What is happening with lek?

What is happening with lek?

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

By Plator Nesturi

The period coinciding with the first months of the year, especially spring, has been known to be a period where the euro has strengthened as opposed to lek. Until March, big companies, banks, etc, which are held by foreign companies, once they produce their financial statements and pay their taxes to the Albanian state, start to buy euros with the earnings made throughout the year. These earnings, which are realized in the country’s domestic currency, lek, are converted into foreign currency and are sent to holding companies abroad. Thus, this is the period known as the period when foreign currencies gain ground against lek.

But, in reality we’re seeing something else happen. Lek has strengthened and the euro and other currencies have weakened compared to it. After several years that the euro was sold at around 140 lek, now, its value has gone down to 133 lek. But what are the causes which have led to a weaker euro and to a stronger lek this month? What effects does this have for the country’s economy? The declarations coming from the Bank of Albania state that all transactions effectuated inside the territory of the country should be in lek and not as it was proceeded before, in a foreign currency. According to the Bank, this is being done to exert more control and to prevent negative phenomena identified before, without actually naming them.

What’s interesting is the fact that in every other country, the changes that take place in the area of finance, would be on the focus of public opinion, provoking a debate between specialists due to 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.

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. So, this would make the debt decrease not as a result of economic growth, but as a result of other factors.

But, the strengthening or the weakening of the domestic currency is also accompanied by other factors. The drop in the value of the domestic currency favors exports abroad, while the strengthening of the currency favors 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. Based on this, it’s absurd that this financial policy of strengthening the currency is applied, because it harms domestic manufacturing. And if all of this is being done to adjust debt figures in order to obtain new loans, the damage for medium-term issues would be bigger. Let us recall the Greek crisis. In the Brussels’ books, the debt figures of this country were acceptable, but the hole sucked everything and the country suffered a total economic and financial collapse.

The fact that financial experts are not worried about the latest movements in the money market and financial market, leaves a bitter taste, because this not only affects the interests of the citizens, but the interests of the economy too. One thing is sure: banks and big companies will not be the ones who will suffer from these. If we go back to last year’s report on the banking sector, we would notice that their profits accounted for tens of millions of euros. According to statistics, all of them had registered earnings, although the number of loans had not registered an increase. According to the report, the increase of revenues for the banking sector was mostly due to the service sector, which accounted for 70% of earnings. In other words, through transaction fees. If we go back to the drop of the euro value and the strengthening of lek during this period, then banks and large companies which will buy euro to send their profits to the holding companies abroad, will manage to make extra profits thanks to the lek being strengthened. Under these circumstances, everyone would win, besides citizens and domestic producers.

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