Why does a strong economy cause a strong currency and why does our economy not?

International theory and practice show us that:

In the short term

If an economy experiences high rates of economic growth, then the economy is likely to see interest rates rise as the Central Bank responds to higher growth and potential inflationary pressures by setting interest rates.

These higher interest rates lead to “hot money flows”, where foreigners want to save to take advantage of the best returns. This causes an appreciation of the exchange rate.

In the long term

If strong economic performance affects an important level of investment and rapid growth of productivity and competitiveness, then the economy has entered a new stage of development.

Due to increased productivity, exports have become increasingly competitive in the regional market and beyond. This means that the demand for exports increases more than before.

This economic situation causes a stable evaluation of the lek.

Countries with a strong history of economic growth, political stability and a stable currency will attract investors who want to take advantage of stability in the economy.

Albanian practice shows us that:

according to these norms, the Albanian economy should already be characterized by high economic growth [1], low inflation and a stable appreciation of the Lek, also by attracting investors more than before.

In the case of the situation of the Albanian economy, investors (individuals and certain businesses) are more willing to save in deposits in euros and dollars than in lek [2], instead of investing, because traditionally these currencies save well their value in time, due to the strong and stable economic performance of the main European economies.

Meanwhile, the Albanian economy with a history and legacy of poor economic performance (low and unstable growth, hidden inflation rate), where confidence in the economy is weak, is seen as not maintaining public confidence to invest in the strengthened Lek. The exchange rate crisis, seen in the context of a decline in exports of construction materials and metals, minerals and fuels, as well as garments [3], is causing investors to exchange more euros than before, increasing its offer in the market, since with the lower value of its exchange with the lek, it is not possible to afford the current expenses and those for raw materials for production. This affects the weakening of exports, but even if there is an extension of this exchange regime and a decision of some of the exporters to move to the surrounding countries with a fixed exchange rate, with a better tax justice and with a less demanding administration corrupt.

According to the perception of the business about the economy and fiscal and monetary policies, it seems much more likely that the Lek will be unstable in the future, since informality and the economy with hope, as well as not yet diversified to protect against external and internal shocks it affects business and individual decisions much more than seasonal (tourism) or sectoral (infrastructure and real estate) economic strengthening.

For example, a spread of the military conflict in the Middle East, or similar conflicts in our small region directly affect the activities related to the tourism industry, thereby losing economic growth, just as happened in Montenegro (economy of dependent on tourism) in the pandemic period.

Meanwhile, having a larger supply of Euros and Dollars from a higher number of foreign visitors, as well as hard currency inflows into the market from informal sources, it is expected that in 2024 (if these short- and long-term factors do not change) the economy Albanian should not be stronger than in 2023, it may even stay in place no.

[1] High economic growth reflects an increase in people’s real income, which means that the ratio between their income and the prices of the goods/services they can buy is increasing, or else it means that goods and services are becoming more affordable. affordable, where people become less poor

[2] https://www.bankofalbania.org/?crd=0,8,2,0,0,17020&uni=20231030142055141101104774752993&ln=1&mode=alone

[3] https://www.instat.gov.al/media/12683/tregtia-e-jashtme-shtator-2023.pdf