TIRANA, Nov. 29 – Money outside Albania banks hit a historic high during this year to account for a fifth of total currency in circulation, triggering concerns over a hike in informality amid a sharp decline in interest rates that has waned investor interest in traditional bank deposits and the emerging investment funds.
Central bank data shows money outside banks hit a record high of 268.8 billion lek (€2.1 billion) to account for 21.5 percent of currency in circulation in the country’s financial system at the end of the third quarter of 2018, up 3.5 billion lek (€28 million) compared to December 2017 and 19 billion lek (€155 million) compared to the end of 2016.
Experts link the hike with a sharp decline in interest rates for savings denominated in the national currency and Europe’s single currency and a possible hike in tax evasion at a time when private investment remains sluggish amid slowly growing credit due to a still high level of non-performing loans keeping lending standards high.
Commercial banks operating in the country have earlier identified a rise in informal borrowing by both businesses and households as a key concern for poor demand for new loans despite loan rates having considerably dropped in the past few years due to consecutive cuts in key interest rates.
Yet, the country’s construction sector has revived and turned into a key driver of the economy following a long-ailing period in the aftermath of the global financial crisis but amid sluggish growth in credit, triggering accusations of money laundering by the main opposition Democratic Party and some economy experts who also link the Euro’s free fall against the Albanian lek with an alleged surge in drug and crime proceeds illegally entering the country.
There are also rumors that a vetting process that Albania has been applying since early 2018 as part of a justice reform scanning judges and prosecutors over their wealth could have triggered a withdrawal in savings from the banking system due to tight criteria applied on justifying assets.
Experts link Albania’s high level of money outside banks with a cash tradition and high levels of tax evasion at around 30 percent of the GDP. Money circulating outside banks is estimated at about 10 percent in the Eurozone and even some regional Western Balkan countries.
Albania’s central says the high level of cash use is characteristic of developing economies, poor financial education and inadequate infrastructure.
The Bank of Albania monitors money outside banks only for the national currency, but says it has no information about Euro or dollar cash amounts in the country which some experts have linked to the sharp strengthening of the Albanian national currency with a negative effect on the country’s Eurozone destined exports and high level of Euro-denominated deposits.
“The Bank of Albania measures the amount of money in circulation inside and outside banks, mainly related to the national currency, lek. We have no information regarding foreign currency, mainly euro but also dollar amounts circulating outside banks,” governor Sejko has earlier said.
Euro-denominated deposits and loans, at a total of €4 billion, comprise about half of the total savings and credit in Albania’s banking system, making the Albanian economy highly euroised and limiting the impact of Albania’s easier monetary policy in boosting sluggish consumption and lending.
Currency outside banks in Albania has followed a rising trend during electoral years, giving rise to speculations about money being used in electoral campaigns non-transparently and even vote-buying allegations.
The hike in currency outside banks started in late 2008 at the outbreak of the global financial crisis when Albanian savers massively withdrew deposits from Greek-owned banks in the country in panic over the critical situation of their parent banks. The situation later stabilized following some legal changes making subsidiaries of foreign owned banks in Albania operate as independent from their parent banks.
The Albanian economy continues remaining largely cash-based with cash withdrawals dominating card transactions despite the number of debit and credit cards rising and online banking gaining ground.
The hike in money outside banks comes at a time when both deposits and investment fund assets declined in the first three quarters of this year, partly due to Euro’s depreciation against the Albanian lek, but mainly as a result of withdrawals due to lower interest rates.
Deposits in the country’s banking system dropped to a total of 985.5 billion lek (€7.87 billion) in Sept. 2018, down 16 billion lek (€129 mln) compared to the end of 2017, according to Albania’s central bank.
Meanwhile, both the number of investors and net assets in the now five investment funds dropped during the first three quarters of this year as yields on government securities where local operators heavily invest hit new lows after the key interest rate was cut to a new all-time low of 1 percent last June by Albania’s central bank in a bid to stimulate credit growth and curb negative effects from the sharp depreciation of Europe’s single currency against the Albanian lek.
Net assets in the five majority foreign-owned collective funds dropped by a significant 9.7 percent to 65.6 billion lek (€520 mln) compared to the end of 2017, accounting for around 4.3 percent of the country’s GDP and about 7 percent of the bank deposits.
