Download Remittances in Armenia

REMITTANCES IN ARMENIA: DYNAMIC PATTERNS AND DRIVERS1
-
Remittances to Armenia have been particularly unstable
They have recently behaved procyclically and positively correlated with other
external shocks
They are mainly determined by the evolution of the Russian economy.
Remittances2 play a key role in the Armenian economy. On average over the last five years,
remittances have been very large at 16 % of GDP (gradually trending down though from a peak
of 19% in 2004). Remittances are a critical source of FX inflows for Armenia, averaging 38%
higher than total exports, twice higher than FDI, eight times higher than bank flows, and four
times higher than official government inflows to Armenia. Remittances now finance around 40%
of imports. The role of remittances in the Armenian economy stands out in the international
comparison, with Armenia being among the 15 largest remittances recipients in the world.
Remittances to Armenia feature several distinctive characteristics. Remittances come to a
great extent from Russia (89 percent3), are sent mostly in US Dollars, and are sent to a great
degree through the banking system.4 We describe below some key features of the nature of the
evolution of remittances, and shed some light on its determinants.
1
Prepared by Armine Ghazaryan and Guillermo Tolosa, with valuable comments from Mark Horton, Takuji
Komatsuzaki, and Joe Thornton.
2
Remittances include net transfers and compensation of employees unless otherwise specified.
3
5-year average of non-commercial net inflow via banking system.
4
For a characterization of remittances in Armenia see Oomes and Atoyan (2006)
2
Figure 1. Remittances with respect to GDP: Cross-Country Comparison
(In percent of GDP)
2008
70.0
70.0
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
20.0
10.0
10.0
0.0
0.0
Lesotho
Tajikistan
Moldova
Tonga
Kyrgyz Rep.
Haiti
Samoa
Nepal
Honduras
Cape Verde
Jordan
Bosnia
Nicaragua
Armenia
Macedonia
Georgia
Romania
Bulgaria
Latvia
Ukraine
Croatia
Lithuania
Poland
Estonia
Azerbaijan
Hungary
Belarus
Slovak Rep.
Turkey
Russia
60.0
Source: World Bank World Development Indicators
I. A STABILIZING FORCE?
Remittances to Armenia have experienced large swings. In the first decade after Armenian
independence, remittances grew seven-fold between 1994 and 1998, and fell by 24 percent
during the Russian crisis in 1998, remaining subdued for some years thereafter. During the last
cycle of the world economy, remittances featured another steep increase of 120 percent (during
2004-08) followed again by a large downturn of 28 percent when the crisis hit in 2009.
Figure 2. Armenia: Dynamics of Remittances
(In millions of U.S. dollars)
2000
1200
1800
(RHS)
1000
1600
1400
800
1200
1000
600
800
400
600
(LHS)
200
400
200
Source: Armenian authorities and IMF staff estimates
Note: because of a methodological break in 2004, data is not strictly comparable
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
1993
0
3
Figure 3. Evolution of Remittances: Country Groups
The variations in remittances
(Index, 2008=100)
appear large by various relevant
metrics. These variations in
120
120
remittances collide with the
conventional wisdom in the literature
100
100
regarding the stable nature of this
source of external finance.5 In effect,
80
80
in the last crisis movements in
60
60
remittances were much sharper in
Emerging
Armenia than in the rest of the world
40
40
CIS
(see Figure 3). Also, during the last
Armenia
cycle, the variations of remittances
20
20
were particularly pronounced
2005
2006
2007
2008
2009
2010
compared to other elements in
Source: IFS and IMF staff estimates
Armenia’s own balance of payments.
Swings were in a comparable range in percentage terms with other external flows typically
considered more volatile like FDI or exports. In the context of a much larger magnitude of
remittances compared to others
elements, remittances movements
Figure 4. Armenia: Remittances Vs. Other Inflows
(Index, 2008=100)
were the single largest contributors
to balance of payment movements
160
160 in terms of dollar values.
140
140
Remittances
120
120
FDI
Exports
100
100
80
80
60
60
40
40
20
20
Source: Armenian authorities and IMF staff estimates
2011
2010
2009
2008
2007
2006
2005
2004
0
2003
0
The macroeconomic
consequences of this pattern are
visible. There is clear evidence
regarding the macroeconomic effect
of remittances in Armenia.6
Remittances appear to have become
a source of amplification of
business cycle, as remittances have
also been highly correlated with
5
Note contrast with the past, in which studies pointed to the stable nature of remittances (Ratha et al in Global
Development Finance, 2003). During the recent crisis episode increased procyciclical nature of remittances across
the world is probably associated with the unusual nature of the crisis in which the source of the shock came from
countries which send remittances.
