for such a regulation is that the SAA does not aim at unifying the Albanian and the Community market into a single market, but only the creation of a free trade area between these two parties.

For this reason, the harmonisation of the domestic legislation to the EU acquis, in the sector of financial services, will be focused on the adoption of the first banking Directive (consolidated in the Directive 2000/12/EC), which lays down the essential requirements for the authorisation of credit institutions, the principles of the right of establishment and the freedom to provide services, and the establishment of a supervisory authority.

Full harmonisation with the acquis in the sector of financial services includes the adoption, from the Bank of Albania, of the technical instruments of prudential supervision, in particular:

• Own funds: The Directive 2000/12/EC puts forward a definition of own funds comprising two elements (original own funds and additional own funds). The amount of additional own funds included in own funds must not exceed the original own funds. • Solvency ratio (in Albania referred to as the capital adequacy ratio): The own funds of each credit institution are defined as a proportion of the risk-adjusted value of its assets and off-balance-sheet items. That essentially concerns the credit risks incurred in the event of non- payment by a borrower and draws a distinction between the degrees of risk associated with individual assets and off-balance-sheet items, and with certain specific categories of borrower. The prescribed minimum ratio is 8%. • Large exposures: The Directive 2000/12/EC limits the credit institution’s exposure to one single person to a maximum equal to 25% of its own funds. Credit institutions must report every large exposure (more than 10% of own funds) to the competent authorities. A credit institution must not incur large exposures which, in aggregate, exceed 800% of own funds. • Supervision on a consolidated basis of credit institutions applies to all banking groups, including those the parent undertaking of which are not credit institutions. The Directive 2000/12/EC has provisions on the competent authority or authorities responsible for consolidated supervision and how the authorities shall cooperate. The competent authorities must require full consolidation of all the credit and financial institutions which are subsidiaries of a parent undertaking.

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In conclusion, we can say that under the Stabilisation and Association Agreement, the Republic of Albania is committed to adopting all of the European legislation in the area of financial services, but without creating the conditions for the Community financial institutions to be established within the territory of the Republic of Albania, without having to be licensed. At the same time, the activity of these institutions within the Republic of Albania will be subject to regulation and supervision by the Bank of Albania.

V.2 The approximation of laws in the area of payments and movement of capital

The free movement of capital is a key element to the Internal Market and the associated country can benefit from this freedom, in accordance with its economic development. Just like in the case of financial services, for the movement of capital the Agreement provides liberalisation to be achieved in two phases. During the first phase the necessary improvements for market entry will be realised, which aim at creating the conditions for the further gradual application of Community rules on the movement of capital.

The EU legislation, in the field of free movement of capital is based on some general principles14:

• The effective removal of controls on capital and payments not only compromises respective foreign exchange restrictions, but any kind of administrative regulation which effectively discriminates on the basis of the source or destination of the capital. • The rights to such free transactions are conferred on residents rather than nationals. • Not only are the general prohibitions ruled out by this freedom, but equally any, explicit or implicit, authorisation procedures. • Some general restrictions to this freedom continue to be applied. These exceptions include national security and public policy, but do not extend to broader economic interests, i.e. monetary policy15.

During the second phase, the Parties shall engage in full implementation of the Community rules in this area16. The adoption of the European legislation includes the full liberalisation of capital movement. Pursuant to Article 56 of the Treaty Establishing the European Community, “all restrictions on the movement of capital and payments between Member States and between Member States and third countries shall be prohibited”. This principle is enshrined in the Directive 88/361/EEC for implementation of Article 67 of the Treaty, which abolishes the general arrangements for restrictions on movement of capital between persons resident in Member States17.

The experience of the European Union shows that there is no particular legal or administrative precondition for the liberalisation of capital movements. The most significant impact of removing capital controls is not on administrative structures, but on policy management. In the absence of controls, large

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outflows and inflows of capital may occur which complicate monetary and exchange rate policy. Thus, legislative approximation in this field presupposes an overall stable macroeconomic environment18.

The liberalisation of capital movements has facilitated cross-border transfers within the European Union, but there are still some differences between the legislations of Member States regarding payments, differences that may become an obstacle to the functioning of the Internal Market in this area. For this reason, the legal harmonisation in the European Union in the area of payments, aims at standardising the technical methods and applying the equal rules for the internal and cross-border transactions and payments, which will promote and facilitate the free movement of capital.

In order to create the necessary conditions for the gradual application of Community rules on the free movement of capital (an obligation that derives from Article 62 of the SAA), the legislative activity of the Bank of Albania should be focused on the adoption of the following EU acquis:

Directive 97/5/EC on cross-border credit transfers, which establishes minimum information that should be provided to the clients as well as the performance requirements so as to ensure that credits (up to EUR 50,000) can be transferred from one part of the Community to another rapidly, reliably and inexpensively. The Directive 97/5/EC is further supplemented by the Regulation 2560/2001/EC on cross-border payments in euro, which extends the effects of the Directive to all types of payments.

Directive 98/26/EC on settlement finality in payment and securities settlement systems seeks to contribute to the efficient and cost effective operation of cross-border payment and securities settlement arrangements in the Community, while facilitating in this way the free movement of capital.

Commission Recommendation 97/489/EC concerning transactions by electronic payment instruments and in particular the relationship between issuer and holder establishes the minimum information that should be provided to the consumers during transactions with electronic payment instruments (information on charges, exchange rates and interest rates) as well as the minimum obligations and liabilities of the parties concerned.

It is worth mentioning that the approximation of the Albania’s legislation to that of the Community is a nonnegotiable requirement for European integration. Since the final goal of the Republic of Albania is its accession to the European Union, the only negotiable element in the process of approximation of laws is the timetable for its finalisation, and the possible transitional periods.

VI Conclusions

The implementation of the obligations deriving from the Stabilisation and Association Agreement and the efforts to adopt the acquis communautaire in

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the domestic legal system should not be considered as goal in itself, but rather as a mean for achieving broader economic goals. The European standards in the areas of financial services and movement of capital, on their side, reflect the international principles adopted in the framework of the World Trade Organisation and the Basel Committee for Banking Supervision.

By adopting the European Union law, Albania not only will facilitate its future membership in the EU, but also adjust its legal and administrative framework to the international standards, while promoting its integration in the international banking community.

The incorporation of the acquis communautaire in the domestic legal system should not be considered as formal and abstract process of transplanting the Community regulations in Albania. This, since introducing economic law, and banking legislation in particular, should be adjusted to the economic context and the market structure in which they have to operate19. As defined by the European Commission in the White Paper, the three elements needed in order to develop a correctly functioning financial sector are: a) trained and reputable personnel; b) appropriate legislation; and c) effective supervisory bodies to ensure that the financial institutions are respecting the laws and regulations under which they operate.

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References

1. The Europe Agreements and beyond: A strategy to prepare the countries of Central and Eastern Europe for accession; Communication from the Commission to the Council; COM (94) 320 final; Brussels, 13.07.1994. 2. Association Agreements with the countries, of Central and Eastern Europe: a general outline; Communication from the Commission to the Council and the Parliament; COM (90) 398 final; Brussels, 27 August 1990. 3. White Paper for the preparation of the associated countries of Central and Eastern Europe for integration into the Internal Market of the Union; COM (95) 163, Brussels, 10.05.1995. 4. Report from the Commission to the Council: On the work of the EU/Albania High Level Steering Group, in preparation for the negotiation of a Stabilisation and Association Agreement with Albania; Brussels, June 6, 2001. 5. Albania 2005 Progress Report; Brussels, 9 November 2005 {COM (2005) 561 final}.

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Endnotes

* Elvis Çibuku: Specialist, Foreign Relations, European Integration and Comunication Department. Tirana, 11 July 2006 1 See: Presidency conclusions of the Copenhagen European Council of 21/22 June 1993, page 13. 2 Albania 2005 Progress Report; Brussels, 9 November 2005 {COM (2005) 561 final}. 3 See: Progress towards meeting the economic criteria for accession; No. 26; European Commission, November 2005. 4 Pursuant to Article 1, par. 2, of the SAA: “The aims of this association are… to support the efforts of Albania to complete the transition into a functioning market economy, to promote harmonious economic relations and develop gradually a free trade area between the Community and Albania”. 5 In the EU these institutions are called by the common name “credit institutions”, which means an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account as well as electronic money institutions (Article 1 of Directive 2000/12/EC). 6 OECD National Treatment Instrument (2000). 7 The Stabilisation and Association Council, which will be established under the Article 116 of the Agreement, shall supervise the application and implementation of the SAA. It shall consist of the members of the Council of the European Union and members of the Commission of the European Communities, on the one hand, and of members of the Government of Albania, on the other. 8 Communication from the Commission to the Council of 23 May 1986 on the programme for the liberalisation of capital movements in the Community {COM(1986) 292 final}. 9 Pursuant to Article 61, par. 1, of the SAA: “With regard to transactions on the capital and financial account of balance of payments, from the entry into force of the Agreement, the Parties shall ensure the free movement of capital relating to direct investments made in companies formed in accordance with the laws of the host country and investments made in accordance with the provisions of Chapter II of Title V, and the liquidation or repatriation of these investments and of any profit stemming therefrom”. 10 Pursuant to Article 61, par. 2, of the SAA: “With regard to transactions on the capital and financial account of balance of payments, from the entry into force of this Agreement, the Parties shall ensure the free movement of capital relating to credits related to commercial transactions or to the provision of services in which a resident of one of the Parties is participating, and to financial loans and credits, with maturity longer than a year”. 11 Pursuant to Article 60 of the SAA: “The Parties undertake to authorise, in freely convertible currency, in accordance with the provisions of Article VIII of the Articles of the Agreement of the International Monetary Fund, any payments and transfers on the current account of balance of payments between the Community and Albania”. 12 Joint Cases 286/82 and 26/83 Lusi and Carbone v. Ministero del Tesoro

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(1984); ECR 377. 13 These principles are set out in the second banking Directive (consolidated in the Directive 2000/12/EC), which is the main instrument for completing the Internal Market in banking. The Directive introduces the principle of a single banking licence or authorisation, which grants banks the right to establish branches in other Member States or to provide cross-border services without a new authorisation (but after notification of the host authorities). 14 Annex to White Paper for the preparation of the associated countries of Central and Eastern Europe for integration into the Internal Market of the Union; COM (95) 163, Brussels, 10.05.1995. 15 A similar regulation may be found in the Article 61 of the SAA, according to which: “…where, in exceptional circumstances, movements of capital between the Community and Albania cause, or threaten to cause, serious difficulties for the operation of exchange rate policy or monetary policy in the Community or Albania, the Community and Albania, respectively, may take safeguard measures with regard to movements of capital between the Community and Albania for a period not exceeding one year if such measures are strictly necessary”. 16 Pursuant to Article 62 of the SAA: “During the first three years following the date of entry into force of this Agreement, the Parties shall take measures permitting the creation of the necessary conditions for the further gradual application of Community rules on the free movement of capital”. 17 “Capital movements”, as set out in the Directive, are understood to be all the operations necessary for the purposes of capital movements carried out by a natural or legal person. This includes direct investments, investments in real estate, operations in securities and in current and deposit accounts, and financial loans and credits. 18 Annex to White Paper, pg. 3. 19 Michel Tison; Harmonisation and Legal Transplantation of EU Banking Supervisory Rules to Transitional Economies. A Legal Approach; Financial Law Institute, Universiteit Gent, 1999

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Foreign direct investment in Albania (fiscal year 2004)*

Introduction

Foreign direct investments (FDI) stand in an important position in the economic background of the developing countries. They provide necessary investments for the economic growth and for the technological development, when domestic savings cannot. Moreover, capital flows serve as a signal for the change of one’s country economic conditions, compared to the foreign ones. These flows influence a set of economic variables of a country, such as: current account deficit, exchange rate, domestic savings and investments, employment, etc..

Many countries have benefited from capital flows in the form of FDI. Fighting the lack of capital that the closed markets used to suffer, they have helped the effective use of these sources and they have created a competitive environment, which provides the investors with ever-growing outputs.

A long-lasting, positive effect of the FDI is the transfer of the production technology and of the most effective manners of industrial set up, from the countries of origin to the host ones. In this track, FDI also have a positive effect on the output of domestic companies. In general, the bilateral causative relationship between the FDI and the economic and political stability has been positive1, which means that the latter has induced higher levels of FDI. On the other hand, the great concentration of FDI in a country has helped its general stability. Another positive aspect is that, regardless of the cyclic trends, the capital in the form of FDI is not easily transferable within a short period of time, so it presents fewer risks to the monetary stability of a country than the other forms of financial capital.

Apart from the priority of drafting an institutional framework to encourage the foreign investment in Albania, their accurate measurement is a necessity of time. For this reason, the Bank of Albania, in collaboration with the Institute of Statistics conducts annual surveys in the enterprises with foreign capital participation. The purpose of these surveys stands in evidencing the foreign investment in Albania, through national surveys of the foreign and joint - venture enterprises operating in Albania.

The survey we are analysing is the second one conducted by the Bank of Albania. In monitoring this database, the Bank of Albania has planned the conduct of annual surveys. These surveys will be conducted among the population living by foreign direct investment enterprises in the country. Meanwhile, the all- inclusive FDI survey in Albania will be conducted every 3 years.

The success of this initiative is really important for the Bank of Albania, not only for the accurate measurement of foreign investment flow in Albania, but

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also for the calculation of the stock of these investments, which will serve as a basis for defining the International Investment Position (IIP) of Albania.

The legal framework and the informal economy do not allow complete and real statistics on foreign direct investment in Albania.

The development of a database for the foreign capital in the form of direct investment and the research analyses on the results of the surveys, provide us with a clear setting of the origin of foreign capital in Albania, the sectors of economy that have absorbed most of the foreign capital and their effects on the domestic economy.

The analysis of the FDI market characteristics in Albania and of their productivity, may act as a promoting element in the opening of new foreign capital enterprises in Albania.

The study proceeds with definitions and methodologies related to the concept of the FDI. This section describes the approach used to estimate the foreign capital stock. The analysis of the survey results is divided into two main sections. Section 2 analyzes the numerical characteristics of foreign and joint venture enterprises operating in Albania (such as, the sectoral distribution of enterprises, their origin, the regional distribution of foreign capital enterprises in the country, the concentration of labour force, etc.).

Section 3 analyzes the quantitative characteristics of the FDI, mainly related to the evaluation of the capital stock by country of origin and its distribution by sectors of economy.

I Definitions and methodologies

Even though the definition of the foreign direct investment has changed over the years, historically a certain limit of capital participation and the idea that the investor plans to show control influence in the enterprise, have been closely related to the meaning of the FDI. IMF and OECD, attempting to harmonize the definition, have developed a common definition: “… the foreign direct investment reflects the aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is resident in another economy (the direct investment enterprise).

