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Albania: Supplementary Information for the Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for a Waiver of Nonobservance of Performance Criterion, and Financing Assurances Review

Author(s):
International Monetary Fund
Published Date:
August 2005
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1. This supplement provides information on developments since the staff report was issued.

2. The authorities have recently provided data regarding the Bank of Albania’s (BoA) balance sheet at end-June 2005 (Table 1). These data indicate that the end-June indicative target floor on net international reserves of the BoA (NIR) was observed, but the indicative target ceiling on net domestic assets of the BoA (NDA) was exceeded by lek 3.4 billion (1.9 percent of reserve money at end-2004). While corresponding commercial banks’ balance sheet data are not yet available, the authorities indicated that this unexpected jump in NDA was due to an earlier-than-expected increase in the demand for cash associated with the summer vacation season—which banks have satisfied by drawing down their balances at the BoA’s (reverse) repo facility, prompting an increase in reserve money.

Table 1.Albania: Bank of Albania’s Balance Sheet, Selected Items(Stocks at end of period, in billions of leks, except when indicated)
December 2004March 2005June 2005June 2005Difference
Act.Act.Act.Prg.
(A)(B)(A-B)
(At current values)
Reserve money178.6171.2180.4174.36.1
Currency141.6133.5140.0135.44.6
Deposit Money Banks Deposits36.937.740.438.91.5
Net international reserves (NIR)105.7108.5109.7103.56.2
Net international reserves (NIR, in US$ million)1,141.21,116.51,067.81,101.9-34.1
Net domestic assets (NDA)72.962.770.770.8-0.1
Memorandum:
Net foreign assets of the Bank of Albania (in US$ million)1,279.81,257.91,216.11,236.5-20.4
Reverse repo position of commercial banks at the Bank of Albania2.310.91.1......
(Valued at program’s accounting conventions 1/)
Reserve money178.6171.2180.4174.36.1
Currency141.6133.5140.0135.44.6
Deposit Money Banks Deposits36.937.740.438.91.5
Net international reserves (NIR)117.8118.0117.0114.32.7
Net international reserves (NIR, in US$ million)1,105.21,107.41,098.01,086.711.3
Net domestic assets (NDA)60.853.163.460.03.4

Evaluated at program exchange rates and program price of gold and based on definitions contained in the Technical Memorandum of Understanding for the fifth review of the PRGF arrangement (IMF Country Report No. 5/89).

Sources: Bank of Albania; and staff estimates.

Evaluated at program exchange rates and program price of gold and based on definitions contained in the Technical Memorandum of Understanding for the fifth review of the PRGF arrangement (IMF Country Report No. 5/89).

3. This unprogrammed expansion in NDA does not change the thrust of the staff’s appraisal, but it warrants close monitoring and, if persistent, may require a policy tightening. Monetary policy is focused on keeping inflation within the 2–4 percent BoA’s target band, and available evidence indicates that inflationary pressures remain subdued. The 12-month inflation rate was 2.9 percent in June (after four months below the lower end of the range) and food prices (a key component of the CPI) have fallen in recent months owing to increased supply. The lek has continued its appreciating trend, strengthening vis-à-vis the euro by 3.8 percent since January 1, 2005, and by 2.4 percent since the July 3, 2005 elections. Thus, the unexpected expansion of liquidity may represent a temporary shock (perhaps reinforced by uncertainties in the run-up to the elections) that could unwind over the summer season. The authorities, however, agree that it calls for a detailed follow-up and that, if reinforced by other indicators of inflation risks, could require an upward move in the policy interest rate.

4. Staff continues to support the authorities request for completion of the sixth review of Albania’s three-year arrangement under the Poverty Reduction and Growth Facility.

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