Eurasia Press & News
As the sustained rise in the value of the lek causes a crisis in exports, action is needed – but will a country that seemingly turns a blind eye to manifest criminality in whole sectors of the economy bite the bullet?
Albania’s government acknowledged lately that the country’s exporters are facing a crisis with a strange provenance: the strengthening of the national currency, the lek.
It has proposed changes in the law that aim to ease the difficulties for exporters and has posted the proposal for fast-track parliamentary procedures, which are normally used only in matters of an urgent nature.
According to the proposal, companies that export more than 70 per cent of their sales will be exempted from prepaying profit tax for at least two years.
In the Albanian tax system, profit tax is prepaid based on a calculation of the previous year’s profits. The measure doesn’t reduce the total burden of taxes for these companies but eases their liquidity difficulties by exempting them from prepayment obligations.
“The strengthening of the local currency in the economy of a country has a high impact,” the government explained in its explanatory note to parliament, accompanying the proposal. “Exports become more expensive, which decreases demand, while imports become cheaper, which increases demand for them,” the note added, suggesting that the current trend will lower demand for locally produced goods and slow economic growth.
Albania uses a flexible exchange rate regime, which means the currency fluctuates freely up and down, depending on supply and demand. This regime is preferred by free-market champions because it allows the market to regulate rates. If the lek is strong and imports become cheaper, then the outflow of hard currency used to buy these imports will increase, depreciating pressure on the currency.
However, there is one problem: the lek has strengthened continuously for almost five years, stating from a rate of 140 lek to one euro in 2016 to less than 105 lek per euro now.
This 25-per-cent rise in the value of lek means that any imported good or service is 25 per cent cheaper today than it was five years ago, while any exported good or service is equally more expensive.
Flatlining economy, but construction is booming
Over these five years, the economy has not grown much. IMF data say the economy between 2016 and 2022 grew by an average of 3 per cent. This is nothing abnormal for a developing country and lower than the growth potential estimated by the IMF, of about 4.5 per cent per year.
However, while the economy has not grown significantly, the construction sector has boomed. Tirana has been transformed into a big construction site, while large blocks of villas and apartments have been built also along the coast. Property prices have almost doubled, according to the Fischer Index calculated by Albania’s Central Bank.
Many believes the discrepancy between modest economic growth and a strengthened local currency – and a rapid increases in property prices – points to the presence of drug money in the country. Albania has relaxed checks on the source of money used to purchase properties by both locals and non-residents, and it is also easy to pay partly in cash, both to avoid taxation and extra checks.
Rapid growth in real estate prices has created a bifurcated economy where properties are brought and sold among the moneyed few while the rest of the nation is far outside that market.
In 2020 Albania was included on the grey list of the countries at risk for money laundering by Moneyval, the Council of Europe’s Anti-Money-Laundering Committee, while construction and real estate are widely considered to be sectors of choice for criminals that aim to launder or to just park the proceeds of illicit activities.
Problem? What problem?
The government denies that such a problem even exists. It claims the strengthened lek is result of good performance by the economy, including tourism, which has indeed posted strong gains following the 2020 pandemic.
Central Bank Governor Gent Sejko explained further in a press conference lately that both tourism and “the purchase of properties by non-residents” were behind the influx of extra euros into the economy.
However, this defies basic economic reasoning. Economic growth doesn’t necessarily lead to such a strengthening of the currency. Albania is a country with large trade and current account deficits and imports everything from fuel to food. If the number of foreign tourists grows, then the imports needed to serve them, such as food or fuel, must grow as well. In that case, both imports and exports grow while the exchange rate is not so strongly affected. Otherwise, faster economic growth cannot bring such massive changes in the currency rates, though drug money can.
Putting aside the debate on how and why the hard currency is influencing the exchange rate, the question is what can be done.
There are three possible solutions, two of which are equally painful while one, the most reasonable one, seems for the moment impossible.
Starting from the last, law enforcement should check the source of the money used to buy properties and seize them and follow confiscation procedures if documents are not presented on the lawful origin of the money.
Albania has become a de facto fiscal and money laundering paradise; proof of that can be found in the high number of cases in which drug dealers have been identified as entrepreneurs in the construction sector.
Even a purely political message, saying that Albania is not a welcoming country for such money, could help ease the flow of these illicit proceeds.
But this does not seem possible. Instead of concentrating on fighting money laundering, Prime Minister Edi Rama has pushed for a controversial fiscal amnesty, claiming the country needed it to fuel economic growth.
The two other solutions to the problem are these: One is: hands off. Do nothing. Let the lek strengthen up to the point when the drug dealers see that they are losing money in spending their hard-won euros cheaply. At a certain point, they will stop converting euros into fewer and fewer leks. That strategy implies also that the country’s ability to produce anything, from milk to shoes to touristic services, will be eroded further. Albania is already suffering from demographic collapse as people leave and the population ages.
The second solution is intervention by the central bank. The Bank of Albania has done it before: In 2018, when the lek strengthened from 136 to 124 lek per euro, the bank purchased some 300 million euros in an effort to contain the rise.
However, the Central Bank Governor on Wednesday insisted that the situation is very different now. Then, he recalled, the trouble was low inflation, which allowed the bank to pump leks in the market in exchange for euros. Now, the trouble is high inflation. And if the bank purchases more euros in exchange for leks, that means more inflation, albeit a less strong currency. So, the idea of the intervention by the central bank suggests that in order to protect exports, the general population must be taxed by extra inflation. The illogical and painful growth in real estate prices will be transferred to all goods and services as well.
Ultimately, the crisis in the exchange rate must be seen also as a consequence of a long-lasting moral crisis among the population at large. Too many people are not offended by the presence of crime money everywhere, even in their own corner bar, and cynical comments, that “the capitalism works in that way”, are not rare.
Ultimately, an economic model based on drug money that fuels construction and real estate will benefit the few at the expense of us all.
