Euro drop still unjustified

Tirana Times
By Tirana Times March 29, 2019 14:52

Euro drop still unjustified

Story Highlights

  • Theoretically, there should be a straight connection, i.e. an improvement in the current account deficit, which means more foreign currency entering from official sources should have affected the euro's decline. Practically this has not happened, as the current course performance and current account deficit shows.

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TIRANA, March 26- On Dec. 19, 2018, the euro was exchanged by 122.69 lek, reaching the lowest level since August 2008. While the average exchange rate for the whole year was 127.6 lek, 6.5 lek less versus the average of the previous year, marking the largest annual decline since 2004. The current exchange rate has remained at an average 125 lek, having experienced slight increases.

The strong depreciation of the euro implies a very high bid of the Euro comparing to its demand. But where did this high offer for the currency come from? Official data from the Bank of Albania published in the balance of payments, show that the formal economy has not brought more currency in 2018. The current account deficit, an indicator measuring domestic currency entry and exit transactions, was -860 million euros in 2018, with an improvement of only 6 million euros, a negligible amount to reach the course rate (daily transactions estimated at over 50 million euros). Even in the fourth quarter, when the euro marked a sharp decline, the current account deficit was 364 million euros, reaching the highest level since 2011.

Historical data from the Bank of Albania show that since 2015, the period when the euro has fallen by 12 lek or almost 9%, the current account deficit has remained almost unchanged, even in 2017 it has slightly deteriorated. Theoretically, there should be a straight connection, i.e. an improvement in the current account deficit, which means more foreign currency entering from official sources should have affected the euro’s decline. Practically this has not happened, as the current course performance and current account deficit shows. Officially, more currency has not really entered the country in the last three years, but again the euro is significantly depreciated.

Another indicator of the high amount of currency circulating in the country, along with the effect on the exchange rate, is the high growth of foreign currency deposits. According to other data of the Bank of Albania, deposits in euro at the end of 2018 amounted to 4 billion euros, with a 10% increase on an annual basis, or about 370 million euros more. This is the highest ever recorded share of common currency savings. The increase in euro deposits in 2018 was much higher compared to the previous year, when they increased by only 68 million euros.

Along with the high euro bid, another factor affecting the depreciation of the euro in 2018 was the conversion of banks’ capital, and the disbursement of an European Bank for Reconstruction and Development (EBRD) loan to the Albanian Power Corporation. The Bank of Albania has announced that these transactions amounted to nearly 300 million euros to be converted at a certain moment, exerting pressure on the depreciation of the euro. But on the other hand, the BoA acknowledged that it has bought over 400 million euros in total, mainly during June-September, not only for the exchange rate effect but also for foreign currency reserve reasons, which should have amortized the effect of capital and credit conversion of the EBRD.

The highest amount of foreign currency goes abroad for buying goods (import), amounting to 3.8 billion euros, or nearly 4 times higher than the currency that comes as a result of goods sold abroad (export), causing a deficit of almost 2.9 billion euro. High commodity deficit has a significant impact on the current account deficit. the balance is positive by about 1 billion euros out of the various services. Exports of services, mainly from call centers and the attire industry, as well as net tourism revenues, generated a net of 431 million euros. Albanian spending has increased considerably, resulting in a 3.5 percent lower net tourism income than a year earlier.

The balance has returned negative to -5 million euros for primary revenues, which has come as a result of increased investments abroad. The balance of secondary incomes was positive, which are mainly the money that emigrants bring home, that in recent years are returning to a growth as a result of revitalizing the immigration cycle. As a result, a net 860 million euros left Albania in 2018, with an improvement of just 6 million euros compared to the previous year.

 

Tirana Times
By Tirana Times March 29, 2019 14:52