A stronger euro, which is dominating over the domestic currency, lek, would act as a threat for Albania’s financial stability. The alarm this time is not given by experts in the country, but by the International Monetary Fund. This institution has conducted a special study on Albania, considering as a case of a “euroizated” economy, where the European currency has a greater domination in this economy than lek. “In a euroizated economy such as Albania’s, financial stability may be very susceptible to developments in the currency exchange rates”, experts of IMF say. Meanwhile, they offer an example of the indirect threats coming from the currency exchange rate. This example relates to loans in euros which become more and more expensive as the euro strengthens. By becoming more expensive, they also become harder to be paid back. “What’s more, low interest rates in lek promoted the euroization of deposits”, IMF’s study on Albania further states. In other words, if bank interest rates on deposits in euros are higher than interest rates in lek, Albanians will convert their deposits into euro. The IMF goes even further by offering concrete figures, such as the one concerning deposits in euro which grew from 40% to 50% of their total within a decade, namely, from 2006 until 2016. In this aspect, experts of the International Monetary Fund say that the low interest rates in the domestic currency lead to a growing euroization, stressing the long-term financial weaknesses associated with this. Therefore, they suggest that the domestic currency should be strengthened, even through higher interest rates, but also in the domestic money market, thus supporting, in a way, the special package of measures that was recently introduced by the Bank of Albania against “euroization”.
“Low interest rates have negative effects”
An extended period of low interest rates may have negative effects on financial stability. This is another finding made by experts of the International Monetary Fund on the Albanian economy. Thus, IMF has recommended authorities to take immediate measures in order to improve its monetary policy. In other words, it should raise interest rates for the domestic currency. “Financial crises must be prevented, because they can have serious implications and they could cause significant losses”, experts of IMF further say on this. Meanwhile, they also mention four concrete ways as to how a low interest rate for the domestic currency may have a negative effect on Albania’s financial stability. “Euroization, which increases the threat coming from fluctuations in the currency exchange rate. It threatens the banking system, the funding of the structure of banks and it poses a threat on bank assets”, IMF says. “Low interest rates for the domestic currency increase euroization and increase long-term financial weaknesses”, experts of this institution also explain.
Appeal: Banks should be kept financially healthy
Experts of the International Monetary Fund address a very important appeal for the Albanian authorities in regards to banks. “In a financial system intermediated by banks, monetary authorities are interested on having a financially healthy banking system. A long period of low profits or losses in banks, would have negative effects in capital adequacy ratios. This would have an impact on the financial stability, directly or indirectly, through a deteriorated public perception”, the study of the International Monetary Fund states, adding, on the other hand, that this not only would damage banks’ sources of financing and their costs, but it would also pose threats in its abilities toward customers.
Effects of low interest rates, customers and banks are changing “strategies”
Customers, but banks too, seem to be changing their “strategies” following the constant fall of interest rates. Thus, according to IMF, this situation has led customers to opt for short-term deposits or even current accounts. Banks are also looking to boost their cashflow, because they are offering more short-term loans than before. “A side effect of the low level of interest rate relates to the structure of the maturity of the financing of banks”, the International Monetary Fund says, adding that the latter are increasingly being driven toward more liquid instruments such as government bills.
“Low interest rates encourage investors and banks to take more risks. These risks may have been softened by micro and macro policies. However, to identify these risks on time and in order to apply cautious policies is not always easy. These risks seem to be lower in Albania”, experts of IMF say among others.