Measurement of Co-Circulation of Currencies and Dollarization in the Republic of Armenia, The

European Journal of Comparative Economics, The, 2005 by Zoryan, Hakob

It is well known, that survey results always need to be treated with caution. In particular, respondents may not be fully precise in their ratios or seasonal factors may affect FCC.

Based on the estimated amount of FCC, we can derive unofficial dollarization index (UDI).

UDI = (FCC FCD) / EBM = 81% (14)

83% of the respondents thought the ratio of dollars will remain unchanged over the next three years, however, 89% of respondents stated that if their income grows they would hold more dollars. The reason stated by many of them for holding U.S. dollars in preference to other foreign currencies is that the dollar is familiar to people and is a stable currency. 87% of respondents receiving remittances from Europe (in euros) through banks stated that they withdraw dollars.

Questions to determine the seasonality of dollarization reveal that the CSI peaks in December, when remittances from abroad increase sharply, and is lowest in the summer and fall when the demand for drams is the highest for foreign cash is correspondingly low.

The results of the survey are striking, and show that dollarization in Armenia is much more extensive than alternative measures, such as those reported in Table 2. I am aware that survey results always need to be treated with caution. In this case, respondents may not be fully precise in their ratios of FCC (and in particular with respect to seasonal factors). But the difference between our estimates and those reported in Table 2 are too great to be due to survey errors.

6. Other Estimates of Unofficial Dollarization

This paper presents the first attempt to provide survey estimates of FCC in Armenia. Feige (2002) has estimated per capita FCC and CSI for a number of transition countries, including Annenia, based on adjusted Reports of International Trdnsportation of Currency or Monetary Instruments (CMIR). Feige's estimates for Armenia are $55 per capital1 and 62% for the CSI (p. 13). These estimates would place the level of FCC at approximately $200 million in 2001.

Some significant economic changes have taken place between 2001 (Feige's estimates) and 2003. Capital inflows have increased significantly. FCD have increased by 12% since the end of 2000 and private remittances in 2002 were 50% higher than in 2000.

Another indicator of growth of FCC is the holdings of foreign cash by banks (Figure 3). There is very little relation between FCC and bank holdings of foreign cash in the short run, but in the long run the growth of bank holdings of foreign cash indicates increasing demand for FCC. Comparison of banks' local and foreign currency cash holdings shows almost a stable level of drams and steady growth of foreign currency (Figure 4).

While it is difficult to compare estimates for 2001 (Feige) and 2003 (our survey results), it would appear that an estimate in the range of 650 to 700 million dollars in FCC in 2001 would be a reasonable figure based on our survey. If this is correct, the FCC in 2001 was several times Feige's estimate. Even Feige (2002) admits that it is very difficult to estimate FCC for a large number of countries based on CMIR: