The effects of the appreciation of the Lek this 8-month 2024

It is important to note that currency appreciation is relative, as it is measured against another currency. For example, if the Lek appreciates against the Euro, it means that the Lek buys more Euros, but it does not necessarily mean that the Lek is overvalued against all other currencies.

At least as a rule of thumb the exchange market works exactly like that. Meanwhile, in Albania the Leku has been evaluated in the same trend for all three strong currencies (Euro, American Dollar and British Pound). Meanwhile, it does not have the same appreciation trend with the Swiss franc or other currencies that are not the main partners of Albanian businesses, or even with the small presence of Albanian immigrants in relation to the countries that use the currencies as above.

The appreciation of the Lek has several possible effects:

The first tangible effect is that imports should become cheaper. The reason lies in the cause-effect relationship, since when a currency appreciates, it becomes relatively stronger compared to other currencies. As a result, imported goods become cheaper in terms of currency appreciation, benefiting consumers.

But, if we look at the consumer price index in the 8th month of 2024 for food products and non-alcoholic beverages (mostly about 70% of consumption is imported) there is an annual change with 2023 of 19.7%. From the calculation of the exchange rate difference in the same period, it can be seen that the Lek was overvalued by 3%. As a consequence of this evaluation situation of the lek, there should also be a drop in prices to close to the same level, since for the 8-month period 2024 there has been little change in other operational and financial costs. In fact, in these prices that are consumed in the domestic market, there are also influences of international price conjunctures, which are reflected very little for food products.

In not following the downward trend of the cheaper cost of imports in the prices of food goods and non-alcoholic beverages is the factor of informality, which is borne both by the presence and at the same level of corruption of the institutions that have the duty to fight it, but also by uncertainty influenced by short-term policies that have distorted market freedom and the competitive environment for formal businesses. The main benefit comes from most importing businesses, as well as in these periods, when the institutions cannot get the right tax obligations, it is necessary to review the programs to firstly fight evasion, as well as secondly to recalculate the right taxes for them.

The second tangible effect is lower inflation. The appreciation of the Lek has managed to help reduce inflationary pressures by making imports cheaper, where this effect was explained above.

In fact, lower import prices should also be for industrial products and goods, which translate into lower costs for businesses and lower overall consumer prices for various related goods and services. From the statistical indicators, it can be seen that the costs for producers have increased further during 2024[1]

Even in this case, the lower inflation has not translated into a lower cost than the 8 months of 2023, when inflation was higher. Although there is a decrease of at least 3%, inflation continues to remain high compared to the devaluation of foreign currencies with which imports are paid.

The third effect, but with weight for the Albanian economy, are the challenges for exporters. Currency appreciation can pose challenges for exporters as their goods become relatively more expensive for foreign buyers. In the Albanian market, this positive shock of the exchange rate of the local currency (a rapid and unstoppable appreciation) is making exports and some imports less expensive, since on the one hand competition from foreign markets has reduced the demand for local products , with the consequence of reducing the production and prices of the domestic market[2].

As a result, their sales in the domestic market have also decreased, being accompanied by a decrease in the number of employees, even though the salary fund for existing employees has a slight increase.

This could negatively affect export competitiveness and potentially lead to a decrease in export volume.

The fourth effect is the impact on the current account and trade imbalances. Thus, the significant and prolonged appreciation of the Lek is seen to have affected the balance between import and export by increasing the difference between them and the economy’s dependence on import to the detriment of production for export. At the end of the 8th month of 2024, the deficit between imports and exports is 339.5 billion ALL, from 277.3 billion ALL that was for the 8th month of 2023. The main reason is that exports seem to have become less competitive.

The fifth effect is the impact on tourism and capital flows (inward foreign investment). The appreciation of the Lek may affect tourism, as a stronger Lek makes them more reluctant to spend as travel destinations become relatively more expensive.

During the first 6 months of 2024, 33.9% more foreign visitors entered compared to the first 6 months of 2023[3]. Meanwhile, their expenses for the same comparative period increased by 25.3% (in 6m.I 2024 they entered 1.95 billion Euros and in 6m.I 2023 they entered 1.55 billion Euros). This indicator, which does not coincide with the increase in visitors, is precisely influenced by the effect of the appreciation of the Lek, despite the fact that dedicated measurements and analyzes are needed for this purpose.

Moreover, capital flows may have been affected by the appreciation of the lek, as investors are finding the country’s assets less attractive due to the strength of the currency.

The Albanian lek continues to appreciate even during the second 6 months of 2024, even though the strong and resilient economy, as well as the arrivals from foreign visitors and foreign capital flows together with remittances, are cited as official reasons. In the reality of the data for these influencing elements, we see that they do not have the strength to influence an even stronger Lek than in 2023.

The economy does not have a development boom and production growth, but an increase that is expected to go up to 3.4% in annual terms, based mainly on construction and various services, including trade and services that enter into tourism.

Meanwhile, inflows are in normal annual growth trends along with inflows from foreign visitors. Remittances have an abnormal upward trend, which slightly affects the appreciation of the lek, since the increasing sums go to purchase real estate.

The effects are felt more by the formal economy and the strongest impact goes to producers who have already lost not only the competitiveness gained in recent years, but also the resources to invest in transforming their businesses according to the new market conditions, influenced by factors outside the formal economy.

[1] https://www.instat.gov.al/media/13859/tr-2-2024-icp-shqip.pdf

[2] https://www.instat.gov.al/media/13926/prodhuesit-e-t%C3%AB-mirave-t2-2024.pdf

[3] https://www.instat.gov.al/media/13700/lëvizjet-e-shtetasve-në-shqipëri-qershor-2024.pdf