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Remittances in Armenia Stylized Facts and Theories in Progress Vache Gabrielyan Central Bank of Armenia Transfers’ contribution to GDP growth during 2003-2007 It’s Obvious: Remittances Fuel Growth ? GDP growth, model results, p Contribution to GDP growth. pp 2003 10.2 2.0 2004 12.0 4.5 2005 12.4 5.6 2006 12.6 6.3 2007 12.6 6.8 It’s Obvious: Integration matters Sources of remittances, mil USD Transmission mechanism of remittances in Armenia Remittances Aggregate Supply Import Real Exchange Rate Export Investment Consumption Aggregate Demand  It’s Obvious: remittances affect… everything Not as Obvious: Are Remittances an Engine of Growth or External Vulnerability? During the first decade of the 2000s, remittances had significant impact on the Armenian economy …still, within a larger picture, the impact was much larger elsewhere in the neighborhood... Source: the IMF Dealing with Second-Hand Dutch Disease It seems that FX rate, growth rate, real estate prices are all correlated with remittances They, in turn are correlated with the wages of non-tradable sectors in Russia (where most of the Armenian migrant workers are employed) This, in turn, is well correlated with world oil and gas prices Thus, in case of labor mobility with larger and wealthier market, policy issue is rather complicated: Dealing with Second-Hand Dutch Disease (I owe this term to Roger Robinson) Current Account sustainability: vulnerable to all types of sudden stops (including remittances) From the viewpoint of the effects on income distribution and poverty, CBA surveys showed that 60 percent of remittance receiving households are in middle and high income class, and 40 percent are poor and extreme poor households. 1 percent increase of transfers brings 0.2 percent appreciation of the Real Exchange Rate in the long run. From the 2004 till 2008/4 long run Equilibrium Real Exchange rate have appreciated by 39 percent, in which 25.5 percentage point is due to t