MOLDOVA: Net Purchases of Foreign Currency in Cash
Introduction
In Moldova, net purchases of foreign currency in cash from individuals by resident banks and currency exchange offices constantly and largely exceed net remittances (from all channels, including informal), which suggests that individuals sell more foreign currency in cash than they receive from abroad. The difference might be coming from informal or underground activities.
Scope, Methodology, Compilation Practices, and Data Sources
Scope
Adjusting the item 'currency and deposits-net acquisition of financial assets-other sectors’ by estimating the excess of net amounts of foreign cash sold by individuals to banks against estimates of net remittances (since 2008).
Data sources
- Information on sales/purchases of foreign exchange cash to/from individuals by commercial banks / monthly
- Information on sales/purchases of foreign currencies by independent foreign exchange offices / monthly
- Information on demand and supply of foreign exchange in the forex market / monthly
- Information about the deposits of commercial banks, on their own behalf and on the behalf of and their clients, by commercial banks / monthly
- Remittances statistics (balance of payments), the Reporting and Statistics Department, National Bank of Moldova (NBM) / quarterly
- Analysis of the exchange rate behavior in Moldova, 2017, the Economic Research Department, NBM
Compilation Practices
The estimation affects the item ‘currency and deposits - net acquisition of financial assets - other sectors’ in the financial account of the balance of payments (BOP). A comparison is made between the net supply of foreign currency in cash and net remittances in the same period.
If net remittances are smaller than the net supply of foreign cash, it is assumed that the extra cash sold comes from savings made from remittances received in the past (postponed consumption) or from other unknown sources (from the past or current period). In that case, the difference is recorded on the credit side as a decrease in other sectors’ currency and deposits assets and as an increase in currency and deposits of deposit-taking corporations on the debit side.
In the case when net remittances are larger than the net supply of foreign cash, that would reflect a growth in households’ assets in the form of foreign cash as a result of saving and would represent potential postponed consumption. The difference would be recorded as an increase in other sectors’ currency and deposit assets on the debit side (with the credit entry in remittances). In practice, however, this has never happened in Moldova so far.
These adjustments are accompanied by the analysis of the evolution of deposits of individuals and banks in FX and in national currency in order to exclude the inter-sectorial flows as a possible generator of positive or negative differences between the net supply of FX and net remittances for the current period. Several situations are possible:
The Analysis of the Evolution of Deposits
|
Commercial banks, national currency |
Commercial banks, foreign exchange |
Natural persons, national currency |
Natural persons, foreign exchange |
Economic agents, national currency |
Economic agents, foreign exchange |
Interpretation |
|
|
1 |
↓ |
↓ |
↓ |
↓ |
↓ |
↓ |
Actual outflow of FX from banks to other sectors |
|
2 |
↑ |
↑ |
↑ |
↑ |
↑ |
↑ |
Actual inflow of FX to banks from other sectors |
|
3 |
↑ |
↓ |
↓ |
↑ |
↓ |
↑ |
Intra sectoral flows (conversion of deposits in national currency into deposits in FX) |
|
4 |
↓ |
↑ |
↑ |
↓ |
↑ |
↓ |
Intra sectoral flows (conversion of deposits in FX into deposits in national currency) |
- A net decrease in deposits (both in FX and in national currency) of natural persons and of economic agents, accompanied by a net decrease in commercial banks’ deposits in FX and in national currency, which is a firm indication of outflow from banks to other sectors (row 1 in the table above);
- A net increase in deposits (both in FX and in national currency) of natural persons and of economic agents, accompanied by a net increase in commercial banks’ deposits in FX and in national currency, which is a firm indication of flow from other sectors to banks (row 2 in the table above);
- Natural persons’ or economic agents’ deposits in FX decrease/increase as a result of conversion, accompanied by a simultaneous reverse net dynamics in national currency deposits. In this case there are no inter-sectorial flows, if the amounts converted are deposited with commercial banks (rows 3 and 4 in the table above);
- A net decrease/increase (reverse in national currency) in natural persons’ deposits, accompanied by a net increase/decrease in economic agents’ deposits (reverse in national currency), while the deposits of banks do not change significantly (or the change is explained by flows with the central bank). In this case, there are only intra-sectoral flows and no flows between sectors (not included in the table above).
Along with these estimations, the international investment position (IIP) stock on ‘assets - currency and deposits - other sectors’ is adjusted. The adjustment of the stock is based on the assumption that part of the remittances in foreign cash entering the country via informal channels (such as cash carried across borders in pockets) is saved (an empirical coefficient measuring the propensity to save is applied, based on a study conducted by the Economic Research Department of the NBM). Thus, the IIP positions are adjusted by recording the estimated part of remittances entering the country through informal channels in ‘other changes in volume (reclassification - sector change)’ (starting from 2001).
Current Challenges and Conclusions
The main issue with this adjustment is that the discrepancy between the net supply of foreign currency in cash from individuals by banks and net remittances received might partly arise from possible issues with the estimation of net remittances (which are evaluated using a complex statistical model) or with the estimation of other BOP items, or some omissions.
This situation could be caused by the underestimation of remittances or by the omission of other kinds of cash inflows, but anyway the net change in currency and deposits of individuals, which represent financing sources for transactions with non-residents via the banking system, are reflected.
These problems could pertain to the current period, or be cumulated historically, or more probably, both. The estimated flows can have a mixed nature, postponed consumption or offsetting records of current period’s transactions. We are still working on the method in order to define and cover as much as possible all the transactions that generated these amounts of FX.
Additionally, within the amounts estimated, it is impossible to distinguish between flows coming from informal, underground or illegal activities, because this supply-based approach estimates the total.