Bank of Albania keeps key rate unchanged as record strength of local currency helps curb inflation, puzzling experts

Tirana Times
By Tirana Times May 3, 2023 23:07

Bank of Albania keeps key rate unchanged as record strength of local currency helps curb inflation, puzzling experts

Story Highlights

  • While officials say the lek’s appreciation is a vote of confidence in the Albanian economy, some experts are pointing to the influence of informality in the economy as the cause for the lek's appreciation. 

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TIRANA, May 4, 2023 - Albania’s central bank announced Wednesday it is keeping its key interest rate unchanged at 3 percent with global trends and a strong local currency taking the edge off domestic inflation and thus making rate increases less necessary.

Bank of Albania Governor Gent Sejko said the latest inflation data was better than what had earlier been forecast, with inflation continuing a downward trend. He added that while domestic inflation pressures remain high, international trends have been positive.

"From a macroeconomic perspective, the decline in inflation mostly reflected the decline in imported inflation, driven by both the decline in inflation in our trading partners and exchange rate strength,” Mr. Sejko told a press confernece

Domestically, Albania has seen a high demand for goods and services as well as an increase in wages due to labor shortages, which could lead to higher inflation down the road, so the the BoA Supervisory Council could have to further increase rates in the future. 

BoA’s decision came as the U.S. central bank, the Federal Reserve, increased its key rate on Wednesday to 5.25 percent. The European Central Bank also increased its key rate by 0.25 percent to 3.25 percent this week. Central banks around the world have been increasing rates to combat inflation.

-Exporting businesses unhappy with strong lek-

One of the reasons that the BoA can keep the rate stable is the recent record breaking strength of the local currency, the lek, compared to the euro. However, many Albanian businesses are expressing concern due to export sector losses and are urging authorities to intervene. 

"Exporting companies are hit immediately, as they receive income in euros but have to make payments in lek within a month. This includes paying salaries, taxes, electricity, and other local products. In the past year, we’ve received less than what was invoiced due to a drop in the value of the euro throughout the year," according to Alban Zusi, president of the Albanian Export Center

Representatives of the export sector came out with a joint declaration requesting authorities address the issue as they risk bankruptcy. 

Bank of Albania purchases euros in the open market to slowly increase its foreign currency reserves on a regular basis -- a move that technically can help weaken the local currency or stabilize it -- but Governor Sejko said Wednesday there would be no direct intervention in the exchange rate. 

The Albanian economy has made significant progress over the last two years, with growth reaching 4.8 percent in 2022. Inflation has also decreased from last year's record high of 8.3 percent to 5.7 percent. Construction and tourism have been the driving factors.

Despite the positive indicators in the Albanian economy, such as an increase in exports and foreign investments, some experts are pointing to the influence of informality in the economy and illicit money as the cause for the lek's appreciation. They argue that these developments in the economy, which result in more euros entering the market, do not justify the euro's devaluation to historical minimums.

-Experts puzzled by strong local currency-

However, experts are worried about the country's significant appreciation of the lek against the euro. The lek has strengthened by 3.4 percent compared to January and 7.1 percent compared to April last year. A number of economic experts believe that the strengthening of the local currency is a direct consequence of informality in the economy. 

"We have quite increased flows in formal channels as well, but without any doubt in Albania an important part is occupied by informal channels, which maintain such a role in the market, which in my opinion makes our domestic currency unjustifiably strong," Selami Xhepa, one of Albania’s top economists, said in a recent interview.

Despite these concerns, officials at Albania’s central bank remain optimistic, seeing the two-year trend of strengthening the local currency against the euro as a sign of confidence in the economy.

“Supported by statistics, we can confidently say that the speed of export growth has outpaced that of imports, resulting in an increased supply of currency in the local market. In addition, direct foreign investments have grown at a double-digit rate in 2022, providing ample resources and foreign currency inflows to meet the country's import needs and generate a surplus of currency in the Albanian market,” according to Erald Themeli, director of the monetary policy department at the Bank of Albania.

In 2022, exports increased by 41 percent, or by about 2 billion euros, official data shows, closing the gap with imports. Foreign direct investments increased by 33 percent, or by about 340 million euros. Remittances also increased by 9.6 percent, or by around 72 million euros, while the public debt decreased from 74.5 to 64.6 percent, according to official data.

The strengthening of the local currency against the euro could have a negative impact on certain sectors, however, particularly exports. This is because exports receive income in euros but have to make payments in the local currency within a month, leading to immediate losses.

This story has been updated to reflect the latest ECB rate hike.


Tirana Times
By Tirana Times May 3, 2023 23:07