Foreign direct investment involves both the initial transaction establishing the relationship between the investor and the enterprise and all subsequent capital transactions between them and among affiliated enterprises, regardless of the legal form of their registration – as incorporated or unincorporated.

The fifth Edition of the IMF Balance of Payment Manual (BPM5) defines the owner of 10% or more of a company’s capital as a direct investor. This percentage is used as the basic dividing line between direct investment and portfolio investment in the form of shareholdings. Thus, when a non-resident

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who previously had no equity in a resident enterprise purchases 10% or more of the shares of that enterprise from a resident, the price of equity holdings acquired should be recorded as direct investment. From this moment, any further capital transactions between these two companies should be recorded as a direct investment.

A direct investor may be an individual, an incorporated or unincorporated private or public enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises.

Direct investment capital comprises (i) the capital provided (either directly or through other related enterprises) by a direct investor to a direct investment enterprise and (ii) the capital received by a direct investor from a direct investment enterprise.

Direct investment capital transactions are made up of the equity capital, the reinvested earnings and any other direct investment capital (or inter company debt transactions).

• Equity capital comprises equity in branches, all shares in subsidiaries and associates and other capital contributions. • Reinvested earnings consist of the direct investor’s share (in proportion to direct equity participation) of earnings not distributed, as dividends and earnings of branches not remitted to the direct investor.

I.1 Calculation of the stock of Foreign Direct Investment

In presenting the direct investment statistics is taken into account the fact that the direct investments consist in the relations of the foreign direct capital, derived from the participating interests of the non-resident units in the domestic enterprises. The FDI stock comprises:

1. the shares in the nominal capital held directly by shareholders (subscribed capital);

plus 2. the shares in the capital reserves and revenue reserves, as well as in the profits brought forward and in the profits for the year, to be attributed to the direct shareholders. These shares are determined based on the respective proportion shares of the individual direct shareholders in the nominal capital;

less 3. the shares in the losses brought forward and in the losses for the year to be attributed to the direct shareholders.

Aggregation of the items 1 to 3 above yields the direct investment capital.

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The direct investment capital also comprises:

4. direct lending by direct or indirect shareholders in Albania or abroad.

plus 5. direct lending by other associated enterprises, namely – direct investment abroad – lending by affiliated enterprises in the country, and – in the case of foreign direct investment in the country – lending by affiliated enterprises domiciled outside the country.

Due to the lack of statistical information, in the calculation of the FDI stock are included only the three above mentioned items.

II Numerical characteristics of the FDI enterprises in Albania

II.1 Foreign Direct Investments (FDI) by investing country

According to the origin of the investing country, Italy and Greece have a dominant position in foreign direct investment in Albania. 51 per cent of direct investment enterprises have participation of Italian foreign capital and 24 per cent of Greek foreign capital. The nearest followers are the Turkish capital (4 per cent) and the American one (3 per cent) (table 1). Meanwhile, we notice an opening toward China and the Middle East, accompanied by increasing flows of capital from these countries.

Investing Country No. of enterprises Percentage Table 1 Foreign direct investment by investing European Union 434 82.5% country England 3 0.6% Austria 3 0.6% Belgium 1 0.2% Bulgaria 2 0.4% France 4 0.8% Greece 128 24.3% Germany 9 1.7% Holland 2 0.4% Hungary 7 1.3% Italy 269 51.1% Malta 1 0.2% Cyprus 2 0.4% Slovenia 2 0.4% Sweden 1 0.2% Regional countries 40 7.6% Croatia 4 0.8% Kosovo 6 1.1% Macedonia 8 1.5% Serbia and Montenegro 2 0.4% Turkey 20 3.8% Middle East & North Africa 15 2.9%

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Saudi Arabia 3 0.6% Egypt 3 0.6% Kuwait 1 0.2% Lebanon 6 1.1% Israel 1 0.2% Syria 1 0.2% Far East 10 1.9% China 10 1.9%

Australia 1 0.2% United States of America 14 2.7% Canada 2 0.4% International Institutions 2 0.4% Switzerland 2 0.4% Other 6 1.1%

Total 526 100.0% Source: Bank of Albania

II.2 Dynamics of the establishment of new enterprises with foreign capital

The frequency of FDI enterprises establishment in Albania, as expected, has followed the trends of the domestic economic development, since its opening to the foreign capital. The United Nations2 cite the year 1990, as the year when the Albanian legislation first permitted the opening of the country toward foreign direct investment. The establishment of new enterprises with foreign capital participation in the country has increased over the first years of transition, having a recession during the socio- economic crisis of the year 1997 (chart 1). After this period, this trend has been moderated, also effected by the general problematic situation in the Balkans. The year 2004 seems to have had a positive trend.

II.3 Geographical distribution of Foreign Direct Investment

Regarding the geographical distribution of the FDI in Albania, it is noticed that they are mostly concentrated in Tirana and in the west part of the country (chart 2 and table 1 in the attached annex). The areas with the most concentration of the FDI are the ones with the highest income and the most developed infrastructure. The central internal zone and the northeast part of the country are the least favourite areas for the foreign investors. Apart from the undeveloped infrastructure of these areas and the lack of marketing, the internal and external migration, which makes it difficult to find qualified labour force, is considered to have played a role in this. However, there is a considerable percentage of the FDI in the borderline with Greece, like in Korça and in Gjirokastra.

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II.4 Concentration of the labour force

Regarding the employment, there is a disproportion between the size of the enterprises and the labour force. Upon this, 46 per cent of the enterprises (table 2) have 1-9 employees, accounting for only 4 per cent of total employment. On the other hand, enterprises employing more than 100 employees represent only 12 per cent of FDI enterprises in Albania, employing about 61 per cent of the labour force. This means that there is a higher concentration of FDI enterprises in Albania, in labour-intensive sectors, clearly observed in the concentration of the FDI by sectors.

No. of employed in enterprises: Number of enterprises % Number of employed % Table 2 Concentration of the 1-9 238 46 901 4 labour force 10-50 171 33 4274 19 51-100 50 10 3777 17 over 100 62 12 13723 61 Total 521 100 22675 100 Source: Bank of Albania

II.5 Foreign capital participation

The participation of the foreign capital in around 66 per cent of the enterprises is within the interval of 75-100 per cent of the subscribed capital (chart 3). What stands out is the relatively high presence of the foreign capital in the enterprises with most employed people. Enterprises totally owned by foreign investors account for 56 per cent of the surveyed ones.

II.6 Foreign direct investment by sectors of economy

The sectoral distribution of foreign direct investment in Albania shows a high level of concentration in the manufacturing industry and the wholesale trade (table 3).

This means that there have been more investments in sectors with high returns on investment. These investments may be considered unstable, because of the quick change of their geographic location and the sector they are operating.

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Meanwhile, investments in the manufacturing industry, represented by textiles and footwear, aim at labour-intensive sectors rather than capital or technological intensive ones. Hence, the role of these investments in improving the technology of the domestic production has fewer positive effects on other sectors of production. The last one may be also explained by the higher domestic demand for short-term consumer goods.

Combining these results with those on employment, we conclude that investment in industry have aimed at labour-intensive sectors rather than capital or technological intensive ones. This leaves little space to the role of foreign investment in the transfer of technology and in the enhancement of the technological capacity of domestic production, minimizing the positive side effects of these investments in other sectors of production.

(The analytical distribution of enterprises by economic activity is provided in table 2 of the attached annex.)

Table 3 Distribution of Number of Section Description % enterprises by sectors (NACE enterprises Rev. 1.1) A Agriculture, hunting and forestry 3 1 B Fishing 3 1 C Extraction industry 12 2 D Manufacturing industry 234 45 E Electricity, gas and water supply 2 0 F Construction 41 8 Wholesale and retail trade; repair of motor vehicles, G 142 27 motorcycles and personal and household goods H Hotels and restaurants 7 1 I Transportation, storage and communication 24 5 J Monetary and financial intermediation 4 1 Real estate, renting, information technology, K 24 5 research and business activities L Public administration and defence; compulsory social security 0 0 M Education 4 1 N Health and social work 5 1 O Other community, social and personal service activities 15 3 P Activities of households 0 0 Q Extra-territorial organizations and bodies 0 0 n.a 1 0 TOTAL 521 100 Source: Bank of Albania

III Quantitative characteristics of foreign direct investment

III.1 Foreign capital stock

Starting from the available information and basing on the above explained methodology, the foreign capital stock, in the form of direct investment, is estimated at the level of ALL 38 billion for year 2004.

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48 new direct investment enterprises were established over 2004 in Albania, bringing in a new flow of foreign capital of ALL 28.6 million. This flow of capital has been mainly absorbed by textiles, wholesale trade of foodstuffs, etc.

In addition, over 2004, in more than 12 per cent of the interviewed enterprises, the boards of shareholders have made decisions on increasing the subscribed capital, increasing the foreign capital in Albania by about ALL 5 billion. It seems that the foreign investors are evaluating the investment environment of our country. Reinvested earnings for 2004 were estimated at ALL 10 billion, considerably higher compared to the previous year, and it maintains the highest level for the period being analyzed.

III.2. Foreign capital origin

Investors from EU countries dominate FDI in Albania. At year end 2004, no less than 82 per cent of total FDI stock was accounted for EU countries, the major investors among them being Greece (with 48 per cent of total foreign equity stock at year end 2004) and Italy (with 30 per cent). (chart 4 and table 3 in the attached annex). Of non-EU countries, only Turkey and Lebanon are considered to be significant investors.

Greece and Italy have considerably increased their presence in the foreign equity stock in Albania. Albania’s geographical proximity to these countries and its strong economic collaboration with the EU, are the main reasons for the domination of foreign investors from these countries.

The growth of the foreign capital stock over the years seems to have been more significant for the Greek capital. By the end of 2004, the latter was estimated at about ALL 18 billion, from ALL 7 billion at year ended 2001 (chart 5). Greek capital is mainly concentrated in the communication sector (68 per cent), due to its participation in the privatization process over 2000-2001, and to the wholesale trade (13 per cent). Its presence in textiles has become weaker over the recent years.

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Italian capital, for the surveyed period (2001-2004), has maintained its representation with investment in the manufacturing industry between the intervals of 60-65 per cent. By the end of 2004, the Italian capital stock was estimated at about ALL 11.3 billion from ALL 3.8 billion in 2001.

III.3. Distribution by economic activity

Accounting for 36 per cent of total FDI stock at the end of 2004 and 45 per cent of the total foreign enterprises, manufacturing industry is by far the most attractive sector of FDI in Albania (table 5). Within the manufacturing sector, foreign capital, accounting for more than 65 per cent, is concentrated in textile and clothes industry, food processing and furniture. Manufacturing industries using technology (such as, medical and pharmaceutical, electrical machinery and equipment and electronics) and using the capital (such as, refined petroleum products and chemical products) almost share the remaining part. This indicates that a strong motivation for the foreign companies has been the competitive advantage of the cheap labour force.

The communication sector, being represented by only 5 enterprises, shares about 33 per cent of the foreign capital stock, by the end of 2004. The wave of privatizations over 2000-2001 attracted potential investors in this industry. Foreign capital invested in this sector has shown an increasing trend in the last years, by raising their share in nominal capital as well as the rate of reinvested earnings and investment over the fiscal year.

The rapid developments in the construction sector over the last years, are calling the attention of foreign investors. The presence of foreign capital in this sector has increased considerably over the last two years, bringing new flows of foreign capital even in other supporting fields, such as in architectonic and engineering activities (classified under section K, table 5).

Table 4 Distribution of Section Description 2001 2002 2003 2004 foreign capital stock by % sectors (NACE Rev 1.1) (in A Agriculture, hunting and forestry 0.8 0.6 0.4 0.5 percentage) B Fishing 0.0 0.0 0.0 0.0 C Extraction industry 3.0 1.9 1.2 1.2 D Manufacturing industry 33.1 31.7 37.8 36.3 E Electricity, gas and water supply 0.0 0.5 0.3 0.2 F Construction 4.8 4.7 5.6 5.6 Wholesale and retail trade; repair G of motor vehicles, motorcycles and 10.4 6.8 5.6 9.6 personal and household goods H Hotels and restaurants 6.7 5.5 3.4 3.0 I Transportation, storage and communication 35.8 43.0 38.9 36.9 J Monetary and financial intermediation 4.4 3.8 2.7 2.4 Real estate, renting, information technology, K 0.2 1.0 2.7 3.3 research and business activities Public administration and defence; L 0.0 0.0 0.0 0.0 compulsory social security M Education 0.0 0.0 0.1 0.1

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N Health and social work 0.0 0.0 0.0 0.1 Other community, social and O 0.5 0.4 1.1 0.9 personal service activities P Activities of households 0.0 0.0 0.0 0.0 Q Extra-territorial organizations and bodies 0.0 0.0 0.0 0.0 n.a. 0.3 0.2 0.1 0.1 TOTAL 100.0 100.0 100.0 100.0 Source: Bank of Albania

(The analytical distribution of foreign capital stock by sectors of economy is provided in table 4 of the attached annex.)

III.4 Investment over the fiscal year 2004

Rate of responses for this section is 56 per cent.

According to the available information from enterprises, about 100 per cent of investment flow over 2004 was used for fixed assets.

The total investment amounted to ALL 15 billion, out of which ALL 14 billion relate to foreign investors’ quota.

More than half of total investment was used for technical installations, machinery and equipment.

Total Investments (I+II) 100.0 Table 5 Structure of I. Intangibles 0.1 investment over the fiscal year 2003 II. Tangibles 99.9 Out of which 1. Land 1.7 2. Buildings 3.7 3. Construction and general installations 22.6 4. Technical installations, machinery, equipment, tools 51.6 5. Transportation means 3.2 6. Office and information technology equipment 2.5 7. Other 14.7 Source: Bank of Albania

The manufacturing industry results to be the sector with the major flow of investment over the fiscal year 2004, accounting for about 42 per cent, followed by the communication sector with about 39 per cent.

