• 1. Summary
• 2. Background
• 3. Developing Democracy
• Political parties seats in Parliament
• 4. European and Regional Integration
• 5. Making Good Progress
• 6. International Support for Reform
• 7. Fiscal Policy
• 8. Public Investment Plans 2001-03
• Macroeconomic Indicators: 2000 - 2005
• 9. Economic Structure
• 10. Restructuring Opportunities
• 11. Energy Sector Reform Underway
• 12. Privatisation Boosts FDI
• 13. Banking Sector Reforms
• 14. Monetary & Exchange Rate Policy
• 15. Boosting Trade
• 16. External Accounts
• 17. Credit Ratings
• 18. Economic Outlook
• 19. Albania - Key Economic Indicators

This was confirmed in mid-2001 with the re-election of PM Meta and the Socialist Party government for a second four-year term. They have been rewarded for their success in steering the country through difficult times in 1997 and 1999, and their sound management of the economy, which has seen inflation tumble and GDP growth average 7% every year since 1998.

The election victory also gives them a mandate to continue with the more demanding aspects of structural reform that still need addressing. The continuation in leadership and policy direction is significant. In particular it will reassure the international donor community and private investors, and help Albania sustain the inflows of technical and financial assistance that are essential if the government is to make the improvements in the country’s infrastructure and institutions that donors still expect. While the IMF is one of the many organisations that have applauded Albania’s progress so far, all sides recognise more needs to be done. A new IMF facility, to support Albania’s reform efforts over the next three years, is expected shortly.

Closer regional co-operation and integration with Europe have emerged as another key feature of Albania’s transition process. After decades of isolation, the country is committed to developing relations with all its European neighbours. In this regard the prospect of eventual EU membership is an important catalyst for reform. In the short term however, Albania is benefiting from the substantial financial commitments that are being made to support economic development in the region, including the Stablity Pact for South Eastern Europe.

While concessional funding will continue to fund a large part of Albania’s economic development, providing the right conditions to attract sufficient volumes of private sector investment is equally important if the country is to sustain the growth rates it needs to raise living standards. Many of the shortcomings Albania faces are similar to those seen in other transition countries at this stage of development, which have over time been successfully resolved. This is true for Albania, where measures to address investors’ concerns are in place and already showing results.

With no evidence to suggest Albania plans to lessen it commitment to reform or closer European integration, continued external donor support appears certain and the prospects for sustained improvements in economic performance, living standards and political stability appear strong.

This progress was thrown off course in 1997 when fraudulent investment schemes that had attracted most people’s savings collapsed. The scandal triggered months of widespread civil unrest, and political instability, which led to the downfall of the Democratic Party government and President Berisha. The economic fallout from the crisis was equally severe. GDP contracted by 7% in 1997 as international trade slowed, remittances from abroad fell sharply and foreign aid flows were suspended. The fiscal deficit widened considerably, resulting in a large build up of domestic debt

Political stability was restored with the election in June 1997 of a Socialist Party government, which acted quickly to re-establish macroeconomic control with the help of a six-month emergency assistance programme from the International Monetary Fund. This was followed in 1998 by a 3 year Enhanced Structural Adjustment Facility (now a Poverty Reduction and Growth Facility) to support a more far-reaching programme of reform. Macroeconomic targets under the IMF programme were broadly met in 1998; growth reached 7.3%, inflation dropped to single-digit levels, and the currency remained reasonably stable.

Albania’s political and macroeconomic stability was severely tested again in 1999 when the country, which has a population of around 3.3 million, had to deal with the influx of almost 500,000 refugees escaping the conflict in Kosovo.

Despite these shocks, Albania, with the help of the donor community, has continued with a challenging programme of economic and structural reform, and the results have been impressive. In line with GDP growth rates of 7.3% in 1998 and 8% in 1999, the economy expanded by a further 7.8% in 2000.

In particular reform of the electoral system, including the establishment of politically independent institutions and procedures ensures that elections are run in accordance with international standards and that they are less confrontational. Party politics in Albania are highly polarised, with the political landscape dominated by two main groups: the Socialist Party and the centre-right Democratic Party.

Last year international monitors (OSCE) described the local elections in October 2000 as the fairest since the fall of the communist regime in 1990. The 24 June 2001 elections have also been described as democratic and fair, with noticeably more restrained political rhetoric, making for a more peaceful atmosphere than earlier polls. Both elections demonstrate how well democracy is developing and help confirm the country’s new-found political maturity and stability.

