The Euro's decline returns, touching a new historical record near 93.6 lek

The Euro/Lek exchange rate is deepening its gradual downward trend. According to the Bank of Albania exchange rate, the Euro was exchanged today for 93.64 Lekë, the lowest level ever recorded.

Since the beginning of the year, the Euro exchange rate against the Lek has fallen by 3.2%, while on an annual basis the decline has reached 4.2%.

According to foreign exchange agents, the fall in the exchange rate during the summer season is mainly related to the usual seasonal trend. During this period, the foreign exchange supply increases, due to the increase in the number of tourists from abroad.

In general, for years the foreign exchange market has been characterized by a high foreign exchange supply. 
According to official figures and analyses of the Bank of Albania, this increase is due to the improvement of the Balance of Payments, thanks to the increase in foreign exchange flows from tourism and high levels of foreign direct investment. However, the market continues to perceive a strong impact of foreign exchange inflows from illegal activities.

In parallel, it is estimated that the government's fiscal policy is also playing a role in the strengthening of the Lek. For years, the budget balance has been in a wide surplus for most of the year, while usually the entire planned deficit is spent in December. This fiscal policy followed by the government reduces the supply of Lek in the market and affects the further strengthening of the domestic currency.

The Bank of Albania has tried to slow the decline of the Euro by making large purchases of the currency. For the period 2024-2025, the Central Bank has purchased more than two billion euros in the domestic market. The purchases have continued in the first half of this year, but the figures have not yet been made public.

This year, the Bank of Albania plans to further increase its planned purchases of foreign exchange in the domestic market. It aims to purchase 330-450 million euros through auctions, with the aim of increasing foreign exchange reserves. The purchase target has increased significantly compared to the projections in the range of 270-350 million euros foreseen for 2025.

However, purchase figures will certainly be higher, including direct purchases to curb the strengthening of the Lek.

The increase in inflation above the 3% target, however, makes it challenging for the Central Bank to continue large purchases. Under these conditions, foreign exchange purchases are no longer justified by the objective of price stability, while curbing the decline of the Euro will have the cost of higher inflation in the economy.

The strengthening of the Lek is estimated to have partially curbed inflationary pressures on the Albanian economy, making goods and services imported from abroad cheaper.

But, on the other hand, the strong Lek has hit the exporting sectors of the economy. In particular, tailoring activities have been hit hard and have lost competitiveness linked to low labor costs. But, on the other hand, the depreciation of the Euro is also damaging the competitiveness of the tourism sector, a sector that has grown thanks to its perception as a low-cost alternative./ Monitor