Section Description % Table 6 Structural distribution of investment A Agriculture, hunting and forestry 0.2 over the fiscal year 2004 by B Fishing 0.0 sectors of economy C Extraction industry 2.0 D Manufacturing industry 42.2 E Electricity, gas and water supply 0.5 F Construction 1.3 Wholesale and retail trade; repair of motor vehicles, G 10.4 motorcycles and personal and household goods

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H Hotels and restaurants 0.5 I Transportation, storage and communication 38.5 J Monetary and financial intermediation 0.0 Real estate, renting, information technology, K 2.9 research and business activities L Public administration and defence; compulsory social security 0.0 M Education 1.0 N Health and social work 0.2 O Other community, social and personal service activities 0.3 P Activities of households 0.0 Q Extra-territorial organizations and bodies 0.0 TOTAL 100.0 Source: Bank of Albania

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Annex

Table 1 Foreign investment in Albania - by statistical region No. County No. Districs No. of enterprises

1 Berat 7 1 Berat 7 2 Kuçovë 3 Skrapar 2 Dibër 0 4 Dibër 5 Mat 6 Bulqizë 3 Durrës 76 7 Durrës 68 8 Krujë 8 4 Elbasan 21 9 Elbasan 20 10 Peqin 11 Gramsh 12 Librazhd 1 5 Fier 24 13 Fier 20 14 Mallakastër 15 Lushnjë 4 6 Gjirokastër 19 16 Gjirokastër 18 17 Tepelenë 18 Përmet 1 7 Korçë 52 19 Korcë 48 20 Devoll 1 21 Kolonjë 1 22 Pogradec 2 8 Kukës 0 23 Kukës 24 Has 25 Tropojë 9 Lezhë 5 26 Lezhë 5 27 Kurbin 28 Mirditë 10 Shkodër 23 29 Shkodër 23 30 Malësi e Madhe 31 Pukë 11 Tirana 273 32 Tirana 271 33 Kavajë 2 12 Vlorë 21 34 Vlorë 17 35 Sarandë 2 36 Delvinë 2 Total 36 521

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Table 2 No. of Albanian enterprises with foreign direct investment (direct affiliation) - by activity, end-year 2004 NACE DESCRIPTION No %

A Agriculture, hunting and forestry 3 1 ‘01 Agriculture, hunting and related service activities 2 0 ‘02 Forestry, logging and related service activities 1 0 B Fishing 3 1 ‘05 Fishing, fish farming and related service activities 3 1 C Mining and quarrying 12 2 CA Mining and quarrying of energy producing materials 3 1 ‘10 Mining of coal and lignite; extraction of peat 0 - Extraction of crude petroleum and natural gas; service activities ‘11 3 1 incidental to oil and gas extraction, excluding surveying ‘12 Mining of uranium and thorium ores 0 - CB Mining and quarrying, except of energy producing materials 9 2 ‘13 Mining of metal ores 0 - ‘14 Other mining and quarrying 9 2 D Manufacturing 234 45 DA Manufacture of food products, beverages and tobacco 14 3 ‘15 Manufacture of food products and beverages 12 2 ‘16 Manufacture of tobacco products 2 0 DB Manufacture of textiles and textile products 92 18 ‘17 Manufacture of textiles 3 1 ‘18 Manufacture of wearing apparel; dressing and dyeing of fur 89 17 DC Manufacture of leather and leather products 29 6 ‘19 Tanning and dressing of leather; manufacture of luggage, handbags, saddlery, harness and footwear 29 6 DD Manufacture of wood and wood products 8 2 Manufacture of wood and of products of wood and cork, except furniture; ‘20 8 2 manufacture of articles of straw and plaiting materials DE Manufacture of pulp, paper and paper products; publishing and printing 10 2 ‘21 Manufacture of pulp, paper and paper products 4 1 ‘22 Publishing, printing and reproduction of recorded media 6 1 DF Manufacture of coke, refined petroleum products and nuclear fuel 0 - ‘23 Manufacture of coke, refined petroleum products and nuclear fuel 0 - DG Manufacture of chemicals, chemical products and man-made fibres 7 1 ‘24 Manufacture of chemicals and chemical products 7 1 DH Manufacture of rubber and plastic products 12 2 ‘25 Manufacture of rubber and plastic products 12 2 DI Manufacture of other non-metallic mineral products 20 4 ‘26 Manufacture of other non-metallic mineral products 20 4 DJ Manufacture of basic metals and fabricated metal products 14 3 ‘27 Manufacture of basic metals 2 0 ‘28 Manufacture of fabricated metal products, except machinery and equipment 12 2 DK Manufacture of machinery and equipment n.e.c. 1 0 29 Manufacture of machinery and equipment n.e.c. 1 0 DL Manufacture of electrical and optical equipment 10 2 30 Manufacture of office machinery and computers 0 - 31 Manufacture of electrical machinery and apparatus n.e.c. 7 1 32 Manufacture of radio, television and communication equipment and apparatus 1 0 33 Manufacture of medical, precision and optical instruments, watches and clocks 2 0 DM Manufacture of transport equipment 1 0 34 Manufacture of motor vehicles, trailers and semi-trailers 0 - 35 Manufacture of other transport equipment 1 0 DN Manufacturing n.e.c. 16 3 36 Manufacture of furniture; manufacturing n.e.c. 16 3 37 Recycling 0 - E Electricity, gas and water supply 2 0 40 Electricity, gas, steam and hot water supply 1 0 41 Collection, purification and distribution of water 1 0 F Construction 41 8

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45 Construction 41 8 G Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods 142 27 50 Sale, maintenance and repair of motor vehicles and motorcycles; retail sale of automotive fuel 8 2 51 Wholesale trade and commission trade, except of motor vehicles and motorcycles 108 21 52 Retail trade, except of motor vehicles and motorcycles; repair of personal and household goods 26 5 H Hotels and restaurants 7 1 55 Hotels and restaurants 7 1 I Transport, storage and communication 24 5 60 Land transport; transport via pipelines 4 1 61 Water transport 2 0 62 Air transport 3 1 63 Supporting and auxiliary transport activities; activities of travel agencies 10 2 64 Post and telecommunications 5 1 J Financial intermediation 4 1 65 Financial intermediation, except insurance and pension funding 2 0 66 Insurance and pension funding, except compulsory social security 2 0 67 Activities auxiliary to financial intermediation - K Real estate, renting and business activities 24 5 70 Real estate activities 9 2 71 Renting of machinery and equipment without operator and of personal and household goods 2 0 72 Computer and related activities 2 0 73 Research and development 0 - 74 Other business activities 11 2 L Public administration and defence; compulsory social security 0 - 75 Public administration and defence; compulsory social security 0 - M Education 4 1 80 Education 4 1 N Health and social work 5 1 85 Health and social work 5 1 O Other community, social and personal service activities 15 3 90 Sewage and refuse disposal, sanitation and similar activities 2 0 91 Activities of membership organizations n.e.c. 6 1 92 Recreational, cultural and sporting activities 6 1 93 Other service activities 1 0 P Activities of households 0 - 95 Activities of households as employers of domestic staff 0 - 96 Undifferentiated goods producing activities of private households for own use 0 - 97 Undifferentiated services producing activities of private households for own use 0 - Q Extra-territorial organizations and bodies 0 - 99 Extra-territorial organizations and bodies 0 - n.a. 1 Total 521 100

Table 3 Foreign direct investment in Albania by investing country 2001 - 2004. end-year stock in 000 Lekë 2001 % 2002 % 2003 % 2004 %

European Union 12,197,774 77 15,119,893 79 25,641,738 82 31,085,736 82 of that Austria 873,285 5 873,390 5 874,102 3 874,117 2 Greece 6,973,210 44 9,205,083 48 13,906,849 45 18,139,697 48 Germany 290,252 2 388,130 2 382,921 1 369,613 1 Italy 3,760,558 24 4,410,597 23 9,896,521 32 11,314,441 30 Other countries 300,469 2 242,693 1 581,346 2 387,868 1

Europe & Central Asia 1,210,619 8 1,251,390 6 2,048,256 7 3,152,459 8 of that Croatia 178,110 1 178,110 1 281,907 1 325,792 1

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Kosovo 51,243 0 77,060 0 92,608 0 115,890 0 Macedonia, Former Yugoslav Republic 278,968 2 247,644 1 849,865 3 898,669 2 Turkey 702,246 4 748,523 4 816,074 3 1,803,815 5 Other countries 53 0 53 0 7,801 0 8,292 0

Middle East & North Africa 1,521,447 10 1,932,085 10 1,882,647 6 1,972,923 5 of that Egypt 527,980 3 528,674 3 529,955 2 543,731 1 Lebanon 991,429 6 1,401,013 7 1,350,110 4 1,354,149 4 Other countries 2,039 0 2,398 0 2,582 0 75,043 0

East Asia & Pacific 777 0 777 0 38,306 0 13,515 0 China 777 0 777 0 38,306 0 13,515 0

United States 278,441 2 327,376 2 890,437 3 757,264 2 International Organisations 696,269 4 696,269 4 696,269 2 696,269 2

Other countries 13,146 0 -72,784 0 12,804 0 29,994 0

Total 15,918,473 100 19,255,005 100 31,210,458 100 37,708,160 100

Table 4 Foreign direct investment in Albania - by activity 2001 - 2004. end-year stock in 000 Lekë NACE DESCRIPTION 2001 2002 2003 2004

A Agriculture, hunting and forestry 122,599 123,642 122,187 177,435 Agriculture, hunting and ‘01 122,450 123,493 122,038 177,285 related service activities ‘02 Forestry, logging and related service activities 150 150 150 150 B Fishing 3,871 5,400 5,301 5,157 Fishing, fish farming and ‘05 3,871 5,400 5,301 5,157 related service activities C Mining and quarrying 478,818 367,904 369,849 446,866 Mining and quarrying of energy CA 3,051 -78,139 -15,339 -3,072 producing materials ‘10 Mining of coal and lignite; extraction of peat Extraction of crude petroleum and natural ‘11 gas; service activities incidental to oil and 3,051 -78,139 -15,339 -3,072 gas extraction, excluding surveying ‘12 Mining of uranium and thorium ores Mining and quarrying, except of CB 475,767 446,042 385,188 449,938 energy producing materials ‘13 Mining of metal ores ‘14 Other mining and quarrying 475,767 446,042 385,188 449,938 D Manufacturing 5,276,885 6,097,960 11805036.97 13,701,582 Manufacture of food products, DA 1,087,117 1,122,912 4,890,497 4,071,129 beverages and tobacco ‘15 Manufacture of food products and beverages 898,688 928,740 4,704,788 3,884,379 ‘16 Manufacture of tobacco products 188,430 194,172 185,708 186,749 DB Manufacture of textiles and textile products 1,016,115 1,193,020 1,325,668 1,440,979 ‘17 Manufacture of textiles 26,442 26,303 22,946 23,705 Manufacture of wearing apparel; ‘18 989,673 1,166,717 1,302,722 1,417,274 dressing and dyeing of fur DC Manufacture of leather and leather products 281,515 302,533 442,715 450,686 Tanning and dressing of leather; ‘19 manufacture of luggage, handbags, 281,515 302,533 442,715 450,686 saddlery, harness and footwear DD Manufacture of wood and wood products 183,867 184,927 306,678 280,800

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Manufacture of wood and of products of ‘20 wood and cork, except furniture; manufacture 183,867 184,927 306,678 280,800 of articles of straw and plaiting materials Manufacture of pulp, paper and paper DE 10,673 7,491 16,082 53,428 products; publishing and printing Manufacture of pulp, paper ‘21 210 222 690 34,711 and paper products Publishing, printing and reproduction ‘22 10,463 7,269 15,392 18,717 of recorded media Manufacture of coke, refined petroleum DF 0 0 0 0 products and nuclear fuel Manufacture of coke, refined petroleum ‘23 products and nuclear fuel Manufacture of chemicals, chemical DG 68,158 70,855 73,613 85,881 products and man-made fibres Manufacture of chemicals ‘24 68,158 70,855 73,613 85,881 and chemical products DH Manufacture of rubber and plastic products 136,086 139,851 289,950 278,368 ‘25 Manufacture of rubber and plastic products 136,086 139,851 289,950 278,368 Manufacture of other non- DI 1,447,380 1,940,798 2,804,110 3,678,295 metallic mineral products Manufacture of other non- ‘26 1,447,380 1,940,798 2,804,110 3,678,295 metallic mineral products Manufacture of basic metals and DJ 588,372 497,227 598,430 1,739,017 fabricated metal products ‘27 Manufacture of basic metals 415,200 282,455 294,411 913,092 Manufacture of fabricated metal products, ‘28 173,172 214,772 304,019 825,925 except machinery and equipment Manufacture of machinery DK 105 371 105 1,266 and equipment n.e.c. Manufacture of machinery 29 105 371 105 1,266 and equipment n.e.c. Manufacture of electrical and DL 8,143 8,008 382,507 913,872 optical equipment Manufacture of office machinery 30 and computers Manufacture of electrical machinery 31 7,985 7,735 381,700 913,143 and apparatus n.e.c. Manufacture of radio, television and 32 105 105 105 105 communication equipment and apparatus Manufacture of medical, precision and 33 53 168 702 624 optical instruments, watches and clocks DM Manufacture of transport equipment 372,795 548,024 586,110 610,119 Manufacture of motor vehicles, 34 trailers and semi-trailers 35 Manufacture of other transport equipment 372,795 548,024 586,110 610,119 DN Manufacturing n.e.c. 76,560 81,944 88,572 97,743 36 Manufacture of furniture; manufacturing n.e.c. 76,560 81,944 88,572 97,743 37 Recycling E Electricity, gas and water supply 105 87,204 87,204 87,204 40 Electricity, gas, steam and hot water supply 0 54 54 54 Collection, purification and 41 105 87,150 87,150 87,150 distribution of water F Construction 762,983 900,195 1,749,458 2,093,426 45 Construction 762,983 900,195 1,749,458 2,093,426 Wholesale and retail trade; repair G of motor vehicles, motorcycles and 1,659,806 1,300,980 1,743,499 3,609,569 personal and household goods

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Sale, maintenance and repair of 50 motor vehicles and motorcycles; 83,675 70,782 85,795 95,081 retail sale of automotive fuel Wholesale trade and commission trade, 51 1,549,288 1,202,486 1,567,595 3,409,868 except of motor vehicles and motorcycles Retail trade, except of motor 52 vehicles and motorcycles; repair of 26,843 27,712 90,109 104,621 personal and household goods H Hotels and restaurants 1,062,455 1,062,730 1,066,422 1,130,254 55 Hotels and restaurants 1,062,455 1,062,730 1,066,422 1,130,254 I Transport, storage and communication 5,692,778 8,278,967 12152996.8075 13,896,890 60 Land transport; transport via pipelines 16,362 18,678 21,981 259,975 61 Water transport 5,167 -14,078 5,357 -125,036 62 Air transport 929,905 976,537 984,347 1,343,694 Supporting and auxiliary transport 63 11,692 12,309 21,778 16,181 activities; activities of travel agencies 64 Post and telecommunications 4,729,653 7,285,521 11,119,534 12,402,076 J Financial intermediation 705,069 726,789 848,860 893,634 Financial intermediation, except 65 1,155 1,155 104,952 148,836 insurance and pension funding Insurance and pension funding, 66 703,914 725,634 743,908 744,797 except compulsory social security 67 Activities auxiliary to financial intermediation K Real estate, renting and business activities 28,650 186,855 848,618 1,226,813 70 Real estate activities 21,567 42,678 678,499 713,149 Renting of machinery and equipment 71 without operator and of personal 2,100 137,795 139,761 142,835 and household goods 72 Computer and related activities 0 0 0 210 73 Research and development 74 Other business activities 4,982 6,382 30,358 370,620 Public administration and defence; L 0 0 0 0 compulsory social security Public administration and defence; 75 compulsory social security M Education 210 289 21,253 23,598 80 Education 210 289 21,253 23,598 N Health and social work 2,132 2,132 14,821 20,819 85 Health and social work 2,132 2,132 14,821 20,819 Other community, social and O 78,012 69,860 330,851 350,812 personal service activities Sewage and refuse disposal, 90 200 1,318 200 1,834 sanitation and similar activities 91 Activities of membership organizations n.e.c. 70,792 59,397 59,039 71,982 92 Recreational, cultural and sporting activities 6,756 8,965 271,433 276,646 93 Other service activities 266 180 180 351 P Activities of households 0 0 0 0 Activities of households as 95 employers of domestic staff Undifferentiated goods producing activities 96 of private households for own use Undifferentiated services producing activities 97 of private households for own use Q Extra-territorial organizations and bodies 0 0 0 0 99 Extra-territorial organizations and bodies n.a. 44,100 44,100 44,100 44,100 Total 15918472.668058 19,255,005 31210457.555887 37,708,160

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Endnotes

* Prepared by: Argita Frashëri, Head of Unit of Balance of Payments Division, Statistics Department. 1 Razin, A.: FDI flows, a critical look, NBER Reporter Spring 2002. 2 United Nation, World Investment Report, 1992.

