Money outside banks and the impact of informality in Albania

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This paper aims to provide an in-depth analysis of two main phenomena that influence economic development and financial stability in Albania and several other countries in the region, namely North Macedonia, Serbia, and Bosnia and Herzegovina.

These phenomena include the informal economy and the use of money outside banks, which have become increasingly visible and have had significant impacts on fiscal policy, investments, and citizens’ trust in the banking system.

In this analysis, we will examine:

  1. Overview of the informal economy and use of money outside banks

We will assess the levels of the informal economy and money outside banks in each country, including Albania, North Macedonia, Serbia, and Bosnia and Herzegovina, and we will seek to understand how these phenomena affect GDP, trust in banks, and tax collection.

  1. Analysis of the informal economy and money outside banks in Albania

This analysis will focus on the situation of the informal economy in Albania and will address how it has led to a high level of money held outside the banking system.

Albania has invested heavily in fiscalization and digitalization, but the level of informality remains high, making it difficult to formalize economic activities and to benefit from fiscal policies.

  1. Efforts to manage the informal economy and digitalization in regional countries

This section will examine the investments and reforms undertaken in North Macedonia, Serbia, and Bosnia and Herzegovina to manage informality and to encourage the use of banking channels.
We will analyze how far these countries have progressed in reducing informality, increasing trust in the banking system, and the impact of technology on improving administration and business formalization.

  1. Effectiveness of Fiscalization and Digitalization policies in managing the informal economy

We will analyze how fiscal policies and investments in technology—such as fiscalization systems and the digitalization of administration—have helped manage informality and stimulate economic activity in each country in the region.

This section will compare the effects of implemented policies and the opportunities for further improvement.

  1. Comparison of fiscal productivity in Albania and regional countries

A direct comparison will be made of the effectiveness of fiscalization and formalization policies in Albania, North Macedonia, Serbia, and Bosnia and Herzegovina.

This comparison will be based on real data and an analysis of the impact of various policies on productivity growth and the formalization of different sectors of the economy.

  1. Conclusion and reflections for the future

The final section will provide an assessment of the opportunities and challenges that Albania and other regional countries face in improving the formalization of the economy, increasing trust in banking systems, and promoting the use of technology to manage informality.

This will include recommendations for improving policies and investments in technology to achieve sustainable economic growth and financial stability.

This material is structured to provide a detailed overview of the challenges and opportunities these countries face in managing informality and the use of money outside banks, as well as to assess the impact of different policies and investments on economic development.

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Description

In this study, we have analyzed the factors that influence the informal economy and the use of money outside banks in Albania and several other countries in the region, such as North Macedonia, Serbia, and Bosnia and Herzegovina. Here are the summaries and possible comparisons for each aspect:

  1. GDP and the informal economy

Albania (2023) has a GDP of 23.7 billion euros and an informal economy that constitutes 33%-35% of GDP (~7.86-8.3 billion euros), while money outside banks is around 5-7 billion euros (21%-29% of GDP).

North Macedonia (2023) has a GDP of 14 billion euros and an informal economy of 20%-25% of GDP (~3-3.5 billion euros), with money outside banks around 2 billion euros (14%-15% of GDP).
Serbia (2023) has a GDP of 70 billion euros, with the informal economy reaching 25%-30% of GDP (~17-21 billion euros), and money outside banks of 5-6 billion euros (7%-8.5% of GDP).

Bosnia and Herzegovina (2023) has a GDP of 22 billion euros, with the informal economy constituting 30%-35% of GDP (~6.6-7.7 billion euros), and money outside banks around 3-4 billion euros (14%-18% of GDP).

  1. Fiscal and digital policies

Albania has heavily invested in fiscalization and digitalization of public administration, including electronic invoicing systems and real-time monitoring. These investments have increased tax collection, but the major challenge remains the high level of informality and low trust in banking systems.

North Macedonia has undertaken reforms to formalize businesses and has improved digital infrastructure, but progress is still limited by the low use of technology to manage informality.
Serbia has implemented reforms in the tax system and the fight against corruption, as well as improved trust in the country’s banks, yet the use of cash remains high.

Bosnia and Herzegovina has used technology to channel remittances through formal channels and has improved social protection and health insurance for informal workers, but there is still room for growth in the use of technology.

  1. Effectiveness of policies and productivity

Albania has made progress in fiscalization and digitalization, but the high level of informality and low trust in banks and financial systems have limited the positive effects.

North Macedonia, Serbia, and Bosnia have achieved improvements in trust in domestic banks and in tax systems, reducing informality and increasing opportunities for formalization, but these countries also face similar challenges.

  1. Informal economy and money outside banks

The informal economy generates a lot of money outside banks for several main reasons:

Tax avoidance

Businesses and individuals in the informal sector avoid taxes and social contributions, preferring the use of cash to avoid monitoring and control by authorities.

Lack of trust in banking systems

Many individuals and businesses are skeptical of banks, preferring to keep income and transactions outside formal channels.

Anonymity and flexibility of cash

The use of cash offers anonymity and flexibility for those involved in informal activities, which are not controlled.

Culture of cash usage

In some countries, there is a strong culture of using cash, which pushes individuals and businesses to keep money outside banks.

While Albania has significantly invested in technology and fiscalization, it faces a major obstacle from the high level of informality and use of cash.

Compared to North Macedonia, Serbia, and Bosnia, which have improved trust in banking systems and the formalization of businesses, Albania can further improve trust in banks and financial infrastructure to enable a healthier growth of the formal sector.

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