Euro’s free fall alarms Albania’s central bank

Tirana Times
By Tirana Times June 7, 2018 11:42

Euro’s free fall alarms Albania’s central bank

Story Highlights

  • “The strengthening of the national currency is beyond the parameters and criteria that the Bank of Albania applies when it monitors the free floating exchange rate. We have intervened to stop the acceleration of the national currency's appreciation which hits key macro-economic parameters and especially our main inflation target,” says Bank of Albania governor Gent Sejko

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By Ervin Lisaku

TIRANA, June 7 – As the national currency’s strengthening against Europe’s single currency seems unstoppable, Albania’s central bank has finally decided to intervene in the country’s free floating exchange rate regime in a rare emergency intervention targeted at curbing the negative effects on the country’s highly euroised economy.

Governor Gent Sejko says the country’s central bank will buy foreign currency in order to temporarily curb the excess euro inflows in the country’s internal currency exchange market in operations that are expected to stop the national currency’s strengthening trend which is negatively affecting Albania’s Eurozone destined exports, local producers facing tougher competition from now cheaper imports and thousands of poor households relying on remittances from their family members mainly in Italy and Greece where 1 million Albanian migrants live and work.

Europe’s single currency hit a new 10-year low of 124.4 lek this week, having depreciated by 7 percent compared to last January and 11 per compared to mid-2015 when the euro’s five-year reign of about 140 lek came to an end.

“The strengthening of the national currency is beyond the parameters and criteria that the Bank of Albania applies when it monitors the free floating exchange rate. We have intervened to stop the acceleration of the national currency’s appreciation which hits key macro-economic parameters and especially our main inflation target,” said governor Sejko.

“The foreign currency operations will last as long as necessary so that we meet our targets,” says Sejko, adding that Albania will continue applying a free-floating exchange rate regime and intervene only under special circumstances when its traditional instruments don’t yield the expected results.

Albania’s central bank says the strengthening of lek reflects unilateral expectations by currency exchange operators and could have also been triggered as a result of psychological effects.

“The expectations were triggered by information about an increase in foreign currency supply, mainly in response to the expected capital conversion by some banks, the disbursement of a foreign currency-denominated loan to a state-run company as well as expectations for a good tourist season. As a result, expectations have also led to an increase in supply and a reduction in demand for foreign currency,” says governor Sejko.

A central bank deputy governor has earlier said some banks are converting part of their foreign-currency denominated capital into the national currency, apparently triggered by the de-euroization strategy that Albania’s central bank has announced and the recent takeover of two small banks by internal market competitors that is expected to reduce the number of commercial banks operating in the country to 14 if the acquisitions are rebranded.

State-run power utility KESH, producing about 70 percent of domestic electricity generation has recently received the first €118 million tranche of a €218 million loan intended for the company’s modernization.

Meanwhile, expectations for the 2018 tourist season are optimistic following a 2017 season which state institutions say brought more than 5 million foreign tourists and generated a record high of €1.7 billion in annual income.

“Unilateral short-term expectations on the strengthening of the national currency risk turning into stable and long-term expectations. The consolidation of these expectations and the establishment of their self-fulfilling dimension, could lead to a vicious circle with a negative effect on the inflation rate and other economic indicators,” says Sejko.

Albania’s central bank says the strengthening of the national currency also hampers its efforts to bring inflation rate to its 3 percent target, a level estimated to have a positive impact on the country’s economic growth by stimulating consumption and investment.

Inflation rate has been at an average of 2 percent in the first four months of this year and is little likely to meet the Albanian government’s 2.7 percent target.

Albania’s central bank has earlier called on businesses and households not to make hurried euro to lek conversions and now says economic and financial market stakeholders should avoid “unstudied, unhedged and undesired exposures to foreign currency.”

The Bank of Albania has earlier said the de-euroisation package it has adopted to stimulate savings and borrowing in the national currency, has not yielded any effect so far as measures gradually enter into force starting next June, but does not rule out any psychological effect.

The de-euroisation package makes it more expensive for commercial banks to provide Euro-denominated loans and accept deposits in Europe’s single currency, by increasing compulsory reserve requirements and lowering requirements for credit and savings in the national currency.

Albania’s central bank and the ruling Socialist Party majority argue the national currency’s strengthening against the Europe’s single currency is a result of higher euro inflows, mainly in foreign direct investment and the economy recovering to a 9-year high of 3.8 percent in 2017.

However, the main opposition Democratic Party and some economy experts link the national currency’s constant strengthening to illegal euro inflows resulting from the peak 2016 cannabis cultivation and ongoing drug trafficking in the country, considered a major cannabis producer and a key transit route for cocaine and heroin for European markets.

 

Key rate cut to new historic low

 

In another coordinated move, Albania’s central bank has also decided to cut the key interest rate by another 0.25 percentage points to a new historic low of 1 percent in a new monetary policy ease that comes two years after the Bank of Albania last cut key rates.

The new cut to the key rate is expected to further reduce national currency-denominated loan rates in a bid to stimulate sluggish credit and consumption and investment.

One-day deposit and lending rates have also been cut to 0.1 percent and 1.9 percent respectively.

Albania’s central bank has constantly followed an easy monetary policy since late 2011 when the key rate was at 5.25 percent but the moves have poorly translated into boosting credit due to the high level of non-performing loans and Albania’s highly euroised economy with half of total credit and savings denominated in Europe’s single currency which has forced the country’s central bank to undertake a de-euroisation strategy.

 

Tirana Times
By Tirana Times June 7, 2018 11:42