6
For studies about the macro impact of remittances on Armenian economy, see Oomes and Atoyan (2006). The
single most important channel of remittances on the economy took place through construction activity, documented
in Tolosa and Manookian (2011). Other studies of remittances consequences in Armenia include and Grigoryan and
Melkonyan (2011)
4
other FX flows.7 In contrast with the previous remittances cycle (in which remittances were
considerably smaller) Armenia’s double digit growth followed by a double digit contraction
appear to be significantly affected by developments in remittances (see Figure 5).
Figure 5. Armenia: Remittance Growth Vs. Real GDP Growth
(In percent)
80
20
Real GDP Growth,
RHS
60
40
15
10
20
5
0
0
Remittance
Growth, LHS
-20
-40
-5
-10
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
-20
1998
-80
1997
-15
1996
-60
Source: Armenian authorities and IMF staff estimates
Note: because of a methodological break in 2004, that year was dropped from the remittance data
II. DETERMINANTS OF REMITTANCES
Statistical analysis shows that lagged Russian GDP has the largest impact on remittances.
This result is a direct consequence of a large share of remittances sent by relatively recent
migrants or especially seasonal workers working in Russia.8 It reflects both an increase in the
purchasing power from seasonal workers and migrants and a pull factor from further incentives
to migration when Russian economy is performing well.9 Other specifications for economic
7
This also seems to contrast the pre-existing evidence which pointed to countercyclicality of remittances, see also
Ratha et al.
8
89 percent of remittances come from Russia, as 80% of Armenian migrant workers go to Russia (where 85% work
in the construction sector).
9
The migration data from Armenia is however weak and therefore does not easily lend itself to analysis. According
to NSS statistics, migration from Armenia has had a downward trend regardless of macroeconomic developments.
According to Russian statistics, migration increased significantly during Armenia’s boom years and fell
precipitously in 2010, not evidently reflecting relative economic performance patterns.
5
activity in Russia were tried, including wages, employment and GDP in the construction sector,
all being significant but with overall GDP achieving the best fit.10 This result is consistent with
other studies highlighting home country impact on recipient country.11
Figure 6. Remittances Vs. Russian GDP
(Seasonally adjusted)
USD bln
USD mln
600.0
500.0
500.0
Remittances, LHS
400.0
Russian GDP, RHS
400.0
300.0
300.0
200.0
200.0
100.0
100.0
2011Q3
2010Q4
2010Q1
2009Q2
2008Q3
2007Q4
2007Q1
2006Q2
2005Q3
2004Q4
2004Q1
2003Q2
2002Q3
2001Q4
2001Q1
2000Q2
1999Q3
1998Q4
0.0
1998Q1
0.0
Source: Armenian authorities, IFS and IMF staff estimates
The exchange rate ruble/dollar does not show a statistically significant effect on
remittances. This result suggests that whenever the ruble depreciates (appreciates) the ensuing
fall (rise) in the dollar value of income of workers in Russia does not necessarily translate into a
fall in remittances (in dollars). However, during the specific event of the 2008 crisis, the fall in
USD terms was considerably larger than in RUB terms (see Figure 7 below).
10
11
The construction sector GDP measurement could be hindered by informality.
See for example, Akkoyunlu and Kholodilin (2006) for remittances from Germany to Turkey, or Roache and
Gradzka (2007) for US remittances to Mexico.
6
Figure 7. Armenia: Non-Commercial Inflow From Russia: U.S.
