Euro falls, inflation rises and domestic production loses ground

If coordinated policies are not undertaken by the Bank of Albania and the Government to support the productive and exporting sectors, the risk is that the country will enter a cycle where growth relies less and less on production and more and more on imports, consumption and non-productive sectors.

The latest INSTAT data show that inflation in Albania has increased from 2.4% to 3.2%, while the euro continues to remain at historic lows against the lek. In economic theory, a stronger domestic currency should reduce the cost of imports, ease inflationary pressures and improve the purchasing power of citizens. However, Albanian reality is proving the opposite.

Today, the Albanian economy is facing a paradox: the lek is strengthening, but the cost of living is not decreasing. On the contrary, prices continue to rise, while sectors that produce, export and create jobs are losing competitiveness.

The structure of inflation clearly shows that the main pressures no longer stem from imported goods, but from the economy's internal costs. Rising wages, chronic labor shortages, transportation costs, rising prices for services, and low market efficiency have neutralized the benefits that a strong lek should theoretically bring.

On the other hand, the appreciation of the lek has directly hit Albanian exporters. The manufacturing industry, agro-processing and domestic production are facing a contraction in lek revenues, while production costs continue to rise. Profits have shrunk, investments have been curbed and many companies are being forced to reduce activity or lose contracts in international markets.

At the same time, importers have benefited from the favorable exchange rate, expanding their market share.

Imported products have become relatively more competitive, while domestic producers are losing ground in the Albanian market as well. This creates an imbalance that, if it continues, risks weakening the productive base of the economy.

In this situation, the question arises: is the exchange rate simply the result of market forces, or does it require a more active response from economic institutions?

The role of the Bank of Albania is not limited to keeping inflation close to target. It also has the responsibility to monitor the effects that the exchange rate is producing on financial stability, the competitiveness of the economy and strategic production sectors. Even when the exchange rate is determined by the market, its impact on the real economy should be part of institutional analysis and communication.

Equally important is the role of the Government, which must build policies that support domestic production and exports. Fiscal incentives for manufacturing sectors, investments in technology and innovation, reduction of administrative costs, increased productivity, and support for exporting businesses are measures that can mitigate the effects of a strong lek. In their absence, the economy risks relying increasingly on consumption and imports, instead of creating value through production.

What is worrying is the fact that the benefits from the strengthening of the lek are not being distributed evenly. The consumer is not benefiting from a significant reduction in prices, while producers and exporters are bearing a disproportionate share of the cost of this development. This shows that the problem lies not only in the exchange rate, but also in the market structure, the level of competition and the ability of the economy to transmit monetary benefits to citizens.

At a time when European Union countries and the United States are implementing policies to restore production, strengthen national industry, and reduce dependence on imports, Albania cannot rely solely on a strong currency as an indicator of success. An economy does not become more competitive simply because its currency strengthens; it becomes stronger when it produces more, exports more, and creates more value added.

If coordinated policies are not undertaken by the Bank of Albania and the Government to support the productive and exporting sectors, the risk is that the country will enter a cycle where growth relies less and less on production and more and more on imports, consumption and non-productive sectors. Such a model may yield short-term results, but in the long term it undermines the competitiveness, employment, investments and development potential of the Albanian economy. /Florian Zeka, Monitor