The government's populist policies are undermining the Bank of Albania's monetary policies

In one of the media appearances at the beginning of November last year, after the International Monetary Fund published the findings from the annual monitoring mission in Albania, Governor Gent Sejko spoke about the difficulties the Bank of Albania had to fight inflation with the only monetary tool it has in hand; interest rates.

Sejko declared at that time that the massive use of the euro in the Albanian economy, at least in half of it, made the policy of increasing interest rates ineffective. Simply put, interest rates as a mechanism against the depreciation of the lek only worked for those who paid their salaries, purchases and all other family or business expenses in lek.

According to the official data of the Bank of Albania, this part constitutes only half of the economy. The other half is in foreign currency, mainly in euros. This means that in order to fight the unbridled increase in prices in our country, it was necessary to increase the interest even from the European Central Bank, which has these rates for the common currency in hand.

At the beginning of this March, the ECB increased these rates, since the level of inflation in the eurozone countries was beyond forecasts and, moreover, with negligible slowing rates. The ECB, the IMF and all international financial organizations have advised countries in this period of price crisis that raising wages is not the smartest or most efficient tool.

The IMF, in two of its own reports, advises the Albanian government to focus on reducing expenses, refraining from salary increases and focusing financial aid on the needy and those most affected by price increases.

According to the Fund, raising wages beyond market capacity is like adding fuel to the fire, which will lead to further increases in inflation in the country. This devalues ??the lek and increases the cost of living for citizens.

However, the Albanian government ignored the advice of the IMF and announced in the pre-election period salary increases, pension compensations and other financial facilities for citizens and businesses.

The government's decision contradicts the monetary policy of the Bank of Albania, which only a few days ago increased the basic interest rate again by 0.25 percent and without excluding another increase. The Bank's decision-making directly affects the cost of loans, both for citizens and businesses.

But the biggest risk is that the spiral of inflation, fueled by the government's populist policies, escalates in the short term and postpones the normalization of the price situation, bringing about a situation similar to the devaluation of the currency in Turkey and other countries. others that instead of reducing have injected more money into the economy.

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