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Survey on Crediting and Depositing Activity for January-February 2006*

Summary

Analyzing the opinions of specialists of commercial banks on indicators of crediting and depositing activity over the first semester of 2006, it follows that:

Depositing Activity • Commercial banks specialists view the performance of depositing activity over the first part of 2006 as superior to that of six months ago. • In the majority of commercial banks, the plan on deposits was fulfilled at 50-100 per cent, for both deposits in Lek and in foreign currency. According to these commercial banks specialists, depositing in Lek was more successful. • The objective for deposits in Lek and in foreign currency was aided greatly by the high level of confidence towards the banks, and the high service quality. In particular, banking specialists agree that: • There is an apparent enhancement of competition in the banking sector; • The current levels of interest rates in Lek, despite being continually decreasing over the last few years, are viewed as normal; • The upward trend of foreign interest rates has aided the depositing activity in foreign currency. • Specialists expect a rising depositing activity for the second part of 2006. Expectations are more optimistic towards foreign currency deposits. • There is no clear expectation tendency for interest rates in Lek. Nevertheless, the expectations confidence index for interest rates in Lek marks a rise1. Most specialists foresee an increase of foreign currency interest rates, while also expect them to remain in the current levels. • A considerable number of specialists agree that: • The monetary policy of the Bank of Albania and the interest rates determined at REPO auctions affect the deposit rates in Lek. • The Bank of Albania is effective in its interventions in the money market. • The differential on Lek–foreign currency interest rates affects the preference for deposits in Lek or in foreign currency.

Crediting Activity • The average level of the plan realization for crediting is around 71 per cent, marking a fall as compared to the second half of 2005. It is apparent that the realization level of the plan in Lek (79 per cent) is higher than the completion level for the plan in foreign currency (64 per cent). This difference is believed to have resulted from the faster

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acceleration of crediting in Lek and the high competition in the foreign currency credit market. • The size of the informal market has been further reduced as compared to six months ago. • Credit risk is considered unchanged and is expected to remain at the same level for the coming six-month period. • Banks have increased crediting to households and to small business. This fact is apparent in the new products that banks are introducing, in response to demand for both these groups. • According to the interviewed subjects, for the future is expected: • A rise in crediting activity, in particular of credit to business; • A marked rise of credit in Lek as compared to credit in foreign currency; • Stable interest rates of credit in Lek and an increase in foreign currency interest rate; • Maintenance of crediting preference for the trade sector.

Inflation Expectations • The majority of specialists expect a stable rate of inflation, even a decrease in it, for the second half of the year. These expectations are based on the belief that the Bank of Albania will take the appropriate measures to ensure price stability. • Expectations for an increase in inflation are based primarily on the increase of government spending in the second half of the year, as a result of the rise of oil and energy prices, and on the rapid increase of credit.

Analysis of the survey data for the first six-month period of 2006

A survey was conducted during June on the crediting and depositing activity of commercial banks for the first half of 2006. The objective of this survey was to withdraw the opinions of banking specialists on the latest developments in crediting and depositing activity. The survey in June 2006 included the opinions of around 95 specialists on both crediting and depositing. The participation rate is around 34 per cent higher than in the previous survey. This increase is attributed to the entrance of Raiffeisen Bank in the crediting market, as well as to the expansion of the banking system throughout the country. This increased number of collected opinions has provided better conditions for deriving conclusions. All interviewed subjects have an average banking experience of 4.5 years.

I. Depositing activity2

Around 70 per cent of commercial bank representatives (specialists) regard the depositing activity of the first half of 2006 as superior to that

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of the preceding six-month period. The other part of the specialists is of the opinion that depositing activity has not changed from the previous six-month period.

The performance of the realization plan of deposits for this six-month period does not mark a change from that of the previous six-month period. Around 64 per cent of depositing specialists express that, during the surveyed period, the plan on depositing was realized at 50-100 per cent for both deposits in Lek and foreign currency. A positive note is struck by the fact that the majority of the remaining specialists express that the realization of the plan exceeds 100 per cent, while only a small percentage of them state a 50 per cent realization of the plan. Considering the opinions of the interviewed subjects, depositing in Lek is presented to have been more successful than depositing in foreign currency for the first half of 2006.

The data on depositing activity during the first half of 2006, however, favours foreign currency depositing. Annual growth rates for both types of deposits have fallen during this period. Nevertheless, the annual growth rate of foreign currency deposits remains higher than that for Lek.

The high level of confidence towards banks and the high quality of service towards clients from these institutions continue to be listed as the main factors that have attracted depositors to commercial banks. The high level of competition, as well as competing interest rates, are furthermore two other factors that have impacted the depositing activity. Currently, a new bank has joined the banking system, while other commercial banks have increased the number of branches in Albania, thereby increasing competition in the banking market. The high level of workers’ remittances and the upward trend of foreign currency interest rates are considered as contributing factors to the positive performance of foreign currency deposits.

Around 62 per cent of specialists express that the current level of interest rates for Lek deposits is normal. Around 32 per cent of them consider the current level of the interest rate in Lek as being low (25 per cent in the previous survey). A small number

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of interviewed subjects view the interest rate in Lek as being high.

Lek interest rates have recorded a downward trend over the first six-month period. The opposite occurred to the interest rates in foreign currency (usd and euro). The increase of foreign currency interest rates reflected the increase of the interest rates by the Federal Reserve and the European Central Bank over this period.

The confidence of specialists on the performance of depositing activity for the second half of 2006 is high, but more moderate than in the previous survey. However, there are more positive expectations as far as foreign currency depositing is concerned. Around 72 per cent of specialists expect a rise in foreign currency depositing, while the remaining do not expect a change. Around 60 per cent of specialists believe that the level of depositing in Lek will rise, while the remaining group expects progress akin to the current performance. Specialists see the performance of interest rates as an important determinant to the depositing activity.

Specialists’ opinions on the future of Lek interest rates continue to be concentrated almost equally among three main alternatives: increase, decrease, and no change. Nevertheless, the confidence index for Lek interest rates demonstrates a further increase in this survey, suggesting that there is an expectation for increasing Lek interest rates.

Foreign currency interest rates are expected to preserve their current levels (around 39 per cent of surveyed), and to increase (around 41 per cent). The confidence index on foreign currency interest rate expectations continues to be positive, demonstrating that expectations for an increase in foreign currency interest rates are higher.

Specialists consider the policy of the central bank through REPO interest rates and the Treasury bills yield as the main factor affecting the future trends of deposit interest rate. The pursue of a competitive policy after surveying the interest rates in the interbank market continues to be considered another crucial factor.

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On average, over 70 per cent of interviewed specialists agree that:

• The monetary policy of the Bank of Albania and the interest rates determined at REPO auctions influence the deposit rates in Lek. • The differential of Lek-foreign currency interest rates influences the preference for deposits in Lek or in foreign currency; • The Bank of Albania is effective in its interventions in the banking market.

II Crediting Activity

According to the opinion of specialists, the average level of plan realization for crediting is about 71 per cent, or 10 percentage points lower over the first half of the year than in the preceding six-month period. It is observed that the level of plan realization for credit in Lek (79 per cent), by the currency of extended credit, is visibly higher than the level for crediting in foreign currency (64 per cent). This difference is believed to be the result of the faster growth of crediting in Lek, as well as of the high competition in the foreign currency crediting market. As evidenced by the official data, crediting in Lek is demonstrating higher growth rates than that in foreign currency. In accordance, the competition index3 demonstrates that the market for crediting in Lek is more dominated than the foreign currency credit market. The high competition in the foreign currency credit market makes the completion of crediting plans harder for banks. Alongside market competition, low demand of economy for money has contributed to the non-completion of bank plans. Such a fact demonstrates that banking expectations on the demand of economy for credit were overvalued.

Compared to the previous year, an overturn of bank crediting preferences is apparent. Whereas big businesses used to dominate the client list of credit banks, from the crediting performance for the first six- month period of 2006 it is apparent that households and small businesses are the most credited groups. These market segments, previously left aside, appear to have become the core of bank strategies for preserving and increasing their share in the crediting market.

According to bankers, the reasons that have positively influenced the advancement of crediting are the strengthening of bank-client relationships, and the stable and favourable macroeconomic environment. However, it must be noted that the average completion level of the plan for crediting is considerably influenced by banking plans, which may be more optimistic than the reality.

Credit risk is assessed to have decreased over the first half of 2006. The percentage of opinions for no change in credit risk remains almost equal to that of the previous survey, while a considerable increase is noticed in the

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case of a fall in risk. The strengthening of credit risk control procedures by banks, the strengthening of bank-client relationships, the enhancement of the formalization of the Albanian economy, the increasing awareness of bank clients, alongside an increase of banking professionalism are the main reasons for the maintenance or low levels of credit risk.

For the second half of 2006, banks’ specialists (61 per cent) foresee equal levels of credit risk. Nevertheless, the negative value of the index for future credit risk demonstrates that the number of those who believe in a fall of credit risk is higher than those who expect the opposite. Compared to the 2005 survey, risk index for the future marks an increase. Opinions on the reduction of risk rest primarily on a closer acknowledge of clients, the possibility of credit information bureau establishment, as well as on the attempts for improving the performance of state institutions, such as the Real Estates Registration Office, Execution’s Office, etc.

Banks have underlined “insufficient arguments for applying for credit” as the main deficiency of businesses when applying for credit. This factor was also assessed as being the prime deficiency. Compared to the previous survey, the lack of administrative abilities on the part of credit applying businesses is assessed as a factor of rising importance. This survey furthermore recognizes problems resulting from the absence of a Real Estates Registration Office or issues related to the legalization and registration of property.

The size of the informal market presents a marked decrease compared to six months ago. The further fall of the associated index demonstrates that the number of those who believe that the size of this market is on the rise continues to decrease. The enlargement and deepening of banking products has created opportunities for businesses to turn to the official credit market for financial support of their activities. Likewise, the efforts against informal activities, in general, appear to have influenced on shrinking the informal crediting market.

The sectoral distribution of credit does not present any important changes in this survey. The trade sector, even though reflecting a fall in preference compared to six months ago, continues to remain the most favourite sector for crediting. Banks prefer to be engaged in this sector because it is one of the most profitable sectors of economy. Compared to the second half of 2005, there is an apparent increase in the preference of banks to credit

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the construction sector. Crediting preferences for the industry and service sectors remain at almost equal levels as six months ago. The agriculture and transportation sectors continue to remain detached from the preferences of banks in the short-term.

All specialists are optimistic for the future of crediting activity in general, where priority will be given to the rise of business crediting. Banks are expected to enlarge their crediting activity in both, Lek and foreign currency. The rise of foreign currency crediting, like six months ago, does not appear very stable.

The majority of the interviewed subjects believe that credit interest rates for Lek will remain unchanged in the future. Compared to the preceding survey, we are faced with a marked fall in the number of opinions foreseeing the decrease of interest rates for credit in lek. Opinions for the increase of credit interest rate in Lek have, in turn, strengthened.

For the first half of 2006, foreign currency interest rates for credit to households have reflected a fall, while interest rates for credit to businesses (for both corporations and businesses) have generally marked an increase. The performance of foreign currency interest rates is believed to have been based primarily on the performance of interest rates in international markets, in particular on the increase of the core interest rate for the two major currencies, the Euro and the US dollar.

The positive value of the foreign currency index reflects the expectations for an increase of foreign currency interest rates. But, in contrast to six months ago, the number of specialists who expect an increase in foreign currency interest rates has increased substantially. This performance is influenced by the latest developments in the international markets.

III Expectations on Inflation

In the previous survey, a substantial part of specialists expected an inflation rate of around 3 per cent. The average inflation rate for the first half of the year was 2 per cent. Meanwhile, for the coming six-month period about 54 per cent of specialists expect inflation to remain around the same level as in the first half of the year. About 33 per cent of them expect an increase in the inflation rate. Expectations for a stable or falling inflation rate stem from the confidence that the Bank of Albania will take the necessary steps to maintain price stability. The

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expectations for an increase in inflation are primarily based on the increase of government spending in the second half of the year, on the rising oil and energy prices, and the fast credit growth.

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Annex

Depositing activity

The following tables display the data on the information provided by the survey on the depositing activity of commercial banks over semesters from 2002 to 2006.

