From dilemma to trilemma for the Albanian market

From dilemma to trilemma for the Albanian market

The devaluation of the euro directly affects deposits and income benefits, which are lower for citizens but also for businesses that export and import. In the meantime, borrowers should rethink not to focus only on loans in Euros, but now also focus on loans in Lek, but also in US Dollars and British Pounds. The Euro now has two strong global competitors: the US dollar and the British pound, which means that the previous monetary status quo has changed, no longer favoring a Euro as strong as it was before the UK left the EU.

Meanwhile, when the devaluation is also influenced by the factors that we have mentioned below, a situation to rethink is also for the real estate market and all those products that have been referred to the Euro in all these 20 years, to return to the Lek, as a currency that has shown stability all these years in Albanian monetary market.

The euro exchange rate has been falling for months and is now at the same level as the US dollar. A year ago, one euro cost $1.20, and at the beginning of 2022 it was already at $1.13. Since then, the devaluation continued and culminated in a brief parity with the US dollar this early July 2022, before falling below $1 in the middle of the month.

The main global and influencing reason in the foreign exchange market in Albania is that the euro has lost its value due to the increase in inflation in the euro area. Although the financial market in the country is disconnected from the global financial network, the main foreign currencies influence the market through the import and export of goods and services that Albanian businesses carry out with the international market.

Inflation in Albania in June 2022 was 7.04%.

While compared to Eurozone countries, where inflation averaged 8.6 percent in June (14 small eurozone economies experienced inflation above average to the highest level of 22 percent in Estonia, where 5 eurozone economies are below this average)[1], the inflation level in Albania was 1.56% less. This growing trend in these countries is a consequence of higher energy prices due to the Russia-Ukraine conflict.

But, in this global reality of rising energy prices and the impact of imports, Albania has another challenge, that of the informality and lack of effectiveness of policies not properly implemented, conveying to the Albanian market all the defects of unfinished reforms and rampant corruption.

Indeed, the Albanian economy has been less affected by the war in Ukraine than the countries of the Eurozone, considering firstly the fact that evasion and the high level of informality have served as a shock absorber to minimize the increased costs from abroad and from inside.

Secondly, the fact that the state budget has been the biggest beneficiary of the price crisis and informality has benefited to the maximum to convey better than one might think some meager social protection measures, although easily penetrated by the growth of great basic vital prices.

Thirdly, the increased intensity of cleaning Euros, which is the main influencer together with the increased exports and the tourist season with less impact give another impact on the rising inflation. At this moment, inflation tends to devalue the Euro, since inflation is now equated with a decrease in the purchasing power of money. As a result, the high inflation in the Eurozone and Turkey and the surrounding countries (Albania’s main trading partner is the EU), showing the weakening of their currencies compared to the US dollar, also affects the Albanian market through imports and exports.

But since the current financial-monetary dilemma is present (on the one hand inflation is increasing and requires an increase in interest rates, on the other hand, weak economic growth requires low interest rates) it seems that the Albanian economy will suffer the trilemma in the coming months, adding to the growing pressure from informal money that is suffocating the small Albanian market.

The fall of the euro is making the inflation problem even worse than it already is by importing further inflation due to the weak euro. Therefore, consumers may face even higher prices putting the government in the toughest possible conditions of decision making.

The government has little chance of preventing the rising cost of living that is eroding the purchasing power of households.

Fiscal policy as a possible way out has been misused over the years and has lost its effectiveness, just like the overuse of antibiotics in the human body.

The only possible positive policy in the face of a weak euro is a possible increase in direct money supply, which would ease the government’s debt bills but also boost consumer demand. A release of the Lek into circulation would serve as an instrument in the hands of poor families and individuals to pay the increased cost of living, but also as an intervention in the foreign exchange market due to the low exchange rate of the Lek with the Euro. The purchase of the Euro by the individuals themselves would serve as a facilitating role alongside the Bank of Albania to balance the domestic monetary market, which could lead to easing fears of an economic slowdown.

A weakened euro could slow down Albanian exports to the eurozone. But, in accordance with the way public finances seek to be profitable, an activation should be achieved to optimize the payment of the public debt in Euro, to help costs that could be higher if the Euro had not been devalued.

At least, from all this it should be understood that real-time actions are the ones that have a chance to help financial and monetary policies, turning the trilemma of the Albanian market into a dilemma.

[1] https://www.aljazeera.com/news/2022/7/13/what-prompted-euros-parity-with-us-dollar-and-whats-its-impact

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