TIRANA, Feb. 20 – Albania’s national currency, lek, has gained significant ground against Europe’s single currency during the past month in an uncommon trend for the beginning of the year which some experts explain with a psychological effect from the de-euroization package that Albania’s central bank has recently unveiled.
The euro dropped to as low as 132.35 lek this week, down 1.64 lek compared to mid-January, being almost close to the eight-year low of 132 lek it hit last June, according to the central bank’s fixed exchange rate.
“Of course the first thing that comes to mind is the recently launched de-euroization strategy by the Bank of Albania as a mid and long-term goal. I personally think that in addition to a momentary psychological impact, there have been no important changes in the euro-lek pair to justify such an impact,” says Albanian economy expert Elvin Meka.
“Technically, in order to measure such an effect, we will have to observe changes in the euro and lek-denominated deposits few months later as well as household engagement in lek-denominated government securities,” he adds.
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.
Euro-denominated loans and deposits accounts for slightly more than half of total lending and savings in Albania’s banking system, making it highly euroized, something which limits the impact of Albania’s central bank monetary policy and exposes customers to currency exchange risks.
According to expert Elvin Meka, the situation is also related to higher supply of euro in the internal market related to the payment of taxes, real estate investments by foreigners living in Albania and more foreigners living in Albania.
Meanwhile, market operators explain lek’s strengthening with the supply-demand relationship in the country’s free floating exchange rate regime.
Announcing the de-euroisation measures last week, Albania’s central bank governor Gent Sejko said the strategy to reduce Euro-denominated loans and deposits, could have a psychological effect on the exchange rate.
“These measures don’t affect the exchange rate, but they can affect it psychologically. The measures are related to the liquidity situation in the banking system. We have a free floating exchange rate which is impacted by demand and supply factors, but not those measures. Those are regulative measures applied by the banking system,” said Sejko.
“The exchange rate can appreciate or depreciate depending on demand, supply, fluctuations and internal and external shocks. These measures extend over time to orient the banking system toward the use of the national currency, but not to make euro disappear,” Sejko said, reacting to exporters’ concern over a further strengthening of the national currency, reducing their profits.
The national currency, lek, is already trading at an 8-year high of about 132.3 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.
A considerably weaker euro has negatively affected Albania’s poorly diversified exports, two-thirds of which are destined to Eurozone countries.
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.
Albania’s central bank attributes the strengthening of the national currency against the euro to higher GDP growth fuelled by an increase in FDI and tourism revenue, but some experts say the euro inflows from rising cannabis cultivation and trafficking in 2015-2016 also had an impact.
The U.S. dollar, whose weight on the Albanian economy is considerably lower, has also lost considerable ground against the Albanian national currency during the past year, reflecting the EUR/USD pair performance with Europe’s single currency having appreciated by an annual 16 percent.
The currency of major commodities, the U.S. dollar fell to 106.71 lek this week, down from 110.82 lek in early January 2018 and an average of 127.43 lek in February 2017, depreciating by an annual 17 percent.
U.S. dollar-denominated loans in Albania account for around 10 percent of the total loans to businesses and a negligible 1.2 percent in loans to households.