OP-ED/Where is the domestic currency heading to?

OP-ED/Where is the domestic currency heading to?

This article has been written for Albanian Free Press newspaper and www.albanianfreepress.al

By Plator Nesturi

The domestic currency, Lek, has become quite a strong currency. In the recent weeks, the Bank of Albania had to intervene in order to buy the excessive amount of euro in circulation with the scope of somehow normalizing the plummeting of the European currency. For more than two months, it was us, at Albanian Free Press the ones who raised the alarm. It was spring and during this period of the year, the euro should strengthen in value, but the opposite had happened. And this was not affected by some international crisis which could have strange effects on the Albanian money market.

In fact, there’s no concrete explanation for this. People spoke of speculation, but without going any deeper. It was said that there’s been economic growth, but everyone laughed at this argument. So, nobody is able to pinpoint it. Financial analysts are also unable to say anything accurate on this. In the recent debates on this topic, a crisis has also been mentioned along with the injection of dirty money in circulation, especially in the construction sector. But, none of these arguments was convincing for the appreciation of the Lek. A combination of these factors, experts say, adding in this case, the element of fear that exists among people for the fall in the value of euro, pushing them to exchange them for Lek.

In this aspect, it’s true that there could be a combination of factors, however, something remains clear. This depreciation of the euro has caused losses for Albanian farmers, domestic manufacturing businesses and individuals for which prices of products do not change, while there’s less capital in circulation. Meanwhile, banks and large exporting companies are the ones who have to gain from this. And this has not occurred as a result of the market conditions, which act as regulators of the economy. An OK was received from above in order for this to happen. Let us look into the chronology. The first months of the year, especially spring, is the period when the Euro strengthens against Lek. This is the period when up until March, large companies, banks, etc., which are mainly branches of foreign companies here, prepare their financial statements and start to buy Euros with the earnings made during the year. These earnings which are generated in Lek, because this is the domestic currency, are then converted into foreign currency and sent to the holding companies abroad. This period is known for the strengthening of foreign currencies against the domestic currency.

But, quite the opposite happened. Lek strengthened and the Euro along with other currencies, weakened. This has led to extra profits for banks and foreign companies sending their profits abroad. And all of this thanks to the exchange rate which favored them. What’s interesting is the fact that in every other country, changes that take place in the area of finance would provoke quite a stir and a heated debate between specialists because of the negative and positive effects that they could have on the economy and on people’s pockets. In reality, this situation is not being commented a lot.

Another aspect which caused quite a debate relates to the intervention made by state institutions in order to reduce public debt and make the economy more attractive for the absorption of new loans. Several financial experts have led me to believe that one of the reasons why the Bank of Albania is applying a policy to strengthen lek, has to do with the aim of decreasing public debt. In other words, public debt accounts for 75% or 74% of GDP, this leaves the government very little room to take on new debts for reforms or public works. But, if the Bank of Albania strengthens the value of lek, the exchange rate could take the debt down to 70% of GDP and this offers the possibility for new loans.

The drop in the value of the domestic currency favours exports abroad, while the strengthening of the currency favours imports. So, if lek strengthens, the farmer who would sell his tomatoes abroad in euros, would lose from this, because he would make all of his business transactions in the country in lek. Meanwhile, those who purchase TV sets abroad by using the euro as a currency, would gain out of this, because they would earn more when they sell them in lek to the Albanian consumers. This way, this policy of strengthening the lek would affect the pockets of Albanian citizens and at the same time, it would also be a burden for domestic production, which would have extra costs.

The consequences of this situation on the economy and the citizens are clear and experts are able to explain them, but when it comes to making public appearances, there seems to be a reluctance to instruct individuals and businesses as to their course of action. What’s worse is the lack of transparency by institutions handling finances. They issue statistics, but no professional interpretation accompanies this process, which, at the end of the day, has an impact on the economy and people’s pockets.

Note: The views expressed in this article are the author’s own and do not necessarily reflect Albanian Free Press’ editorial policy