Question: To what extent are the objectives of your bank/branch for receiving deposits in lek accomplished (compared to their projections in the semi-annual plan)? (in percentage) December ’02 June ’03 December’03 June ‘04 June ’05 December ‘05 June ‘06 0 – 50% 7.3 7.3 7 9.4 14.3 13 10 50 – 100% 54.5 36.4 35.1 48.4 59.5 63 64.4 Over 100% 38.2 56.4 57.9 42.2 26.2 24 25.6 Average level 90.4 99.6 100.5 91.4 81.0 80.7 82.8

Question: To what extent are the objectives of your bank/branch for receiving deposits in foreign currency accomplished (compared to their projections in the semi- annual plan)? (in percentage) December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 0 – 50% 17.6 11.3 10.7 20.3 14.5 12 16.9 50 – 100% 54.9 60.4 50.5 53.1 65.1 60 61.8 Over 100% 27.5 28.3 39.3 26.6 20.5 28 21.3 Average level 80.0 83.5 89.7 78.1 78.0 83.2 77.2

Question: What is your projection regarding the performance of deposits in lek for the following semester? (in percentage) December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Increasing 92.7 84.5 57.1 57.14 64.6 64 58.9 Decreasing 0 0 16.1 6.5 9.8 6 2.1 Unchanged 5.5 15.5 25 36.5 22.0 28 35.8

Question. What is your projection regarding the performance of deposits in foreign currency for the following semester? (in percentage) December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Increasing 60.8 51.0 46.2 55.6 75.6 77 71.7 Decreasing 5.9 10.2 15.4 4.8 3.7 3 1.1 Unchanged 25.5 38.8 30.8 39.7 18.3 15 21.7

Confidence index on the performance of deposits in lek and in foreign currency for the following semester December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Index in lek 92.7 84.5 41 50.8 54.9 58.2 56.8 Index in foreign currency 54.9 40.8 30.8 50.8 71.9 74.2 70.6

Question. What is your projection regarding the performance of interest rate for deposits in lek for the following semester? (in percentage) December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Increasing 36.4 5.7 18.5 10.94 7.23 24 35.2 Decreasing 7.3 49.1 57.4 48.44 49.40 30 20.9 Unchanged 50.9 45.3 20.4 40.63 32.53 44 40.7

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Question. What is your projection regarding the performance of interest rate for deposits in foreign currency for the following semester? (in percentage) December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Increasing 21.0 12.8 13.7 40.3 42.2 41 40.7 Decreasing 9.0 14.9 21.6 17.7 13.3 8 11.6 Unchanged 69.9 72.3 56.9 41.9 38.6 45 39.5

Confidence index on the performance of interests in lek and in foreign currency for the following semester. December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Index in lek 29.1 -43.4 -38.9 -37.5 -42.2 -6.3 14.3 Index in foreign currency 12.0 -2.1 -7.9 22.6 28.9 32.8 29.1

Crediting activity

The following tables display the data on the information provided by the survey on the crediting activity of commercial banks over semesters from 2002 to 2006.

Question. Considering the following groups, identify the groups your bank has mostly extended credit to over the present semester. (in percentage) December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Medium-size business 1.3 1.3 1.3 1.3 1.8 1.8 1.9 Large-size business 1.6 1.3 1.5 1.5 1.9 1.8 2.2 Small-size business 2 1.9 2.0 1.9 1.9 1.9 1.9 Households 1.7 1.6 1.5

Question. How do you assess the level of credit in lek extended by your bank (foundation) over the present semester, compared to the level of credit projected in the business plan of your bank for this period? (in percentage) December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 0 0 0 0 2.7 4.3 1.5 0-50 0 6.9 3 8.1 20 5.8 17.6 50-100 32.1 41.4 48.5 45.9 54.3 47.1 49.5 100 42.9 24.1 24.2 16.2 5.71 25 14.3 Over 100 25 27.6 24.2 27 15.7 20.6 18.7 Average (in percentage) 98.2 91.4 91.7 86.5 71.1 87.5 79.1

Question. How do you assess the current credit risk in Albania compared to the previous semester? (in percentage) December ‘02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Higher 10.7 17.2 11.1 7.9 11.6 26.1 22.2 Equal 78.6 58.6 72.2 68.4 60.9 59.4 55.6 Lower 10.7 24.1 16.7 23.7 27.5 14.5 22.2 Index 0 -6.9 -5.6 -15.8 -15.9 11.6 0

Question. What is your projection regarding the credit risk over the following semester, compared to the current risk? (in percentage) June ‘03 December ‘03 June ‘04 June ‘05 December ‘05 June ‘06 December ‘06 Higher 10.7 13.8 16.2 10 10 9 15.2 Equal 64.3 58.6 64.9 80 68.6 77.6 61.9 Lower 25 27.6 18.9 10 21.4 13.4 22.8 Index -14.3 -13.8 -2.7 0 -11.4 -4.5 -7.6

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Question. Among the following problems, identify the factors which restrict the credit process of businesses over the present semester, ranking them by precedence (most important (1), less important (7)). (average level of importance) December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Inadequate arguments 3.3 2.9 2.7 3.6 3.02 2.9 2.6 Presentation of unreal balance sheets 2.9 4.1 3.2 3.3 2.8 3.2 3.1 Lack of culture in bank- 3.3 2.6 3.6 2.8 3.5 3.5 3.8 client relationships Business plan deficiencies 3.5 3.5 3.7 3.8 3.5 3.5 3.4 Inadequate information on the 5.1 4.9 4.9 4.6 4.6 4.6 4.5 legislation related to business activity Deficiencies in business 4.0 3.7 3.8 3.7 4.4 4.4 3.9 administration Other* 5.2 5.4 5.3 5.5 5.4 5 5.9

Question. What is the size of the informal credit market in the present semester compared to the previous semester? (in percentage) December ’02 June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Bigger 44.4 81.5 55.9 64.7 70.3 63.1 62.8 Equal 40.7 14.8 32.3 29.4 21.9 21.5 24.4 Smaller 14.8 3.7 11.7 5.9 7.8 15.4 12.8 Index 29.6 77.8 44.1 58.8 62.5 47.7 50

Question. Among the following economic sectors, identify the most profitable sectors to engage in crediting over the following semester, ranking them by precedence (most favourite (1), least favourite (6)). (average level of importance) June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Trade 1.7 2.1 1.7 1.7 1.7 2.0 Industry 2.6 2.4 2.7 2.8 3.2 3.0 Construction 2.9 2.9 2.8 3.1 2.7 2.6 Services 3.2 3.1 2.8 2.9 3.1 3.0 Agriculture 5.9 5.4 5.6 5.1 5.2 5.4 Transportation 4.6 4.4 4.3 4.7 4.7 4.8

Question. What is your projection regarding the growth of credit activity in lek for the following semester? (in percentage) June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Higher 57.7 51.4 62.5 83.3 79.1 85.7 Equal 34.6 34.3 30 15.3 17.9 14.3 Lower 7.7 14.3 7.5 1.4 2.9 Index 50 37.1 55 81.9 76.1 85.7

Question. What is your projection regarding the growth of credit activity in foreign currency for the following semester? (in percentage) June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Higher 77.8 79.4 71.1 53.1 45.9 48.8 Equal 22.2 17.6 26.3 29.7 47.5 41.8 Lower 0 2.9 2.6 17.2 6.6 9.3 Index 77.8 76.5 68.4 35.9 39.4 39.5

Question. What is your projection regarding the interest rate of credit in lek for the following semester? (in percentage) June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Higher 17.9 2.8 10 2.8 7.1 Equal 53.6 44.4 38.9 27.5 29.2 45.7 Lower 28.6 55.6 58.3 62.5 68.1 47.1 Index -10.7 -55.6 -55.6 -52.5 -65.3 -40

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Question. What is your projection regarding the interest rate of credit in foreign currency for the following semester? (in percentage) June ’03 December ’03 June ‘04 June ’05 December ‘05 June ‘06 Higher 3.6 3.8 2.78 15.4 6.3 17.9 Equal 46.4 69.2 55.6 58.9 67.2 59.7 Lower 50 26.9 41.7 25.6 26.6 22.4 Index -46.4 -23.1 -38.9 -10.3 -20.3 -4.5

Question. What was the performance of interest rates for the following groups over the present semester like? (in percentage) December 2005 June 2006 Real estates Lek Usd Euro Lek Usd+Euro Increasing 22.0 28.6 18.4 14.0 16.7 Decreasing 33.9 11.9 14.3 68.0 44.4 Equal 44.1 54.8 63.3 18.0 33.3 Index -11.9 16.7 4.1 -54.0 -27.7

Consumer Lek USD EURO Lek USD Increasing 25.5 26.3 19.1 9.1 11.7 Decreasing 23.6 7.9 9.5 45.4 23.5 Equal 50.9 63.2 71.4 40.9 64.7 Index 1.8 18.4 9.5 -54.0 -27.7

SME Lek USD EURO Lek USD Increasing 19.6 27.3 17.4 4.8 31.6 Decreasing 33.3 18.2 21.7 57.1 26.3 Equal 47.1 50.0 60.9 33.3 36.8 Index -13.7 9.1 -4.3 -52.4 5.3

Corporations Lek USD EURO Lek USD Increasing 15.6 27.5 19.5 5.3 27.8 Decreasing 37.8 22.5 26.8 42.1 27.8 Equal 46.7 50.0 53.6 47.4 38.9 Index -22.2 5.0 -7.3 -36.8 0.0

Note: The indices are created as the difference of the positive alternative and the negative alternative.

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Endnotes

* Eriona Suljoti: Head of office, Monetary Issues Office, Monetary Policy Department. Klodiana Istrefi: Chief specialist, Monetary Policy Department. 1 This index is constructed by making the difference between the increasing alternative and the decreasing one. 2 The response rate to the questions was around 97 per cent. 3 Measured according to N competition indicator, for 5 most active banks in the credit market.

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Bank of Albania news over April-June 2006

On April 13, 2006, the Governor of the Bank of Albania, Mr. Ardian Visit of the Governor of the Fullani, held a meeting with his counterpart, the President of the National Bank of Albania, Mr. Ardian Fullani in the National Bank Bank of Poland Mr. Leszek Balcerowicz. Mr. Fullani introduced to the of Poland members of the Monetary Policy Committee and the Governing Council of this bank, the monetary policy regime implemented in Albania. The Governor also introduced them to the latest developments in our economy and the efforts of the Bank of Albania to keep inflation under control. Afterwards, the joint meeting between the two Governors focused on specific areas of the bilateral cooperation in the future, which will provide the Bank of Albania with the experience of the National Bank of Poland in the process of European integration, as well as with assistance in specific areas, such as, banking supervision and monetary policy.

On April 28, 2006, the Bank of Albania, in cooperation with the FSVC Round-table discussion on (Financial Services Volunteer Corps) and the USAID (United States Agency the establishment of the Credit Information Bureau for International Development) organized a round-table discussion on the establishment of Credit Information Bureau in Albania. Participants in this round-table were commercial banks’ managing directors, FSVC experts, representatives of the IMF, World Bank, USAID and other international financial institutions, representatives of the American Embassy and the Bank of Albania experts. The Bank of Albania is committed to complete duly the project on the establishment of Credit Information Bureau, which shall assist in further growing the credit volume and quality, and also influence on the reduction of time to process the loan applications.

On April 21 – 26, 2006, the Governor of the Bank of Albania, Mr. Ardian On the activities of the Fullani, at the same time acting as the Governor of Albania by the International Governor of the Bank of Albania, Mr. Ardian Fullani Monetary Fund, headed the delegation of the Bank of Albania in the Spring over the Spring Meetings Meetings of the World Bank and the International Monetary Fund. Moreover, Mr. of the World Bank and the Fullani participated in the meeting of the Financial Committee of the Monetary International Monetary Fund Fund and in the meeting of the World Bank Development Committee. In the meetings held with representatives and experts of the International Monetary Fund, World Bank, Federal Reserve and Financial Services Volunteer Corps, Mr. Fullani introduced them to the economic developments and macroeconomic situation in Albania, as well as to the Bank of Albania objectives in the future, in particular those related to the implementation of inflation targeting regime. During his stay in Washington, Mr. Fullani had a special meeting with one of the Board Governors of Federal Reserve System, Ms. Susan Bies. In this meeting, Ms. Bies expressed the willingness of the Federal Reserve to continue providing the Bank of Albania with technical assistance and experts, in particular, in the field of banking supervision.

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Regional technical seminar On May 30, 2006, the Bank of Albania, in cooperation with the Deposit “Financial policy issues of Insurance Agency and the Convergence Programme of the World Bank, deposit insurance funds in South-East Europe” organized the regional technical seminar “Financial policy issues of deposit insurance funds in South-East Europe”, “Rogner Europapark” hotel, Tirana. Participants in this seminar were managing directors of deposit insurance funds all over the region, policy makers and consultants from different countries in the region, financial market actors, financial experts and representatives of different international institutions, who debated about the challenges and concrete solutions related to boosting deposit insurance funds, as well as about the experience of the respective countries in fund schemes. Another special matter discussed in this seminar was the institutional and operational reform the deposit insurance schemes should undergo in order to withstand the changes and challenges of the financial system in the future.

Meeting of the Governor On June 23, 2006, in the context of enhancing the cooperation with the of the Bank of Albania, central banks in the region, upon the invitation of the Governor of the Central Mr. Ardian Fullani, with the Governor of the Central Bank of Bosnia and Herzegovina, Mr. Kemal Kozaric, the Governor of the Bank of Bosnia and Bank of Albania, Mr. Fullani had a formal meeting at the Central Bank of Herzegovina, Mr. Kemal Bosnia and Herzegovina. Sarajevo meeting marks a further step into an Kozaric ever-growing process of regional cooperation between the central banks. In this joint meeting, both Governors provided a comprehensive introduction to the latest developments in the respective economies, placing a special emphasis on the achievements in the area of macroeconomic stability, the undertaken reforms, and developments in the financial sectors as well as on its stability. They both shared the opinion that the experiences of one country may be relevant to the other; therefore, the cooperation needs to be further intensified.

Annual General Meeting of On June 25-26 2006, the Governor of the Bank of Albania, Mr. Ardian the Bank for International Fullani participated in the 76th annual meeting of the Bank for International Settlements Settlements, which held its proceedings in Basel, Switzerland. Participants in this annual meeting were central bank governors and senior personalities of the financial world. Mr. Fullani had several meetings with representatives of the European Central Bank, Bank for International Settlements and of other European and regional central banks. Availing himself of this opportunity, considering the specific nature of the BIS, Mr. Fullani insisted in absorbing evermore qualified technical assistance, in particular in certain fields of priority, such as in monetary policy and banking supervision. In all bilateral and multilateral meetings, the further enhancement of the cooperation between the Bank of Albania and these institutions was a common point of discussion.

Formal visit of the Governor On June 29-30, 2006, upon the invitation of the Governor of the Bank of the Bank of Greece, Mr. of Albania, Mr. Ardian Fullani, the Governor of the Bank of Greece, Mr. Nicholas C. Garganas in the Bank of Albania Nicholas C. Garganas, accompanied by the Director of Financial Institutions and Credit Supervision, Mr. Panayiotis Kyriakopoulos, made a two-day

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formal visit in Albania. This visit was made in the context of the bilateral relationship between the two institutions, with a special emphasis on the exchange of information and experience in the field of banking supervision. After discussing the economic developments in the respective countries, the meeting proceeded with the discussion of economic issues in the region and its financial stability. Both Governors considered the regional cooperation as one of the best ways to achieve financial stability and integration. At the end of the meeting, the Governors expressed the engagements of their respective institutions in further enhancing the cooperation and experiences in various fields of central banking.

