Albania’s central bank to continue euro purchase operations

Tirana Times
By Tirana Times August 2, 2018 14:18

Albania’s central bank to continue euro purchase operations

Story Highlights

  • Experts predict the national currency will continue strengthening in August due to higher euro inflows from the peak tourist season and remittances by migrants in Italy and Greece coming to spend their holidays at home and that the Bank of Albania can’t do much to stop euro’s free fall under a free floating regime determined by market demand and supply

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TIRANA, Aug. 2 – Albania’s central bank says it will continue its euro purchase operations from the local currency exchange market in a bid to curb any further strengthening of the Albanian lek against Europe’s single currency following a series of negative effects on the country’s highly euroised economy.

The ongoing operations come at a time when the Bank of Albania’s emergency interventions in the free floating currency exchange regime during the past couple of months have only managed to curb euro’s unprecedented free fall in the local Albanian market during this year and a time when euro inflows in the local market are expected to register a sharp hike due to the peak tourist season under way and dozens of thousands of Albanian migrants coming home to spend their summer holidays.

Europe’s single currency has been trading at a 10-year low of about 126 lek during the past couple of months, down 6 percent from the mid-January peak level of about 134 lek and 10 percent below mid-2015 level when euro’s five-year reign of about 140 lek came to an end.

This week, the euro fell to 125.55 lek, down 0.36 lek compared to the peak level in late July, reflecting the rising euro inflows from the peak tourist season adding to the already excess euros in the local currency exchange market.

Experts predict the national currency will continue strengthening in August due to higher euro inflows from the peak tourist season and remittances by migrants in Italy and Greece coming to spend their holidays at home and that the Bank of Albania can’t do much to stop euro’s free fall under a free floating regime determined by market demand and supply.

The central bank’s currency purchase operations have not been fully disclosed yet, but in one case Albania’s central bank converted last June into national currency a €118 million loan disbursed to Albania’s state-run power utility, KESH, by London-based EBRD.

 

Negative effects

The sharp strengthening of the Albanian lek has negatively affected the country’s Eurozone destined exports, local producers facing tougher competition from cheaper imports, sizeable Euro-denominated savings and remittances as well as government revenue.

On the positive side, the situation is having a positive effect for the Albanian government’s external debt and households and businesses who have borrowed in Europe’s single currency but generate their income in the local currency, making loan repayments slightly cheaper.

A weaker euro makes Albania’s Eurozone dominated imports much cheaper, but that is not being translated into lower prices as consumer prices rose by an average of 2 percent in the first half of this year.

Last week, the Albanian government was forced to make a mid-year budget cut and suspend planned salary hikes and has cited the euro’s free fall as one of the main reasons behind the underperformance in government revenue during this year.

In a parallel move, Albania’s central bank also cut the key rate to new historic low of 1 percent in early June to avoid negative effects from lower imported inflation delaying plans to meet the 3 percent inflation target, estimated to have a positive effect on Albania’s developing economy.

Albania’s inflation target has been running below the 3 percent target for five consecutive years and Albania’s central bank now expects the 3 percent inflation target to be met by 2020, a one-year delay compared to last March’s announcement, and the easier monetary policy to continue until the first half of 2019, postponing plans by six months.

 

Tourism effect

Speaking at a press conference this week, central bank governor Gent Sejko said the Bank of Albania would continue its intervention program to fight what he called seasonal effects related to the tourism sector after managing to stabilize the exchange rate at an average of 126 lek during the past couple of months.

“We are monitoring the market and we will see how thing go. We could not forecast there would be such sharp appreciation of the national currency and that’s why we were forced to intervene,” said Sejko.

“Our analysis suggests of an imbalance in the demand and supply ratio at the currency exchange market, partly as a result of high seasonal [foreign currency] inflows while a fast and further appreciation of the local currency would put at risk the mid-term inflation target,” adds Sejko.

The travel and tourism industry was one of the key drivers of the Albanian economy in 2017 when authorities say it generated a record high of €1.7 billion in income, about 14 percent of the country’s GDP, according to Albania’s central bank.

 

Question marks over reasons

Albania’s central bank and the government says the strengthening of the national currency reflects higher euro inflows from major energy-related projects, tourism revenue and market expectations following a loan to a state run company and banks converting part of their capital to local currency following two mergers in the past year.

The central bank has also hinted of a possible psychological effect from the de-euroisation package targeting to reduce high levels of Euro-denominated savings and loans, currently at about half of the total, by making it more expensive for banks to provide euro loans since mid-2018.

Meanwhile, the main opposition Democratic Party and some economy experts have linked the national currency’s constant strengthening to alleged 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.

 

Tirana Times
By Tirana Times August 2, 2018 14:18