Currency and Monetary Policy

Currency and Monetary Policy

For decades Albania's government artificially maintained the exchange rate of the country's currency, the lek, at between L5 and L7 to US$1 without regard to production, prices, the external market, or other factors. Among the casualties of the economic collapse of the early 1990s was the government's control over public finances and monetary aggregates; another victim was the lek's facade of stability. An enormous budget deficit, brought on in part by huge government subsidies to money-losing enterprises during a period of almost complete breakdown in production, led to triple-digit inflation. The regime took steps to impose monetary discipline by suspending payment of wage increases. To slow inflation, the government promised to cut its budget and eliminate price supports and subsidies to loss-generating state enterprises.

The government's first tentative step toward currency convertibility came when the August 1991 law on economic activity legalized the exchange of foreign currency for leks at rates set by the State Bank of Albania or by the private foreign currency market. A month later, the government devalued the lek by 150 percent and pegged it to the European Currency Unit (see Glossary). The inflationary spiral quickly drove the lek's value downward. Foreign businesses had no choice but to reinvest lek profits, despite the government's announced intention of introducing a fully convertible lek, because the acute shortage of foreign-currency reserves made convertibility impossible.


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