The Impact of Economic Variables on Foreign Currency Loans in Albania. Evidence from 2002-2023

Abstract

This study examines the macroeconomic determinants of foreign currency loans (FCL) in Albania from 2002 to 2023, a period marked by significant financial euroization. Utilizing time-series analysis, including correlation, regression, vector autoregression (VAR), and Granger causality tests, we assess the impact of GDP growth, inflation, price level ratio (PLR), foreign direct investment (FDI), remittances, and trade balance on FCL. Our findings reveal that while initial correlation analyses indicated strong associations between FCL and remittances, as well as the trade balance, these relationships did not translate into significant causal effects in regression and VAR models. Specifically, lagged values of FCL and inflation were the only significant predictors of current FCL in the VAR model. Granger Causality Tests further confirmed the absence of significant causal relationships between FCL and the examined macroeconomic variables, with a marginal indication that past FCL values may influence FDI. This suggests that the dynamics of FCL in Albania are primarily driven by its own past values and inflation, rather than direct impacts from other macroeconomic factors. The results highlight the complexity of predicting FCL in a highly euroized economy and underscore the need for nuanced policy approaches to manage exchange rate risks and ensure financial stability.