Exchange rate dynamics in Albania, 2015-2025 in a structural reading

The analysis of the behavior of the exchange rate in Albania during the period 2015–2025 shows that the relationship between the lek and macroeconomic factors is neither uniform in time nor symmetrical in intensity. The exchange rate does not react the same in all economic situations, but exhibits different behaviors depending on the phase of the economic cycle, the level of market pressure and the structure of foreign exchange flows. In this sense, the movements of the lek cannot be interpreted as the result of a simple monetary mechanism, but as the product of an economic structure characterized by asymmetry, euroization, pronounced seasonality and selective institutional intervention.

One of the most consistent findings is that the lek lacks a clear self-regulating mechanism.

In periods when the lek strengthens significantly, it tends to remain strong for longer than would be justified by the real fundamentals of the economy.

In 2015–2018, for example, the gradual strengthening of the lek was accompanied by increased tourism and stable inflows of foreign currency, but without any commensurate reaction from the manufacturing sector or exports. This suggests that the strengthening of the lek has not functioned as a signal for economic restructuring, but rather as a reflection of a foreign exchange surplus that has not been channeled into productive investments. Meanwhile, in periods when the lek weakens, the market reaction is faster and stronger, indicating that the forces pushing the exchange rate towards the positive extreme are more stable and structural, while the factors weakening it are more temporary and cyclical.

In contrast, the period 2019–2021, dominated by the COVID-19 pandemic and global uncertainties, showed that the exchange rate becomes much more sensitive to shocks. Changes in foreign exchange flows, especially in tourism and foreign exchange flows, produced faster and stronger fluctuations in the lek. It is clear here that in crisis situations, the Albanian economy exhibits a form of amplification, where external shocks are not mitigated, but are directly translated into the exchange rate, reflecting the structural weakness of internal stabilization mechanisms.

In this context, foreign exchange flows from tourism and inflows of money from various sources play a key role. Over the past few years, the significant increase in the number of tourists and the increase in remittances from emigrants and other sources have created a structural surplus of euro in the market, which is not fully neutralized by the demand for imports or investments. This has produced a continuous pressure towards the strengthening of the lek, especially in periods when these flows are at their seasonal peak. Their impact is not linear, since in “normal” periods the effect is moderate, while in periods of foreign exchange surplus the effect is significantly amplified, creating disproportionate exchange rate movements. In other words, the Albanian economy is more sensitive to foreign exchange inflows than to their lack, which creates a structural trend towards lek appreciation.

Another important finding is related to inflation and the interest rate differential. In theory, rising inflation should lead to a depreciation of the domestic currency. In Albanian practice, this relationship is weak in periods of stability, but becomes strong only in situations of high pressure, when inflation is perceived as stable and not temporary. In 2022–2023, when inflation increased significantly as a result of global energy and food shocks, the exchange rate response was stronger and faster. This shows that the market does not react to every inflation signal, but only when it crosses a threshold of credibility and becomes a dominant factor in economic expectations.

This behavior suggests that expectations play a greater role than macroeconomic indicators themselves.

The exchange rate in Albania is sensitive to perceptions of fiscal stability, the political climate, and institutional security. In uncertain periods, even small changes in macro indicators can produce strong reactions, while in periods of high confidence even larger real movements pass almost without impact on the exchange rate. This makes the exchange rate not only an economic indicator, but also a barometer of institutional and political confidence.

A particularly significant element is the role of the interventions of the Bank of Albania. Analyses show that the interventions do not have a uniform effect. They result almost neutral in periods of stability, but become effective only when the exchange rate enters extreme areas, that is, when it strengthens or weakens beyond historical intervals. This means that monetary policy functions more as an emergency stabilization mechanism than as a daily instrument for steering the exchange rate. Under normal conditions, exchange rate stability is not a product of policy, but of the structure of foreign exchange flows.

From a structural point of view, this behavior reflects a deeply euroized economy, where a large part of transactions, savings and investments are carried out in foreign currency (euro) until 2024. In this reality, the lek is not the dominant currency in economic decision-making, but often serves as a unit of account, while the euro functions as a real store of value. This makes the exchange rate less sensitive to monetary policy and more sensitive to real currency flows, shifting the center of gravity from the central bank to structural factors.

In terms of public policy, the implications are important.

First, exchange rate stability cannot be achieved through monetary instruments alone, but requires structural policies that affect the real exchange rate balance, such as diversifying exports, encouraging productive investment, and reducing informality. It is these harmonized measures that ensure that any exchange rate stabilization will be temporary and dependent on seasonal factors.

Second, the continued strengthening of the lek has adverse effects on different sectors. On the one hand, it reduces the cost of imports and helps control inflation, but on the other hand, it harms the competitiveness of exports and discourages domestic production. This creates a development paradox, where short-term monetary stability produces long-term structural weaknesses.

Third, analyses show that the Albanian economy is more exposed to positive than negative shocks. This means that the foreign exchange surplus from tourism and foreign exchange flows and remittances produces strong exchange rate movements, while negative shocks are absorbed more quickly through increased imports and the use of foreign exchange reserves. Therefore, strong cycles of lek strengthening are more stable than cycles of its weakening, making appreciation a more persistent phenomenon than depreciation.

In terms of long-term development, this situation produces an economic model based on inflows and consumption, not on production and exports.
The exchange rate, instead of reflecting the real productivity of the economy, mainly reflects the structure of monetary flows, becoming a more financial than real indicator.

In conclusion, the findings suggest that the exchange rate in Albania is not simply the result of supply and demand in the foreign exchange market, but a reflection of an economic architecture built on euroization, seasonality and unstable expectations. Monetary policies have a limited role and operate mainly under extreme conditions, while structural and institutional factors remain the real determinants of the dynamics of the lek.

Therefore, any serious debate on the exchange rate must shift from the question “What should the Bank of Albania do?” to the more fundamental question of “What kind of economy is Albania producing?”