What further lowered the exchange rate level at the start of the 2024 tourist season?

Euro in its exchange with the Lek at the beginning of May 2024[1] has depreciated on average by 3.7% since the end of 2023. If we look at the exchange rate of the Euro with the Lek, at the beginning of May 2023 and the end of 2022, the depreciation was 2.8 %.

From this comparison, we see that the Euro has depreciated more in the first 4 months of 2024 compared to the same period of 2023.

But what further decreased this balance of the Euro with the Lek in 2024?

In the analysis of the influencing factors for the exchange rate[2], we will try to align the data of the first quarter of 2024 with those that influenced in 2023 the devaluation of the Euro, the American Dollar and the British Pound and the strengthening of the Albanian Lek.

In this logic of the analysis of the many factors that affect the exchange rate, we are listing the reasons based on the data published by the institutions, according to the scope of their coverage[3].

1. Albania’s peak tourism season is almost upon us, and thanks to the weak Euro, this year can be a particularly unaffordable time for foreign visitors who want to see and taste in person the beauty and spectacular cuisine and also nature and history of Albania’s.

However, although the government and the direct institutions for the administration of hospitality policies cannot promise small crowds, the drop in currency has not gone unnoticed, with the country welcoming 10.3 million visitors in 2023, the largest historical number.

The first quarter of 2024 marked the next record, in which the number of foreign visitors exceeded the level of 1.54 million foreign visitor arrivals or 464 thousand visitors (+ 43.3%) more than the first quarter of 2023, where 80% of them came from neighboring countries, as well as Italy and Greece and the rest from Eastern Europe (4.5%), Western Europe (5%) and the rest (10.5%) came from Northern Europe, Linen, Africa, America, Asia and the Middle East[4].

If we calculate that in the first quarter of 2024 the number of Albanian citizens exceeded the level of 1.75 million exits outside Albania, or 361.7 thousand visitors (+ 25.9%) more than the first quarter of 2023, then the balance of entry and exit of foreigners and Albanians is 102.7 thousand visitors.

Based on the balance of payments for the first quarter of 2023, the inflow of foreign visitors to the economy recorded a value of 624 million Euros. In the absence of data from the Bank of Albania for the first quarter of 2024, on a comparative basis related to the increased number of visitors of 43.3% more, the calculation reaches an entry of the main currencies up to 900 million Euros.

Based on the balance of payments for the first quarter of 2023, the outflow of foreign currencies from the economy recorded a value of 435 million Euros. In the absence of data from the Bank of Albania for the first quarter of 2024, on a comparative basis related to the increased number of Albanian outflows of 25.9% more, the calculation reaches an inflow of the main currencies up to 550 million Euros.

The difference between the values entered into the economy by tourists and the values left by the Albanian economy for tr.1 2024 compared to tr.1 2023 is 350 million Euros.

Notice! The effect of foreign exchange inflows from foreign visitors has an impact on the devaluation of foreign exchange rates.

2. Albania’s trade balance in Q1 2024[5] results in a negative difference (exports minus imports) and is 113.7 billion ALL (up to 1.09 billion Euros)[6]. In the first quarter of 2023, Albania’s trade deficit was ALL 85.7 billion (up to EUR 790 million). This difference shows that Euros (1.09 billion in 2024 and 790 million in 2023) have remained in the economies of the countries from which Albanian businesses imported. The main impact comes from the drop in the value of Albanian exports, which also have an effect on the drop in consumption.

The change in the values of trade deficits for tr. 1 2024 with tr. 1 2023 is 300 million Euros.

Notice! The effect of currency outflows from the country for imports has an impact on the evaluation of the foreign exchange rate.

3. Remittances in the first quarter of 2023 were worth 214 million Euros. In the absence of data from the Bank of Albania for the first quarter of 2024, on a comparative basis related to an insensitive impact compared to 2023, our calculation does not go beyond the year 2023 and it remains that the remittances for the first quarter of 2024 be at the levels of tr.1 of 2023.

Notice! The effect of currency inflows from senders outside Albania has an impact on the devaluation of the exchange rate of foreign currencies.

4. Foreign investments in the first quarter of 2023 were worth 308 million Euros. In the absence of data from the Bank of Albania for the first quarter of 2024, as well as with a comparative basis related to an insensitive increase compared to 2023, our calculation does not exceed the year 2023 and remains that they will be around that value. The main reason is the withdrawal of SHELL from the forecast for new investments, as well as a stability in the demand for real estate during 2024[7].

