Ongoing emergency intervention keeps Albanian lek stable at peak tourist season

Tirana Times
By Tirana Times August 24, 2018 13:47

Ongoing emergency intervention keeps Albanian lek stable at peak tourist season

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  • A much stable Albanian lek comes at a time when Albania’s central bank continues its emergency euro purchase program from the local currency exchange market in a bid to stop the national currency’s upward trend

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By Ervin Lisaku

TIRANA, Aug. 24 – Albania’s national currency is showing stability for the third month in a row against Europe’s single currency following a sharp upward trend in the first half of this year with a series of negative effects for the country’s highly euroised economy.

Europe’s single currency has been trading at an average of 125.6 lek during August, at almost similar levels compared to the previous couple of months, but remaining at a 10-year low against the Albanian lek and losing about 6 percent compared to last December in a situation that has significantly negatively affected Albania’s Eurozone-destined exports, local producers facing tougher competition from cheaper imports and sizeable Euro-denominated savings and remittances.

The euro currently trades at about 10 percent below the mid-2015 level when its five-year reign of about 140 lek came to an end, with the free fall having primarily hit two-thirds of the country’s Eurozone destined exports, causing significant losses to exporters.

A much stable Albanian lek comes at a time when Albania’s central bank continues its emergency euro purchase program from the local currency exchange market in a bid to stop the national currency’s upward trend by curbing excess euro supply and trying to influence a free floating exchange rate regime determined by market supply and demand.

The Bank of Albania decided to undertake an emergency euro purchase program and cut the key rate to a new historic low of 1 percent in early June 2018 in a bid to curb negative effects on the Albanian economy and prevent possible disinflationary pressure from euro’s free falls which makes imports much cheaper and puts at risk the central bank’s key 3 percent inflation target that has now been delayed for 2020 at a time when inflation stands at about 2 percent.

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.

 

Peak tourist season

The much stable national currency comes at a time when the peak tourist season is under way and during a month when dozens of thousands of Albanian migrants return home to spend their summer holidays significantly increasing the euro supply on the local market and regularly putting pressure for a stronger lek during summer.

Almost 3 million foreign tourists visited the country during the first seven months of this year, up 12.4 percent compared to the same period last year, hinting of higher income from the emerging travel and tourism industry which last year generated about €1.7 billion, about 14 percent of the country’s GDP, according to INSTAT statistical institute and the Bank of Albania.

The Albanian migrants’ arrival in summer also leads to higher remittances, a key source of income for thousands of households in the country, but whose contribution during the past decade has significantly waned due to recessions in Italy and Greece, the hosts of around 1 million Albanian migrants.

 

Unclear causes

Albania’s central bank says the stronger national currency reflects a recovering economy, 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.

However, 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.

The Vienna Institute for International Economic Studies, one of the top centers for research in Central, East and Southeast Europe, cited an ‘unprecedented appreciation’ of Albania’s national currency against Europe’s single currency when it revised downward Albania’s 2018 growth forecast to 3.8 percent last July, down from a previous 4.1 percent outlook.

In its latest monetary policy report, Albania’s central bank says the local currency strengthened by an average of 2.3 percent against Europe’s single currency in 2017, but the upward trend accelerated to 6.4 percent in the first half of this year when lek gained 3.4 percent against the euro in only five weeks until early June when Albania’s central bank decided to apply its emergency intervention instrument in a bid to curb the negative effects from euro’s free fall in the local market.

 

Exports ‘defy’ euro effect

The current effects of euro’s free falls are not yet very visible if one looks at a double digit growth in exports, but the government says the situation is also negatively affecting the state budget which underwent a surprise mid-year cut last July following underperforming revenue.

Albania’s exports of goods grew by about 17 percent in the first seven months of this year seemingly defying the negative effects from the sharp strengthening of Albanian’s national currency against Europe’s single currency, but the double-digit growth was fuelled by the resumption of electricity exports following heavy rainfall lifting the country’s hydropower reliant domestic system out of crisis following last year’s prolonged drought.

A sharp hike in crude oil exports following the late 2017 bankruptcy of a local refiner as well as recovering commodity prices giving a boost to the country’s oil, mining and steel industry also helped boost exports.

FDI in the first quarter of this year also registered a double-digit strong hike, boosted by the intensification of construction works in the Albania section of the major Trans Adriatic Pipeline ahead of the completion of the project’s investment stage by the end of this year.

 

 Mixed expectations

Experts predict the national currency could lose some ground against the euro with the conclusion of the tourist season in September, but a new construction boom amid sluggish recovery of credit and allegation of money laundering could still keep the euro trading at a 10-year low against the Albanian lek.

The Albanian government expects the economy to recover to 4.2 percent this year, up from a 9-year high of 3.8 percent in 2017, but international financial institutions such as the World Bank and the IMF predict growth could slow down to 3.5 to 3.7 percent as major energy related-projects that drove growth in the past four years, such as the Trans Adriatic Pipeline and the Devoll Hydropower, complete their investment stage.

 

 

Tirana Times
By Tirana Times August 24, 2018 13:47