30 January 2007

1386) Remittances In Armenia: Size, Impacts, And Measures To Enhance Their Contribution To Development

Submitted To:
USAID/Armenia
October 1, 2004

EXECUTIVE SUMMARY

Remittance transfers to developing countries have grown dramatically over the past two decades and have generated considerable excitement in recent years over their potential to aid growth and development. Armenia is a case of a small economy facing poor economic fundamentals that possesses a very large diaspora community and receives large remittance inflows. There is considerable interest in the donor community as to whether these remittance inflows can be increased and their impacts on growth and development enhanced. This report seeks to define remittances appropriately in the Armenian context, evaluate their size and importance to the economy, evaluate their macroeconomic and microeconomic impacts, and propose initiatives in light of this analysis to leverage remittances for developmental goals. . .

There is some confusion in the remittance literature over what a proper definition of remittances should be. We argue that remittances should be defined as the sum of flows from non-emigrant temporary workers and longer-term emigrants. Most remittance studies use data only on the latter, and sometimes only on a portion of the latter. We describe the recommended methodologies for estimating remittances in the balance of payments and review the official Armenian numbers in detail. The Armenian National Statistical Service (NSS) uses data on formal-sector wire transfers and also remittance income as captured in a household survey. It thus covers to at least some degree informalsector remittance flows. We develop alternative estimates of remittance flows using data from an informal survey that we carried out of Armenian diasporans in several European and Russian cities, an NSS survey of travelers, and migration data. The official estimate of remittance inflows was $289m in 2003, whereas our alternative estimate equals roughly $900m. Because we examined the official estimate in great detail, we were able to identify where it was most off the mark. The biggest error is due to a methodological mistake that can be rectified at little cost. The true importance of remittances to the Armenian economy is much higher that the ratio of official remittances to GDP (10%) and could be three times as important as that. In addition to shedding light on the size and importance of remittances in Armenia, we believe that the insights gained on how remittance data are constructed will be useful generally to the remittance literature.

Formal and informal Armenian remittance transfer channels are then evaluated. Our informal survey of diasporans surprisingly revealed that formal financial channels are much more widely used by Armenians transmitting from Russia than from western Europe. Two new transfer systems, Anelik and Unistream, have appeared in the CIS that have significantly lowered transactions costs and encouraged remittance transmission through formal channels. Although trust and confidence in the banking system continues to be low for several reasons, there are positive trends in the use of formal transfer channels, at least with regard to remittances coming from the CIS. Transactions costs for these remittances are significantly below the costs for remittances coming from the USA, Canada, or Europe. Reducing transfer fees to even lower levels might have a negative impact on the banking system, as many Armenian banks significantly depend on transfer . .







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