I graduated from the Faculty of Economics. Professors used to tell us that when inflation increases, money depreciates. Today there is inflation, money has no value, but the lek is being appreciated. How is it explained?

Answer :

Dear reader. Your question is very interesting. In fact, you are right that in our daily life you feel that there is inflation (price increase) in every aspect of the goods and services you buy for daily life consumption. This result of the increase in inflation is confirmed by the official reports of the Bank of Albania. Obviously, this increase in prices shows that the purchasing power of our national money (LEK currency) is decreasing day by day.

In theory you are right. The economic doctrine teaches us that under conditions of inflation, our national currency should have been devalued (for example, it could be 1 EUR = 130 LEK). But this happens in conditions where the amount of foreign currency in the country would be static (unchanged). Right here, is the key to your confusion, as Albania is an economy with a relatively high level of informality and a fairly wide diaspora belt spanning three decades.

In other words, this new diaspora of immigrants send their income earned in foreign markets in Albania to their relatives in both official and unofficial ways.

If we refer to an official average of remittances in foreign currencies from immigrants in recent years, it is at the level of 1-1.2 billion euros every year. But experts estimate that this figure is much higher, if we take into account the unofficial remittances that people bring with them in their pockets, bags or through other channels outside the financial system.

All this amount of money in foreign currencies translates into increased consumption, directly affecting the increase in prices (increased demand always increases prices). It does not matter at all whether the transactions in the economy of Albania are carried out between businesses and/or individuals in the LEK currency or in foreign currencies. The increase in demand causes the increase in inflation.

I was measuring LEK, why does it get stronger then? Because the amount of foreign currencies in circulation (mainly EUR and GBP) has increased significantly. This leads to the devaluation of these currencies (abundant quantity of each commodity in circulation, leads to a decrease in price).

So, in fact, inflation is increasing and we as citizens do not have purchasing power with our savings (it does not matter in which currency we have income), but we have a devaluation of foreign currencies against the national currency LEK. In other words, the LEK was not evaluated, but foreign currencies were devalued, due to their abundance in the market.

Artan Gjergji answered.  Read his biography.

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