The fall of the euro "saved" the government/ BSH: More than half of the decrease in public debt last year came from the exchange rate

2024-04-08 07:16:00, Ekonomi CNA

The fall of the euro "saved" the government/ BSH: More than half of

More than half of the decrease in public debt last year came as a result of the strengthening of the lek in the exchange rate.

The Bank of Albania estimates that the ratio of gross public debt to Gross Domestic Product (GDP) fell to 59.2% at the end of 2023, being about 5.3 percentage points lower than the level estimated at the end of 2022.

According to the Bank of Albania, more than half of this decrease, or 2.7 percentage points, is attributed to the effect of the appreciation of the lek against the euro.

In parallel, other factors that influenced the reduction of public debt were the increase in economic activity in the country, by 1.9 percentage points; negative real interest rates, with 0.8 percentage points; as well as, the consolidating side of the fiscal policy, with 0.7 percentage points.

According to the estimates of the Bank of Albania, fiscal consolidation was in fact the factor with the lowest impact on the reduction of public debt in real terms.

However, the budget deficit for 2023 resulted in a significant decrease compared to the previous year. It touched the level of 31.3 billion ALL, against a planned level of 55.5 billion ALL.

In real terms, the deficit was estimated at around 1.4% of GDP, from 3.7% a year earlier. The realization of the deficit for 2023 was concentrated in the month of December, while the first eleven months of the year were characterized by positive and high values ??of the fiscal balance.

The rating agency "S&P Global Ratings" (Standard & Poor's) in March improved for the first time the long-term rating of Albania's sovereign debt from B+ to BB-.

In the analysis that argues for the improvement of the rating, S&P brought as the main reasons the reduction of the public debt and the improvement of the external position of the economy.

However, the detailed analysis of the Bank of Albania shows that in fact the debt reduction is due more to the developments in the balance of payments and the exchange rate, than to the government's effort to reduce the public debt.

At the end of the year, the euro-lek exchange rate was down by more than 9% compared to the previous year.

The analyzes of the Bank of Albania conclude that the strengthening of the lek in recent years is caused by the structural improvement of the external sector of the economy, manifested in the continuous narrowing of the current account deficit, as a result of the increase in exports of services and in the continuous growth of foreign direct investments.

In addition to this factor, the Bank of Albania considers that the appreciating performance of the local currency has also reflected the increase in confidence towards our national currency in the foreign exchange market, as a result of the increase in the confidence of market agents in its stability and the improvement of investors' feeling of foreign to the perspective of the Albanian economy.

The Bank of Albania estimates that the impact of the exchange rate appreciation on the economy has been overall positive.

The appreciation of the local currency has reduced the external debt of the private and public sector, increasing its long-term sustainability, becoming a premise for reducing financing costs.

It has influenced lower inflation rates, something that is evident in both the regional and the European context, protecting consumers from the erosion of purchasing power.

At the same time, lower inflation rates have enabled a slower increase in the base rate, producing a less negative impact on economic growth.

The overvaluation of the exchange rate has also had a positive effect on the strengthening of financial stability. This is reflected in the improvement of the borrowers' ability to pay in foreign currency, which has influenced the improvement of the quality of the balance sheets of the banking sector.

However, the Bank of Albania points out that the strengthening of the exchange rate has uneven impacts in terms of sectors, depending on the exposure these sectors have to exchange rate fluctuations, their financial and operational flexibility, as well as the demand situation foreign to the sector.

In this context, the strengthening of the lek during 2023 has aggravated the financial and competitive position of some segments of the export sector, which generally have low opportunities for price negotiation, low operational profit margins, and currently face a demand of low in the international environment.

In the short term, the blow to these sectors has been addressed through temporary fiscal facilities, as a more appropriate instrument for the selective treatment of their problems.

The Bank of Albania suggests that the businesses of these sectors should increase restructuring efforts, in the direction of increasing productivity, finding new markets and making greater use of exchange rate protection instruments./ Monitor Magazine