Who has more money?

By Oleg Bozhkov

Money turnover rate in the Baltic States doubles that of the developed countries.

Under the Socialist rule money played secondary role in everyday’s life and people rushed to spend it, provided there was enough supply of goods they wanted. Now it’s the other way round – goods are waiting for the consumers with money to come. Nevertheless, money turnover remains extremely high in the Baltic States.

Fig: S.Tulenev, Chas

Monetary indicators’ hierarchy

The “broadest” monetary indicator (defined as ‘broad money’ in developed countries) consisting of all currently available means of payment, including the deferred ones (for example, termed deposits), is called M2X in Latvia and M2 in Lithuania and Estonia (see the Table). Any other “broader” monetary indicators like �3, �4 or �5 have not yet been calculated in the Baltic, probably because of underdeveloped local financial markets.

M2X (M2) comprises all national currency in circulation (excluding balances on banks’ deposits) and bank deposits (both current and demand deposits) in foreign and national currencies. 

Another, more important difference in definition concerns M2D indicator used only in Latvia for apparent reason that difference between M2X and M2D stands for the amount of foreign currency deposits by residents of a country, and Latvia has the highest rate of foreign currency deposits per capita in the Baltic States at 430 euros. For comparison, Estonian figure is 3.5 times lower (or about 120 euros) and Lithuanian rate is 1.3 times lower, at about 310 euros.

In order to put all the indicators in one table we had to provide Estonian and Lithuanian M2D’s expert assessment and thus to determine money supply in national currencies. Subtracting term deposits in national currency from M2D we come up with the most liquid monetary indicator – M1 or the so-called ‘narrow money’ consisting of national currency in circulation and demand deposits in the national currency, i.e. funds that can be used for immediate payment for any deal, service or goods.

If we compare volumes of national currency deposits per capita in the three Baltic States, Estonians emerge as an absolute leader with 1,400 euros per capita; Latvian indicator is 3.3 times lower and  Lithuanian indicator is 2.2 times lower than the Estonian one (see Table). In fact, Estonians are demonstrating trust in their national currency (in Estonia deposits in national currency outnumber deposits in foreign currencies, but in Latvia the rate is fifty-fifty), possibly due to the croon being pegged to the German mark from the very start regardless of hyperinflation. 

Subtracting demand deposits in national currency from �1, we can get the so-called monetary base or �� indicator, representing national currency in circulation and bank deposits in the central bank.

�� is the central bank’s “monetary offer” and by this tool it can influence all other monetary indicators. This influence is very limited in the Baltic States because all Baltic national currencies are pegged either to the euro or SDR, and central bank’s national currency emission depends on foreign currencies’ influx into the country (central banks sell national currency to banks for euros and US dollars).

Money turnover rate slows down

Latvia’s share of available national currency in circulation in the broad money indicator M2X is the highest in the Baltic at 30.5% (e.g. in Estonia it is 16.5%). In developed countries this indicator does not exceed 10% (see Graph 1). The US indicator is a little higher only because up to 60% of available dollars are in circulation outside the country.

This can be explained by underdeveloped system of non-cash payments in Latvia despite the country having much more banks that Lithuania and Estonia together (at the same time, about half of Latvia’s population still do not have bank accounts).

Money turnover rate, i.e., the ratio between national GDP and the monetary indicator M2X (M2), shows how many times each banknote unit (and not only that in circulation) turns on average in the economy every year. Graph 2 shows that the money turnover rate in the Baltic States is falling, although these countries still have a long way to go to catch up with the level of developed countries at 1.5 times a year. In terms of money turnover, Estonia again leads among its Baltic neighbors with the annual 2.3 turnover rate (e.g. Lithuanian rate indicator is 3.2 and Latvian rate is 2.65).

Thus, the Baltic States have not yet got rid of the old stereotype that goods are more valuable than money, despite “shock therapy” and the banking crisis they went through. When these stereotypes would cease to exist completely, and people would begin to prefer saving over spending, it might hit hard not only supermarkets but also the record high Baltic GDPs growth rates fuelled by the consumption boom. This outcome is most likely if population income would lag behind that of the economic growth.

Money supply breakdown in Baltic states (as of 01.10.2003)
Description of monetary indicators	Latvia			Estonia			Lithuania
	bn LVL	bn EUR		bn EEK	bn EUR		bn LTL	bn EUR
M2X	2.07	3.28		47.80	3.10		16.40	4.80
National currency deposits by residents	0.62	1.00		2.70	0.18		3.60	1.10
National currency deposits per capita, EUR	--	430.00		--	120.00		--	310.00
M2D *	1.45	2.28		45.10	2.90		12.80	3.70
Term deposits in national currency	0.37	0.58		10.60	0.70		3.60	1.10
M1	1.10	1.70		34.50	2.20		9.20	2.60
Demand deposits in national currency	0.29	0.48		21.80	1.40		3.70	1.10
National currency deposits per capita, EUR		430.00			1400.00			620.00
Mo	0.79	1.22		12.70	0.80		5.50	1.60
National currency in circulation	0.63	1.00		8.00	0.50		4.60	1.30
Share of liquids in general circulation, %	30.50	--		16.50	--		27.50	--
Bank deposits with central bank	0.15	0.22		4.70	0.30		0.90	0.25
GDP value	5.50	8.70		112.00	7.20		52.50	15.20
Money turnover rate (annual)	2.65	--		2.30	--		3.20	--
* Lithuania and Estonia – expert estimates
Source: Baltic States’  central banks information.