In this year’s National Assembly elections 100 members of parliament were directly elected, and 40 were elected by proportional representation from party lists. Parties must win at least 2.5% of the vote to gain a share of the 40 seats. The new constitution means this is different to the 1997 election when 115 were elected directly and 40 by proportional representation. The president is elected every five years by the National Assembly, with the support of at least three-fifths of its members. Elections last held in 1997, elected President Rexhap Meidani.

Despite a change in tactics by the opposition Democratic Party (led by former President Sali Berisha), his broad centre-right coalition the "Union for Victory" failed to prevent the ruling Socialist Party from being re-elected for a second four-year term. Indications from first round voting on 24 June 2001 (second round voting on 8 July) are that the Socialist Party had won in 35 out of 100 districts, other parties or independents had won 18 districts, and that there will be a second round vote in 47 districts.

Voters have re-elected 31 year-old Prime Minister Ilir Meta, who has proven himself to be the popular leader of a Socialist Party-led government that has restored public order, secured successive years of economic expansion and pursued a moderate pro-European foreign policy.

The country enjoys good relations with the US, western Europe, (particularly Italy, Greece and Germany), and its Balkan neighbours including Serbia and Montenegro. Relations with the government of Macedonia are good, if somewhat strained by recent developments involving ethnic Albanian extremists in Macedonia and Kosovo. Albania, which is committed to closer European integration, is strongly opposed to the activities of groups such as the Kosovo Liberation Army (KLA) and any aspirations they may have to establish a Greater Albania.

4. European and Regional Integration
Albania is working with all its neighbours, the EU and the US to improve relations and promote regional stability. In this regard it is forging closer political and economic links with both EU and Balkan countries. In March 2001, the leaders of Albania, Bulgaria, Bosnia-Herzegovina, Macedonia, Yugoslavia, Greece, Turkey and Romania agreed to boost regional economic co-operation in an effort to advance towards European Union integration. They believe increased regional co-operation will give a boost to investor confidence in a market that could bring together 55 million consumers.

A particularly important international initiative for the region is the Stability Pact for South Eastern Europe which provides a forum for increased co-operation between Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Yugoslavia, Macedonia, and Romania, and access to multilateral funding. The EBRD, which is collaborating with other multilateral institutions and bilateral donors in the framework of the Stability Pact, invested €523 million in south eastern Europe in 2000. It could invest as much as €600 million in 2001. As of end-2000, the EBRD had reportedly approved 12 investments in Albania, totaling €102.6 million for projects with a total value of €310 million.

The EU is another major supporter of regional integration. In November 2000 the EU announced a new €4.65 billion aid programme for South Eastern Europe which runs from 2000-06. In addition within the context of the Stability Pact, the European Union has also established the process of Stabilisation and Association Agreements (SAA) which is designed to help bring stability to the region by integrating each country into European structures and offering the prospect of future EU membership. Albania, which has had its reform efforts actively supported by the EU since 1991, is one of five countries in south eastern Europe participating in the EU’s SAA process.

Recognising that the prospect of EU membership can be a powerful motor for change in support of Albania’s own reform programme, the EU/Albanian High Level Steering Group was formed to help improve co-operation and assess Albania’s capacity to take on the obligations of an SAA. The European Commission published its assessment in June 2001 SAA. The Commission has acknowledged the impressive achievements Albania has made, since an earlier assessment in 1999, but it has also identified problems which mean it would be difficult for Albania to fully meet the obligations of an SAA at the present time. It concluded that in due course the Commission could recommend opening negotiations (unlikely before 2002) if the current pace of change is sustained.

In particular the Commission identified that Albania has adopted a large number of important new laws and regulations, but because many government departments are under resourced and administrative structures are weak, there is a problem with implementation.

Many of the issues highlighted in the assessment are not unique to Albania, but common to many former communist countries in this stage of transition. Successfully addressing these weaknesses, many of which are structural and the result of Albania’s past isolation and system of government, will require time, continued funding and sustained external support. The government is committed to tackling these developmental issues, which other transition economies have suffered and in time overcome. The evidence to date shows that in a number of key areas it is making progress.

5. Making Good Progress
For a small country with limited resources, Albania has achieved remarkable results in management of the economy. Its macroeconomic policies have been effective in controlling inflation, boosting reserves and in attracting the support of the international financial agencies. A new 3-year programme with the IMF is expected later in 2001.

