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The exchange rate between the Euro and the Lek does not meet the conditions for an intervention by the Bank of Albania, in the current macroeconomic context.
An analysis by the International Monetary Fund (IMF) concludes that the Bank of Albania should maintain the current rate of non-intervention in the exchange rate, in line with the previous recommendations of the IMF.
According to the analysis, there are no shocks in capital flows that would justify an intervention in the exchange rate, although the foreign exchange market in Albania is shallow and the presence of loans exposed to exchange rate risk is significant.
The IMF assesses that the risks related to the exchange rate should be addressed especially through efforts to reduce the euroization of the economy and through macroprudential measures, which aim to avoid taking over the risk of the exchange rate by banks and their clients.
However, the IMF notes that deflationary risks associated with a continued appreciation of the Lek should be monitored. However, the IMF estimates that such interventions should not be preventive in nature (ex-ante), but can only be undertaken when a shift in inflationary expectations is observed as a result of the strengthening of the currency exchange rate.
So far, however, IMF estimates show that the pass-through of the effects of exchange rate appreciation on inflation is relatively small.
Despite the strengthening of the Lek, the economy is still in an inflationary phase. Annual inflation at the end of 2023 marked the level of 4%, while the Bank of Albania expects that the fall near the 3% target can only happen in the second half of this year. In the evaluations of the Bank of Albania, the strengthening of the Lek has helped to reduce inflation, but since inflation is still above the target, it is still too early to talk about deflationary risk.
The IMF has repeatedly advised the Bank of Albania to allow the exchange rate to act as a shock absorber in the economy and to limit interventions only in case of disturbances in the foreign exchange market.
However, according to the IMF's Integrated Policy Framework, exchange rate intervention may be justified in cases where the foreign exchange market is very shallow, when there are large currency mismatches that threaten macroeconomic stability, or the exchange rate may breach the inflation target. However, the IMF's analysis shows that none of the above factors currently pose risks that would justify the intervention of the Bank of Albania in the foreign exchange rate.
Last year, the Euro-Lek exchange rate fell by 9.1% compared to the previous year. However, at certain times, especially in the summer season, the annual decline reached up to 14%.
The Bank of Albania has emphasized that it remains committed to the free exchange rate regime, but nevertheless last year it undertook two interventions in the foreign exchange rate, in order to prevent the rapid decline of the Euro rate.
On June 9, the central bank bought 5 million euros, while on July 20 (after the Euro reached the historical minimum level of 100.49 ALL) it bought another 12.1 million euros.
Also, the Bank of Albania decided to increase the amount of purchases through planned auctions for the needs of the administration of the foreign exchange reserve. In total, it is estimated that the Bank of Albania bought about 250 million euros in the domestic foreign exchange market last year./Monitor
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