What options do we think are needed in addressing alternative sources for the budget and anti-inflation actions?

Fighting inflation by increasing interest rates may lead to a weakening of production and employment in 2023, but also a further contraction of purchasing power in the country.

First, it should be analyzed that monetary policy is not obligatory to follow the same decision-making as the European Central Bank but should be based on the reality of the monetary market and the unresolved problems with informal money. The increase in the basic interest rate by the Bank of Albania looks that does not seem to have the expected impact on reducing inflation as in European monetary union market.

In addition to signaling to the formal actors of the economy and the citizens, that BSH is following its three percent inflation objective, the further increase in basic interest rates will have a very negative impact on consumer and family loans, as we are not in the conditions that have the European market with real indexation of wages and pensions, but also with a sufficient level of income to cover the increased costs of loan installments. This would increase bad loans. On the other hand, an increase in financial costs for individuals will worsen the stabilization of inflationary trends due to the decrease in purchasing power due to the lack of income in the pockets of families and businesses that have relationships at various levels with banks.

Interest rates are part of the cost of businesses, but also of families, and with this effect they have begun to reduce the profits of businesses and reduce their incentives to increase activity. The same applies to family consumers, whose increased financial costs will attract them from other planned expenses to carry out both for assets and other daily expenses.

Secondly, high energy and fuel prices mean that a part of the state budget, as well as the purchasing power of Albanian businesses and families, goes to the accounts of countries that sell oil and electricity. Low purchasing power weakens consumer demand. Demand for capital goods is also weakening. In this context, this will affect a not so insignificant level higher unemployment, where the impact from the lower turnover from local businesses can increase the problems of the labor market, but also in the budget of social security and health.

These demand shortfalls can be compensated by government spending only to the extent that the state budget for 2023 allows.

Thirdly, a reformation of the vision and objectives for the expansion of the financial market is needed. Currently, the Albanian financial market with the levels it represents is very dormant compared to the country’s economic development strategy.

A new role must be taken by private investment funds, even more so when we lack a functional stock exchange.

In our analysis, we think that the financial market is best developed by those that also address the much-promised social problem of increasing pensions.

Investments for the transformation of the pension scheme and social spending, which are not sufficiently the focus in this budget, should be strongly and immediately promoted through private/personal pension fund schemes. Starting from the moment, when the government itself has already understood this new role that it must play by promoting legal changes for private pensions, it must be understood in advance that they make a necessary contribution to maintaining an increasing level of well-being of the needy. In addition, they reduce dependence on the budget by stimulating an easing of social policies through the absorption of private capital by each contributing citizen. For the government, which needs to borrow from more alternative sources, these private pension funds can serve as safe financing mechanisms even better than the bonds/treasury bills themselves.

Even more, considering that higher government expenditures financed by loans mean an increase in public debt, then a delegated policy controlled and monitored by the government of funds self-financed by citizens for their pensions in addition to guaranteeing the current scheme from the budget would also create an optimization of the financial market including banks in more opportune investments than until now.

Finally, the increase in productivity means more goods/products that can be produced with the given physical capacities of agricultural and livestock production, but also for those industries for which the conditions and environment exist to develop. Thus, the current cause of inflation, the shortage in the supply of many raw materials, inputs and final products can be fought to minimize its effect directly on businesses and therefore also in part of the effect that dictates the increase in prices.

Productivity improvements will also reduce production costs. As a result, Albanian products can once again become more attractive to the rest of the world. However, increasing productivity takes time. Until then, the supply gap responsible for rising prices should also be reduced by lower demand. Thus, the demand for euros will increase. As a result, the lek loses its regained value these months and the euro costs more again. This is in the interest of productivity, as it is related to the interest of exporters, but also to the indirect and temporary stabilization of inflation.