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Legal events over April-June 2006

BANKING SUPERVISION

On May 3, 2006, the Supervisory Council of the Bank of Albania approved upon Decision No. 32, the Regulation “On the use of information technology and communication in the entities licensed by the Bank of Albania”. The purpose of this regulation is to define the terms and conditions the entities licensed by the Bank of Albania need to meet in order to organize and put their systems of information technology and communication into function.

INFORMATION TECHNOLOGY

On May 3, 2006, the Supervisory Council of the Bank of Albania approved upon Decision No. 34, the Regulation “On the functioning of the SWIFT service at the Bank of Albania”. The purpose of this regulation is to provide a better and safe organization and functioning of the SWIFT service at the Bank of Albania.

TRANSFER OF OWNERSHIP

On May 3, 2006, the Supervisory Council of the Bank of Albania approved the Decision No. 33, “On the transfer of ownership of 80 per cent of shares in the shareholders’ equity of the Italian-Albanian Bank Jnt. Stk. from the Ministry of Finance of the Republic of Albania and Capitalia s.p.a., Italy, to SanPaolo IMI s.p.a., Italy”. According to this decision, SanPaolo IMI s.p.a. will own 80 per cent of the shares of Italian-Albanian Bank, while European Bank for Reconstruction and Development will continue to own 20 per cent of this bank shareholders’ equity.

On May 24, 2006, the Supervisory Council of the Bank of Albania approved the Decision No. 38 “On the approval of ownership transfer of 60 per cent + 2 shares of shares in the shareholders’ equity of National Commercial Bank Jnt. Stk. from Kent Bank / Bayindir Bank a.s. to Çalik-Seker Konsorsiyum Yatirim a.s., Turkey”. Upon this change, the structure of shareholders of the National Commercial Bank shall be as follows: Çalik – Seker Konsorsiyum Yatirim a.s. owns 60 per cent + 2 shares; European Bank for Reconstruction and Development 20 per cent – 1 share; and International Finance Corporation 20 per cent – 1 share of this bank shareholders’ equity.

ADMINISTRATION OF FOREIGN RESERVE

On June 14, 2006, the Supervisory Council of the Bank of Albania approved upon Decision No. 42, the Regulation “On the investment policy for

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the administration of foreign reserve”. This regulation defines the objectives, criteria and rules related to the administration of foreign reserve.

On June 14, 2006, the Supervisory Council of the Bank of Albania approved upon Decision No. 43, the Regulation “On the functions of governing structures in the decision-making process for the administration of foreign reserve”. The object of this regulation is to define the functions of the governing bodies and responsible organizational units of the Bank of Albania in the decision-making process for the administration of foreign reserve.

BUDGET

On June 28, 2006, the Supervisory Council of the Bank of Albania approved upon Decision No. 50, the Regulation “On drafting and attending the implementation of budget and investments at the Bank of Albania”. The purpose of this regulation is to define the rules and procedures of drafting and attending the implementation of budget and investments at the Bank of Albania.

RESOLUTIONS OF THE ALBANIAN PARLIAMENT

On June 8, 2006, the Parliament of the Republic of Albania adopted the resolution “On the occasion of signing the Stabilization and Association Agreement”. The Albanian Parliament welcomes the signing of this agreement, considering it as a historical moment in the process of European integration and as a coronation of several years’ efforts of Albania’s accession into the European Union.

On June 25, 2006, the Parliament of the Republic of Albania adopted the resolution “On assessing the activity of the Bank of Albania for 2005”. Through this resolution, the Albanian Parliament appraises the activity of the Bank of Albania, the monetary policy of which has influenced on keeping inflation within the forecasted objective of 2-4 per cent and on maintaining the economic and financial stability in the country. The Parliament encourages the Bank of Albania in its initiatives for further boosting the banking system stability in Albania and recommends it to focus on enhancing the independence of its institution and further deepening of the guaranteeing and supervisory role in the system. Moreover, the Parliament expresses its expectations that the Bank of Albania will continue throughout 2006 to be an accountable institution while designing and implementing the monetary policy and further boosting the financial system in the country.

INTERNATIONAL AGREEMENTS

On April 25, 2006, the Parliament of the Republic of Albania adopted the Law No. 9520 “On the ratification of the supplementary financial agreement

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between the Republic of Albania, represented by the Ministry of Finance, the Albanian Development Fund, as the agency implementing the project, and Kreditanstalt fur Wiederaufbau (KFW), of the financing agreement of the project “Social investment fund II””. This agreement provides a supplementary loan of EUR 216 thousand to the Albanian Government.

On May 11, 2006, the Parliament of the Republic of Albania adopted upon the Law No. 9527 “Agreement between the Council of Ministers of the Republic of Albania and the Government of the Republic of Italy, regarding the realization of the programme on private sector development, through an assistance loan to support small and medium enterprises and provide them with technical assistance”. This bilateral agreement provides a programme to develop small and medium enterprises, the financing of which will involve the extension of EUR 27.5 million in the form of assistance loan and EUR 2.5 million in the form of a grant.

On May 11, 2006, the Parliament of the Republic of Albania adopted upon the Law No. 9528 “The financial agreement between the Council of Ministers of the Republic of Albania, represented by the Ministry of Finance, and Artigiancassa S.P.A., regarding the programme on private sector development, through an assistance loan to support small and medium enterprises and provide them with technical assistance”. This financial agreement provides a loan of EUR 25 million for the financing of private sector development.

On June 19, 2006, the Parliament of the Republic of Albania adopted upon the Law No. 9566 “The agreement between the Council of Ministers of the Republic of Albania and the Association of German Industry (BDI/IFG) operating on behalf of German creditors, to reschedule the arrears on debt to German creditors, not guaranteed by the Federal Government of Germany”. This agreement defines the terms of replanning the arrears on debt of German exporters to Albanian importers (former state enterprises of foreign trade), which are not guaranteed by the Government of the Federal Republic of Germany.

ECONOMIC POLITICS

On April 3, 2006, the Parliament of the Republic of Albania adopted upon the Law No. 9507, some amendments to the Law No. 9075, dated May 29, 2003 “On the approval of main terms and conditions to settle the inherited external debt in arrears of Albania”. The main amendment consists in the deadline of the agreements regarding the settlement of external debt, which shall terminate by December 31, 2007.

On April 18, 2006, the Parliament of the Republic of Albania adopted upon the Law No. 9517, an amendment to the Law No. 7943, dated June 1, 1995 “On the supplementary pensions and private pension institutes”. This amendment clarifies the term “inspectorate”, which shall imply a structure of the Ministry of Finance.

On April 19, 2006, the Council of Ministers adopted the Decision No. 223 “On the payment of unemployment benefits”. The purpose of this decision is

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to define the terms and rules on when and how an individual may benefit from unemployment.

On April 19, 2006, the Council of Ministers adopted upon the Decision No. 230, some amendments to the Decision No. 194, dated April 22, 1999 “On the adoption of the salary structure of pre-graduate educational workers”. According to this decision, the salaries of pre-graduate educational workers shall rise by about 17 per cent, starting from April 15, 2006. Moreover, the thirteenth salary of the end year shall become part of the monthly salary of employees working in this system.

On April 19, 2006, the Council of Ministers adopted the Decision No. 233 “On the fund of expenditures of Telecommunication Regulatory Entity”. This decision allocates to this entity a fund of about ALL 190 million.

On April 19, 2006, the Council of Ministers adopted the Decision No. 224 “On establishing the base unemployment revenue”. According to this decision, the base unemployment revenue shall be ALL 5240 per month.

On April 27, 2006, the Council of Ministers adopted the Decision No. 245 “On establishing the minimal salary on a national scale”. According to this decision, the base minimal salary of employees to be applied by any juridical or natural persons on a national scale shall be ALL 14 thousand and be paid for 174 working hours per month.

On April 27, 2006, the Council of Ministers adopted upon Decision No. 239 the abrogation of the Decision No. 313, dated July 11, 1994 “On the establishment of budget branches in the cities”.

On May 10, 2006, the Council of Minister adopted the Decision No. 267 “On the appointment of financial experts in borrowing associations put under administration”. This decision appoints 5 financial experts for the financial control of borrowing associations and for drawing the coefficient of putting the amounts of borrowing associations’ creditors under administration.

On May 10, 2006, the Council of Ministers adopted upon the Decision No. 269, some amendments to the Decision No. 503, dated June 30, 2005 “On the organization, competencies and functioning of the Agency of Sequestrated and Confiscated Property Administration”. This amendment is reflected in the structure of this agency, which becomes part of the Ministry of Finance.

On May 22, 2006, the Parliament of the Republic of Albania adopted upon the Law No. 9540, some amendments to the Law No. 9314, dated November 11, 2004 “On the privatization of shares, owned by the state of Albania, of the United Bank of Albania”. According to this amendment, the privatization of these shares shall terminate by December 31, 2006.

On May 22, 2006, the Parliament of the Republic of Albania adopted upon the Law No. 9538, an amendment to the Law No. 8560, dated

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December 22, 1999 “On tax procedures in the Republic of Albania”. This amendment requires the tax authorities to submit to the trade register a copy of the identification number as a fiscal entity, within five days from the entry of the data in the national register of taxpayers.

On May 24, 2006, the Council of Ministers adopted upon the Decision No. 314, some amendments to the Decision No. 704, dated November 16, 2005 “On the approval of criteria on the representation, selection, appointment and dismissal of members and the functioning rules of the Council of Statistics”. The chairman and the members of the Council of Statistics are remunerated for participating in the meetings to the extent of 20 per cent and 10 per cent of the salary of the INSTAT Managing Director. When the Council convenes more than once a month, the members shall be remunerated for only one meeting.

On June 1, 2006, the Parliament of the Republic of Albania adopted upon the Law No. 9549 “The agreement on the strategic objective grant between the Government of the Republic of Albania and the United States of America to fight corruption in the context of the initial programme of assessing the millennium challenge”. USAID grants to the Albanian Government USD 13 850 000 to aid the achievement of the strategic objective put forward in this agreement.

On June 5, 2006, the Parliament of the Republic of Albania adopted upon the Law No. 9533, some amendments to the Law No. 8386, dated July 30, 1998 “On the method and procedures of selling the property of non- bank juridical persons who have borrowed from the public at large”. The main amendment consists in the way of selling the property of borrowing associations, to be carried out through an auction. The rules to the procedures and the way of carrying out the sale and transfer of credit shall be established upon the decision of the Council of Ministers.

On June 28, 2006, the Council of Ministers adopted upon the Decision No. 430 “The revised action plan for the reduction of informal economy for 2006-2009”. This decision attributes the Ministry of Finance, along with other relevant institutions, the responsibility to include in the medium-term budget programme for 2007-2009, the expenditures for the accomplishment of projected measures for the execution of this plan.

On June 28, 2006, the Council of Ministers adopted the Decision No. 432 “On the establishment and administration of budget institutions revenues”. According to this decision, budget institutions revenues derived from their main activity and the provision of service to the third parties shall be considered as public revenues and be allocated to the state budget.

On June 28, 2006, the Council of Ministers adopted the Decision No. 434 “On the special fund in budget institutions”. This decision provides the establishment of a special fund in budget institutions, which shall be used by their management to remunerate the employees in cases of recreational activities, instant monetary aid, bad situations and other related.

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BANK of albania MANAGEMENT 30 June 2006

SUPERVISORY COUNCIL

ARDIAN FULLANI Chairman FATOS IBRAHIMI Vice Chairman TEFTA ÇUÇI Member ELISABETA GJONI Member LIMOS MALAJ Member SULO HADËRI* Member TONIN KOLA* Member KSENOFON KRISAFI Member ADRIAN CIVICI Member

GOVERNOR ARDIAN FULLANI

GOVERNOR’S OFFICE GENC MAMANI

DEPUTY GOVERNORS FATOS IBRAHIMI First Deputy Governor

GENERAL INSPECTOR TEUTA BALETA

DEPARTMENTS and other units HUMAN RESOURCES DEPARTMENT Dashmir Halilaj MONETARY POLICY DEPARTMENT Gramoz Kolasi RESEARCH DEPARTMENT Erjon Luçi MONETARY OPERATIONS DEPARTMENT Marjan Gjermeni SUPERVISION DEPARTMENT Klodion Shehu Information Technology Department Xhilda Kanini Deliana STATISTICS Department Kliti Ceca Issue Department Valer Miho Accounting and Payments Department Marseda Dumani Legal Department Toni Gogu Audit Department Teuta Baleta FOREIGN RELATIONS, EUROPEAN INTEGRATION AND COMMUNICATION DEPARTMENT Ina Kraja ADMINISTRATION DEPARTMENT Agron Skënderaga SECURITY AND PROTECTION DEPARTMENT - Printing House Alfons Theka

branches ERMIRA ISTREFI Shkodra VALENTINA DEDJA Elbasani ANILA THOMAJ Gjirokastra LILJANA ZJARRI Korça SHPRESA MEÇO Lushnja

* The mandate of the member of the Supervisory Council terminated on June 16, 2006.

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LIST OF ALL entities LICENSED BY THE BANK OF ALBANIA*

Banks and branches of foreign banks

1. ITALIAN - ALBANIAN BANK (JOINT-STOCK COMPANY) License No. 1/1996, dated 17.07.1998 Approved by the Supervisory Council Decision of the Bank of Albania No. 89, dated 18.06.1998. Certificate No. 1 “On Deposit Insurance”. Delegated Administrator: Giovani BOGANI Address: Rruga “Barrikadave”, Nr. 70, Tirana, Albania Tel.: 23 39 65, 23 56 97, 23 56 98, 22 62 62 Fax.: 23 30 34

2. RAIFFEISEN BANK (JOINT-STOCK COMPANY) License No. 2/1998, dated 11.01.1999 Approved by the Supervisory Council Decision of the Bank of Albania No. 163, dated 11.12.1998. Certificate No. 2 “On Deposit Insurance”. Director: Steven GRUNERUD Address: Bulevardi “Bajram Curri”, European Trade Center, Tirana, Albania Tel.: 226 699, 224 540, 222 669, 225 416 Fax.: 275 599, 223 587, 223 695, 224 051

3. UNITED BANK OF ALBANIA (JOINT-STOCK COMPANY) License No. 3/1998, dated 11.01.1999 Approved by the Supervisory Council Decision of the Bank of Albania No. 165, dated 11.12.1998. Certificate No. 3 “On Deposit Insurance”. Director: Abdul Waheed ALAVI Address: Bulevardi “Dëshmorët e Kombit”, Nr. 8, Tirana, Albania Tel.: 22 84 60, 22 38 73, 22 74 08 Fax: 22 84 60, 22 83 87

4. ITALIAN BANK OF DEVELOPMENT (Banca italiana di sviluppo) (FORMER DARDANIA BANK) License No. 5/1998, dated 11.01.1999 Approved by the Supervisory Council Decision of the Bank of Albania No.164, dated 11.12.1998. Certificate No.4 “On Deposit Insurance”. Director: Libero CATALANO Address: Bulevardi “Dëshmorët e Kombit”, Ndërtesa Kullat Binjake, Tirana Tel.: 28 03 51 / 2 / 3 / 4 / 5. Fax: 28 03 56.

