Judging from the monetary indicators of these recent years, we notice that Lek supply (M2 growth) in the internal market has been declining due to the lack of government’s privatization incomes, which the Bank of Albania converted in Lek by injecting liquidity in the market. The reduced Lek supplies, together with its increased demand (due to the high interests rates of financial assets in Lek during 2003), have been exercising pressures on the Lek appreciation during 2003. 1  4  Foreign sector forecasts belong to June 2003. BIS Review 8/2004  3. Main suppositions of the monetary program of the Bank of Albania for 2004  In designing the monetary program for 2004 particular attention was given to the Bank of Albania’s target, that is keeping up the annual inflation rate within the limits of 2-4 percent. In hitting this target, the monetary program aims the control of money supply growth so that the level of real monetary assets responds to the real needs of the economy for a 6 percent economic growth. The economy demand forecast does still rely on the quasi-constant velocity forecast of money circulation. This forecast, judging from the nominal GDP level, is the bridging gap between inflation and money supply growth (intermediate objective). The monetary program guarantees the observance of quantitative objectives set by the Bank of Albania, the level of NDA and NIR of the Bank of Albania within the limits and the control of government’s domestic borrowing at the level of 2.7 of the GDP.
These benchmarks have always shown that the SNB’s portfolio management achieves good results in the long term and works cost effectively. The investment process is concluded with the fifth step, risk control. The risk control function checks compliance with guidelines and limits, and conducts a performance measurement. Furthermore, the relevant financial risks are identified, assessed and monitored on a daily basis. In addition, regular sensitivity analyses and stress tests are conducted and the results are reported to the Governing Board and the Bank Council’s Risk Committee. Organisationally, the investment process and risk control are separated from one another to the greatest possible extent. In this way, we ensure effective risk control. Monetary policy takes precedence over investment policy It is true that the structure of the SNB’s investment and risk processes is similar to that of large commercial asset managers. And yet there are also enormous differences. After all, the SNB is a central bank; for us, monetary policy objectives always take precedence over investment policy. When investing our foreign exchange reserves, we base our decisions on the criteria of security, liquidity and return. The weightings given to these criteria are derived from the monetary policy function of the foreign exchange reserves. Ensuring room for manoeuvre in the implementation of monetary policy requires, in particular, a high weighting for the liquidity criterion. As is common practice for a central bank, we invest a substantial share of our foreign exchange reserves in very liquid and highly rated foreign government bonds.