Euro in great supply, state aiming to strengthen Lek

Euro in great supply, state aiming to strengthen Lek
Bank of Albania, the ministry of Finance and the Oversight Financial Authority agree: Use of foreign currency (euronization) represents a potential source of risk for the financial stability of the country! They sign the strategy to strengthen Lek

 By Eglantina Nasi

Loans which are mostly issued in the European currency, Euro. Deposits which are more and more larger in this currency rather than the domestic currency, Lek and many other bank transactions or informal transactions that people generally carry out in Euros and not in Lek. Experts have called this situation “euronization” and according to them, this is threatening the financial stability of the country. This is the reason they recommend its weakening, putting domestic currency, Lek, at the center of all banking transactions. So, Bank of Albania, Ministry of Finance and Financial Oversight Authority have decided to apply an action plan which aims at decreasing the use of the European currency in the Albanian economy. One of the measures includes banks’ obligation to inform customers with concrete examples how their loan installments go up if Lek is depreciated against Euro, when they sign a loan contract. This may convince them about the fact that a loan in Lek is perhaps the best choice for them, in order not to see frequent fluctuations of the loan installments due to the fluctuations in the currency rates. But, these will also include other measures that the state will take regarding loans in the national currency obtained by public institutions when issuing bonds or obligations, which are currently also issued in foreign currency at competitive interest rates, making loans in Lek more attractive.

On the other hand, the state must also make sure to reflect all values that relate to financial relations in the national currency, strengthening the image of Lek as such. This will also apply to relations with big financial institutions. All of this “with the aim of boosting confidence on the national currency and encourage its use in the financial system and Albanian economy”. “Given that the use of foreign currencies is significant, then this phenomenon acts as a potential threat for the financial stability of the country”, experts who have drafted the strategy in question say. With this, they clearly confirm that an “invasion” of domestic economy, is causing significant financial damage. This is also reflected in practice when people obtain a loan in euro. This causes a constantly changing situation for them as far as the payment to banks is concerned, which is not the case with the domestic currency.

Why this plan of measures to strengthen domestic currency now?

According to Albanian financial experts, the plan of measures that must be implemented to strengthen Lek came at a moment when a significant weakening of the domestic currency is being noticed against European currency. According to them, if deposits in Lek used to dominate the total number of deposits in the banking system, today they are almost equal to deposits in foreign currency. The same thing can also be said on loans, making Albanian customers more and more prone to currency exchange blows. While there are no concrete figures as to the current level of “euronization” of the Albanian economy, it is believed that this figure may be around 50%. In practice, this means that around half of financial transactions, commercial exchanges, deposits and loans are being made in the European currency.

Currency and deposits in foreign currency constantly increasing

The Bank of Albania reports that as of 2013, there has been a constant drop of deposits in the current currency, Lek, while deposits in Euro have seen a growth. For 2016, the stock of savings in foreign currency was 3.8 billion Euros. In November, deposits went up by 40 million euros, while deposits in Lek for the same period dropped by 10 billion Lek.

This shows that the trend of deposits in the European currency is growing, as interest rates for savings in Lek are almost zero, for any kind of maturity period. Meanwhile, the Bank of Albania may intervene with measures to strengthen Lek, making interest rates rise.

On the other hand, referring to the data offered by the Bank of Albania, 60% of loans issued by the Albanian financial sector is in foreign currency. Meanwhile, Euro is also widely used for internal transactions, especially in home sales.

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