According to the history and development of inflationary trends it has been observed that countries with higher inflation usually see their currency depreciating relative to the currencies of their trading partners. This is usually accompanied by higher interest rates as well.<\/p>\n
As a rule, in economies that have a structured financial market, as well as limited informality and informal money, it has also been noticed that interest rates, inflation and exchange rates are all highly correlated.<\/p>\n
How does the policy of increased interest rates work in countries with developed capital markets?<\/p>\n
By manipulating interest rates[1]<\/a>, Central Banks exert influence over both inflation and exchange rates and changing interest rates affect inflation and currency values. Higher interest rates offer lenders a higher return compared to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. However, the impact of higher interest rates is mitigated if inflation in the country is much higher than elsewhere, or if additional factors serve to depreciate the currency. The opposite relationship exists for lower interest rates\u2014that is, lower interest rates tend to lower exchange rates.<\/p>\n Does this mode of operation as above apply to Albania?<\/p>\n From all the analyzes mentioned above, but also from various historical and current analyzes of economists and analysts in the country, you can say in summary that such a scheme cannot work in full. Problems related to the massive presence of informality, the lack of a completely free market, the high level of corruption to the detriment of the rule of law, acute problems with the structuring and business model, polarizing politics and the emergence of clientelistic approaches to fiscal policy, institutions central authorities with truncated independence and integrity cannot enable the operation of the scheme for reducing inflation and increasing the economy and well-being in the same way as above.<\/p>\n On the other hand, in the conditions when the country’s economy is spending much more on foreign trade than it earns and is borrowing capital from sources outside the formal monetary market, which is influenced by imports of construction raw materials, so more euros are demanded than received through export sales, then the excess demand for euros should increase the exchange rate of the euro.<\/p>\n In the situation, where albanian imports go for daily consumption, for a part of industry and agriculture, for raw materials and construction materials to create more real estate[1]<\/a>, in an informal monetary market, where there are Euros more than as much as the market needs (so the circulation of the euro is uncontrolled by the institutions) it happens that even though there is an increased demand from imports, the excessive presence of the European currency undoes the policies and actions in the exchange market and we have an unpredictable exchange market which creates uncertainty and wrong orientation for Albanian businesses and families that interact with the monetary market.<\/p>\n But, an important argument that tests the presence of an informal economy and money uncontrolled by institutions is the fact that in the conditions, when the state budget has been exposed to a large public debt for several years, it should have influenced an inflation of up. This did not happen in the chaotic Albanian economy, and inflation only happened when it was provoked by imports and exaggerated news from public sources about the increase in prices due to the war in Ukraine, etc.<\/p>\n In the most opportune scenario, the government should have communicated with the Bank of Albania about the need to print money to pay part of the large debts, encouraging inflation from within and at a time when it was not present in European countries. However, now that the government is in a situation where it is unable to service its deficit through internal means, then it has gone public by increasing the offer of securities for Albanian individuals. In fact, the biggest address should have been for foreigners, Albanians across the borders, but also citizens of the Balkan countries. In fact, the call to Albanian citizens is a small part of the market.<\/p>\n Finally, what is needed not only by the exchange market, but by the current market and the future generation, is a different policy from today that must responsibly guarantee the sustainability of a strong economic performance, which encourage investors with integrity to invest their capital and not exploit the opportunities of local resources.<\/p>\n If Albania manages to become a country with such positive attributes, it will attract investment funds from other countries, using political and geographical advantages to the disadvantage of other countries that are perceived to have more political and economic risk.<\/p>\n There are three main reasons that are imported as influences from outside Albania for the weakness of the euro.