The Albanian lek’s recent strengthening in the exchange rate is positively influencing the value of Foreign Direct Investments (FDI) in Albania.
Data from the Bank of Albania reveals that, during the first half of this year, the stock of Foreign Direct Investments in the country surged to 12.38 billion euros.
The stock of Foreign Direct Investments has grown by approximately 1.3 billion euros or 11.9% since the year’s commencement. The rise in the stock of direct investments during this period significantly surpasses the influx of new investments.
The Bank of Albania explains that, although these figures might initially appear paradoxical, the disparity is attributable to distinct methodologies for evaluating new inflows and the stock of foreign direct investments.
According to international methodologies, inflows are assessed using the average exchange rate for the period, while the stock is evaluated using the exchange rate from the final day of the period, in this case, the rate on June 30, 2023.
The Bank of Albania further clarifies that changes in the stock result not solely from new inflows but must also consider fluctuations in the exchange rate, price variations, and other factors. Consequently, the stock of foreign investments is periodically revalued to reflect changes in asset prices.
In recent years, the Albanian lek has demonstrated a strengthening trend in its exchange rate against foreign currencies, especially the euro. However, this year, the lek’s appreciation has accelerated notably.
At present, the euro-lek exchange rate exhibits an annual decrease of around 10%, with the rate falling as much as 14% at its lowest point in July this year.
This exchange rate not only influences the stock but also the new inflows of foreign direct investments.
While new foreign investments primarily come in foreign currencies, the reinvested earnings of foreign companies are reported in lek, which is then converted into euros – the currency used for Balance of Payments statistics.
The significant increase in the proportion of reinvested earnings within the structure of Foreign Direct Investments can be partially attributed to the lek’s strengthening in the exchange rate.
In recent years, reinvested earnings have become a dominant element within the structure of Foreign Direct Investments.
For the first half of this year, the value of reinvested earnings from foreign enterprises reached 376 million euros, marking an almost 12% increase compared to the same period in the prior year.
Reinvested earnings constituted 55% of the total value of foreign direct investments for the first half of 2023.
These statistics indicate that the recent record levels of foreign direct investments can, in part, be ascribed to the strengthening of the lek in the exchange rate.
