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Coping With Strong Remittances:The Case of Armenia
Nienke Oomes
International Monetary Fund
Resident Representative in Armenia
Outline
1. Recent economic developments in Armenia
2. Size and sources of remittances inflows
3. Macroeconomic effects
4. Policy response
5. Conclusions
1. Recent economic developments
Double digit growth Declining poverty Low inflation Falling debt
GDP has grown at double digit rates
6.0
9.6
13.913.4
12.9
10.1
13.9
5
6
7
8
9
10
11
12
13
14
15
2000 2001 2002 2003 2004 2005 2006
Rea
l GD
P, a
nnua
l per
cent
cha
nge
Poverty has declined
0
10
20
30
40
50
60
1998-9 2004 2005
Per
cent
of
popu
latio
n be
low
pov
erty
line
PovertyExtreme poverty
Inflation has been low
0.8
3.1
4.7
2.9
0.7
7.0
1.1
0
1
2
3
4
5
6
7
8
2000 2001 2002 2003 2004 2005 2006
Ave
rage
CP
I In
flat
ion,
in p
erce
nt
External debt has come down
NPV of external debt(in percent of GDP )
10
15
20
25
30
35
40
45
50
2000 2001 2002 2003 2004 2005 2006
2. Size and sources of remittancesRemittances have increased significantly
(In millions of U.S. dollars)
100
200
300
400
500
600
700
2000 2001 2002 2003 2004 2005 2006
Remittances amount to about 10% of GDP
0
2
4
6
8
10
12
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
% o
f G
DP
Workers' remittances
Compensation of employees
Other private current transfers(mostly real estate purchases)
Sources
a. Most remittances to Armenia (70%) are sent from Russia, and are correlated with Russian GDP growth
b. Most remittances to Armenia (55-85%) are sent through banks
c. Most remittances to Armenia (90%) are sent in U.S. Dollars
Remittances to Armenia are correlated with Russian GDP
0
20
40
60
80
100
120
140
160
0 50 100 150 200 250Change in Russian GDP, USD bln
Cha
nge
in r
emitt
ance
s to
Arm
enia
, US
D m
ln
Other private current transfers are correlated with real estate prices
0
20
40
60
80
100
120
140
160
180
2002Q1 2003Q1 2004Q1 2005Q1 2006Q1
US
D m
illi
on
0
100
200
300
400
500
600
700
800
900
1000
US
D p
er s
quar
e m
eter
Other private current transfersYerevan 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
60
70
80
90
100
110
120
130
140
2000 2001 2002 2003 2004 2005 2006 2007
Real Effective Exchange Rate
Nominal Effective Exchange Rate
CPI differential
January 2000=100
Nevertheless, the current account has not worsened
External Current Account Balance(In percent of GDP)
-14.6
-9.5
-6.2-6.8
-4.5-3.9 -4.0
-16
-14
-12
-10
-8
-6
-4
-2
0
2000 2001 2002 2003 2004 2005 2006
But exports may have been negatively affected
0
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006
Exports (in percent of GDP)
Exports excluding precious stones and metals (in percent of GDP)
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)
350
375
400
425
450
475
Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07
AM
D/U
SD
-10
-5
0
5
10
15
Inte
rven
tions
(U
SD
mill
ion)
CBA InterventionsAMD/USD exchange rate
As a result, monetary aggregates increased, but inflation remained subdued
-10
0
10
20
30
40
50
60
70
2004 2005 2006 2007
Reserve money
Broad money
CPI Inflation
Ann
ual p
erce
nt c
hang
e
…partly due to dedollarization
40
45
50
55
60
65
70
Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07
Deposit Dollarization Ratio
Credit Dollarization Ratio
In p
erce
nt o
f to
tal
…and partly thanks to tight fiscal policy
Overall Fiscal Balance(In percent of GDP)
-4.6
-4.0
-1.5
-1.9
-1.6
-2.3
-2.6
-5.0
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
2000 2001 2002 2003 2004 2005 2006
Per
cent
of
GD
P
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.
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