IMF warns that Euro revaluation poses high risk to the economy

2025-01-29 08:39:00, Ekonomi CNA

If the exchange rate returns to the values ??of 2022, then this event will have a high and immediate impact, especially on the financial sector, households and businesses, notes the International Monetary Fund (IMF) in the latest consultation of the agreement with Albania.

The Fund notes that the risk of a euro revaluation is medium, but if it occurs, the risk is high. In the last report, the Fund paid more attention to exchange rate developments and the importance of maintaining a flexible regime.

In 2022, the euro was exchanged for an average of over 120 lek, while in July of this year, the euro was exchanged for the first time below 100 lek.

"If the exchange rate were to take an unexpected turn, returning to the 2022 level, it would negatively impact the financial sector, businesses and households, through an increase in non-performing loans, given that a large portion of loans are in foreign currency," the IMF notes.

The Fund analyzed that the depreciation of the euro was driven by increasing inflows of tourism, emigrants, and foreign investment, but there were some moments when the depreciation was driven by non-fundamental factors (speculation).

Albania's real effective exchange rate remained broadly stable in the first 10 months of 2024 after recording an appreciation of 11 percent in 2023. The cumulative appreciation over the past decade is around 35 percentage points.

"While Albania remains competitive as a tourist destination, pressures to position Albania as a competitor in the long term will increase if wage growth continues to outpace labor productivity growth," the IMF estimates.

In 2024, net financial inflows were driven mainly by FDI inflows, which accounted for about 7 percent of GDP. The IMF analyzes that foreign investment is mainly concentrated in the tourism and construction sectors and may now grow at a slower pace as tourism flows stabilize.

The Bank of Albania increased its exchange rate interventions during 2024. The total injection of value last year was about 3 percent of GDP. The IMF recommends that the Bank of Albania should allow the exchange rate to adjust more flexibly, with intervention serving only as a complementary tool in addressing non-fundamental fluctuations.

The IMF's analysis finds that there have been limited episodes in 2024, in which fundamental pressures on the lek's appreciation were driven by non-fundamental forces. In such circumstances, exchange rate interventions can serve as a complementary tool to break speculative momentum, but such interventions should be limited in scale, the Fund analyzes./ CNA