Albania’s Energy Transformation and the urgency of a new Monetary-Currency Paradigm

Albania, as a country with considerable energy resources, a producer of crude oil, with potential in gas and a regional leader in renewable energy, has entered a new phase of economic development for the second half of the decade we are in.

Crude oil production has remained stable at around 12-13 thousand barrels per day, with a significant portion exported as crude oil and refined products[1].

Electricity, almost 100% from renewable sources (hydropower dominant at 95-98%, plus rapid growth in solar energy, or photovoltaic energy) has reached a historic moment. By the end of 2025, solar energy has covered 10% of total electricity production, fulfilling the set objective for the year. Newly installed solar capacity just in 2025 reached about 156 MW (including the large Karavasta park at 140 MW and others), while wind energy is being prepared with new auctions.

Natural gas remains in a phase of small imports (through TAP, with supplies from Azerbaijan starting from 2025-2026), but with plans for transitional power plants that could strengthen the position as a transit and potential exporter in the future.

This position as an energy exporter (mainly oil and renewable electricity) has made Albania more exposed to global price turbulences.

In 2025, Brent prices fluctuated around 65-75 dollars per barrel (annual average close to 68-70 dollars according to EIA trends), bringing foreign inflows when prices were high, but also pressures when they fell toward the end of the year.

These shocks from international prices were directly reflected in the trade balance, where exports of minerals and fuels contributed to an increase in total exports (around 4-5% annual growth in some months), but the fluctuations also caused contractions in non-energy sectors due to the strengthening of the lek.

The current account balance was kept at a moderate deficit of around 2.4-2.5% of GDP (according to BoA), thanks to remittances, tourism, and record FDI (over 1.7 billion euros in 2024, continuing with the same trend in 2025).

The Bank of Albania’s foreign exchange reserves reached historic levels of around 7.3-7.76 billion dollars at the end of 2025 (a 30% increase from 5.96 billion at the end of 2024), covering more than 7 months of imports. The BoA’s net foreign assets (NFA) increased significantly (around 687 billion lek in December 2025), reflecting energy inflows and proactive interventions.

Historically, Albania has dealt with these turbulences through traditional policies, meaning a managed exchange rate regime (without a hard peg, but with regular interventions), temporary subsidies for energy for consumers, and fiscal buffers[2].

These measures have been effective in periods of stability, but the recent years up to the end of 2025 have shown clear limitations.

Exposure to global oil and energy prices has increased with the expansion of production and exports.

The financial system remains small, highly euroized (still over 50% of deposits and loans in euros) and segmented, creating an internal currency risk premium that makes the economy sensitive to speculations.

The strengthening of the lek (around 7-12% against the euro in the last two years, with BoA interventions to buy euros in large amounts, over 900 million euros just in 2024, continuing similarly in 2025) has damaged the competitiveness of non-energy exports (textiles, shoes), causing the closure of small factories.

Existing policies have not fully integrated the chain, as follows: energy price shocks → improvement/strengthening of NFA → pressure on the exchange rate → endogenous financial risk.

The shock transmission mechanism in the model adapted for Albania is clear.

An increase in oil prices (as in 2025) improves NFA (net foreign assets) through exports, creates capital inflows and pressure for lek strengthening, which the BoA partially neutralizes with euro purchases.

A decline (as the trend toward the end of 2025 and projections for 2026) weakens NFA, increases the risk of deliberate devaluation of the national currency compared to foreign currencies, and tensions financial intermediaries that lack protection against risk.

Financial segmentation and high euroization create a risk premium that is transmitted into higher interest rates for the lek, undermining the effectiveness of monetary policy.

Traditional policy, i.e., adjustment of the interest rate (BoA lowered it to 2.5% in July 2025, keeping it there until the end of the year) stabilizes inflation (around 2.2-2.4% average in 2025, within the 3% target) and output, but does not fully address the financial pressure from NFA and exchange rate fluctuations.

Here arises the need for an integrated policy, i.e., active monetary policy for inflation and output, accompanied by careful intervention in the foreign exchange market (FXI).

The BoA has already started this in practice with currency purchases to stabilize the rate, but until the end of 2025 it remained reactive.

A new paradigm would make it proactive, with FXI to neutralize the currency risk premium, allowing the exchange rate to reflect fundamentals (NFA improved by renewable energy and oil), without allowing large deviations in consumption or production.

Old vs. New Paradigm for Albania In the old paradigm, the focus was on stabilizing the exchange rate through an informal peg or broad energy subsidies, with passive reaction to global shocks.