Macroeconomic stability is widely accepted as one of the main achievements of the Albanian government. GDP has grown steadily by an average of around 7.7% each year for the period 1998-2000, after a 7% fall in 1997. The economy performed well in 2000 as improved business confidence and rapid growth in private remittances combined to boost domestic demand. GDP grew by 7.8% in 2000. Construction and services, particularly transport, contributed to this increase. Despite a drought, agricultural output, which still accounts for more than 50% of GDP, increased by some 3.5% in 2000.

Progress in structural reforms has been significant considering the Kosovo crisis. Privatisation of small and medium sized companies can now be considered as complete and privatisation of larger companies is proceeding well. Important progress has been made in boosting government revenues through reform of the customs and tax services.

Overall conditions for investment have improved. The government has strong western support and will benefit from greater regional stability and international action to encourage south eastern European integration and cooperation. Completion of the privatisation process will also be critical to economic growth and investor confidence.

Macroeconomic policy for 2001 will aim at supporting strong GDP growth as well as maintaining low inflation and a prudent level of official reserves. To achieve the growth target of about 7.3%, the government plans to continue with reform and privatisation in the financial and enterprise sectors. Efforts to reduce the budget deficit are now starting to pay off, including better tax collection and more efficient and cost-effective public expenditures. The prudent 2001 budget further strengthens revenue collection and allows for increased spending on investment, health, and education.

During the 1990s the government’s economic transformation programme was supported by large inflows of grants and concessional loans. Foreign aid together with private transfers, were instrumental in reducing exchange rate volatility and current account deficits, and in building up foreign exchange reserves. Government policies and foreign assistance were particularly critical in helping Albania through crises in 1997 and 1999. Much foreign aid was used to ensure that Albania could meet its monetary and fiscal targets in support of its macro stabilisation objectives. The priority given by the government to maintaining fiscal discipline meant that these objectives were achieved.

In practice the government’s economic policies and development strategy are based on reform strategies endorsed by the EU, IMF and World Bank. Namely, the Poverty Reduction and Growth Strategy (PRGS), the EU Stabilisation and Association Agreement (SAA) and the Medium Term Expenditure Framework (MTEF). Together they target the improvements that still have to be made to generate the strong levels of growth needed to sustain improvements in living standards and eliminate poverty.

One of the most important aspects of this strategy has been the three-year Poverty Reduction and Growth Facility (PRGF) worth SDR 45 million (US$60 million) agreed with the IMF in 1998. Under the terms of the facility, (originally known as an Enhanced Structural Adjustment Facility) Albania has been co-operating with the IMF to restructure its economy as a condition for receiving both adjustment and poverty reduction financing. The IMF is reported to be pleased with the government’s success in achieving the economic aims of the PRGF, and a new three-year PRGF is expected to be in place shortly after the current one ends in June 2001.

With GDP per capita estimated at US$1,147 in 2000, Albania is one of the poorest countries in Europe. In an attempt to target resources on improving living standards, the government presented an interim Poverty Reduction Strategy Paper to the World Bank and the IMF in June 2000. A more comprehensive Strategy Paper will be presented to international donor institutions in mid 2001 and further improvements will be made in 2002 following the results of Albania’s population census conducted in April 2001.

Better public expenditure management is also central to the government’s programme to increase the accountability of public institutions, combat corruption and encourage foreign investment. An important aspect of this policy is the government’s MTEF 2001-03, which improves the link between policy planning and budget allocation. Work with the World Bank on the MTEF started in January 2000, and was presented to donors in December 2000 after it was updated to take account of the 2001 Budget. The Government intends to make the MTEF an annual process to ensure the budget is transparent and that public expenditure is used effectively. An important aspect of the MTEF is that it provides a mechanism for ongoing dialogue with the donor community in order to ensure more rational planning and utilisation of external commitments to Albania. The three-year time horizon gives the donor community time to plan its financial commitments and gives the government an early indication of the availability of financing and time to make decisions on allocation.

Financing these priorities, while at the same time maintaining macroeconomic stability, requires improvements in revenue levels and continued reliance on foreign financing, to help reduce domestic debt and interest payments. Fiscal revenues in Albania have remained far below those of other transition economies in Europe, but the structural problems affecting domestic revenue capacities are being tackled to ensure tax revenues expand as the economy grows. In particular reforms in the area of tax collection and administration agreed under the PRGF are boosting tax revenue levels. With estimates of the extent of the informal sector ranging from 20% to 40% of the Albanian economy, the fiscal benefits of capturing an increasing portion of this shadow economy would be substantial.