On the other hand, the high and increasing levels in circulation of physical money outside banks even during 2024 affects the decisions of serious investors to invest in other sectors.

Even the economic performance of Albania, although resistant to the crises of recent years, always compared with its neighbors, does not have the stability in time to convince large investors to invest their capital[8].

Notice! The effect of inflows of foreign currency into the country from foreign investments has an impact on the devaluation of the foreign currency exchange rate.

5. The public debt[9] at the level presented at the end of the first quarter of 2023 was 1.38 trillion ALL and lower than the previous quarter by – 1.62 billion ALL. At the end of the first quarter 2024, the public debt was 1.36 trillion ALL and is lower than the previous quarter -5.65 billion ALL.

If we evaluate their impact at the end of the first quarter 2024 we understand that it is smaller compared to the end of the first quarter 2023.

Therefore, not receiving a new debt from foreign markets is a positive indicator for the weakening of the Lek and the evaluation of the exchange rate of foreign currencies.

6. General public expenditures for the 3-month period of 2024, reached about 130.4 billion ALL (up to 1.25 billion Euros) with a realization of 96 percent of the plan for the period. Whereas, compared to the same period of 2023, this item was 4.1 percent higher or about 5.1 billion ALL more[10].

The additional effect in Tr.1 2024 from Tr.1 2023 is up to 49 million Euros.

Notice! The effect of the realization of public expenses (salaries, operating expenses and investments) has an impact on the evaluation of the exchange rate of foreign currencies, since the supply of Lek is strengthened.

7. The interest rate of lending to the economy[11] for the first quarter of 2024 remained at the levels of 2023, at 3.25%.

Compared to Tr.1 in 2023, there seems to be little change in the direction of the interest rate of lending to the economy, while obviously this increase in the interest rate in 2023 has shrunk lending to the economy[12] and individuals.

Notice! The effect of the decrease in lending from the financial system has an impact on the evaluation of the exchange rate of foreign currencies, as the supply of Lek strengthens.

In a summary of the influencing factors for the first quarter of 2024 compared to the first quarter of 2023, we understand that:

– the net effect from tourism has an impact on the devaluation of the Euro and other currencies, but largely amortized by the effect of the negative trade balance. The effect from public spending has an impact on the weakening of the Lek, completely amortizing those impacts from the tourism factor.

– the effect from remittances and foreign investments are not influential in the devaluation of the Euro, since their effect is amortized by not receiving a new debt, so there is no new entry of the Euro.

From the analysis of the influencing factors in the devaluation or evaluation of the exchange rate, it can be seen that the factors of the formal economy and its developments are not the main influencing factors in the strengthening of the lek. The main influences on the decline of the Euro by at least 3.8% of its value by the end of 2023 (for the first 4 months of 2024) is an influence that comes from informal factors.

Price volatility caused by informal (black) money in the financial system is affecting the credibility of the economy, where rational entrepreneurs invest mainly in the country’s real estate, which accounts for ¼ of foreign investment, after taking into account the country’s risk in investments in other sectors.

[1] https://www.bankofalbania.org/Tregjet/Kursi_zyrtar_i_kembimit/

[2] foreign exchange inflows from tourism, trade deficit, remittances, foreign investment, new debt, public investment and interest rate increases

[3] The calculation for each of the factors is done in Euro, for ease of understanding their impact

[4] https://www.instat.gov.al/media/13226/lëvizjet-e-shtetasve-në-shqipëri-mars-2024.pdf

[5] https://www.instat.gov.al/media/13192/tj-mars-2024.pdf

[6] https://www.bankofalbania.org/Tregjet/Kursi_zyrtar_i_kembimit/

[7] https://financa.gov.al/wp-content/uploads/2024/04/Ekonomia-dhe-Buxheti-Shkurt-2024-2.pdf

[8] https://altax.al/ekonomia-qe-kemi-sot-e-cenuar-nga-investimet-joproduktive-dhe-politika-e-demshme/

[9] https://financa.gov.al/buletini-statistikor-i-borxhit/

[10] https://financa.gov.al/newsroom/permbledhje-e-performances-paraprake-te-te-ardhurave-dhe-shpenzimeve-per-3-mujorin-2024/

[11] https://www.bankofalbania.org/Shtypi/Njoftimet_per_shtyp/Vendimmarrja_e_Keshillit_Mbikeqyres_ne_mbledhjen_e_dates_3_prill_2024.html

[12] https://altax.al/si-mundet-njekohesisht-te-ulet-inflacioni-dhe-te-rritet-ekonomia-me-produktivitet/