Holding cash by businesses as a survival strategy

In 2024, the Albanian economy has shown stable growth and declining inflation, creating a favorable environment for economic activity and financial stability.

According to the Bank of Albania, the economy grew by 3.8% in 2024, driven by increased household spending and business investments, particularly in the services and construction sectors.

Inflation declined rapidly, marking a full recovery from the shocks of rising international prices. By the end of 2024, inflation is expected to be around 2%, below the Bank of Albania’s target of 3%.

The Bank of Albania has maintained an accommodative monetary policy to support economic growth and reach its inflation target. In 2024, the bank planned to purchase €330 million to increase foreign exchange reserves, aiming to raise them to €7.4 billion by 2026.

Key indicators of Albania’s economic and financial health, such as public and external debt, have improved. Additionally, the ratio of non-performing loans has declined, reflecting a better quality of the loan portfolio.

In Albania, non-financial corporations[1] increased their cash balances during the pandemic, creating a liquidity buffer that has helped them cope with potential interest rate hikes and maintain stable levels of economic activity.

Interest rates have remained low, stimulating demand for credit and investment. However, the IMF has recommended additional measures to curb the growth of real estate credit, to preserve financial stability.

In 2024, the value of gold rose by 26%, reaching the highest level since 2010. This increase was influenced by the ECB’s accommodative monetary policy and global tensions that drove investors to seek safe assets such as gold.

The IMF forecasts stable economic growth for 2025–2029 at around 3.5%, supported by domestic demand and tourism. Inflation is expected to return to the Bank of Albania’s target after 2025, reflecting price stabilization and sustained economic growth.

In 2024, the Albanian economy experienced stable growth and falling inflation, fostering a favorable climate for economic activity and financial stability. The accommodative monetary policy and growing foreign exchange reserves contributed to price stability and supported economic growth. However, it remains important to monitor global developments and take measures to preserve financial stability and ensure sustainable growth going forward.

According to a dedicated IMF assessment on the impact of U.S. monetary tightening and the resilience of the non-financial corporate sector[2], with a focus on cash holdings, two key aspects were examined regarding the transmission of monetary tightening and its effects on how corporations respond to rising interest rates and their economic activities:

First, there has been a decline in net interest payments. As monetary policy tightened, net interest payments by non-financial corporations were halved. This occurred despite higher interest rates—an unusual trend compared to past tightening cycles, which typically saw increased interest payments. The main reason for this was that corporations already held long-term debt with low-interest rates, reducing their exposure to rising rates.

Corporations also accumulated more liquidity during the pandemic, increasing their cash balances, which in turn eased their interest payment burdens. This reflects a strategic financial adaptation to mitigate potential consequences of tighter monetary policy.

Second, there is a negative correlation between the policy rate and net interest payments. Corporations with higher cash holdings during the pandemic were more inclined to increase capital spending and support employment, in contrast to those with lower cash reserves. This indicates that such businesses are less sensitive to interest rate increases and can continue investing and expanding economic activity despite monetary pressures.

Due to the accumulation of liquid assets during the pandemic, these firms have managed to shield portions of their economic activity (such as investments and employment) from the impact of rising interest rates, helping to maintain economic resilience under tight monetary conditions.

Building on this evaluation of the U.S. non-financial market, the following analysis explores the implications for monetary policy transmission in Albania’s economic and financial environment.

In the post-pandemic years, monetary policy in Albania has transmitted the easing of interest rates more slowly into the economy.

This analysis suggests that the increase in cash holdings by non-financial corporations has limited some of the usual effects of tight monetary policy, such as rising interest payments and reductions in capital expenditures.

It also suggests that investments and employment may have remained relatively unaffected by monetary tightening, creating a divergence between economic sectors in how they respond to stricter monetary policy.

Holding cash by non-financial corporations has played a critical role in mitigating the impact of tighter monetary policy, insulating some sectors from the effects of higher interest rates. This mechanism has allowed businesses to sustain high levels of activity—including investment and employment—despite restrictive monetary conditions.

However, the current fiscal and financial situation of Albanian corporations, in the context of an underdeveloped financial market, creates a unique dynamic regarding cash holdings by non-financial corporations.

In Albania, capital and financial markets are still at a basic stage of development. This causes Albanian businesses to rely heavily on bank financing or their own accumulated capital. With an insignificant bond and equity market, long-term financing options are limited.

Businesses hold cash to cover emergency needs and to compensate for the lack of access to alternative financing sources. For instance, companies in the construction and manufacturing sectors tend to accumulate liquidity to cope with extended cash collection cycles.

Between 2020–2024, some companies in the services and trade sectors reported increased bank deposits to offset delays in client payments and to preserve stability in an uncertain economic environment.

Interest rates in the Albanian market are higher than the regional average, influencing corporate financial management practices. Due to the high cost of borrowing, Albanian companies prefer to maintain liquid reserves to finance operational activities and investments.

The absence of alternative financial products limits corporations’ ability to manage debt efficiently. This compels them to avoid short-term borrowing to meet daily needs.

An IMF study in 2023 showed that Albanian small and medium-sized enterprises (SMEs) relied primarily on equity, holding up to 20% of their assets in cash to avoid dependence on high-cost loans.

Albanian corporations often hesitate to commit to long-term capital projects due to economic uncertainty and fiscal instability.

Liquidity is more commonly used for projects with quick returns rather than for long-term investments. Since a large portion of investments are financed with cash, companies are less exposed to interest rate fluctuations.

Tourism sector companies between 2022–2024 used accumulated cash to finance small expansions, such as opening new units or improving existing capacities, thereby avoiding bank loans.

In some cases, high levels of cash holdings are associated with informality and tax evasion:

Some Albanian businesses prefer to use cash to avoid taxes or conduct transactions outside the formal financial system.

Due to deficiencies in the financial and fiscal system, some companies report inaccuracies in liquidity management.

In the retail sector, reports from the Bank of Albania have shown a high tendency for cash use in large transactions, highlighting the high level of informality in the economy.

Uncertainty in the Albanian economic environment—including inflation volatility, depreciation of the Euro and U.S. dollar, and shifts in fiscal policy—affects corporate decisions to hold cash. Corporations hold liquidity to navigate risks such as sudden cost increases or declining demand. They are more inclined to preserve stability than to take risks through large investments.

During the 2022–2023 energy crisis, many industrial and commercial companies in Albania used cash reserves to manage rising energy costs and maintain operations. In Albania, holding cash by non-financial corporations is a survival and adaptation strategy in response to a limited financial market and an unstable economic environment. This situation reflects the lack of financing options and macroeconomic uncertainty, pushing firms to use liquidity as a tool to maintain operational flexibility and stability.

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[1] Korporatat jofinanciare janë entitete juridike që angazhohen kryesisht në aktivitete ekonomike jofinanciare, si prodhimi i mallrave dhe ofrimi i shërbimeve. Ato përbëjnë një sektor të rëndësishëm në ekonominë e një vendi dhe zakonisht kategorizohen sipas aktivitetit të tyre kryesor.

[2] https://www.imf.org/-/media/Files/Publications/WP/2024/English/wpiea2024245-print-pdf.ashx