TIRANA, July 6 – The Vienna Institute for International Economic Studies has urged Albania to consider adopting an intermediate exchange rate system allowing broader fluctuation bands to offer more certainty for exporters and serve as shield against destabilizing capital flows.
In a report measuring competitiveness in the Western Balkans, the Vienna Institute, which is one of the top centers for research in Central, East and Southeast Europe, recommends the adoption of an intermediate exchange rate system with a fluctuation band against the euro for Albania and Serbia, the only two Western Balkans countries applying floating exchange rates.
“For Serbia and Albania, the costs of shifting from a floating to a less flexible exchange rate are comparatively low. Even if it has a floating exchange rate, no country of this size can run an independent monetary policy if the trade and finance components of its economy are liberalized and euroised,” says the report.
Albania faces high euroisation levels with euro-denominated loans and deposits ranging from 40 to 50 percent, which is a key barrier to the easier monetary policy the central bank has been following in a bid to boost sluggish lending and consumption.
“The monetary transmission mechanism is limited by heavy euroization, with foreign currency loans accounting for two thirds of all loans, of which around half remain unhedged,” says the IMF in its latest report on Albania.
The Vienna Institute says that “under the conditions currently prevailing in the Western Balkans – capital outflows and a credit crunch, plus declining macroeconomic demand, plus a weak export base – a floating exchange arrangement, a currency board or the total lack of an own currency are proving to be a barrier to boosting export activity in the short to medium term. For this reason, Albania and Serbia should consider shifting to an intermediate exchange rate regime, while Croatia and Macedonia should consider expanding their bands.”
“An intermediate exchange rate regime would relieve pressure on the minimum reserve policy, which can be regarded as an instrument for managing capital inflows,” says the report.
Albania and Serbia, the two countries with floating exchange rates, are advised to adopt an intermediate exchange rate system with a floating rate linked to the euro, which would offer more certainty for export-oriented companies in terms of currency risks.
Croatia and Macedonia with their fixed exchange rates, on the other hand, should consider widening their exchange rate band against the euro in order to reduce the risk of undesired capital inflows negatively affecting the real exchange rate.
Montenegro and Kosovo, where the euro was adopted unilaterally, and Bosnia and Herzegovina, which is pegged to the euro through a currency board, are advised to keep their current exchange rate regime as the risk of speculation against an individual currency would be too high given the low level of currency reserves.
Since 1992, soon after the collapse of the communist system and the country’s shift from a centrally planned to a market economy, the Albanian authorities have adopted a floating exchange rate system. The de jure exchange rate system is classified as free floating, but the de facto exchange rate arrangement is floating, with the monetary authorities occasionally intervening in the foreign exchange market in order to accumulate reserves and avoid excessive disruptions in the functioning of the market.
The Euro dropped to a five-year low of below 137 lek this week and is expected to further depreciate in the next couple of months during the peak of the tourist season when Europe’s single currency becomes a common currency due to tourists and migrants coming to spend their summer vacations home.
The depreciation of the euro which has traded at an average of 140 lek in the past couple of years is also affecting the country’s exports two-thirds of which are destined for Eurozone countries.
The national currency, lek, has lost around 15 percent during the past seven years against the Euro. In November 2008, when the global crisis broke out, the Euro stood at an average of 123.29 lek. Since then, it has been on a constant appreciation trend against lek, climbing to a historic record high of 141.97 lek in June 2011 and remaining at an average of 140 lek since then.
