TIRANA, Feb. 13 – The de-euroization package that Albania’s central bank has announced has found exporters and economy experts divided over the effects such a policy could have on the country’s highly euroized economy.
Alban Zusi, the head of Albania’s Exporters’ Association, fears the central bank’s strategy to discourage saving and lending in Europe’s single currency will lead to a stronger national currency and losses for the country’s exports, two-thirds of which are destined for Eurozone countries, mainly Italy and Greece.
The national currency, lek, is already trading at an 8-year high of about 133 lek against Europe’s single currency in a gradual upward trend that began in mid-2015 as the euro’s five-year reign of about 140 lek came to an end.
“The euro’s depreciation by 6 percent in the past couple of years has led to losses of about €60 million for the country’s exporters considering total exports of about 1 billion euros,” says Alban Zusi, the head of the Exporters Association, worried over the implications such a policy could have on the country’s free floating exchange rate regime.
Exporters are also worried a stronger national currency could make them lose their competitive advantage especially in key sectors such as the garment and footwear industry producing the country’s top exports, employing about 100,000 people and relying on cheap labor costs.
Albania’s exports grew by 12 percent in 2017 following sluggish performance since the mid-2014 slump in commodity prices paralyzing the country’s poorly diversified exports, but Albania’s trade gap still widened by 5.2 percent last year due to a hike in imports fuelled by some major energy-related investment.
When it comes to imports, a stronger national currency will make them cheaper, but damage local producers who will be forced to reduce prices to survive tough competition from abroad. An increase in imports will also negatively affect the country’s GDP growth as Albania is already a net importer with exports meeting only about 44 percent of what the country imports.
Zef Preà§i, an economy expert who heads the Albanian Centre for Economic Research, is also against the central bank’s de-euroization strategy, saying the move could have negative effects for Albania’s long-term EU integration prospects and even further strengthen the national currency in the short-run with a negative impact on the country’s competitiveness and exports.
Preà§i favors Albania’s unilateral introduction of the Euro as neighbouring Kosovo and Montenegro have done, saying this policy will help Albania deal with high public debt levels and curb the effect of money laundering and drug proceeds on the national economy.
“A rapid move toward the euro instead of the Albanian lek will undoubtedly serve the reduction of risks and buffering from shocks on the horizon as a result of the government’s careless policies, especially regarding the aggressive increase in public debt, the threatening involvement of the private sector in public infrastructure investment and even the evident exposure of the national economy toward money laundering from criminal proceeds such as the cultivation, processing, trade and exportation of marijuana and other stronger drugs,” says Preà§i.
Albania’s public debt is already at 70 percent of the GDP, a high level for the country’s stage of development, while public private partnership and hike in cannabis cultivation in 2015-2016 have become hot topics in Albanian politics and economy.
“That does not also exclude the adverse effect, such as the case of PIIGS, the Mediterranean countries that adopted the euro and were the gist of Eurozone’s 2011-12 crisis, which showed that the decrease in public debt interest rates only pushed the governments to increase their public debt levels,” says Preà§i.
“In order not to repeat this phenomenon, I think that by unilaterally adopting the euro, a favourable environment is created for more transparency over public debt and a greater role of the European Central Bank in this respect. In addition, I think that the introduction of the euro will help curb dangerous PPPs especially in the future and somehow protect the national economy from the evident and threatening money laundering phenomenon,” he adds.
Expert Selami Xhepa has earlier said the de-euroization measures could curb the financial market and drive investors to seek other opportunities abroad.
“The more you increase rigidity toward investment alternatives in euro, the more investors and banks as part of the financial system, will look for alternatives abroad where there is zero risk regarding the exchange rate risk,” says Xhepa, warning that the measures negatively affect investors who receive payments in euro from abroad and use euro as their currency in their day-to-day operations.
In favor
Other economy experts see the central bank’s move as not a war against Europe’s single currency, but the protection of borrowers and savers that could also help the Bank of Albania on a better transmission of its monetary policy.
“The reason for the initiative to reduce the use of euro in the economy is based on several factors; statistics show there is about 1 billion euros annually in migrant remittance flows, 65 to 70 percent of the trade exchanges are carried out in Europe’s single currency and tourism which is the sector contributing most income to the economy and has 90 percent of its inflows in euro,” says Adrian Civici, an economy expert.
“The Albanian economy has a 50 percent euroisation rate. Facing this situation, the Bank of Albania has undertaken a de-euroization process for a better pass-through of its monetary policy to the economy and protect customers from the sharp exchange rate fluctuations as the biggest volume of loans is Euro-denominated at a time when salaries are in the national currency, lek,” adds Civici.
Banking expert Elvin Meka says the process the central bank has initiated is the right one but, will not be easy.
“There will not be any effort to drastically stop the use of euro in the economy and the Albanian financial system. What we target is a balance on the use of Albanian and foreign currencies in the economy,” says Meka.
“As far as businesses are concerned it must be clear that there will be no administrative measures that banks can impose on businesses. The measures have a regulatory character that target promoting a greater use of the national currency in the economy and the financial system such as lending and saving,” Meka has said.
De-euroization package
The new de-euroization rules that Albania’s central bank will apply by next June make it more expensive for commercial banks to provide Euro-denominated loans and accept deposits in Europe’s single currency, by increasing compulsory reserve requirements.
Compulsory reserve requirements for lek-denominated deposits and loans, currently at about half of the total, have been lowered or kept at the same levels in a bid to encourage the use of national currency and protect savers and borrowers from exchange rate fluctuations.
“These regulatory amendments aim at making foreign currency transactions in the banking sector more costly (i.e. less preferred) and promote mechanisms for raising the awareness of borrowers (especially those households who are unhedged against the exchange rate risk) on risks that accompany foreign currency borrowing,” central bank governor Gent Sejko has said.
The compulsory reserve requirement for foreign-currency liabilities that mainly involve Euro-denominated deposits has been raised to 12.5 percent, up from a previous 10 percent on both foreign and local currency deposits. For commercial banks where foreign-currency deposits account for more than half of the total, the reserve requirement for any liability above the 50 percent level has been set at 20 percent.
Meanwhile, compulsory reserve requirements for lek-denominated deposits has been lowered by 2.5 percent to 7.5 percent.
Similarly, the minimum requirements on foreign-currency denominated liquid assets has been increased to 20 percent of the short-term liabilities, up from a previous 15 percent and preserved at 15 percent on lek-denominated liquid assets.
In a bid to raise awareness of the risks facing borrowing in foreign currency, commercial banks have also been asked to propose borrowers an alternative lek-denominated loan and provide examples of changes in loan instalments in case of currency exchange fluctuations.
The de-euroization package will also serve the country’s central bank to increase income and reduce losses it incurs from the high level of Euro-denominated deposits and loans.
A recent IMF working paper by international and Albanian experts, estimates that Albania loses a total of about 9 billion lek (€67 million) annually, 0.6 percent of the GDP, from its high euroization levels at about 50 percent.
IMF experts estimate Albania’s current euroization level of about 47 percent needs to drop by only 10 percent in order not to negatively affect the country’s banking system and economy.
