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

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

The introduction of the Euro enabled some countries with high euroization (D-Markization) to estimate the volume of Euros in circulation. Based on the amounts of Euros that replaced the Deutsche mark, foreign currency in circulation was estimated, for example in Croatia (Feige, 2002). However, this technique could not be applied in Armenia, where euros make only 3-5% of foreign currency in circulation1. Feige (2002) has estimated de facto dollarization in FSU countries, including Armenia. However, the estimates were based on indirect methods and even the author admitted that actual holdings of foreign cash could be significantly different.

The results reported in this paper are based on a survey of 700 Armenians from different strata of society and from urban and rural areas. Our results differ significantly from and are much higher than Feige's estimates but are more or less in line with the ratio of foreign currency deposits to total deposits in Armenian banks.

The paper is organized as follows: Section I1 briefly reviews some key definitions. Section I11 briefly describes the macroeconomic situation in Armenia and the levels of dollarization in comparison with other CIS countries and discusses the reasons for persistence of dollarization; this section also shows that the U.S. dollar is the principal foreign currency used in Armenia and the use of other currencies is negligible. Section IV describes the methodology of the survey. Section V presents results of the survey which indicate that de facto dollarization - calculated as the percentage of total foreign currency in effective money supply - is over 81%. Section VI presents other estimates of unofficial dollarization in Armenia and FSU countries and compares those estimates with the results of our survey; the section concludes that prospective economic developments in Armenia will reduce dollarization. Section VII summarizes the findings.

2. Definitions of Dollarization

"Co-circulation" involves the regular use of two or more currencies within an economy. Dollarization could be defined in the broadest terms as the use of foreign currency as a store of value as a medium of exchange, and as a unit of account. Dollarization is a generic term used to characterize any currency that effectively serves as a replacement for the national currency, i.e., the substitute currency need not be the U.S. dollar.

There are several measures of dollarization in an economy with unofficial dollarization. When describing the dollarization level in Armenia, we follow the definitions by Feige, et. al. (2000):

BM = DCC DDD DTD FCD (1)

where BM is broad money, DCC is domestic (dram) currency in circulation, DDD is dram demand deposits, DTD is dram time and savings deposits and FCD is foreign currency deposits.

EBM = BM FCC (2)

where EBM is the effective broad money supply and include FCC, foreign currency in circulation.

NM = DCC DDD (3)

where NM is the narrow money supply and excludes any foreign currency.

ENM = NM FCC (4)