TIRANA, April 5 – The central bank’s de-euroisation initiative has worried some experts who say the move seeking to curb the high use of Europe’s single currency could have an adverse effect on foreign investors and exporting businesses who use the Euro in their day-to-day operations.
The Bank of Albania says the measures will accelerate the reduction of the current high levels of foreign currency in the country’s banking system, considered a key barrier for the transmission of its easier monetary policy and giving a boost to sluggish credit and consumption.
Zef Preà§i, the head of Albania’s Center for Economic Research, says the move could have negative effects in 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, already suffering due to poor diversification and a slump in commodity prices.
“When we talk about discouraging the use of euro, the question is what we want to achieve with this because in the long run Albania is going to adopt the Euro. Considering the experience of other countries such as Lithuania, Montenegro or Kosovo, maybe it would have been better to move to the opposite direction. I find de-euroisation as a step that could have some temporary benefits, but does not serve even the current situation because it could lead to the strengthening of the national currency and as a result even issues related to labour productivity, exports and competitiveness,” says Preà§i.
Neighbouring Kosovo and Montenegro, who gained independence from Serbia in the 2000s, have been unilaterally using the euro as their national currencies for about 15 years.
Expert Selami Xhepa says the proposed 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.
Economy professor Elvin Meka is more supportive of the central bank’s initiative, but warns the measures should not be drastic.
“This should have already taken place, however it’s never too late to take on a fair battle. Of course from the point of view of the Bank of Albania, such a topic is important because the final goal is implementing the monetary policy as efficiently as possible which under conditions of huge euroisation is less efficient. The Bank of Albania can begin with a certain group of instruments but should fully avoid taking drastic administrative measures which have an adverse effect,” Meka has said.
Central bank governor Gent Sejko has said the proposed initiative would increase the monetary policy efficiency on a broader transmission and further strengthen the positive impacts regarding the preservation of the country’s financial stability.
“This year’s focus of the Bank of Albania’s work is a package of measures on de-euroisation and boosting the impact of the national currency on the Albanian economy. This would increase the efficiency of the central bank which through its key interest rate has an influence on the national currency,” Sejko recently told reporters.
According to him, the financial and banking system’s big exposure to euro has an effect on the stability of the financial system as a major part of credit is still in euro.
“A big number of customers have their income in the national currency and credit in euro which exposes them, affecting their credit performance. Euroisation also has broader macroeconomic effects, with an impact on the cost of government debt,” Sejko says.
“In this respect, in order to reduce euroisation in the banking system, we have undertaken measures by applying a higher rate to liquid assets in euro and liabilities. We will also undertake some measures on the remuneration of the minimum reserve at the Bank of Albania, by discouraging the euro and favouring the national currency. There are also other measures that will be undertaken on raising public awareness regarding euroisation-linked risks,” he adds.
The central bank says it is preparing a memorandum of understanding with the finance ministry and the Financial Supervisory Authority to extend measures in the fight against euroisation.
With the key interest rate at a historic low of 1.25 percent, credit has shown poor signs of recovery affected by non-performing at about 20 percent keeping lending standards tight and poor demand by both businesses and households despite loan rates having considerably dropped in the past few years.
The Albanian economy is highly euroized with euro-denominated deposits and loans accounting for half of the total. The euro is also the main currency used in the real estate industry. U.S. dollar-denominated loans also hold about 10 percent of loans while their weight in deposits is quite negligible.
Albania’s high euroisation rate is a result of the country conducting about two-thirds of its trade with Eurozone countries, mainly Italy and Greece and huge foreign direct investment and migrant remittances from the Eurozone countries.
The country’s highest financial authorities have already identified some measures, including charging higher fees on transactions in foreign currency to curb high levels of foreign currency in the banking system, estimated at 60 percent for credit and almost 50 percent for deposits, with the overwhelming majority being euro-denominated.
Informing the IMF about its de-euroisation plans, the central bank says it is envisaging a set of measures on the banks’ liabilities side, including “the establishment of different reserve remunerations for euro and lek deposits and higher requirements for highly liquid assets to be held against foreign currency deposits.”
