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Contingency fund for exchange rate fluctuations

2024-01-27 13:24:03Biznes SHKRUAR NGA REDAKSIA VOX

Contingency fund for exchange rate fluctuations

Exchange rate fluctuations are viewed with concern by the Government, which has provided medium-term protective measures for this purpose. For the period 2025-2027, it envisages the creation of a contingency fund precisely to protect against strong fluctuations of the lek in relation to currencies, as well as interest rates. In the Macroeconomic and Fiscal Framework 2025-2027, it determines that for each year.

In each planned budget year, a special contingency of not less than 0.7 percent of total budget expenditures must be included, to compensate for potential risks from fluctuations in exchange rates or interest rates, with an impact on the level of debt , the Government emphasizes in the Document. "In accordance with this provision (fiscal rules) of the Organic Budget Law, the 2025-2027 framework includes for each year in a separate item of it, named "Contingency for debt risks, etc.", a contingency of no less than 0.7 percent of total expenses", is specified in the program of medium-term budget ceilings.

Likewise, the Government does not rule out the possibility that any strong fluctuation in the exchange rate will significantly affect the external debt in the medium term. In the 2024 budget, it predicts that interest expenses are expected at the level of 66.2 billion ALL or 2.7% of GDP, but due to uncertainties, it has also foreseen a reserve of 5.3 billion ALL or almost 50 million euros to mitigate the risks of possible from fluctuations in interest rates or exchange rates.

Meanwhile, in the Document of the Economic Reforms Program (ERP) 2024-2026, the Government emphasizes that the performance of the external debt brings with it uncertainty, for which reason it also calculates two risk scenarios, simulating differentiated effects of shocks to the interest rate. interest and exchange rate. In the first Government scenario, the average interest rate paid on external debt increases permanently by two standard deviations over the forecast horizon. In the second scenario, the local currency takes a non-permanent devaluation shock of 10% compared to the base scenario for 2023.

The simulation results indicate a greater sensitivity of the gross external debt to a 10% devaluation of the currency. The deviations of the debt-to-GDP ratio at the end of the forecasting horizon compared to the base scenario are about 3 percentage points in the case of interest rate shocks and about 6 percentage points in relation to the gross domestic product in the case of exchange rate devaluation of exchange. In this case, the external debt would rise to 54% of the Gross Domestic Product.


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