Tirana Times
TIRANA, May 2 – While the Albanian national currency continues depreciating against the euro, financial experts are concerned over the high degree of Euroization putting Albanian consumers at risk of facing negative currency exchange risks. A considerable part of important services and big purchases, including apartments and cars but even ordinary services are offered in euro. Expert Adrian Civici says traders do this in order to be protected from exchange risks but also because 70 percent of imports come from the European Union countries. The high degree of euroization, which is estimated at 40 percent, is another reason why banks are more prone to offer credit in euro at lower rates. However, the ongoing depreciation of the national currency lek against the euro has put individuals and businesses with revenues in lek into a difficult situation.
Credit in euro accounts for almost 70 percent of total lending, according to central bank data. Latest central bank data show the European currency stood at a record 142.4 lek at the end of April 2011 compared to 137.6 a year ago.
Experts say the depreciation of lek is temporary and is common during the beginning of the year when foreign companies operating in Albania transfer part of their profits to their countries of origin. The increasing demand for euro following the liberalization of visas in mid-December has also affected the situation.
Euroization risks
A certain degree of Euroization appears inevitable as Albania becomes more integrated into the European market, and indeed reflects confidence in the country’s transition process, the IMF said in its latest report on Albania. “To effectively contain the risks, banking supervisors should enhance risk-based supervision by setting high standards for risk management and ensure that banks have adequate buffers to handle large shocks.”
Euroization increases banking sector risks and requires high capital and reserves buffer. Currency mismatches could increase solvency risks of the banking sector directly through unfavorable exchange rate movements or indirectly through credit risks of non-hedged portfolios. The central bank’s lender-of-last- resort facilities may only have limited funding in foreign currencies in case of bank runs, which could aggravate creditors’ fears and trigger a run.
While lower Euroization would facilitate monetary policy, it cannot be forced and prudential measures should be adopted to contain the risks. De-euroization policies could involve both market based and administrative measures, but should stick to the principle of first maintaining macroeconomic stability, and in particular low inflation.
