By Ervin Lisaku
TIRANA, July 5 – A much stronger national currency against Europe’s single currency during the first half of this year has delayed the central bank’s inflation target expectations and its easier monetary plans.
Governor Gent Sejko says the central bank now expects the 3 percent inflation target to be met by 2020, a one-year delay compared to last March’s announcement, and the easier monetary policy to continue until the first half of 2019, postponing plans by six months.
Both the inflation target and monetary policy are key instruments that the central bank uses to bring the economy to normality as Albania’s GDP slowly recovers following the 2008-09 global crisis, having picked up to a 9-year high of 3.8 percent in 2017.
The policy change comes as Albania’s national currency, lek, continues trading at a 10-year low of about 126 lek against the euro with a series of negative effects on Albania’s highly euroised economy, primarily hitting exports to the Eurozone, local producers facing tougher competition from cheaper imports and half of the country’s savings in Europe’s single currency.
Emergency interventions by Albania’s central bank through purchases of excess euros during the past month have only managed to stop euro’s free fall in the local Albanian market, stabilizing it at the 126 lek rate, down 6 percent from the mid-January peak level of about 134 lek and 10 percent below mid-2015 when the euro’s five-year reign of about 140 lek came to an end.
The central bank says it cannot do much under a free floating exchange rate regime determined by market supply and demand that Albania applies and pledges to continue its emergency operations by buying excess euros from the market as long as it does not negatively impact its prime inflation target.
The main opposition Democratic Party and some economy experts have linked the national currency’s constant strengthening to alleged 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.
A stronger national currency in a net importer such as Albania makes imports much cheaper and as a result reduces the imported inflation effect, delaying expectations to meet the 3 percent inflation target, a level estimated to have a positive impact on Albania’s developing economy by stimulating growth.
“A stronger national currency will attempt to curb inflation in the coming quarters, but the effect of this factor is expected to be transitory and as a result inflation will permanently return to target within 2020,” governor Sejko said speaking at a press conference this week.
Inflation rate has been at about 2 percent in the first five months of this year, preserving the 2017 levels when it hit a five-year high, but yet standing 1 percent below its target.
After cutting the key rate to a new historic low of 1 percent last June, the central bank says it will also continue to pursue an easier monetary policy until at least the first half of 2019.
“Pursuant to our future predictions and the balance of risks related to them, the Supervisory Council estimated that the key interest rate will not embark on an upward trend before the second quarter of 2019,” says Sejko.
The new cut to the key rate is expected to further reduce national currency-denominated loan rates in a bid to stimulate sluggish credit, consumption and investment and promote borrowing in national currency as part of a de-euroisation strategy.
No info on informal channels
Governor Gent Sejko says emergency interventions to purchase excess euros from the local currency exchange market will continue for an unspecified time and amount in a bid to achieve inflation target which he says could have led the country to deflationary situation in case of no intervention.
“We don’t know and cannot know how much euro we are going to buy on the market. The intervention’s goal is to achieve our main inflation target,” Sejko told a press conference.
“We cannot predict the exchange rate and cannot determine that and as a result cannot determine the level of our interventions. We cannot absolutely predict how much we are going to spend and for how long the program of intervention will continue because that is something that depends on the future currency exchange performance,” he added.
The governor says the central bank only possesses information about the euro flows in the banking system which is estimated between €4 billion to €4.3 billion, but has no information about the amount of euros circulating through informal channels which the opposition and some economy experts claim is the main reason behind euro’s free fall in Albania.
“The Bank of Albania’s foreign currency purchase operations have had a positive impact, curbing the national currency’s strengthening. We possess information on the amount of lek, the currency that the central bank produces and monitors, but we don’t know how much euro is circulating on the market,” says Sejko.
The governor says the central bank has also previously bought foreign currency to handle its foreign currency reserve operations in transactions that could have had the same impact to the current emergency interventions.
In the first quarter of this year, Albania’s central bank purchased €19.3 million to increase its foreign currency reserve, according to a quarterly report.
While no data has been made available on the purchases following the June 6 decision on emergency interventions, the central bank has converted into national currency a €118 million loan that state-run power utility KESH received in a first tranche from London-based European Bank for Reconstruction and Development.
