Download Remittances in Armenia

Coping With Strong Remittances:
The Case of Armenia
Nienke Oomes
International Monetary Fund
Resident Representative in Armenia
Outline
1.
2.
3.
4.
5.
Recent economic developments in Armenia
Size and sources of remittances inflows
Macroeconomic effects
Policy response
Conclusions
1. Recent economic developments
Double digit growth
 Declining poverty
 Low inflation
 Falling debt

GDP has grown at double digit rates
15
13.9
Real GDP, annual percent change
14
13.9
13.4
12.9
13
12
11
10.1
9.6
10
9
8
7
6.0
6
5
2000
2001
2002
2003
2004
2005
2006
Poverty has declined
Percent of population below poverty line
60
Poverty
Extreme poverty
50
40
30
20
10
0
1998-9
2004
2005
Inflation has been low
8
7.0
Average CPI Inflation, in percent
7
6
4.7
5
4
3.1
2.9
3
2
1
1.1
0.8
0.7
0
2000
2001
2002
2003
2004
2005
2006
External debt has come down
50
45
NPV of external debt
(in percent of GDP )
40
35
30
25
20
15
10
2000
2001
2002
2003
2004
2005
2006
2. Size and sources of remittances
Remittances have increased significantly
700
(In millions of U.S. dollars)
600
500
400
300
200
100
2000
2001
2002
2003
2004
2005
2006
Remittances amount to about 10% of GDP
12
10
% of GDP
8
Workers' remittances
Compensation of employees
Other private current transfers
(mostly real estate purchases)
6
4
2
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Sources
a.
b.
c.
Most remittances to Armenia (70%) are
sent from Russia, and are correlated with
Russian GDP growth
Most remittances to Armenia (55-85%)
are sent through banks
Most remittances to Armenia (90%) are
sent in U.S. Dollars
Remittances to Armenia are
correlated with Russian GDP
Change in remittances toArmenia, USD mln
160
140
120
100
80
60
40
20
0
0
50
100
150
200
Change in Russian GDP, USD bln
250
Other private current transfers are
correlated
with
real
estate
prices
180
1000
140
900
800
700
USD million
120
600
100
500
80
400
60
300
40
200
20
100
0
2002Q1
2003Q1
2004Q1
2005Q1
0
2006Q1
USD per square meter
160
Other private current transfers
Yerevan center (right scale)
Yerevan suburbs (right scale)
Armenian average (right scale)
3. Macroeconomic Effects
The exchange rate has appreciated
 The current account has not worsened
 But exports may have suffered

The exchange rate has appreciated
significantly
140
Real Effective Exchange Rate
130
Nominal Effective Exchange Rate
120
CPI differential
110
100
90
80
70
60
2000
January 2000=100
2001
2002
2003
2004
2005
2006
2007
Nevertheless, the current account
has not worsened
2000
2001
2002
2003
2004
2005
2006
-3.9
-4.0
0
-2
-4
-4.5
-6
-6.2
-8
-10
-9.5
-12
-14
-16
-14.6
-6.8
External Current Account Balance
(In percent of GDP)
But exports may have been negatively
affected
30
25
Exports (in percent of GDP)
Exports excluding precious stones and metals (in percent of GDP)
20
15
10
5
0
2000
2001
2002
2003
2004
2005
2006
4. Policy response
Broadly flexible exchange rate
 Focus on price stability
 Tight fiscal policy

The CBA has let the exchange rate appreciate,
while smoothing volatility by large forex purchases
(mostly unsterilized)
475
15
CBA Interventions
450
10
425
5
400
0
375
-5
350
-10
Jan-06 Mar-06 May-06 Jul-06
Sep-06 Nov-06 Jan-07 Mar-07
Interventions (USD million)
AMD/USD
AMD/USD
exchange rate
As a result, monetary aggregates
increased,
but inflation remained subdued
70
Reserve money
Annual percent change
60
50
40
Broad money
30
20
10
CPI Inflation
0
-10
2004
2005
2006
2007
…partly due to dedollarization
70
Deposit Dollarization Ratio
65
In percent of total
60
Credit Dollarization Ratio
55
50
45
40
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
…and partly thanks to tight fiscal policy
2000
2001
2002
2003
2004
2005
2006
-1.0
-1.5
-1.6
-1.5
Percent of GDP
-2.0
-1.9
-2.3
-2.5
-2.6
-3.0
-3.5
-4.0
-4.0
-4.5
-4.6
-5.0
Overall Fiscal Balance
(In percent of GDP)
5. Conclusions

The Armenian authorities have done a good
job at managing foreign exchange inflows:


They have focused on price stability
They have maintained a broadly flexible exchange rate
(with interventions used mainly to smooth out volatility)
 They have maintained a tight fiscal policy

As a result,



Inflation has remained low
Growth has remained high
External debt has remained low
Conclusions (continued)



While performance thus far has been good, there
are concerns about the effects of real appreciation
on external competitiveness
This underlines the importance of structural
measures to raise productivity
Such measures could include improvements in
technology, marketing, management,
infrastructure, the overall business climate, and
an increase in domestic competition.