How would the devaluation of the lek affect public debt? - Scenarios/ 15-30% change in the exchange rate
The appreciation of the lek against the euro since January 2024 and onwards has brought benefits to the government's public debt, making it cheaper and on a downward trajectory.
But what would happen if the exchange rate changed and foreign currencies strengthened against the national currency?
In the medium-term public debt management strategy 2025-2029, an analysis has been made regarding the sensitivity of key debt indicators to changes in market indicators.
Regarding the exchange rate, the possible depreciation of the local currency beyond expectations, against the Euro or other currencies that make up the foreign debt portfolio, is said to have an impact on the trajectory of the debt level, slowing down the pace of the planned reduction.
In addition to the above, the depreciation of the local currency would also have an impact on the cost of debt. In the first scenario, a 15% exchange rate shock is applied in 2026 to the EUR/ALL and USD/ALL exchange rates, and in the second scenario, a 30% shock is applied in 2028 to the EUR/ALL and USD/ALL exchange rates.
The sensitivity analysis shows that a simultaneous increase in interest rates in the domestic and foreign markets could increase the interest rate to GDP ratio by 0.01% in the first scenario and by 0.3% in the second scenario. Meanwhile, a depreciation of the domestic currency by 30% in the extreme scenario would increase the debt to GDP level at the end of the Strategy period by 5.8% and the interest rate to GDP ratio by 0.21%.
Specifically, if at the current exchange rate, public debt is projected to reach 46.1% in 2029, with the 15% scenario, this target goes to 49.6% in 2029.
While in the 30% scenario, public debt is projected to be at 51.9 percent in 2029.
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