5. NATIONAL COMMERCIAL BANK (JOINT-STOCK COMPANY) License No. 6/1998, dated 11.01.1999 Approved by the Supervisory Council Decision of the Bank of Albania No. 162, dated 11.01.1999. Certificate No. 5 “On Deposit Insurance”. Director: Seyhan PENCAPLIGIL Address: Bulevardi “Zhan D’Ark”, Tirana, Albania Tel.: 25 09 55 Fax.: 25 09 56

* Up to June 30, 2006.

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6. TIRANA BANK (JOINT-STOCK COMPANY) License No. 07, dated 12.09.1996 Approved by the Supervisory Council Decision of the Bank of Albania No. 9, dated 12.09.1996. Certificate No. 6 “On Deposit Insurance”. Director: Dimitrios FRANGETIS Address: Bulevardi “Zogu I”, Nr. 55/1, Tirana, Albania Tel.: 23 34 41/42/ 43/44/45/46/47 Fax.: 23 34 17

7. NATIONAL BANK OF GREECE – TIRANA BRANCH (JOINT-STOCK COMPANY) License No. 08, dated 25.11.1996 Approved by the Supervisory Council Decision of the Bank of Albania No. 4, dated 14.03.1996. Certificate No. 7 “On Deposit Insurance”. Director: Spiro BRUMBULLI Address: Rruga “Durrësit”, Godina Comfort, Tirana, Albania Tel.: 23 36 23/24 Fax.: 23 36 13

8. INTERNATIONAL COMMERCIAL BANK (JOINT-STOCK COMPANY) License No.09, dated 20.02.1997 Approved by the Supervisory Council Decision of the Bank of Albania No. 9, dated 30.04.1996. Certificate No. 8 “On Deposit Insurance”. Director: Ooi Kooi KEAT Address: Qendra e Biznesit, Rruga “Murat Toptani”, Tirana, Albania Tel.: 25 43 72 / 25 62 54 Tel/Fax: 25 43 68

9. ALPHA BANK – TIRANA BRANCH (JOINT-STOCK COMPANY) License No.10, dated 07.01.1998 Approved by the Supervisory Council Decision of the Bank of Albania No. 01/03/96, dated 27.12.1997. Certificate No. 9 “On Deposit Insurance”. Director: Andreas GALATOULAS Address: Bulevardi “Zogu I”, Nr.47, Tirana, Albania Tel.: 23 33 59, 24 04 76/77/78 Tel/Fax: 23 21 02

10. AMERICAN BANK OF ALBANIA (JOINT-STOCK COMPANY) License No.11, dated 10.08.1998 Approved by the Supervisory Council Decision of the Bank of Albania No. 105, dated 10.08.1998. Certificate No. 10 “On Deposit Insurance”. Director: Lorenzo RONCARI Address: Rruga “Ismail Qemali”, Nr. 27, P.O. Box 8319, Tirana, Albania Tel.: 27 60 00 / 24 87 53 / 4 / 5 / 6 Tel/Fax: 24 87 62

11. procredit BANK (JOINT-STOCK COMPANY) License No. 12, dated 15.03.1999 Approved by the Supervisory Council Decision of the Bank of Albania No. 22, dated 03.03.1999. Certificate No. 11 “On Deposit Insurance”. Director: Ralf RAITEMEIER Address: Rruga “Sami Frashëri”, Tirana e Re, P.O. Box. 2395, Tirana, Albania Tel.: 23 04 99, 23 34 96 Tel/Fax: 27 12 76

12. FIRST INVESTMENT BANK - TIRANA BRANCH (JOINT-STOCK COMPANY) License No. 13, dated 16.04.1999

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Approved by the Supervisory Council Decision of the Bank of Albania No. 45, dated 13.04.1999. Certificate No. 12 “On Deposit Insurance”. Director: Martin Isvetkov BOGDANOV Address: Bulevardi “Zogu I”, Nr. 64, Tirana, Albania Tel.: 25 64 23, 3 564 24 Tel/Fax: 25 64 22

13. EMPORIKI BANK OF ALBANIA (JOINT-STOCK COMPANY) License No. 14, dated 28.10.1999 Approved by the Supervisory Council Decision of the Bank of Albania No.105, dated 19.10.1999. Certificate No. 13 “On Deposit Insurance”. Director: George CARACOSTAS Address: Rruga “Kavajës”, Tirana Tower, Tirana, Albania Tel.: 35 87 55/ 56/ 57/ 58/ 59/ 60 Tel/Fax: 35 87 52

14. CREDIT BANK OF ALBANIA (JOINT-STOCK COMPANY) License No. 15, dated 28.08.2002 Approved by the Supervisory Council Decision of the Bank of Albania No. 66, dated 28.08.2002. Certificate No. 14 “On Deposit Insurance”. Director: kamal Abdel MONEIM Address: Rruga “Perlat Rexhepi”, Al-Kharafi Group Administration Building, Kati 1&2” Tirana, Albania Tel.: 27 21 68, 27 21 62 Tel/Fax: 27 21 62 E-mail: [email protected]

15. “CREDINS” BANK (JOINT-STOCK COMPANY) License No. 16, dated 28.03.2003 Approved by the Supervisory Council Decision of the Bank of Albania No. 22, dated 26.03.2003. Certificate No.15 “On Deposit Insurance”. Director: Artan SANTO Address: Rruga “Ismail Qemali”, Nr. 21, Tirana, Albania Tel.: 22 29 16, 23 40 96

16. popular BANK (JOINT-STOCK COMPANY) License No. 17, dated 16.02.2004 Approved by the Supervisory Council Decision of the Bank of Albania No. 06, dated 11.02.2004. Certificate No.16 “On Deposit Insurance”. Director: Edvin LIBOHOVA Address: Rruga “Donika Kastrioti”, Pall. 11/1, Kati I, Tirana, Albania Tel.: 27 27 88 / 89 / 90 / 91 Fax: 27 27 81

17. UNION BANK (JOINT-STOCK COMPANY) TIRANA License No. 18, dated 09.01.2006 Approved by the Supervisory Council Decision of the Bank of Albania No. 101, dated 28.12.2005. Certificate No.17 “On Deposit Insurance”. Director: Gazmend Kadriu Address: Bulevardi “Zogu I”, Pallati 13-katësh, përballë Stacionit të Trenit, Tirana. Tel: 25 06 53 Fax: 25 06 54

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Non-bank INSTITUTIONS

1. TIRANA FINANCIAL Union s.r.l. (Western Union) License No. 1, dated 08.12.1999, on conducting the following financial activities: - offering payment services; - mediating in the conduct of monetary transactions; - acting as financial agent or advisor.

Director: Niko Leka, Edmond Leka Address: Rruga “Reshit Çollaku”, Pallati Shallvare, Sh 2, Nr. 18, Tirana, Albania Tel.: 25 06 53 Fax: 25 06 54

2. Diners Club Albania s.r.l. License No. 2, dated 09.10.2000, on conducting the following financial activity: - mediating in the conduct of monetary transactions.

Director: Edmond Leka Address: Bulevardi “Zogu I”, VEVE Business Center, Tirana, Albania

3. ALBANIAN POST-OFFICE (Joint Stock Company) License No. 3, dated 18.04.2001, as a non-bank financial institution to conduct the following financial activities: - offering payment services; - acting as financial agent or advisor.

Director: Arqile Goreja Address: Rruga “Reshit Çollaku”, Nr. 4, Tirana, Albania Tel.: 22 23 15

4. CREDINS Tirana (Joint Stock Company) License No. 04, dated 13.06.2001, as a non-bank financial institution to conduct the following financial activities: - granting credit; - offering payment services;; - mediating in the conduct of monetary transactions (foreign currency included); - offering guarantees; - acting as financial agent or advisor (excluding herein the services set forth in point 3/a and 3/b of Article 26 of the Law “On Banking Law in the Republic of Albania”.

Director: Migena Roshaj Address: Rruga “Ismail Qemali” Nr. 21, Tirana, Albania Tel.: 22 29 16, 23 40 96

5. mountainous Area Financing FUnd License No. 5, dated 29. 03.2002, on conducting the following activity: - granting credit.

Director: Arben Jorgji Address: Rruga “Mustafa Matohiti” Nr. 12, Tirana, Albania Tel.: 25 06 33

6. “AK-INVEST” (Joint Stock Company) License No.7, dated 31.12.2003, as a non-bank financial institution to conduct the following activities:

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- offering payment services; - mediating in the conduct of monetary transactions (foreign currency included); - acting as financial agent or advisor.

Manager: Ilir Adili Address: Rruga “Ded Gjon Luli”, Nr. 2/3, Tirana, Albania Tel.: 24 01 47

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FINANCIAL INSTITUTIONS NOT LICENSED BY THE BANK OF ALBANIA TO CONDUCT THEIR ACTIVITIES ACCORDING TO THE SUPERVISORY COUNCIL DECISION NO. 26, DATED 29.03.2000 “ON the EXEMPTION OF SOME INSTITUTIONS FROM APPLYING THE PROVISIONS OF LAW NO. 8365, DATED 02.07.1998 “ON BANKs IN THE REPUBLIC OF ALBANIA” (These organizations are not licensed or supervised by the Bank of Albania but they have to report to the Bank of Albania).

1. Rural Financing Fund Founded by the Decision of the Council of Ministers of the Republic of Albania No. 207, dated 28.04.1999 Object of activity: Financing the rural area. Exempted upon the Bank of Albania note No.1843, dated 01.08.2000

Director: Zana Konini Address: Rruga “Ismail Qemali”, P.32, Tirana, Albania

2. Besa Foundation Founded by Open Society Fund for Albania (SOROS). Object of activity: Financing small and medium size firms. Exempted upon the Bank of Albania note No. 2895/1, dated 19.01.2001

Director: Bajram Muça Address: Rruga “Asim Vokshi”, Nr. 35, Tirana, Albania

3. Albanian Partner on Microcredit Shareholder: “Opportunity International” (East Europe). Object of activity: Granting credit. Exempted upon the Bank of Albania note No. 828/1, dated 08.04.2002

Director: James Reiff Address: Rruga “Gjin Bue Shpata”, Nr. 7/1, Tirana, Albania

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Foreign exchange bureaus

1. “JOARd” FOREIGN exchange bureau s.r.l., Tirana License: No. 1, dated 01.10.1999 Address: Rruga “Ded Gjon Luli”, Nr.2, Tirana, Albania Brokers: Josif Kote, Pajtim Kodra

2. “AMa” Foreign exchange bureau s.r.l., Durrës License: No. 2, dated 01.10.1999 Address: Rruga “Tregtare”, Lagja 3, Durrës, Albania Brokers: Mirlinda Ceka, Ilir Hoxha

3. “ARIS” Foreign exchange bureau s.r.l., Tirana License: No. 3, dated 01.10.1999 Address: Rruga “Luigj Gurakuqi”, Tirana, Albania Brokers: Ardian Goci, Ismet Noka

4. “UNIONI FINANCIAR” Foreign exchange bureau s.r.l., Tirana License: No. 4, dated 01.10.1999 Address: Rruga “Reshit Çollaku”, Pallati Shallvare, Shk. 2/18, Tirana, Albania Manager: Niko Leka Brokers: Arjan Lezha (Manager), Albert Sara, Dhimitër Papadhopulli, Genta Angjeli (Agalliu), Piro Teti, Flora Simixhi, Petrika Mano (Manager), Lindita Shala, Mirela Bakalli, Anila Demiri, Emili Bakalli (Nako), Astrit Sfërdelli, Mirela Kaiku, Erisa Emiri

5. “AGLI” Foreign exchange bureau s.r.l., Tirana License: No. 5, dated 01.10.1999 Address: Agency No.1: Rruga “Islam Alla”, Nr.1, Tirana, Albania Agency No.2: Rruga “Kavajës”, Tirana, Albania Brokers: kujtim Nina (Manager), Agim Cani, Selim Luli

6. “EXCHANGE” Foreign exchange bureau s.r.l., Tirana License: No. 08, dated 24.11.1999 Address: Rruga “Durrësit”, Nr. 170, Tirana, Albania Brokers: Ivan Pavllovski

7. “UNISIX” Foreign exchange bureau s.r.l., Korça License: No. 09, dated 26.11.1999 Address: Bulevardi “Republika”, Pallati 4, Korça, Albania Brokers: Pandi Cunoti, Ernest Golka, Nikolin Bicka, Eli Bode

8. “EKSPRES J & E” Foreign exchange bureau s.r.l., Durrës License: No. 10, dated 26.11.1999 Address: Lagja 11, Rruga “Prokop Meksi”, Durrës, Albania Brokers: kostandin Ekonomi, Entela Ekonomi

9. “ILIRIA 98” Foreign exchange bureau s.r.l., TIRANA License: No. 12, dated 25.02.2000 Address: Sheshi “Skënderbej”, Teatri i Kukullave, Tirana, Albania Brokers: Edmond Ymeri, Ali Topalli, Ilir Janku

10. “SERXHIo” Foreign exchange bureau s.r.l., Elbasan License: No. 14, dated 07.04.2000 Address: Lagja “Luigj Gurakuqi”, Rruga “11 Nëntori”, Pallati 70, Nr.14, Elbasan, Albania Brokers: Amarildo Canoku

11. “ALBTUR” Foreign exchange bureau s.r.l., Tirana License: No. 15, dated 07.04.2000 Address: Bulevardi “Zogu I”, Pallati 32, Shk.1, Tirana, Albania Brokers: Albert Rahmani, Artur Rahmani

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12. “R & M” Foreign exchange bureau s.r.l., Tirana License: No. 16, dated 22.05.2000 Address: Rruga “Punëtorët e Rilindjes”, Pallati 182, Tirana, Albania Brokers: Edmond Stepa, Miranda Stepa

13. “TEUTA 2000” Foreign exchange bureau s.r.l., Durrës License: No. 17, dated 22.05.2000 Address: Lagja 4, Rruga “Skënderbej”, Ap. 950, Durrës, Albania Brokers: Qemal Hoxha, Arben Çuni

14. “T & E” Foreign exchange bureau s.r.l., Durrës License: No. 18, dated 11.06.2000 Address: Lagja 4, Rruga “9 Maji”, Durrës, Albania Broker: Shpëtim Hysa

15. “ 2000” Foreign exchange bureau s.r.l., Shijak License: No. 19, dated 24.11.2000 Address: Lagja “Popullore”, Shijak, Albania Brokers: Nazmi Ademi, Farije Ademi

