Tuesday, December 12, 2006

Money Outflows from Armenia

Much attention is often paid to foreign investments or FDI (see here, line 22 of xls file), or to remittances by those working outside Armenia (see line 12) and gifts and transfers (see line 15). Obviously, Foreign investment is critical to Armenia's growth, and remittances and transfers from the outside are what insulate many from abject poverty.

While the above inflows are undoubtedly important, outflows are ignored for the most part. These typically take the form of compensation paid to foreigners (i.e. remittances in reverse), interest, and dividends from profits on foreign investments (FDI and portfolio) in Armenia. In the Balance of Payments Accounts these are generally reported as "Income: Debit". In 2005, such income paid to foreigners (labor and capital) stood at USD 321 million, up from only 51 million in 2000 (see line 13).

Don't know how much is paid to foreigners working in Armenia. Not sure how many work in the country or how they are compensated. But could they explain any sizable fraction of these earnings? The second potential explanation, in addition to the foreign labor, is that these may reflect interest payments on past borrowings. If so, why then the sudden jump in 2004? A third possible explanation is that profits of foreign firms may account for much of this. If so, one would have hoped that these would be reinvested in the Armenian economy and not be repatriated to the home country of the business. The sudden jump in income in 2004 may reflect the increasing profitability of investing in the Armenian economy. It may in part be explained by the appreciation of the Dram. But not sure.

It is important to identify the recipients of these earnings. The information reported on the AEA website is obtained from the IMF's International Financial Statistics which does not break down the data. Is anyone familiar with finer data?

These foreign earnings are quite large given the size of the economy. Is there any reason to be concerned?


H said...

I would think that the 3rd point is the most relevant. I think it can be subdivided into at least 2 parts
A) Most of the firms that are known as Armenian firms ( owned by Armenian businessman) are registered offshore. Therefore all the money is siphoned out to Swiss or offshore banks. This is mostly money laundering and tax evasion mechanism.
B) The extraction of natural resources has increased recently.

Conclusion: The country is being robed out of its natural resources and is used as a money laundering middleware.

David said...

Perhaps true. But how do you document it (and arrive at your conclusion)? Do we know anyone who is doing research on the subject?