While ongoing analysis will shed light on why inflation has been so contagious, several factors are likely at play and continue to pose risks to inflation, which although declining in 2023 appears to have left the bitter effects of the exchange rate behind unbalanced exchange rate.While the Bank of Albania has increased interest rates over the past year and at the beginning of 2023, at most economic activity has slowed down only modestly. The unemployment rate is at low levels, but with a slight tendency to increase again.Wage growth has been solid and fiscal policy indicates that further growth will continue over the coming years, although not enough to begin to reverse the sharp declines in real wages over the past two years.In the current period, but also in the future, it is up to the Bank of Albania to offer price stability, regardless of the fiscal position. With core inflation high and domestic inflation risks high, risk management considerations suggest that monetary policy should continue to remain in accommodative territory until core inflation is on a clear downward path.The costs of fighting inflation will be significantly greater if a prolonged period of high inflation increases inflationary expectations and changes inflation dynamics.The combination of tight labor markets with a still-strong stock of household savings and remaining subdued demand may be behind the robustness in activity we've seen so far.The high incidence and persistence of informal work is increasingly seen as an obstacle to sustainable development. Informal businesses are not contributing to the expansion of the tax base and the structure of the informal business register continues to be the same as 10-12 years ago, with small businesses accounting for 89% of all businesses and the trend seems to be that they will remain even smaller, with low productivity and limited access to the financial market.Foreign aid will continue to be an important source of funding. But much more important is legitimate trade, trade that respects the purpose of the laws and regulations governing the collection of VAT, customs duties, the prevention of money laundering and the fight against evasion to reduce informality.Thus, the situation of the Albanian market and business does not coincide with the model of the market and business in today's world.Instead, we currently look the other way as part of the economy is already being used to shift hundreds of billions of lek from abroad to in and vice versa.Slowing down the amount of illegal money leaving the economy through trade fraud can keep large resources in place for poverty alleviation and economic growth while also affecting the wounds caused by inflation and momentary devaluation of the euro and other currencies. foreign.The lack of co-ordination of the fight against evasion and the deliberate misrepresentation of the value of goods in circulation from fiscal audit every day is not a source of black money but is the mechanism through which black money enters or leaves the country.Finally, the pandemic is likely to have reduced output and potential productivity, which would also help explain some of the upward pressure on inflation.Some side effects of fighting inflation with monetary policy can be reduced by giving fiscal policy a greater role. Indeed, economic conditions call for fiscal tightening. It can help reduce demand and reduce the need for interest rate hikes, especially if done cooperatively by a broad group of countries.At the very least, it is critical for the government to resist any temptation to diminish the deficit reduction envisioned in current policies. Where support is needed, they should move from providing broad-based to well-targeted support, and windfalls from high inflation should be saved
