TIRANA, May 23 – Concern among the country’s exporters mounted this week as the euro hit a new 10-year low against Albania’s national currency, considerably reducing profits for about two-thirds of the country’s Eurozone destined exports.
Europe’s single currency hit a new 10-year low of 126.74 lek this week, after trading at an average of 127.3 lek in the previous week, but has depreciated by about 5 percent compared to the mid-January peak level of about 134 lek for this year and is about 9 percent lower compared to mid-2015 when the euro’s five-year reign of about 140 lek came to an end.
The garment and footwear industry producing the country’s top exports is the hardest hit industry due to the low value-added exports it produces as the raw material is overwhelming imported from Eurozone countries, mainly Italy, and labour costs and taxes are incurred in the national currency, lek.
Medicinal and aromatic plant exporters also complain the strengthening of Albania’s national currency against the U.S. dollar and the euro is putting the industry that employs around 90,000 people in serious difficulty.
Most of the country’s medicinal plants are exported to the U.S. but exporters complain their profits have significantly dropped following a sharp depreciation of the U.S. dollar against Albania’s national currency, lek, since early 2017.
The U.S. dollar, whose weight on the Albanian economy is much lower compared to the euro, slightly gained some ground this week as it traded at 108.07 lek, but yet stood at a three-and-a-half year low and was down by 16.5 percent compared to the early 2017 level of about 129 lek, according to Albania’s central bank.
Exports of medicinal and aromatic plant exports hit a 5-year low of 12,888 metric tons, worth about 3.5 billion lek (€26.6 mln) in 2017, with experts blaming the situation on the cultivation of imported sage instead of indigenous varieties, leading to lower demand.
Local farmers and pickers sell 1 kg of unprocessed sage at less than $4 at a time when 20 grams of Albanian sage at U.S. supermarket chains is sold for $5.2.
The Albanian sage meets 70 percent of American market needs.
Medicinal plant exporters warn a weaker U.S. dollar and euro will lead to a cut in jobs and domestic investment to process and export products.
Speaking at conference this week, Filip Gjoka, the head of the Medicinal and Aromatic Plant Producers, said the government should consider tax incentives if the country’s central bank cannot intervene to strengthen lek.
Both the government and the central bank have ruled out the possibility of any market intervention, saying the country’s free floating exchange rate regime is determined by market demand and supply and that the national currency’s strengthening is a result of the Albanian economy recovering, and higher inflows of euros from foreign direct investment, tourism and remittances.
The country’s central bank says the de-euroisation package it has adopted to stimulate savings and borrowing in the national currency, has not yielded any effect so far as measures gradually enter into force starting next June, but does not rule out any psychological effect.
However, the opposition and some experts doubt the main reason behind this situation is euro inflows from cannabis cultivation and drug trafficking that are allegedly being laundered in construction projects.
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.
Albanian exporters estimate the country’s economy will be stripped of at least 14 billion lek (€108 mln) in losses from exports, tourism and remittances for 2018 if Europe’s single currency continues to trade at this 9-year-low rate against the Albanian lek.
Local producers are also at risk because of tougher competition from cheaper imports at a time when the country’s exports cover only about half of total imports.
As a rule, Albania’s central bank can intervene either indirectly through orienting statements or engage in direct currency exchange market operations.
The central bank has up to now called on stakeholders not to make hurried currency conversions pushed by exchange rate fluctuations because of possible huge future losses, but said it cannot intervene as long as the national currency’s strengthening is a result of an increase in foreign currency supply and lower risk premia in the internal financial market.
On the positive side, the depreciation of the euro against the national currency is good news for borrowers in Europe’s single currency who have their income in lek, the government’s external debt payments as well as imports whose cost has slightly dropped.
The depreciation of the national currency has not been yet reflected on the performance of the country’s exports which grew by an annual 17 percent in the first four months of this year, fuelled by ‘construction material and metals” as well as recovering crude oil exports and the resumption of electricity exports.
However, “Garment and footwear” products, accounting for 40 percent of Albania’s poorly diversified exports, grew by a mere 5 percent year-on-year in April 2018 following double-digit growth rates in the previous three months as the euro lost about 5 percent of its value.
Half of Albanians’ savings and lending is in Europe’s single currency, making Albania one of the region’s most euroised economies, in a situation that holds back the pass-through of Albania’s central bank easier monetary policy to promote lending and causes losses of about 9 billion lek (€67 million) annually in seigniorage and foreign currency reserves for the Bank of Albania.
Albanians’ massive savings in euros have also been hit, but the central bank says there have been no panic withdrawals or conversions.
Albania’s total euro-denominated deposits at the end of 2016 were estimated at about 2 billion euros, accounting for 40 percent of total savings, according to the European Central Bank.
