Tuesday, March 10, 2009

Remittances through January

Remittances, as measured by the inflow of noncommercial transfers to individuals through commercial banks, maintained a robust pattern of growth through December of 2008. This is truly impressive given all the shocks that the country experienced. January is a different story where transfers slowed down by some 25 percent year over year. Two questions: why did remittances continue to grow through December, and, two, what does January foretell about the future?

Inflow: USD millions transferred monthly through commercial banks
Source: CBA

A similar pattern is observed for outflows. These are usually smaller, but as with inflows, these transfers also declined in January.

Outflow: USD millions transferred monthlythrough commercial banks
Source: CBA

Wednesday, March 04, 2009

Pressure on the Dram

For much of the past two years, deposits in Armenia's banks grew an average of 30 percent per annum. From November 2008 onward, however, the growth shrunk to about 8 percent. This is still a healthy growth but quite telling of the flow of capital into the country.

Bank Deposits, annual percent change

What is equally interesting is that depositors seem to have developed a preference for foreign exchange and shifted away from the Dram. In January, demand deposits denominated in Drams fell by 26 percent. In contrast, foreign exchange (FX) denominated deposits grew by 34 percent.

Demand Deposits, annual percent change

Similar to demand deposits, Dram denominated time deposits fell by one percent while FX denominated deposits grew by 64 percent in January.

Time Deposits, annual percent change

The move away from the Dram seems to have elicited a response from the Central Bank (CBA). For much of 2007, CBA has pursued foreign exchange intervention policies that could be interpreted as aimed at weakening the Dram. The most dramatic of these is the acquisition of some $173 million in November of that year. But the intervention in the past few months, particularly in light of the above shift in deposits, moved CBA in the opposite direction with the sale of $185 in December 2008 and $149 million last January.

Foreign Exchange Intervention

Of course there is a limit to how much CBA can intervene. Dipping into foreign exchange reserves may not be sustainable if cash inflows continue to decline and the flight to stronger currencies expands. It is a matter of supply and demand, and there is little that the CBA can do about it. The CBA announcement yesterday that it would not a pursue a "managed float" exchange rate policy was unavoidable. The backing of the IMF and the WorldBank is critical at this stage, but the question remains whether the public will stomach the inevitable short run inflation.

Foreign Exchange Reserves

Good sources of data on exchange rates and financial indicators include CBA and IMF (above) and both provide a statement on the shift in the Dram policy. Vahe Heboyan has a very nice paper on the value of the Dram, and a recent IMF study (page 20) extends the analysis to foreign exchange intervention.

Added March 10: Reserves dropped to $1141 million in February from 1585.3 at the end of September, and from 1259.5 in January. Source: CBA

April 28: February intervention was $251.5 million. Total intervention Oct-Feb of $691 million, and Dec-Feb of $586 million. Source: IMF