Major initiatives to help curb tax evasion and improve enforcement are making progress with over 42,000 new taxpayers registered in 2000. Specific measures include changes in key personnel, better control of goods in transit and closer co-ordination between tax and customs authorities. In 2000 improved enforcement led to a significant increase in the number of registered VAT and small business taxpayers, and contributed to a reduction in tax evasion. Efforts have also been made to strengthen the administrative capacity of the tax authorities, with investment in training and computerisation. Plans to expand the tax base to include agricultural activities (represent over 50% of GDP) are also being considered.

As a result of the increase in tax revenues (26% up in 2000 with respect to 1999) the fiscal deficit narrowed from 11.5% of GDP in 1999 to 9.5% in 2000. Government efforts to curb smuggling and corruption, which have proven highly effective in fighting tax evasion, are continuing with greater collaboration with customs agencies in neighbouring countries planned for 2001.

In December 2000 Parliament approved a prudent Budget for the coming year, which forecasts an overall budget deficit of 9.2% of GDP, down from 9.5% in 2000. Domestic borrowing requirements will be limited to 2.7% of GDP, which is consistent with substantial scope for growth in private sector credit. However if privatisation receipts are higher than expected, domestic borrowing could be reduced further. Foreign borrowing will be limited largely to concessional funding from international donors. Moderate increases in foreign debt at concessional terms should not put Albania’s external sustainability at risk. Government policy is to ensure any increase in overall debt is comprised of a decrease in the level of domestic debt (and domestic interest rates) which with an increase in the level of foreign debt on concessional terms should mean a net reduction in interest payments.

Overall tax and customs revenues are projected to rise by 13% in 2001, alongside reductions in the profit tax rate from 30% to 25%, and cuts in import tariffs. On 1 January 2001 the maximum import tariff rate was cut from 18% to 15% and the lowest tariff rate from 5% to 2%.

The expenditure programme under the 2001 budget reflects the government's priorities for investment and social expenditure as developed in the 2001-03 MTEF. Non-interest expenditure is set to increase from 26.8% to 27.8% of GDP in 2001, due to higher tax revenues and lower interest payments. Investment expenditure is projected to rise from 6.7% of GDP in 2000 to 7.5% of GDP in 2001. Health and education spending rises, as will public sector wages and pensions (from 1 July 2001) in an attempt to close the gap between private and public sector levels of pay.

Annual disbursements are expected to peak at US$502 million in 2001, as major construction projects in the transport and water sector enter full implementation, falling back to US$422 million in 2003. While domestic investment allocations will continue to be limited by overall levels of domestic public spending, the government estimates new commitments of external financing will average US$220 million a year during 2001-03.

The multilateral aid agencies and IFIs have been the main source of external financing for public investment projects, and will continue to be so. The most important sources of bilateral financing as grants and concessional credits have been Germany, Italy, Japan, Switzerland and the USA. In the context of the Stability Pact for South Eastern Europe commitments of bilateral aid are expected to increase from US$107 million in 2000 to US$130 million in 2003.

Over the medium-term, the government’s ability to borrow on non-concessional terms will remain limited. However, risk lending by the IFIs to enterprises and financial intermediaries is expected to increase, linked to the privatisation of strategic enterprises with an identifiable income stream.

In the longer-term, as Albania’s fiscal situation strengthens, non-concessional financing will become a more significant source of financing particularly for transport and urban infrastructure. Initially such financing is likely to be provided through the EIB, EBRD and World Bank before extending to the raising of finance on the international bond markets. Albania is not currently rated by the credit rating agencies.

In line with its public investment plans the government is forecasting that the next five years economic growth will remain strong at about 7% a year led by an increase in exports and private sector activities. Inflation is expected to remain low (2-3%), the fiscal deficit is expected to decline further (6.7% of GDP by 2005), and the current account deficit is projected to decline from 8% in 1999 to more sustainable levels of 5.5% by 2005. Fiscal consolidation requires a reduction in the level of domestic debt and a restructuring of expenditures. This will depend on a reduction in the level of domestic borrowing, combined with significant efforts to increase revenues and the use of concessional foreign financing for well-defined priority areas.

Budget expenditures are projected to grow only moderately and stay in the range of 32-33.5% of GDP. Non-interest current expenditures are projected to increase, reflecting the needed increase in spending on health and education. Capital expenditures are projected to increase significantly and remain high to accommodate large infrastructure needs. These increases will be partially offset by an expected reduction in interest payments.