16. “R & T” Foreign exchange bureau s.r.l., Tirana License: No. 20, dated 20.12.2000 Address: Bulevardi “Zogu I”, Tirana, Albania Broker: Renis Tershana

17.” MANUSHI” Foreign exchange bureau s.r.l., Tirana License: No. 22, dated 18.04.2001 Address: Bulevardi “Zogu I”, VEVE Business Center, Tirana, Albania Brokers: Roland Manushi

18. “UNIONI SELVIA” Foreign exchange bureau s.r.l., Tirana License: No. 23, dated 21.05.2001 Address: Rruga “Saraçëve”, Pallati 124/1, Tirana, Albania Brokers: Denis Merepeza (manager)

19. “KALENJA” Foreign exchange bureau s.r.l., Tirana License: No. 24, dated 29.06.2001 Address: Rruga “Kavajës” (next to Turkish Embassy), Tirana, Albania Brokers: Hair Shametaj, Fatmir Shametaj

20. “TILBA” Foreign exchange bureau s.r.l., Elbasan License: No. 25, dated 30.09.2001 Address: Lagja “Luigj Gurakuqi”, Bulevardi “Qemal Stafa”, Njësia Nr.12, Elbasan, Albania Brokers: kristaq Bako, Vjollca Bako

21. “ANAGNOSTI” Foreign exchange bureau s.r.l., Tirana License: No. 26, dated 31.10.2001 Address: Agency No. 1 - Bulevardi “Zogu I”, Pallati 97, Shk.3, Ap.28, Tirana, Albania Brokers: Jani Anagnosti, Odise Anagnosti, Edlira Anagnosti Agency No. 2 - Rruga “Kajo Karafili”, Nr. 11, Tirana, Albania Broker: Fredi Cami

22. “KO-GO” Foreign exchange bureau s.r.l., Tirana License: No. 27, dated 12.11.2001 Address: Rruga “Vaso Pasha”, Pallati 16, Shk.2, Ap. 9, Tirana, Albania Brokers: Mihal Konomi, Përparim Goxhaj

23. “ALB-FOREX” Foreign exchange bureau s.r.l., Tirana License: No. 28, dated 22.11.2001 Address: Agency No. 1: Rruga “Abdyl Frashëri”, Nr.3, Tirana, Albania Brokers: Almir Duli, Agim Xhemo

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Agency No. 2: Rruga “Mine Peza”, Pallati 102, Shk. 1, Tirana, Albania Broker: Fatmir Baholli

24. “L&N” Foreign exchange bureau s.r.l., Tirana License: No. 29, dated 22.11.2001 Address: Rruga “Muhamet Gjollesha”, Tirana, Albania Broker: Leonora Mihalcka

25. “EXCHANGE ALOG” Foreign exchange bureau s.r.l., Tirana License: No. 31, dated 22.11.2001 Address: Rruga “Mine Peza”, Tirana, Albania Brokers: Almida Sterio, Fatmir Tafaj, Eduard Andoni, Elida Hasamemi

26. “BASHKIMI 2001” Foreign exchange bureau s.r.l., TIRANA License: No. 35, dated 12.12.2001 Address: Rruga “Kavajës”,Tirana, Albania Brokers: Bashkim Shametaj, Luan Shametaj, Ilir Mesini

27. “ARJON 2002” Foreign exchange bureau s.r.l., ELBASAN License: No. 36, dated 14.12.2001 Address: Lagja “Kongresi i Elbasanit”, Bulevardi “Qemal Stafa”, Pallati 9-katësh, Elbasan, Albania Brokers: Arben Kovaçi, Besnik Lulja

28. “ALAKTH” Foreign exchange bureau s.r.l., Tirana License: No. 42, dated 18.01.2002 Address: Rruga “Dibrës”, Nr.105/1, Tirana, Albania Brokers: kosta Papa, Arben Memko, Lorenc Konomi, Thoma Konomi, Aleko Plaku

29. “Format” Foreign exchange bureau s.r.l., Tirana License: No. 43, dated 21.01.2002 Address: Rruga “Durrësit”, Pallati 85, Shk. 1, Ap. 1, Tirana, Albania Brokers: Diana Lemi, Egon Sinani

30. “TRI URAT” Foreign exchange bureau s.r.l., Elbasan License: No. 44, dated 05.02.2002 Address: Lagja “29 Nëntori”, Elbasan, Albania Brokers: Fahri Sanco, Ismail Bejta

31. “BESA 2001” Foreign exchange bureau s.r.l., Tirana License No. 46, dated 15.02.2002 Address: Rruga “Myslym Shyri”, Nr. 25, Tirana, Albania Brokers: Belul Lleshi, Vladimir Avda, Mimoza Avda

32.” MARIO” Foreign exchange bureau s.r.l., Saranda License: No. 47, dated 14.03.2002 Address: Lagja 1, Saranda, Albania Brokers: vangjel Gramozi, Blerim Dhima

33. “JAV” Foreign exchange bureau s.r.l., Tirana License: No. 48, dated 20. 03.2002 Address: Bulevardi “Zogu I”, Godina e “Zërit të Popullit”, Tirana, Albania Brokers: Ervin Lera, Ilir Gurashi

34. “DROGU” Foreign exchange bureau s.r.l., Tirana License: No. 49, dated 23.04.2002 Address: Rruga “Vaso Pasha”, Kulla 1, Kati I, Tirana, Albania Brokers: Shkëlqim Drogu, Kostandin Koteci

35. “HYSEN-C” Foreign exchange bureau s.r.l., Laç License: No. 50, dated 23.04.2002

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Address: Lagja Nr. 3, Laç, Albania Broker: Cen Hyseni

36. “UNIONI FIER” Foreign exchange bureau s.r.l., Fier License: No. 51, dated 08.05.2002 Address: Lagja “15 Tetori”, Rruga “Kastriot Muça”, Fier, Albania Brokers: Gjergj Dulaj (manager)

37. “TAXI EKSPRES” Foreign exchange bureau s.r.l., Elbasan License: No. 52, dated 20.05.2002 Address: Rruga “Sami Frashëri”, nr. 11 (pranë shkollës “Edith Durhan”, Tirana, Albania Brokers: Arben Sharra, Sokol Kaleci

38. “GLEAR” Foreign exchange bureau s.r.l., Shijak License: No. 55, dated 23.07.2002 Address: Lagja “Kodër”, Shijak, Durrës, Albania Brokers: Argjend Calliku, Afërdita Calliku

39. “ALBA-POST” Foreign exchange bureau, Tirana License: No. 56, dated 28.08.2002 Address: Rruga “Reshit Çollaku”, Nr. 4, Tirana, Albania

40. “UNIONi BALLSH” Foreign exchange bureau s.r.l., Ballsh License: No. 57, dated 11.09.2002 Address: Rruga “8 Nëntori”, Ballsh, Albania Brokers: Luan Zenelaj, Lavdimir Zenelaj

41. “ESLULI” Foreign exchange bureau s.r.l , Tirana License: No. 58, dated 17.10.2002. Address: Rruga “Reshit Çollaku”, Pallati ”Shallvare”, Shk. 4/1, Tirana, Albania Brokers: Selim Luli, Kleomen Gjiknuri

42. “Deni&Kristi-2002” Foreign exchange bureau S.R.L., Tirana License: No. 61, dated 02.06.2003 Address: Rruga “Myslym Shyri”, Pallati 60, Ap. 3, Tirana, Albania Broker: Maksim Çeku

43. “Yldon” Foreign exchange bureau S.R.L., Tirana License: No. 62, dated 03.06.2003 Address: Rruga “Qemal Stafa”, Pallati 382/2/2, Tirana, Albania Broker: ylli Ndoqi (manager)

44. “BILLI” Foreign exchange bureau S.R.L., Tirana License: No. 63, dated 16.02.2004 Address: Sheshi “Wilson”, Tirana e Re, Tirana, Albania Broker: Sybi Cenolli (manager)

45. “ALBA&ARBËR” Foreign exchange bureau S.R.L., Tirana License: No. 65, dated 06.05.2004 Address: Rruga “Kavajës”, Pallati 3, Kati I, Tirana, Albania Brokers: Pëllumb Mehmetaj, Bukurosh Jaho (managers)

46. “i.s.n.” Foreign exchange bureau S.R.L., Tirana License: No. 66, dated 06.05.2004 Address: Rruga “Kavajës”, Pallati 3, Kati I, Tirana, Albania Brokers: Evzi Zemzadja (manager), Nexhmi Uka, Salandi Brojaj

47. “ariaba” Foreign exchange bureau S.R.L., Tirana License: No. 67, dated 07.06.2004 Address: Ruga “Abdyl Frashëri”, Kati I, Shk. 5, Tirana, Albania Brokers: Agim Xhemo (manager), Astrit Hado

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48. “ALBACREDITS” Foreign exchange bureau S.R.L., Tirana License: No. 68, dated 13.07.2004 Address: Rruga “Ded Gjon Luli”, Nr. 5, Tirana, Albania Brokers: Ermira Skënderi (manager), Engjëll Skënderi, Burhan Kodra, Shqiponja Spahiu

49. “ALB-KREDIT” Foreign exchange bureau S.R.L., Tirana License: No.69, dated 19.07.2004 Address: Rruga “Durrësit”, Nr. 2, Tirana, Albania Brokers: Arben Cani (manager), Vasil Marto, Rudina Muskaj, Valbona Kadriu, Teuta Koltarka, Hajredin Toca

50. “IDEA - 2” Foreign exchange bureau S.R.L., Kavaja License: No. 70, dated 02.09.2004 Address: Lagjja Nr.2, Rruga “10 korriku”, Kavaja, Albania Broker: Taulant Karkini (manager)

51. “O & G” Foreign exchange bureau S.R.L., Tirana License: No. 71, dated 30.09.2004. Address: Rruga “Kavajës”, Tirana, Albania Brokers: Prandvera Ago (manager), Teuta Broqi

52. “OMEGA” Foreign exchange bureau S.R.L., Tirana License: No. 72, dated 20.12.2004. Address: Rruga “Abdyl Frashëri”, Pallati 1, Shk.2, Ap.10, Tirana Broker: Mihallaq Peko (manager)

53. “ELBA 2005” FOREIGN EXCHANGE BUREAU S.R.L., TIRANA License: No.73, dated 28.04.2005 Address: Bulevardi “Bajram Curri”, Pallatet Agimi, Nr.16, Tirana Brokers: kujtim Elbasani (manager) Associates: kujtim Elbasani

54. “JONADA – 05” FOREIGN EXCHANGE BUREAU S.R.L., TIRANA License: No. 74, dated 27.06.2005 Address: Rruga “Kavajës”, Pallati 185, Shkalla 2, Ap. 9, Tirana, Albania Brokers: Liliana Zyfi (manager), Pëllumb Zyfi Associates: Liliana Zyfi, Pëllumb Zyfi

55. “BASHA – N.B.” FOREIGN EXCHANGE BUREAU S.R.L., ELBASAN License: No. 75, dated 08.07.2005 Address: Lagja “Shënkoll”, rruga “Thoma Kaleshi”, Pallati 110, Shk.1, Kati I, Elbasan, Albania Brokers: Nashifer Basha, Çlirim Basha, Sonila Alla

56. “ÇELA 2005” FOREIGN EXCHANGE BUREAU S.R.L., LUSHNJE License: No.76, dated 02.08.2005 Address: Lagja “Çlirim”, Lushnjë, Albania Brokers: Bledar Çela

57. “I & K 2005” FOREIGN EXCHANGE BUREAU S.R.L., LEZHE License: No.77, dated 09.09.2005 Address: Lagja “Besëlidhja”, Pallati 73, Lezhë, Albania Brokers: Ilir Malaj

58. “EUROTOURS” FOREIGN EXCHANGE BUREAU S.R.L., TIRANA License: No.78, dated 17.10.2005 Address: Rruga “Reshit Çollaku”, Nr. 2/18, Pallatet Shallvare, Tirana, Albania Brokers: Albert Cara, Ilir Stafa.

138 Bank of Albania Bank of Albania 139 volume 9 volume 9 number 2 number 2 June 2006 Economic Bulletin Economic Bulletin June 2006

59. “A.B.I.” FOREIGN EXCHANGE BUREAU S.R.L., TIRANA License: No.79, dated 17.02.2006 Address: Bulevardi Zog I, Godina “Zëri i Popullit”, Tirana, Albania Brokers: Ilir Doçi, Suela Dedaj

60. “REGENCY INTERNATIONAL CASINO TIRANA” FOREIGN EXCHANGE BUREAU S.R.L., TIRANA License: No.80, dated 06.03.2006 Address: Rruga “Dëshmorët e 4 Shkurtit”, Parku Rinia, Tirana, Albania Brokers: Rajmonda Lami, Florjan Lami, Bandill Molla, Suzana Aliu, Aides Goga, Majlinda Jupas

61. “ARBËR F” FOREIGN EXCHANGE BUREAU S.R.L., TIRANA License: No.81, dated 07.03.2006 Address: Rruga “Kavajës”, Pallati 3, Kati I (ish-Guden), Tirana, Albania Brokers: Florina Jaho, Bukurosh Jaho

62. “EURO 2006” FOREIGN EXCHANGE BUREAU S.R.L., DURRËS License: No.82, dated 12.04.2006 Address: Lagjja nr.4, Rruga “Migjeni”, pranë Poliklinikës Qendrore, Durrës, Albania Brokers: Hysni Baganaçi, Medi Dyrmishi

138 Bank of Albania Bank of Albania 139 volume 9 volume 9 number 2 number 2 June 2006 Economic Bulletin Economic Bulletin June 2006

UNIONS of SAVINGs and CREDIT ASSOCIATIONs

1. “JEHONA” SAVINGS AND CREDIT ASSOCIATIONS UNION, TIRANA License: No.1, dated 27.06.2002 Address: Rruga “Kajo Karafili”, Nr. 26/1, Tirana, Albania Head of the Executive Board: Vojsava Rama This union consists of 41 savings & credit associations licensed also as special associations and technically assisted by the foundation “Movement for the savings & credit associations development”.

2. “ALBANIAN SAVINGS AND CREDIT UNION” SAVINGS AND CREDIT ASSOCIATIONS UNION, TIRANA License: No. 2, dated 09.08.2002 Address: Rruga “Ismail Qemali”, Nr. 32, Tirana-Albania Head of the Executive Board: Zana Konini This union consists of 91 savings & credit associations, licensed also as special associations and technically assisted by “Mountain Area Financing Fund”.

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REPRESeNTATIVE OFFICES OF FOREIGN BANKS

The Representative Office of Banca Popolare Pugliese in Albania License: No. 01, dated 02. 07.2003 Representative: Pasquale Guido Vergine Address: Sheshi “Skënderbej”, Pallati i Kulturës, Kati III, Tirana, Albania Tel.: 25 67 82

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