INTERVIEW/ Finance expert, Artan Gjergji: If the EURO-LEK ratio continues like this, the country's economy will simply turn into a consumer one

2024-10-07 10:57:28Fokus SHKRUAR NGA REDAKSIA VOX

Financial Markets Expert, Artan Gjergji, in an interview for VoxNews, explains what happened with the devaluation of the European currency in the country and what are the impacts on the economy. He explains that this is a gradual process that started ten years ago. " The main cause of this situation is the large supply of foreign currency in the domestic market. The source of the growth of foreign currency in the domestic market for years has been mainly income from undeclared activities (illegal or legal but not taxed). In recent years, there has been an additional increase in income from remittances due to the third immigrant wave in Germany (as the new diaspora is otherwise known), as well as in the last 2-3 years there has been a significant increase in flows from the export of services in the tourism and call center services or programming and IT services", he says. According to Gjergji, the beneficiary of the moment is the Government, while export is the most affected sector. But if this trend continues for 2-3 years, the economy will remain anemic. " If such a situation continues for a long time, the country's economy will turn into a purely consumer economy, totally dependent on imports and with no added value in the country", he says. Likewise, Gjergji advises citizens who turn to banks for a loan, to take it in the currency in which they have family income, since in the short term they may benefit from the euro exchange rate, but this very exchange rate in the long term may create a problem for them.

Below is the full interview given to VoxNews

Mr. Gjergji, we have been talking about the loss of the European currency against the local currency for months. What really happened?

It is a phenomenon that is not recent, but it is a process that characterizes the country's economy for almost a decade. There has been a gradual appreciation of the national currency LEK and vice versa devaluation of the EURO and other currencies, mainly due to the increase in the volume of foreign currency in the domestic market. In other words, there are no such drastic fluctuations of foreign currencies against each other in the international markets.

Based on this fact, this is a phenomenon that belongs to the supply-demand balances in the domestic market. So the main cause of this situation is the large supply of foreign currency in the domestic market. The source of the growth of foreign currency in the domestic market for years has been mainly income from undeclared activities (illegal or legal but not taxed). In recent years, there has been an additional increase in income from remittances due to the third immigrant wave in Germany (as the new diaspora is otherwise known), as well as in the last 2-3 years there has been a significant increase in flows from the export of services in the tourism sectors and call center services or programming and IT services.

The growing amount of foreign currency in the domestic market, not accompanied by a significant increase in imports, or the outflow of foreign currency in other forms (repatriation of the capital of foreign companies) has led to a deformation of the balances of the domestic market causing an overvaluation of the national currency LEK.

In your opinion, will the downward trend of the European currency continue, and if so, would you suggest that this currency be official in our country?

Undoubtedly, as long as there is no control regarding the entry and exit of foreign currency in the country, this situation will continue for a long time. When I say control, I do not mean a blocking control, but at least statistical control, so that there is more transparency and economic agents can make clearer decisions about their transactions in the domestic foreign exchange market.

No. I don't think the de juro country would be able to switch to the euro system. The first is that this cannot happen unilaterally only at the will of Albania, as our country is a country that is part of the integration agenda. In addition, central banks generally resist giving up the national currency, since they are giving up the main instrument of their monetary policy, or even the entire monetary policy itself.

However, having said that, I don't think the country should do the opposite either. Personally, I have never supported the policy of de-euroization, as I have judged that it will not work (and history has given me the right), but even if it would produce effects, these would be quite negative and would create unnecessary crises or exchange rate fluctuations. I think that the best way is to leave the course free, at the discretion of consumers and economic agents. The magic of the market will work.

Who are the winners and losers from the fall of the euro?

The only beneficiary of the strengthening of the national currency is the Government, but even this benefit is short-term. The strengthening of the LEK against foreign currencies fictitiously improves some economic indicators that are expressed in foreign currency such as GDP per capita, public debt or budget deficit. But in reality the strengthening reduces the well-being of citizens whose income is in foreign currency. According to INSTAT, more than half of the population has income from a source of immigration in foreign currency.

On the other hand, although apparently importers bring goods and services from abroad more cheaply, theoretically this should be reflected in the reduction of prices in the domestic market. But in fact, this does not happen either, since this difference is translated into rent (profit) that goes directly into the pockets of importers without bringing additional income to the Government budget.

Last but not least, the strengthening of the national currency hits the exporters of goods and services in the country, reducing their profits. If we take into account that the majority of service exports for the last 2-3 years have been occupied by tourism services, the impact will be directly on them and the goods export sectors (fashion industry, medicinal plants, etc.).

If we talk further about crediting the economy, what do you suggest as a finance expert? Receiving in Euro or Lek?

There is a general axiom, which says that the loan should always be taken in the currency in which the borrower has his family income. This is due to the fact that, in addition to the risk of (not) generating income, the borrower avoids another big risk such as the risk of exchange rate fluctuations. Although on the face of it the loan taken in foreign currency may seem more favorable, in the long run it may turn into a big risk in the conditions of strong exchange rate fluctuations due to the end of the phase of overvaluation of the national currency.

Maybe in short-term periods of 2-3 years they can be exposed to loans in foreign currency, but personally I would not recommend it for longer periods, if the borrowers' income is in LEK.

If this trend continues, what will happen to the local economy, especially to sectors that are directly affected by the fall of the euro?

As I said above, the export sector will have a tremendous impact. Exports of goods will lose a lot of market and a large part of these businesses may go to the brink of bankruptcy. As for the exports of services (tourism and not only), they will be negatively affected by the missing profit that comes as a result of the overvaluation of the national currency (incomes are in currencies, while expenses are in LEK).

The facilitation of import goods and services will have a tremendous impact on the businesses of the manufacturing sector in Albania, encouraging economic agents to turn more towards import goods due to relatively lower costs. If such a situation continues for a long time, the country's economy will turn into a purely consumer economy, totally dependent on imports and with no added value in the country.

And one last question. How do you see the new regulation of the Bank of Albania for strengthening the conditions for granting loans from second level banks?

BSH closely follows the progress of economic factors and sectors that are affected by the overvaluation of the market. Consequently, BSH draws the attention of banks to be careful in risk management policies in sectors that are expected to be negatively affected. Another element that is directly related to the lending sector is the real estate sector, because they are used as collateral for the loans granted by the banking sector. Both from the overestimation of the lek and from the overestimation of prices in this sector that comes due to the increase in demand, BSH has instructed the banks to improve the coefficients for calculating the real market value for real estate left as collateral. Also, BSH obliges the second-level banks to frequently apply "stress-test" methods to prove their stability and behavior in the conditions of risks that may come from price fluctuations in the markets (especially those of real estate) ).

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