In the past two weeks, the Euro to Lek exchange rate has once again experienced a decline. According to the official exchange rate of the Bank of Albania, on Tuesday, the Euro was traded at 103.29 lekë, the lowest level since December 20th of the previous year.
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| Graph of the exchange rate for 1 euro in relation to the Lek, January 4, 2024, March 19, 2024 |
Since the beginning of 2024 until early March, the Euro exchange rate had remained stable, hovering around the 104 lek mark. However, as the first quarter draws to a close, trends of depreciation in the Lek are resurfacing. The current Euro to Lek exchange rate shows a yearly decline of 9.7%.
Interestingly, a similar trend occurred last year, but the decline in the Euro exchange rate started slightly later, in the last week of March, and was further accentuated during the month of April.
If the patterns of the previous year are to be repeated, it is expected that the decline in the Euro-Lek exchange rate will continue further into the second quarter of the year.
Between late March and late April 2023, the Euro-Lek exchange rate experienced a decline of almost three points, from the level of 114 lekë to near 111 lekë.
So far, foreign trade data has shown a worsening trade balance in goods. For the January-February period, the trade deficit reached 72 billion lekë, an increase of 53% compared to a year earlier. However, the goods trade balance only partially provides a picture of the external economic position and has an increasingly lower significance for the exchange rate.
While historically, the Albanian economy has had a deficit in goods trade, it is largely offset by surpluses in services trade, remittances, and financial account inflows, in the form of foreign direct investment.
Balance of Payments data is published with a time lag and currently do not allow for an accurate assessment. However, tourism is believed to have continued to have a positive effect on foreign currency inflows into the economy. According to INSTAT data, foreign arrivals in January increased by 30% compared to the same period a year ago.
The exit from the winter season is expected to bring about an increase in tourism in the economy, and the exchange rate is one of the indicators expected to be most sensitive to these developments.
Last year, fiscal policy also played a role in tightening the supply of Lek and overvaluing the Euro in the exchange rate.
If the dynamics of deficit spending are similar to the past two years, it is likely that the impact on the exchange rate will be in the same direction for this year. Even for January, the state budget was in surplus, at 15 billion lekë. Considering the slow pace of spending at the beginning of the year, especially on capital expenditures, the likelihood is that the budget surplus will continue to expand in the months ahead.