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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