TIRANA, July 26 – Albania’s national currency has finally stabilized against Europe’s single currency in the past one and a half months following unprecedented strengthening trend that risked posing a key threat to the country’s highly euroised economy.
The euro has been trading at an average of 126 lek since early June after Albania’s central bank decided to undertake emergency interventions to buy excess euros from the local currency exchange market in a bid to curb losses for the country’s Eurozone destined exports, local producers facing tougher competition from cheaper imports and a sharp devaluation of Euro-denominated savings accounting for half of total deposits.
Europe’s single currency hit a 10-year low of 124.17 lek in early June 2018 and traded at an average of about 126 lek for the month, 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.
While exporters continue to incur considerable losses from a stronger lek, the national currency seems to have temporarily stabilized at a time when euro inflows in the country are increasing due to the peak tourism season under way and major energy-related projects concluding their investment stage.
The more stable national currency in the past forty days reflects the ongoing euro purchase operations by Albania’s central bank as it tries to curb the excess euro supply and stop euro’s free fall in the local market where a free floating exchange regime determined by supply and demand is applied.
The 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.
Mixed reactions, results
Albania’s central bank and the government claim the euro’s free fall in Albania is a result of recovering economy and higher euro inflows from FDI, tourism and migrant remittances.
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.
While exporters are suffering considerable cuts in profits, the euro’ free fall has not been much reflected on exports in the first half of this year when they grew by double-digits, but the situation was mainly a result of energy-related exports and a low-base effect. Exports in the first half of this year were mainly fuelled by the resumption of electricity sales and a sharp rise in crude oil exports following the suspension of operations by a local refiner and a pickup in commodity prices.
Albanian exporters have warned the considerable strengthening of Albania’s national currency, lek, against Europe’s single currency at least €100 million for the country’s economy for 2018 alone as two-thirds of the country’s poorly diversified exports are destined for Eurozone countries.
The government has also complained the euro’s free fall against the national currency is putting at risk revenue targets for this year and experts predict it will trigger an unavoidable budget review.
The sharp strengthening of Albania’s national currency against the euro is also having some few positive effects on the Albanian economy, and it’s mostly the Albanian government that is benefiting through lower repayment of loans denominated in Europe’s single currency.
While the national currency seems stable for the moment, prospects are it could further strengthen against the euro next August, the peak of the tourist season and a period when dozens of thousands of Eurozone-based Albanian migrants come home to spend their summer holidays, also bringing remittances for their families and making investment at home in a situation further increasing euro supply in the local market and requiring stronger intervention by Albania’s central bank to keep the national currency stable.
A much stronger national currency against Europe’s single currency during the first half of this year has delayed the central bank’s inflation target expectations and its easier monetary plans.
Governor Gent Sejko says the 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.
‘Unprecedented’ hike
The Vienna Institute for International Economic Studies has slightly revised downward Albania’s 2018 economic outlook, citing an ‘unprecedented appreciation’ of Albania’s national currency against Europe’s single currency.
The 3.8 percent growth scenario that the Vienna Institute now predicts would be a slowdown for the Albanian economy which grew by a 9-year high of 3.84 percent in 2017 backed by major-energy-related investment currently in their final stage and the emerging tourism sector.
The World Bank and the IMF predict the Albanian economy will slow down to between 3.5 percent and 3.7 percent this year as two major energy-related projects, the Trans Adriatic Pipeline and a large hydropower plant, complete their investment stage by the end of this year.
The U.S. dollar, whose weight on the Albanian economy is much lower compared to the euro, has also depreciated by about 9 percent during the past year and currently trades at a three-and-a-half year low of 107.43 lek, compared to a 12-year high of about 130 lek in early 2015.
