The expansionary fiscal policy provided the economic activity with the necessary impulse over the course of the year; however it was also accompanied by higher public debt and upward pressures on Government T-bill yields. The deepening of budget deficit resulted in substantial public debt increase, which as at year-end 2009 accounted for about 59.5 percent of GDP. The Bank of Albania encourages measures to reduce the budget deficit and public debt in the medium run. Lower budget deficit and public debt levels will provide more room in accessing of funds from the private sector and boost confidence in Albania’s macroeconomic stability. In addition, these measures will help to create appropriate conditions for attracting foreign capital in the form of private loans or foreign direct investment. BIS Review 78/2010  3  1.3  Monetary developments and financial markets  Financial intermediation in economy was conditioned by the contraction of financial resources, wavering of confidence in financial institutions and the decline of demand for banking loans in 2009. At the end of March, deposits fell to 55 percent of GDP compared to 63 percent in September 2008. The withdrawal of deposits during the first quarter of the year brought about the slowdown of money growth in economy. Banking activity recovered slowly during the following three quarters. Money supply grew by an average of 6 percent this year or about twice less than the previous year.
These measures proved successful in curtailing the negative consequences and in fully restoring confidence in the banking system. Subsequently, the Albanian banking system maintained sound balance sheets and was in full capacity to carry out its function as a financial intermediary and supplier of the economy with payment instruments. The developments of the first quarter of 2010 attest to the full restoring of public confidence in the banking system. Currently, the level of deposits has exceeded that of end September 2008, prior to the beginning of the withdrawal of deposits. In what follows, I would like to dwell on the aforementioned topics. 1. Monetary policy and price stability  In accordance with its legal mandate, the Bank of Albania’s monetary policy has been designed and implemented in order to achieve and maintain price stability. During 2009, the main risks to price stability have arisen from the slowdown of economic activity, wavering of economic agents’ confidence, imbalanced external position of the Albanian economy and the exchange rate depreciation. Despite these challenges, the Bank of Albania managed to keep the CPI inflation within the target. Let us dwell on these elements further. 1.1  Economic growth  The global context that accompanied Albania’s economic and financial performance over the past year was not at all favourable. The year 2009 featured contracted global economic activity as a result of the economic downturn in advanced economies and considerable economic slowdown in emerging countries. Global economy posted the first negative growth rate of the last 50 years.