Informal Economy Reports

MOLDOVA: Compensation of Employees and Personal Transfers, Inflow of Foreign Cash via Informal Channels 

Introduction

The Balance of Payments Division of the National Bank of Moldova (NBM) applies a comprehensive model to estimate the cash brought in the Republic of Moldova by individuals; the estimated data are included in the balance of payments in the items related to personal remittances.

Scope, Methodology, Compilation Practices, and Data Sources

Scope

Estimating the size of foreign cash “brought in pockets” in the Republic Moldova, to be included in the remittances-related items of the balance of payments.

The necessity of estimating the informal inflow of remittances in cash by natural persons was initially driven by:

• the increasing outflow of economic migrants in the beginning of the 2000’, low financial literacy of migrants and their low confidence in the banking system,
• high dollarization of some domestic markets (e.g. real estate), and the flows of foreign exchange captured by some data sources that are not directly related to balance of payments statistics and that could not be explained.

Over time, the economic reality of the country changed and the judgmental model applied for the estimation of informal inflow of remittances in cash became more detailed and was linked to other statistics (e.g. migration statistics, labor force statistics). The last developments consist in the distribution of cash remittances by main geographical regions.

Method

Judgmental macroeconomic model (based on the balance technique).

Data sources

1. Statistics collected by the National Bank of Moldova:

• International Transactions Reporting System - Summary report on international banking transactions,
• Money transfers of individuals (made through licensed banks, money transfer operators and postal offices),
• Assets and liabilities in foreign currency of authorized banks of the Republic of Moldova - data on foreign cash holdings,
• Cash receipts recorded in/ released from the accounts of individuals of authorized banks,
• Transactions made by foreign exchange offices of authorized banks,
• Currency sale / purchase transactions made by independent foreign exchange offices,
• Foreign currency cash taken out from/ brought to Moldova by authorized banks.

2. Data sources for key household spending categories where foreign exchange in cash is typically used, collected by other national authorities:

• Transactions with real estate (Agency for Land Relations and Cadastre)
• Average market prices of real estate (Real estate agencies)
• Number and value of cars imported by individuals (Customs declarations database)

3. Migration and labor force statistics

• Labor Force Survey (National Bureau of Statistics)
• Population Census (2004, 2014)
• Specially Designed Surveys (CBX-AXA, IOM)

4. Other data sources

• number of residents and non-residents who crossed the border (Frontier service)
• available statistics of partner countries (e.g. Russia - money transfers, working permits)
• economic situation in partner countries of interests for Moldovans.

Compilation Practices

In order to estimate the inflow of remittances in the form of foreign cash in the country through informal channels (other entries than via licensed banks, money transfer operators and postal offices), the main possible types of spending of total cash from remittances are analyzed. Such as: the evolution of resident individuals' deposits (new deposits in FX cash and withdrawal of deposits) the evolution of cash in foreign currency held by licensed banks (including the export-import of cash in FX by banks), the turnovers of foreign exchange offices, and the evolution of real estate and motor car markets. Some spending of cash for education, medical assistance and traveling abroad is estimated, too. The propensity to save of individuals receiving remittances from abroad and the evolution of households' consumption are also taken into account. In effect, cash remittances are derived as the difference between all estimated foreign exchange spending (outflows) and the known (from formal channels) remittances inflows.

Linkages Across Statistical Domains

The estimates are incorporated in items related to personal remittances in balance of payments and in the national accounts (the rest of the world).

Current Challenges and Conclusions

1. The model relies on many assumptions. Individuals’ behavior may change over time, that is why empirical verification of assumptions is important and requires periodical appropriate surveys to be conducted; however, specialized surveys are conducted very rarely.
2. Unfortunately, no comprehensive and reliable counterpart data are available. Moldova’s balance of payments and implicitly remittances statistics do not include data for a part of territory called Transnistria, which is not under control of Moldovan authorities. The counterparts’ statistics include data for the whole territory, that is why our statistics are not comparable. Even with this concern, in 2011 the NBM made an attempt to reconcile its data on remittances with Russia. Despite the above-mentioned inconsistency, that attempt was successful.
3. The geographical distribution of cash received via informal channels remains a challenge.
4. The model estimates the total inflow of remittances from the perspective of demand (spending) -based approach (and then the informal inflow of remittances in cash is derived), therefore it is impossible to distinguish between flows coming from informal, underground or illegal activities.

Annexes

http://www.bnm.md/en/content/international-accounts-methodological-standards-and-data-sources - International accounts: compilation methodology and data sources

Source

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

1. 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);
2. 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);
3. 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);
4. 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.

Source