What is happening to the European currency? There is no end in sight to the fall of the euro, the exchange rate falls to...

The fall of the euro exchange rate continued at a high rate even today. According to the official exchange rate of the Bank of Albania, the European currency was exchanged on Tuesday at 107.4 ALL, touching a new historical minimum. The annual decline of the euro has also reached a record level of 10.6%. In the last month alone, the euro has lost 3.5% of its value in the exchange rate with the lek. According to exchange agents, the decline is explained by the very high supply of currency in the market. This offer coincides with the beginning of the tourist season, but certainly not with the peak of this season, so maybe tourism alone cannot explain the very high foreign exchange offer in the market.

Another hypothesis related to this period of the year could be the impact of non-resident citizens' investments on the real estate market. Bank of Albania statistics showed that property purchases by foreign nationals last year reached the highest historical level. They touched the value of 291 million euros, with an annual increase of 52%. The psychological factor can also exert an influence, driving even more sales of the euro, due to seasonal expectations for an even stronger decline. However, experts note that very strong exchange rate movements can also be linked to exchange operations in high values, which are usually associated with large companies, but which are difficult to identify.
In addition to the large inflows of foreign currency, this exchange rate trend can also be partially explained by the decrease in the supply of the lek. The expansion of the money supply in lek appears to be very low and slow, as evidenced by the slowdown of credit in the local currency, the weak growth of the monetary aggregate M2 and the further expansion of the budget surplus in the first half of this year.

The strengthening of the local currency in theory has a tendency to lower the cost of imports and narrow the country's current account deficit. This should translate into lower consumer prices and lower inflation, of course in the absence of other factors acting in the opposite direction. Such factors could be insufficient competition in the markets or increasing inflationary pressures from the labor market.

The strong lek is favoring borrowers in the European currency, who in most cases have their income in the local currency. The strengthening of the lek leads to a reduction in the level of debt and expenses for its repayment. The biggest beneficiary is the Albanian government, which at the end of the first quarter of 2023 had an external debt in the value of approximately 4 billion euros, or approximately 33% of the total value of the public debt stock. Credit in euros also dominates in the private sector of the economy. According to the Bank of Albania, more than 52% of the credit at the end of last year was in foreign currency and mainly in euros.

But the strengthening of the lek is giving a serious blow to the exporting sectors of goods and services in the economy. The drop in the euro exchange rate by almost 11% in one year translates into a decrease in income (as a result of exchange rate movements) to the same extent for those entities that realize all their income in euros. For many businesses, amortization of such a blow will be difficult, taking into account the still high pressures on the cost side, due to high inflation and salary increases./Monitor