Macroeconomic Indicators: 2000 - 2005

11. Energy Sector Reform Underway
Reform of the energy sector is a major priority given the economic repercussions of energy shortages for industry and the population at large. The energy crisis in the last quarter of 2000 was so serious that the positive growth performance, which has characterised Albania for the past three years, could have been jeopardised. A deepening of the crisis was averted by increased rainfall and warmer weather. Strict implementation of the action plan agreed in December between the Albanian authorities and the donor community will be necessary to minimise the ongoing risks of a serious crisis.

Albania benefits from cheap hydro-electric power. The supply from eight major hydro stations accounts for 95% of all energy generation. However this leaves the country too dependent on rainfall levels. As a result, power supplies are unpredictable and at times heavily restricted. Badly organised distribution and public unwillingness to pay for a poor service (estimated 50% of supply goes unpaid) has also contributed to the problems, causing huge losses for the state-owned Power Generation and Distribution Company KESH.

Further reform of the state electricity company (KESH) is underway. In May 2000, the Italian company ENEL was awarded an 18-month management contract, with the objective of improving revenue collection and reducing theft. Reports suggest they are succeeding with better than expected results in bill collection and decreasing grid losses. In addition the government has introduced a budget subsidy which enables KESH to import electricity on a more timely basis helping reduce the risk of shortages in peak seasons

Earlier this year international donors agreed to release US$85 million for a programme to rehabilitate KESH. If this funding is well utilised it could be followed by the release of an additional US$180 million to rehabilitate the power grid in eight large Albanian cities. In addition the Chinese government is providing a US$23 million loan for the construction of seven new knots in the grid. Other programmes will focus on the rehabilitation of the main power stations on Drin River in northern Albania. Additional investment available from within the Stability Pact framework will be used to fund the construction of four power transmission lines to provide interconnections with neighbouring countries.

Albania is already taking steps to align its energy sector to future EU requirements with plans for the separation of energy generation, transmission and distribution being developed, and the privatisation small electricity producers due to start shortly.

Restructuring of the oil sector started in 1999 when Albpetrol was divided into three commercial companies handling oil extraction (APC), services (Servcom) and refining and marketing (Armo). Armo is due to be privatised in 2001. With estimated recoverable oil reserves of about 550 million tonnes the government is looking to foreign investment in oil exploration to develop the export opportunities.

In September 2000 a memorandum of understanding was signed on construction of a trans-Balkan oil pipeline to run between Burgas on the Bulgarian Black Sea coast via Skopje in Macedonia to the Albanian port of Vlore. Subject to funding, the US$1.13 billion project is due to start in 2001 and take four years to complete. Once operational, the pipeline will have a capacity of 750,000 barrels per day and will ship Russian, Azerbaijani, Kazakh and Turkmen oil from the Black Sea to western European and North American markets.

12. Privatisation Boosts FDI

The government recognises that sustaining economic growth in the medium term is largely dependent on private sector development and on attracting foreign direct investments (FDI). Hence its commitment to an open and comprehensive privatisation strategy that encompasses some 70% of state-owned assets.

In 2000 foreign direct investment totalled $143 million, the highest level in 10 years. With the privatisation of small and medium-sized enterprises largely complete, attention turned in 2000 to privatising large-scale enterprises in strategic sectors (telecommunications, power, mining, petroleum and water resources). Privatisation revenues soared in 2000 largely due to the sale of the GSM operator Albanian Mobile Communications for US$86 million, and the Fushe-Kruja cement plant for US$12.5 million. Another major privatisation was the sale of a majority share in Albania’s second largest bank the National Commercial Bank to Turkey’s Kent Bank.

Major sales planned for 2001 include a controlling stake in Albtelecom, the fixed-line telephone provider, Servcom, the petrol distributor, a number of hydroelectric generating stations, and two large hotels. The licence for a second mobile operator was awarded in February 2001 to a consortium of Panafon (Greece) and Vodafone (UK) for US$38 million.

Privatisation of Albanian’s largest bank, the Savings Bank (SBA) has been launched and is scheduled for completion before the end of 2001. Successful privatisation of SBA would constitute a major step forward in the privatisation process, which would benefit the financial sector overall.

In terms of the origin of private investments, Italy is the leading investor country, with about 500 companies investing more than €100 million, mainly in the clothing and shoe industries, furniture production and fishing. Greece is second, with about 200 companies involved in direct investments totaling about €100 million.