This worked when the economy was smaller and more closed, but today it creates welfare losses. Fluctuations in oil/energy prices cause deviations in the labor-energy ratio, reduce production efficiency, and increase the cost of fiscal buffers.

The new paradigm, adapted for an energy-exporting Albania, integrates active monetary policy (interest rates as the primary instrument for inflation/output) + selective FXI (to neutralize NFA fluctuations and endogenous financial risk).

The exchange rate is allowed to reflect NFA (e.g., moderate strengthening from renewable exports), energy subsidies become selective and tied to real shocks (not general), while coordination between BoA, fiscal government, and energy regulators becomes systematic.

This allows the economy to withstand shocks without extreme costs – such as massive subsidies that burden the budget (already at a low primary deficit in 2025).

Concrete Benefits by the End of 2025 and in 2026: The benefits of this new approach (integrating active monetary policy with careful interventions in the foreign exchange market (FXI)) appear clearly in practice, providing better protection for the Albanian economy both at the end of 2025 and throughout 2026.

First and foremost, the reduction in citizens’ and businesses’ welfare is significantly diminished. Instead of global oil price fluctuations causing large deviations in domestic consumption and production, as happened in some periods of 2025 when the lek’s strengthening affected non-energy sectors, the integrated policy minimizes these effects.

In 2026, when Brent prices are expected to fall to an average of around 56-60 dollars per barrel (according to the latest Goldman Sachs and EIA projections, which forecast a global supply surplus and gradual decline), the drop in oil export revenues is naturally compensated by the growth of renewable electricity exports, without creating deep crises in the exchange rate or the need for emergency measures.

Likewise, production efficiency increases sustainably.

The exchange rate better reflects the strong position of net foreign assets (NFA), supported by foreign exchange reserves that have reached record levels (around 7.76 billion dollars at the end of 2025, with plans for further increases in 2026 through Bank of Albania auctions).

This supports an optimal labor-to-energy ratio, favoring the renewables sector that aims to become a net exporter by 2030. The created stability attracts more foreign direct investment (FDI), as happened in 2025 when energy was the main priority, and this continues in 2026 with new solar projects (such as 95 MW approved for Select Energy) and wind (such as 600 MW in Tropojë from CWP Europe), strengthening the long-term growth base.

Financial stability is significantly strengthened thanks to the neutralization of the currency risk premium. In an economy with high euroization, this reduces pressure on banks and allows credit to continue growing at solid rates (over 11-12% in 2025, without signs of tension), supporting consumers and businesses without unnecessary increases in borrowing costs.

Finally, the economy becomes more resilient to global shocks. In 2026, with projected GDP growth of around 3.5-3.6% (according to the IMF forecasting 3.6%, World Bank 3.5%, and EBRD in similar lines), inflation around 2.8-3% (gradually reaching the target), current account deficit around 2.8-3.5% of GDP, and reserves remaining strong (over 7 months of imports), the integrated policy allows the country to withstand turbulences without recession or massive subsidies that burden the budget.

Even specific risks like droughts affecting hydropower are compensated by the rapid expansion of solar and wind (with several hundred new MW approved or under construction during 2025-2026), ensuring a more stable supply and keeping Albania on the path to becoming a regional energy hub. In essence, this new paradigm not only protects against current uncertainties but creates the foundations for more sustainable and inclusive growth in the coming years.

In conclusion, by the end of 2025 Albania has consolidated its position as an energy exporter, where oil provides inflows, and renewables ensure sustainability and independence.

But this success makes the paradigmatic change not only desirable, but necessary.

From a traditional reactive policy (informal peg, broad subsidies, passive reaction) toward an active, integrative approach, where the currency, exchange rate, and NFA serve as strategic instruments for macroeconomic and financial stability.

This, in our analysis, is a strategic necessity for an Albania that is transforming into a regional energy hub, ensuring sustainable growth, higher welfare, and resilience to global turbulences in 2026 and beyond.

The Bank of Albania, with its successful interventions in 2025, has laid the foundations and now must institutionalize this as the new paradigm.

---

[1] refined oil exports reached about $41.5 million in 2024, remaining a key contributor to the trade balance

[2] are reserves or additional funds that a government holds to cope with unforeseen financial situations, such as an economic crisis, a sudden increase in spending, or a drop in tax revenues. Their purpose is to ensure budgetary stability and avoid increasing debt in emergency situations.
In practice, they can be cash reserves at the central bank, holdings of unused debt that can be used, as well as special funds for emergencies (e.g. for pandemics or natural disasters).