The euro to lek exchange rate has returned to a decline in the last two weeks. According to the official exchange rate of the Bank of Albania, on Tuesday the euro was exchanged for 103.29 lek, the lowest level since December 20 of last year.
From the beginning of 2024 until early March, the euro exchange rate had remained stable around the level of 104 lek. However, with the recent approach of the first quarter, the trends of the depreciation of the lek are resurfacing. The euro to lek exchange rate currently shows an annual decline of 9.7%.
In fact, a similar trend occurred last year, but the decline in the euro exchange rate started a bit later, in the last week of March and intensified further during the month of April.
If the trends of last year are repeated, it is expected that the decline in the euro to lek exchange rate will continue further during the second quarter of the year.
Between late March and late April 2023, the euro to lek exchange rate experienced a decline of almost three points, from the level of 114 lek to near the level of 111 lek.
So far, foreign trade data has shown a deterioration in the trade balance in goods. For the January-February period, the trade deficit reached 72 billion lek, an increase of 53% compared to a year ago. However, the external balance in goods only partially provides a picture of the external position of the economy and has an increasingly lower significance for the exchange rate.
While historically the Albanian economy has a deficit balance in goods, it is largely compensated by the surplus from trade in services, remittances, and financial account inflows in the form of foreign direct investments.
Balance of Payments data is published with a time lag and currently do not allow for an accurate assessment. However, tourism is believed to continue to have a positive effect on foreign exchange inflows into the economy. According to data from the Institute of Statistics (INSTAT), for January, the number of arrivals of foreign citizens increased by 30% compared to the same period a year ago.
The exit from the winter season is expected to bring an increase in tourism to 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 appreciating the euro in the exchange rate.
If the dynamics of deficit spending are similar to the past two years, chances are 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 the value of 15 billion lek. Considering the slow pace of spending at the beginning of the year, especially on capital expenditures, the chances are that the budget surplus will continue to expand in the following months.
