IMF warns over strong lek and real estate credit risks in Albania

The International Monetary Fund has flagged the overvaluation of the Albanian Lek as a growing risk to the country’s economic development and to investor confidence. In its latest review, the IMF urges Albanian authorities to allow greater flexibility in the exchange rate and to rely more on interest rate policy to maintain price stability.

Why is this important: The ALL’s appreciation has helped contain inflation, but the IMF warns it may harm exports, deter foreign investors, and reduce the economy’s ability to absorb external shocks. The recommendations come at a time when inflationary pressures remain and credit growth — especially in real estate — continues to raise concerns.

Context: In its economic outlook for Albania, the IMF advised that the exchange rate should not be artificially constrained, and that it should act as a natural buffer against inflationary shocks.

“The exchange rate should continue to play its role as a shock absorber for inflation. Authorities should allow more flexibility in the exchange rate and use interest rate policy as the main instrument for price stability,” the IMF stated.
“The strategy to shield the economy should be gradual, as exchange rate fluctuations could further raise inflation.”

The ALL has gained considerable value in recent years, driven by strong remittances, tourism revenues, and foreign investment inflows. However, exporters and investors have warned that a persistently strong currency undermines competitiveness and profitability.

Real estate concerns: The IMF also highlighted ongoing vulnerabilities in the real estate market, noting that property-related loans remain a key source of financial risk.

“Non-performing loans fell from 50% of total loans in 2014 to 25% in 2024. However, credit risk remains significant, especially in the real estate sector,” the IMF said.
“Recent assessments suggest a need to restrain new lending for real estate investments, which account for two-thirds of non-performing loans.”

Banking sector transformation: Despite the risks, the IMF praised the structural improvement in Albania’s financial sector over the last decade. It noted that macroeconomic stability and comprehensive reforms have led to a healthier and more resilient banking system.

The report serves as a policy signal to the Bank of Albania and other financial authorities as they weigh their next moves on interest rates, monetary tightening, and credit oversight.