Dollar Vs. Ruble Scale
(Seasonally adjusted)
RUB mln
USD mln
140
3500
120
3000
In rubles, RHS
100
2500
80
2000
In U.S. dollars,
LHS
60
40
1500
1000
Feb-11
Sep-10
Apr-10
Nov-09
Jun-09
Jan-09
Aug-08
Mar-08
Oct-07
May-07
Dec-06
Jul-06
Feb-06
Sep-05
Apr-05
0
Nov-04
-
Jun-04
500
Jan-04
20
Source: Armenian authorities, IFS and IMF staff estimates
Armenian income does not appear to have statistical significant effects. Notably, lagged
Armenian GDP did not show any statistically significant association with remittances, suggesting
an acyclical relation between remittances and GDP. In other words, senders do not appear to
intend to compensate (punish) the recipients of remittances for adverse (favorable) evolution of
income.12
Also, the dram exchange rate does not appear to affect remittances.13 The inclusion of the
change in the nominal exchange rate is useful for examining whether migrants tend to
remit more or less in response to exchange rate depreciations. The latter hypothesis would argue
that a sender of remittances who sends home an amount every month might choose to remit less
in response to a depreciation of the country’s currency, since the lower amount in dollar terms
might still represent an equivalent or greater purchasing power when converted into local
currency.
12
For other countries the evidence is mixed (see Frankel 2009 for evidence on countercyclicality, or Sadar, 2006 for
evidence on the contrary)
13
For a broader set of countries, Chami et al (2008) finds that exchange rate does matter.
7
III. INTERPRETATION AND PERSPECTIVES
The key role of the Russian
Figure 8. Armenia: Remittance Sources
economy in driving
(Index, 2008=100)
remittances to Armenia is a
fundamental element to
understand the large
160
160
variation of Armenia’s
140
140
remittances described
above. In Armenia (and other
120
120
CIS countries) most
100
100
remittances come from
Russia, in contrast to other
80
80
emerging market and low60
60
income countries in which the
Russia to World
40
40
sources of remittances are
US to World
usually advanced
Russia to Armenia
20
20
economies.14 Remittance
US to Armenia
0
0
outflows from Russia behave
2006
2007
2008
2009
2010
2011
rather differently than
advanced economies,
Source: National authorities, Haver Analytics and IMF staff estimates
increasing 260 percent during
boom years (2004 to 2008), compared to an increase of 58 percent from US to all countries.
During the crisis, the fall in remittances from Russia was also larger, at 36 percent in 2009,
compared to a 25 percent increase in the US. (Figure 815)
Going forward, the procyclical nature of remittances during the last cycle is likely to
continue, but will not necessarily be a dominant feature going forward. Results suggest that
the Armenian economy will continue to be very vulnerable to the evolution of Russian economy.
However, if the source of a new economic downturn will be domestic (i.e., not affecting the
Russian economy, such as a drought in Armenia) remittances should not be affected and could
therefore play a larger stabilizing role.
These key stylized facts about external shocks for Armenia have important ramifications
for macroeconomic risk management. These trends reveal key parameters regarding Armenia’s
external vulnerability. First, this underscores the need for efforts by Armenia’s Central Bank to
track leading indicators of Russian GDP (and also specific to construction GDP) to be able to
anticipate effects on Armenia’s external account. These results should also call for a
14
Before this crisis, studies used to point to the countercyclical and stable nature of remittances (Ratha, 2003).
During the recent crisis episode, the increased countercyciclical nature of remittances across the world is probably
associated with the unusual nature of the crisis in which the source of the shock came from sender countries.
15
The peak year of 2008 is taken as a base for calculation of the indices. The relevant data are in USD terms.
8
reassessment of the optimal reserve level in Armenia. The larger the external shocks, and the
more procyclical they are, call for higher level of reserves.16 Also, these findings shed further
light regarding Armenia’s larger economic orientation to Russia. Inasmuch as remittances are
sensitive to developments in Russia, a concentration of higher value added exports on Russian
market represents a further vulnerability as external shocks can be quickly amplified. On the
other hand, Armenia’s vulnerability as an oil importer is somewhat hedged by favorable
implications of oil prices on the Russian economy and by extension, on Armenia.
REFERENCES
Akkoyunlu, S. and K.A Kholodilin, (2006), What Affects the Remittances of Turkish Workers:
Turkish or German Output? Discussion Paper No. 622, DIW Berlin, German Institute for
Economic Research
Atoyan R. and Oomes, N. (2006). Remittances to Armenia: Size, Sources, and Macroeconomic
Implications. Armenia, Republic of Armenia: Selected Issues. IMF Country Report 06/434
Chami, R., A. Barajas, T. F. Cosimano, C. Fullenkamp, M. Gapen and P. Montiel
(2008) Macroeconomic Consequences of Remittances, IMF Occasional Paper No. 259
Washington, D.C.: International Monetary Fund.