<\/p>\n First, the economies of the eurozone are suffering more over time from the war in Ukraine and this has disrupted trade relations even with all those goods and services that need to be recovered from the American market, or the Asian market and beyond. What the European economy loses in purchasing power in its role as an energy consumer, it is still not gaining in its role as an energy producer.<\/p>\n Secondly, the Bank of Albania, like the European Central Bank, has increased the basic interest rates [2]<\/a> and as a result the expectations were that the incoming capital in the eurozone countries would be higher to take advantage of these higher interest rates. But a higher flow of foreign investments does not result in the European market [3]<\/a>. Whereas, in the European monetary market, there is no higher demand for the euro, with the effect of its revaluation in the exchange market. This trend is different from the US dollar which is already more in demand in the market. Meanwhile, foreign investments in Albania have a flow with an increased tendency. The benefits in the economy are still small, since these investments are already being carried out by investors who are present in the Albanian market and represent more capital movement and systematization, instead of diversifying the existing investment portfolio [4]<\/a>.<\/p>\n Thirdly, in times of uncertainty, investors seek security for their investments, and in this time of economic and monetary uncertainty, it is perceived that the euro may not be very safe.<\/p>\n Are there advantages to a weak euro?<\/p>\n The central economic advantage of a weak euro is an improvement in import opportunities. European products, calculated in lek, become cheaper in Albania. Considering that taxes and other component costs of the price do not change, then if one euro is worth 115 lek, then an Italian washing machine with a price of 1,000-euro costs 115,000 lek in Albania.<\/p>\n With a lower exchange rate of 112 ALL, the price drops to 112,000 ALL. The demand for washing machines according to the calculations and the rules of the market should increase. But, in fact, even though the exchange rate has decreased enough to make the sales price attractive, the uncertainty of the future, as well as the weak commercial culture of Albanian entrepreneurs, means that this effect is not used to increase circulation more. Instead of the rule of a normal market, in the culture of Albanian entrepreneurs works the highest profit per unit of sale, instead of the increased profit based on an increased turnover.<\/p>\n If the prices had decreased slightly, or even if they were at the same levels as a year ago, then even the market that depends on imports would have a higher turnover, taking advantage of the opportunities of a weaker euro. to recover the increase in the purchase price of imported goods. Unfortunately, this does not happen and Albanian businesses with a limited market aim to use every opportunity not in favor of the consumer, but of their business.<\/p>\n But, if at least these benefits were used in time to increase the salaries and bonuses of the employees to a higher level, all this would increase the production or sales of the businesses, also aiming to expand their market. Thus, importing businesses through the increase in the value of work, but also the formalization of the business, would give an effect like an economic stimulus package, making the local economy grow stronger.<\/p>\n [1]<\/a> https:\/\/www.investopedia.com\/trading\/factors-influence-exchange-rates\/\u00a0<\/a> [2]<\/a> https:\/\/www.ecb.europa.eu\/press\/pr\/date\/2022\/html\/ecb.mp221215~f3461d7b6e.en.html<\/a><\/p>\n [3]<\/a> https:\/\/www.ceicdata.com\/en\/indicator\/european-union\/foreign-direct-investment<\/a><\/p>\n [4]<\/a>https:\/\/www.bankofalbania.org\/Statistikat\/Statistikat_e_Sektorit_te_Jashtem\/Investimet_e_huaja_direkte\/Pozicioni_i_investimeve_te_huaja_direkte.html?evb=agregate&evn=agregate_parent_sel&Cgroups=<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" According to the history and development of inflationary trends it has been observed that countries with higher inflation usually see their currency depreciating relative to the currencies of their trading […]<\/p>\n","protected":false},"author":2,"featured_media":14159,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[9756],"tags":[9763,11259,12413,11260,9429,10683,8561,11134,8563,10055,11258],"class_list":["post-14154","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","tag-albania-en-2","tag-businesses","tag-ekonomia-en","tag-eurozone","tag-export","tag-import-en","tag-individuals","tag-inflacion-en","tag-inflation","tag-prices-en-2","tag-weak-euro"],"featured_image_src":{"landsacpe":["https:\/\/altax.al\/wp-content\/uploads\/2022\/12\/weak-euro-1-1033x445.jpg",1033,445,true],"list":["https:\/\/altax.al\/wp-content\/uploads\/2022\/12\/weak-euro-1-463x348.jpg",463,348,true],"medium":["https:\/\/altax.al\/wp-content\/uploads\/2022\/12\/weak-euro-1-300x169.jpg",300,169,true],"full":["https:\/\/altax.al\/wp-content\/uploads\/2022\/12\/weak-euro-1.jpg",1033,583,false]},"yoast_head":"\n
\nhttp:\/\/www.instat.gov.al\/media\/11094\/tregtia-e-jashtme-nentor-2022.pdf<\/a><\/p>\n