Increases in FDI can be attributed to both regional factors (improved stability and closer SEE/EU integration) and domestic developments. In particular progress with privatisation in the banking sector and public utilities. With a stable exchange rate, low inflation and political stability, the conditions for both foreign and domestic investment are improving. However, the government recognises investment is still low and that more needs to be done to tackle corruption, improve the infrastructure and to clamp down on the informal economy which hinders fair competition and discourages companies willing to operate legally. The new regional Anti-Corruption Initiative agreed under the Stability Pact should help the Albanian authorities efforts.

13. Banking Sector Reforms
Following the collapse of fraudulent investment schemes in 1997, the authorities have focused their efforts on rebuilding the financial infrastructure and restoring public confidence in the financial sector. With the support of the IMF, the World Bank, the IFC and the EBRD, they have embarked on a policy aimed at restructuring and privatising the Savings Bank (SBA), opening up the market to private banks, and establishing a competitive and well-regulated domestic financial market operating under the close supervision of an independent central bank.

Albania’s second largest bank, the National Commercial Bank, was privatsed in June 2000. The process for privatising the Savings Bank (SBA) is well underway. The government plans to sell a controlling stake in SBA, which dominates the Albanian market with 80% of Lek deposits and 37% of hard currency deposits, before the end of 2001. The Savings Bank, formed in 1991, is the country’s largest bank with a network of 30 branches. It is the pillar of the payment system in Albania and acts as the agent for the state treasury throughout the country. It is primarily a deposit-taking institution that invests its large deposit base nearly exclusively in treasury bills.

The NCB and the Savings Bank dominate Albania’s banking sector. There are also several partly or wholly foreign-owned banks operating in Albania. Their level of lending activity is low, but is increasing following the extension of various credit lines by IFIs and donors such as Italy and Greece. The expansion of the banking system through the licensing of new foreign banks is gradually increasing competition and improving the quality of services, as well as helping develop Albania’s banking infrastructure and attract foreign capital.

The first joint venture bank was Banca Italo-Albanese (BIA, also known as the Italo-Albanian Bank) established in 1994 between the Banca di Roma and the NCB with minority participation by the EBRD. The only other joint venture is the Arab-Albanian Islamic Bank (originally between the NCB, which has now transferred its shares to the Ministry of Finance, and several Arab investors). Foreign banks include the Greek banks (Tirana Bank, Alpha Credit and the National Bank of Greece), the American Bank of Albania and the Bulgarian First Investment Bank.

A stock exchange was established in May 1996, but trading is negligible, limited to government bonds, treasury bills and privatisation vouchers. A special securities commission exists to regulate trading activity. Auctions of treasury bills of three, six and 12 months’ maturities are held twice a month.

14. Monetary & Exchange Rate Policy
Macroeconomic stability and rising confidence have allowed the Bank of Albania (independent since 1996) to gradually relax monetary conditions and slowly reduce interest rates. The last direct instrument of monetary policy, the minimum interest rate on three-month deposits, was eliminated in September 2000. The BoA now relies primarily on open market operations in conducting monetary policy. Declining interest rates and a better business climate have led to higher private sector credit growth. Stricter bank supervision by the BoA, through regular monitoring and on-site inspections, together with the establishment of internationally accepted accounting standards is helping strengthen confidence in the sector overall. Monetary policy continues to be in line with objectives agreed with the IMF.

Annual average price increases have been reduced; the annual rise in consumer prices plummeted from 21% in 1998 to 0.4% in 1999. Consumer prices remained stable in 2000, with deflation year on year every month between August.1999 and May 2000. End-year inflation in 2000 was 4.2% on an annualised basis, while average annual consumer price inflation came in at close to zero. This was the result of tight fiscal and monetary policies, and low levels of employment and imported inflation. The higher end-year rate is attributable to a rapid rise in international oil prices and the energy crisis which emerged in the last quarter of the year. The budget for 2001 forecasts inflation to be 2-4%.

Prudent financial policies, productivity growth, and the continued strength of the exchange rate relative to European currencies combined to help keep inflation low, and in turn helped maintain strong demand for the Lek. Low inflation and a comfortable level of foreign exchange reserves equivalent to some 4-5 months of imports, contributed to the stability of the Lek. In the course of 2000, a modest depreciation of the Lek against the US dollar (143 Leks/USD in December 2000, compared to Lek 138 in December 1999) helped encourage exports, however, low inflation and good external reserves prevented it from a larger fall in value. At the end of the year the Lek strengthened against the dollar, as returning migrant workers fuelled demand for the Lek. The BoA’s stated main monetary policy objectives for 2001 include keeping inflation low and supporting a flexible exchange rate regime, which takes into account the balance between the Lek's exchange rate against the dollar and the Euro.