TIRANA, July 23, 2023 – Albania’s currency, the lek, has continued its trend of trading at historic highs against the world’s most important currencies, causing both surprise and worry as the euro’s 12 percent fall in 7 months hurts key domestic industries that have their income in foreign currency while costs in the local currency.
The euro has inched closer to the 100 lek threshold, causing a downward drag on most other currencies. The official exchange rate of the Bank of Albania reported the euro trading at 100.5 leks on Thursday, reaching a historical minimum.
The euro-lek exchange rate has dropped by 14.1 percent compared to the same period last year and by 12 percent since the beginning of this year.
The lek-euro exchange rate is closely watched in Albania as the Eurozone is by far the EU candidate country’s biggest trade partner and most foreign transactions are done in euros, thus that rate is a driver for all foreign currencies.
-All major currencies affected-
Where the euro has gone, other currencies have followed. The British pound has hit a new historical low at 115.72 leks. The pound-lek rate has fallen by 15.8 percent compared to a year ago and by 10.2 percent since the start of the year.
In another significant development, the U.S. dollar has declined to 89.61 leks, marking a new record low since the end of 2008. The dollar-lek rate has fallen by 21.6 percent compared to last year and by 16.2 percent since the beginning of this year.
The Swiss franc has also taken a hit, reaching a multi-year low, and is currently exchanging at 104.46 leks, the lowest value since 2009. The franc has dropped by 11.5 percent compared to a year ago and by 10 percent since the beginning of the current year.
-Influx of foreign currency-
But what’s behind such a trend? Experts point to several reasons.
The exchange rate during this period has been significantly impacted by the surge in foreign currency supply due to the tourist season. Recent statistics have shown that the number of foreign tourists this year has reached record highs, leading to increased tourism revenues in the balance of payments. With tourism reaching its peak between July and August, its influence on the exchange rate is stronger than at any other time of the year.
Apart from the substantial effect of tourism, the exchange rate is also being affected due to increased remittances, exports of other services, and high level of investments in real estate from abroad, according to experts.
But the potential for gray or illicit funds coming in cash from abroad is also a concern. Albanian police at border points frequently report intercepting individuals attempting to enter the country with substantial sums of undeclared cash, leading to worries that money laundering in the economy is having several side effects, including the strength of the local currency.
-Central bank intervention, end of season could help change trend-
Analysts suggest that the substantial pressures from the surge in foreign currency supply may be further exacerbated by the tightening of the lek supply. This tightening is a result of the restrictive features of monetary and fiscal policies, characterized by higher interest rates, slower credit growth and a budget surplus.
These factors too have collectively contributed to an unprecedented strengthening of the lek in the foreign exchange rate.
Based on historical trends, economists expect the lek to continue its strengthening trend until at least the first week of August, unless unforeseen factors or intervention by the Bank of Albania come into play.
The country’s central bank has intervened before to try to make the currency better match economic growth numbers, and both it and the government are under significant pressure from businesses to address the lek’s unusual behavior.
-Effects on the economy-
The robust lek has proved beneficial in mitigating the partial rise in import prices in the Albanian economy and has been one of the contributing factors to lower inflation levels compared to other European countries.
However, experts caution that the magnitude of the lek’s recent strengthening may pose challenges for the economy, particularly for exporters and domestic production. During the first half of this year, exports experienced a significant decline, mainly due to the strengthening of the lek in the foreign exchange rate.
The strong lek has had important effects on the economy, including making imports cheaper and reducing the cost of monthly loan payments for foreign currency borrowers. On the positive side, the government is getting a discount on its foreign euro loans.
However, this is becoming an increasingly significant threat to export-oriented businesses, especially for those struggling to raise prices and compensate for the loss incurred due to the exchange rate.
Moreover, given that the euro is the dominant currency in the country’s foreign trade exchanges, the appreciation of the lek against it has had a substantial impact. The strength of the lek has also contributed to making imports more affordable, thereby helping to maintain relatively low inflation levels in comparison to neighboring economies and European Union countries.
Typically, increased tourism to Albania during the summer months would further weaken the euro; however, it remains to be seen how these factors will unfold in the coming months and whether the euro will continue to weaken against the Albanian lek.
