Albania's Cash Economy Booms Amid Tourism Surge and Central Bank Intervention

The Albanian economy is experiencing a paradoxical situation where it has one of the highest levels of cash circulation outside of banks in Europe. According to the latest data from the Bank of Albania, the volume of money circulating outside the banking system reached 534.1 billion lek in August, equivalent to 5.8 billion euros.

This represents a 15.2% increase over the past year, adding 766 million euros in physical cash to the economy. The country's GDP is around 23 billion euros, making the amount of cash circulating outside of banks almost a quarter of its economic output.

The surge in cash circulation can be attributed to several factors, including a growing tourism sector, a persistent informal economy, and the side effects of Central Bank intervention to contain the weakening of the euro. The tourism sector is particularly responsible for this increase, with foreign exchange inflows matching the growth of cash in the economy.

The Bank of Albania has been intervening aggressively in the market by buying billions of euros to protect Albanian exporters and tour operators whose margins are being squeezed by an overvalued local currency. This protective mechanism comes with a side effect: creating and injecting massive amounts of new lek liquidity into the banking system, which then 'flows' outside the financial network.