Frankel, J. (2009) “Are bilateral remittances countercyclical?, NBER Working Paper 15419
Grigorian, D., Melkonyan, T. (2011): Destined to Receive: The Impact of Remittances on
Household Decisions in Armenia
IMF. 2005. “Workers’ Remittances and Economic Development” in chapter II of “World
Economic Outlook: Globalization and External Imbalances.” April.
Jeanne, O. and Rancière, R. “The Optimal Level of International Reserves for Emerging Market
Countries: Formulas and Applications” IMF Working Paper 06/229
Ratha, D. (2003), Workers.remittances: An important and stable source of external development
finance. In Global Development Finance: Striving for Stability in Development Finance, pp.
157.175. World Bank
Roache, S.K. and Gradzka, E. (2007), Do Remittances to Latin America Depend on the U.S.
Business Cycle? IMF Working Paper, Western Hemisphere Department, International Monetary
Fund
Tolosa, G. and Manookian, A. (2011), “Armenia’s housing boom-bust cycle” Armenia’s
Alternative Center Quarterly Journal of Economics.
16
See Jeanne et al. (2006)
9
APPENDIX. REGRESSION ANALYSIS ON REMITTANCES
THE MODEL
The following regression model is specified to identify determinant factors in remittance inflow
to Armenia:
where the dependent variable
is net remittance inflow to Armenia, and the
following are the regressors:

is Armenian quarterly real GDP in AMD,

is the AMD/USD official exchange rate,

is Russian quarterly real GDP in RUB,


is the RUB/USD official exchange rate,
accounts for the methodological break in the series on remittances in 2004Q1
because of the introduction of new sources of data.
All the variables are seasonally adjusted to eliminate seasonality and are taken in logarithmic
values. In order to eliminate nonstationarity problem, 1st differences of the variables are taken. In
order to estimate the lagged impact of factors on the dependent variable – one-period lagged
regressors are considered in the regression.
DATA
The regression is based on quarterly data from 1998Q1 to 2011Q3, albeit from 1998Q3 to
2011Q3 after differencing and taking lagged regressors. The data sources for the regression were
the IFS database and Armenian authorities for remittance and GDP data.
RESULTS
The results of the regression are presented in Table 1 below and in Figure 9.
The results suggest that one-period lagged Russian GDP (significant at 1 percent level)
significantly determine net remittance inflow to Armenia. The RUB/USD exchange rate also (at
10 percent significance level) determine the remittance inflow. The dummy variable on the data
break of 2004 demonstrate high statistical significance (at 1 percent level).
The variables of Armenian GDP and AMD/USD exchange rate are not statistically significant.
10
Table 1. Determinant Factors of Remittances
Dependent variable: ΔlogREMITTANCES
Variables
Intercept
ΔlogARMGDP(-1)
ΔlogARMER(-1)
ΔlogRUSGDP(-1)
ΔlogRUSER(-1)
M04
Observations (after adjustments)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
Coefficients
-0.0198
0.2241
0.0398
3.0334*
0.3469**
0.5515*
53
0.4303
0.3697
0.1420
0.9480
31.4252
7.0999
0.0001
0.0391
0.1789
-0.9594
-0.7364
-0.8737
2.0387
Notes: The estimation method is Least Squares.
Sample included 1998Q3 to 2011Q3.
t-statistics are in parantheses: * p < 0.01, ** p < 0.1.
(0.86)
(0.37)
(0.07)
(2.94)
(1.99)
(3.77)
11
Figure 9. Armenia: Regression on Remittances
Quaterly Change in Remmitances
(USD ths)
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0
0
-0.2
-0.2
-0.4
Actual
-0.4
-0.6
Derived from Regression
-0.6
2011Q2
2010Q3
2009Q4
2009Q1
2008Q2
2007Q3
2006Q4
2006Q1
2005Q2
2004Q3
2003Q4
2003Q1
2002Q2
2001Q3
2000Q4
2000Q1
1999Q2
-0.8
1998Q3
-0.8
Residual
(USD ths)
0.6
0.6
0.4
0.4
0.2
0.2
0
0
2011Q2
2010Q3
2009Q4
2009Q1
2008Q2
2007Q3
2006Q4
2006Q1
2005Q2
2004Q3
2003Q4
2003Q1
2002Q2
-0.6
2001Q3
-0.6
2000Q4
-0.4
2000Q1
-0.4
1999Q2
-0.2
1998Q3
-0.2