TIRANA, May 3 – As the euro hit a 10-year low of 127.7 lek this week, the central bank reassured the downward trend of Europe’s single currency will be short-term and not affect the country’s highly euroised economy which it says is heading toward constant recovery after hitting a 9-year high of 3.8 percent in 2017.
Speaking at a press conference this week, central bank governor Gent Sejko attributed the significant strengthening of the national currency to increased euro inflows from foreign investment, remittances and tourism as well as an increase in exports, but warned the de-euroisation strategy that the bank has unveiled has also had some psychological effect.
“The Bank of Albania estimates that the mid-term trend of the strengthening of Albania’s national currency, a process which started in the second half of 2015, reflects the operation of fundamental factors. Those factors materialized in an increase of the foreign currency supply as a result of the narrowing of the current account gap, the high level of foreign direct investment and lower risk premia in the internal financial market,” said governor Sejko.
The national currency, lek, has been on a gradual upward trend that began in mid-2015 as the euro’s five-year reign of about 140 lek came to an end, negatively affecting Albania’s poorly diversified exports, two-thirds of which are destined to Eurozone countries.
As a rule, Albania’s free-floating exchange rate regime is determined by market demand and supply, but the central bank can also intervene in emergency situations.
“We have envisaged that the de-euroisation strategy and stimulating the use of the national currency has a neutral effect on the banking system and financial system. That is because the measures applied on the compulsory foreign currency reserve are compensated by those in the national currency and vice versa. We expect lower exposure to foreign currency in a three to five-year period. In addition, the measures are not in force yet,” said Sejko.
“In case we have a psychological effect, which is not impossible, that is market-driven. That is a result of rumor, overreaction, misunderstanding or maybe ill-reaction by market perception. But there are a lot of other factors related to the real market, there is high inflow of foreign currency,” he added.
The governor says that the central bank is monitoring the exchange rate on a daily basis to determine its reaction strategy based on the conventional instruments of the monetary policy.
“I call on all economic stakeholders not to act hastily and show bias against the exchange rate which means not making hurried conversions pushed by exchange rate fluctuations because they could incur huge losses in the future,” said Sejko.
“One thing is for sure, that we have high euro inflows in the economy. But the strengthening of the national currency parameters could also be a result of speculative market factors. Our objective is the price stability and an excessive appreciation of lek would affect our target,” he added.
The strengthening of lek is estimated to have curbed inflation by 0.2 to 0.3 percent in 2017 when consumer prices hit a five-year high of 2 percent, but yet standing below the central bank’s 3 percent target which has a positive impact on the economy and consumption.
Economy expert Adrian Civici, a former member of the central bank’s supervisory board, says the analysis to national currency appreciation phenomenon leads to the conclusion that the main reason behind is the high availability of supply of euro on the market compared to the national currency.
“Another factor that has to be underlined is the public reaction to de-euroisation policy that Albania is currently pursuing, which in many cases has been wrongly interpreted as a trend and target to abandon the euro for lek,” says Civici.
Earlier this year, Albania’s central bank adopted a de-euroisation campaign in a bid to discourage current high levels of borrowing and saving in Europe’s single currency, accounting for half of the total. The de-euroisation package makes it more expensive for commercial banks to provide Euro-denominated loans and accept deposits in Europe’s single currency, by their increasing compulsory reserve requirements and lowering requirements for credit and savings in the national currency.
“If we consider the upcoming tourist season which has been historically accompanied by massive inflows of euros, it is clear that even in the upcoming months the euro will continue to trade at levels of 127 to 129 lek,” says Civici.
According to him, the consequences of this exchange rate will mostly be felt in Albanian exporters’ income and euro-denominated savings whose value will drop.
“I think commercial banks are also being negatively affected by a weaker euro,” says Civici.
“Meanwhile, importers are expected to benefit, especially those operating in the Eurozone. It will also have positive effects for households and businesses who have borrowed in euro and have their regular income in lek. This category is favored in paying out loan instalments. Even the government is favored by the downward euro trend as the public debt stock goes down,” he adds.
Cannabis effect?
Economy expert Suzana Guxholli, an opposition Democratic Party official, links the phenomenon to 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.
“All sources of information and processed and unprocessed data, do not provide an answer to this phenomenon which clearly proves the inflow of euro in the Albanian economy from informal and unofficial inflows starting last year,” says Guxholli.
The main opposition Democratic Party has accused the ruling Socialists of laundering alleged drug proceeds in a new construction boom and the much-rumored €1 billion public private partnership that the government is implementing in public investment.
“That is why the labeling of our economy by local and foreign economists and journalists as a cannabis economy provides an answer to this typical Albanian financial phenomenon. Like never before in the past 10 years, the euro has depreciated to record lows while the Albanian lek has strengthened, turning into a trend for several months, in a completely strange and inexplicable way at a time when the euro has been growing outside Albania and has strengthened,” says Guxholli.
According to her, the exchange rate strengthening for the national currency, makes exports more expensive and imports cheaper, lowering internal demand and encouraging import spending.
“For an anemic economy such as Albania, a stronger lek creates a vicious cycle with negative mid and long-term consequences. It has a positive impact only in economic flourishing reducing inflationary pressure. In the depressive Albanian economy, it increases pressure, reduces foreign investment as foreign investors see the country as highly risky with an unsafe economy,” says Guxholli.
“By making exports more difficult and reducing them, the appreciation of lek cuts economic growth, lowers the competitiveness of domestic products, bringing an undesired increase in imports, the trade gap, unemployment etc.,” she adds.
