Money laundering increases inflation and damages the economy

8 Tetor, 20220

For many months, prices have been kept under pressure by the markets of the goods we import, not simply because our economy has produced more, but because the economy is not as free and open as in the countries where the market is most influenced. mostly from supply and demand.
In Albania, the market is not fully open, but in addition, this year it is also limited in the right to give and take freely. One reason that has influenced a lower inflation than the surrounding countries has been the inhibition of the energy market showing us the Albanian economy is still at backward levels in relation to the level of energy market freedom that other countries have.
As a rule, inflation occurs if the money supply increases faster than economic output under normal economic circumstances. Inflation can also be influenced by factors beyond the money supply, which is provided either by the Central Bank in the form of printing more money than the market needs, or by dirty/informal money.

Not wanting to deal in this analysis with the direct monetary supply (excess money printing) by the Central Bank, a topic which we have dealt with in several series of analyzes with different perspectives, in this case we will analyze the impact that comes to the market from the supply monetary from money laundering.
This topic is interesting as it is related to the current political initiative of the Socialist Party for the approval of fiscal amnesty.
One of the most frequent comments on the negative effects of the fiscal amnesty, both from local and foreign experts, but also from the organizations and embassies of the partner countries, those of business in the country and representatives of the opposition, is the significant risk of informal money laundering, which can gain a lot of ground from this law.

If we exclude the direct monetary supply of money, then what does it mean for the market and its prices, and the effect on the consumer, if the money to be circulated in excess is “dirty?”

The preliminary reaction of the effects that may fall on the country is that money laundering increases the demand for money (by increasing the supply), affects interest and exchange rates by making them more volatile and all causes high inflation. The dirty money supply affects the market directly, as it disrupts the current supply flow through the financial resources that come to the market from current economic growth, and just like those dammed rivers, even though they are needed, they disrupt the infrastructure as well. in which they pass. So, the direct primary effect shows that informal money is harmful to the entire economy. On the other hand, spending rates increase due to the uncontrolled and rapid flow of money into the country.

Among some effects that are considered positive are those that affect greater increases in exports and imports, in addition to even higher inflation. In this entry of dirty money, maximum vigilance is needed from the Bank of Albania, so that with its countermeasures in the increase of interest rates, it affects the market to cope with the huge monetary flow. Monetary policy will be adversely affected by these various demands for money caused by black money.
If the demand for money was high at the time of the entry of excessive informal money, then the anti-inflation measures of the Bank of Albania could stabilize the monetary market in the medium term. However, the Albanian financial market has a modest demand in relation to the entry of an additional financial capital from fiscal amnesty of up to 2 billion Euros. Moreover, money laundering can result in erratic shifts in money demand and significant volatility in capital flows and exchange rates, like what the foreign exchange market experienced in the summer of 2022.
In the current case of the money market in the country, we see an indication of the failure of predictability in central bank policy, because of the influence of black money on the demand for money.
Meanwhile, the consumer will be directly affected by the effects of the supply of goods at higher prices but also by a chaotic offer, since the market rules will be affected by informal money that, in unequal competition with the formal market, will disrupt the current chain of circulation of goods by trying to establish new rules dictated not by market logic. This market offer of excess money makes it challenging for the consumer to get goods and services at better prices for them, but it also affects businesses by disrupting the competitive environment, affecting the reduction of the productivity of economy.

But the effect of money laundering does not end there, as the social costs of money laundering include allowing drug traffickers, smugglers and corrupt politicians and officials to expand operations and transfer economic power from the market, government, and citizens to these the last. In extreme cases, money laundering can lead to a complete takeover of the legitimate government, which cannot be ruled out as an option in a market country with a hybrid democracy and poor population.
The dire consequence of all this is that the political system will continue to buy voters with their money. This form of corruption has occurred and still occurs through redistribution.

A classic example of this is the construction sector.
The money that is given due to the legalization of informal money through a residential construction through an administrative process can make many individuals and businesses related to construction feel grateful. However, the builder who cleans the money is the one who invests in the economy, either by working more or by a formal amount of his money, so in such situations, capital is taken out of the context of the current economy and economic activity is negatively affected for due to wrong incentives.

Governments and administrations in these last two decades, whose function should be to provide services to citizens, have taken on the role of an authority that observes and invests on behalf of the population, all under the guise of benevolence. But often this “benevolence” succeeds in buying votes in a democracy or promoting the approval of the regime in an autocracy.

And here we are now.

Over the past 20 years, both major parties in the country have joined the social policies and reforms for integration by turning to populism and implementing “benevolent” social and development policies. And then, especially in the last few years, short-term politics began to dictate the actions of the budget towards the increase of burden of the public debt. This borrowing by going to foreign markets for credit started with the argument of economic empowerment, but in fact the economy in this last decade has not grown more than 2.5 percent per year. This increase shows that the taking of debts has not gone entirely for the reason it was taken.
And this year, the inflation was an unexpected result.
Inflation of assets (buildings and machinery and lek) has long been on the rise, but the trend went unnoticed because the focus is on consumer price indices (CPI). But suddenly, with supply chain problems, CPIs began to rise rapidly, and politicians try to diffuse political responsibility as they have long done with a marked lack of political and financial irresponsibility.
Politicians have so far preferred to ignore or minimize the problem, as the austerity measures needed to solve the issue would remove the means to appease voters with money.

But this money is not a gift from a “benevolent government”.
They are capital that is being squandered by others.

The Bank of Albania, which is the main guardian of the Lek’s stability, tries to reassure the public by stating that this is a momentary phenomenon, caused by short-term supply chain problems and effects from foreign and energy markets.
But old and new politicians hypocritically even avoid the reason. In fact, each of the political parties and the governments they have implemented are responsible for not coping with the current inflation, as they are the ones who, with their decisions, have created large public deficits and irresponsible overspending.

And wages and pensions that would have had to rise for increased welfare are now at the survival level for over half the population.
The situation calls for honesty and common sense.

But they are in short supply.

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