FLASH
Shkruar nga Irena Beqiraj
When foreign companies reinvest profits, although it is considered an increase in capital and as such is presented as an increase in foreign capital, there is no additional monetary injection into either the company or the economy.
The best compliment I get and give to someone I disagree with is not "You're right," but "You made me think"!
Only reexamining knowledge helps you understand complexity where everything seems simple.
So the debate about whether the reinvested profits of foreign companies influenced the "Glorious Uprising" of the strengthening of the lek made me think and reread it again.
One of the most difficult distinctions for finance students to understand has always been the difference between net income and cash flow. In my not-so-simple Corporate Financial Analysis course, I always began explaining this distinction with the famous statement that "Net income is opinion, net cash flow is fact."
Net profit is an opinion because its value depends on the standards and methodologies followed in financial reporting, so the value of profit would also change depending on them. While cash flow does not. Therefore, when evaluating a company, analysts pay more attention to cash flow and not net profit.
That said, when foreign companies reinvest profits, even though it is considered an increase in capital and as such is presented as an increase in Foreign Capital, there is no additional monetary injection into either the company or the economy. So it is simply a movement of amounts without monetary effect from the profit account to the capital account, without affecting the company's net cash flow and without creating an additional monetary base in the economy.
The event of profit reinvestment is not associated with any new foreign exchange addition in the foreign exchange market, and as such creates neutrality in both the balance of payments and the exchange rate.
Since no cross-border money physically moves during a profit reinvestment to ensure mathematical neutrality and zero effect on the balance of payments, Eurostat's methodology determines that the 830 million euros reinvested during 2025 are recorded in the balance of payments in two parallel, offsetting accounts with opposite signs, i.e. simultaneously as both an input and an output, thus zeroing out their effect on the balance of payments as well.
This theoretical explanation is also supported by empirical studies.
International empirical evidence does not show a strong direct link between retained earnings (reinvested earnings) of foreign companies and domestic currency appreciation, precisely because retained earnings do not involve new flows or necessarily imply any foreign exchange transactions. Instead, the evidence shows only indirect effects, conditional on whether reinvestment and FDI are generally associated with higher productivity and export expansion.
In Albania, the structure of foreign investments has little or no connection with productivity growth and exports. In fact, their low or no productive nature significantly limits their effect on the economy.
In short, both theory and empirical studies converge on the same point: reinvested earnings have little or no impact on lek appreciation, because they do not affect the immediate supply and demand for foreign currency or domestic currency. Any impact they have comes indirectly through increased productivity and export incentives!
The ultimate goal of this debate is not to produce consensus, much less dominance, but to promote critical thinking, which is the trait that distinguishes an ordinary economist from a good economist.
An ordinary economist is like a driver who crashes on the right road!
Rritja e kapitalit mund te ndikoje ne rritjen e fluksit vetem kur vjen nga jashte jo nga rritja qe vjen nga fitimi i akumuluar.Nje bisnes mund te kete fitim neto te realizuar dhe nuk ka ose likuiditetet i ka negative.dmth borxhet tejkalojne asetet efektive.Nje bisnes falimenton kur ska para pavaresisht se eshte e sukseshme dhe eshte me fitim.Fitimi nuk rrit likuiditetin ,ne qoftese nuk ke shitur dhe mallrat jane aty,perkunder nuk ke mundedi te vazhdosh se ske para.