Imports and exports of 2023, the effect on the economy and the indicators that have influenced the overvaluation of the Lek

In our economy, imports of goods in 2023 are 1.98 times higher than exports [1].

This ratio has increased by 3% compared to 2022. Albanian consumers are used to seeing products from every corner of the world in their grocery and industrial stores. These imported products offer more choices to consumers. By market logic, they are produced more cheaply than any domestically produced equivalent, and imports usually help consumers manage strained family budgets from rising prices and falling real incomes.

The value of 872.7 billion ALL (8 billion Euros) of imports that arrived in 2023 in relation to 440.4 billion ALL (4 billion Euros) of exports distorts the trade balance in 2023 with a monetary demand in the domestic market for Lek for at least the equivalent of 4 billion Euros. This trade imbalance or trade deficit (imports – exports) should devalue the local currency, the Lek [2].

In fact, the local currency was overvalued, so it didn’t ask much about this market effect that affects the countries of the world in the same way. Although other influences must also be considered, our economy is not similar to other countries in the world, as can be seen from the opposite trend it has followed according to statistical indicators.

What is the effect on the economy of imports and exports during the year 2023?

The internal production of the country, in its formula according to the expenditure method, has an inherent part and the trade balance  [3]. Based on this calculation, we see that if we did not have a trade deficit, but instead had a surplus (exports more than imports), then this reality of the economy would contribute to the economic growth of Albania. This means that there would be a high level of production from manufacturing facilities, as well as a greater number of people employed to keep these productions running. For exporting companies, this means a high level of manufactured goods, i.e. an inflow of funds into the country, which stimulates consumer spending and contributes to economic growth.

If we now return to the economic reality that has been designed as a functional model in these three decades, our model seems to have been based on imports more than exports. The high level of imports indicates strong domestic demand and a growing economy in terms of consumption growth.

If these imports are mainly productive assets, such as machinery and equipment, as we see in the 2023 import statistics, this bodes well for the future as productive assets will improve the productivity of the economy in the long run. But, if these machines and equipment are not used for production, but for infrastructure and expenses that do not contribute directly to the products for export, then their beneficial value is lost in time and this advantage as above does not give impact even in the case when the coordination is weak can also result in ineffective investments.

Albania in this case is using this whole approach not in full functionality. Of course, the advantages in terms of increasing well-being have not been taken advantage of, since high informality affects competitiveness and low productivity, and corruption affects the increase in business costs and the inhibition of development initiatives, naturally combining with regional competition and other influences resulting from the geopolitical situation. So, it seems that the situation of the economy can result in the best case in a weak economic growth or towards a stagnation of the productive sectors.

Who then influenced the overvaluation of the Albanian Lek?

From the arguments summarized by the interpretations of the Bank of Albania and the Ministry of Finance, it has been claimed that the strengthening/overvaluation of the Lek in relation to the Euro and other strong currencies has come about due to the high flow of currency in the local market influenced by tourism, foreign investments and remittances, but also from the increase in the basic interest rate by the Bank of Albania. In fact, these euro inflows should also include the inflows from debts received during 2023 (Eurobond and others) [4].

Let’s analyze in detail the influencing factors in the large supply of Euros in the Albanian market.

According to the statistics of the Bank of Albania [5], the Ministry of Finance [6] and INSTAT and the statements of senior officials, it is observed that during the year 2023 there is an entry:

– of Euros and other foreign currencies at the converted level of 4 billion Euros and an exit from Albanian visitors to foreign countries at a level of 55% of this value, which means that they have left the Albanian market.
– of remittances that tend to reach the level of 1.3 billion Euros (including in this amount remittances in British Pounds, Dollars and other currencies)
– of foreign investments, are expected to result in the value of up to 1.2 billion Euros
– of taking on new debt, where for 2023 it goes up to 1.2 billion Euros
– public investments in 2023 are expected to reach over 120 billion Lek, which stimulates the supply of the Lek and affects its weakening
– the increase of the basic interest rate by 0.5% throughout the year

From the ranking of influencing factors above, a monetary offer in Euros and other currencies nets up to 1.2 billion Euros according to the influences on the Albanian market. All these factors have an impact on the devaluation of the Euro by 12.7% throughout the year, as they are the ones that affect the large monetary supply in the market.

However, in the analysis we also include the effect calculated above as a result of the trade deficit, where the estimated value of 4 billion Euros (including other strong currencies) has an impact on the weakening of the Lek, also influenced by investments with funds public, which are usually carried out in bulk at the end of the year, it seems that the monetary supply of the Euro from the formal economy has a weak impact on the strengthening of the Lek.

In a placement of the two sets of influencing factors in the function of explaining the weakening of the Euro, it is seen that the balance between the two factors with 1.2 billion Euro more money supply cannot make the big difference in the exchange rate with a depreciation of the Euro by 12.6 % throughout the year 2023.

To make this conclusion more reliable, we look to the year 2022 to also compare trends for the same influencing factors this year.

During 2022:

– the trade deficit is 463.6 billion ALL (4 billion Euros)
– Foreign exchange inflows from tourism (Euros and other foreign currencies) were 2.84 billion Euros and foreign currency outflows were 62% of the incoming amount (1.7 billion Euros).
– remittances were worth 834 million Euros
– foreign investments were worth 1.37 billion Euros
– the new debt was 617 million Euros
– public investments were 112 billion ALL
– interest rate increase 2.25%

When we also include the effect calculated above as a result of the trade deficit, where the estimated value of 4 billion Euros (including other strong currencies) with an impact in the direction of the depreciation of the Lek, as well as public investments, then obviously the supply of the Euro in the market is lower than the Lek offer.  From all the factors above, a monetary supply in Euro and other currencies results in 1.17 billion Euros and have an impact of 5.1% in the direction of the devaluation of the Euro.

In the case of an increase in the interest rate, as a basic rule it serves to attract more foreign investments, mainly in investments in money exchanges. From the comparison between the years 2023 and 2022, this greater withdrawal of foreign capital does not seem to have happened, where this shows another defect of the Albanian market, which lacks the instruments to implement this open and developed market principle.

[1] https://www.instat.gov.al/media/12949/tj-dhjetor-2023.pdf

[2] If a country imports more than it exports (known as a trade deficit) there is relatively less demand for its currency, so prices should fall. In the case of the local currency, it depreciates or loses value.

[3] GDP=C+I+G+(X−M), where C=Consumption, I=Investments, G=Government expenditures, X=exports, M=imports

[4] https://financa.gov.al/plani-vjetor-i-huamarrjes-2023/

[5] https://www.bankofalbania.org/?crd=0,8,1,1,0,17830&uni=20240118160751141101105959557495&ln=1&mode=alone

[6] https://financa.gov.al/treguesit-e-borxhit/