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Armenia: The Challenges of Growth
Armenia: The Challenges of Growth

DOUBLE-DIGIT GROWTH: THE DRAM DRAMA AND THE BENEFITS AND CHALLENGES OF AN EMERGING ECONOMY


by Haroutiun Khachatrian

For six consecutive years, Armenia has enjoyed double-digit economic growth. Turning the corner in 2001, the Gross Domestic Product (GDP) has stayed above 10 percent, even reaching 14 percent in 2003 and 2005.

In 2005, the European Bank for Reconstruction and Development (EBRD) announced that Armenia had regained the GDP rate (meaning the new value created in a given country) it held before the collapse of the Soviet Union. The announcement was met with skepticism by those who wondered how such growth could possibly occur, considering closed factories and closed borders and a railway export system that had rusted from lack of service.

Suspicious of a National Statistic Service (NSS) census that put population figures higher than anyone believed, the public and even some analysts held little faith in calculations of the republic's economic good fortune.

Skepticism aside, since 2001 Armenia has met the General Data Dissemination System standard set by World Bank—one of the first in the Commonwealth of Independent States to do so. International Monetary Fund (IMF) reports are also now routinely consistent with those of NSS. In other words, the good news is reliable.

Reports and standards of measure, however, may prove less useful tools than simple observation to see that—especially in the capital, Yerevan—life has changed, along with international assessments of Armenia's well being.

The trend is reflected in nearly every aspect of life, from the increased number of vehicles to the escalating prices of goods and services. And if more new cars or name-brand shops may prove less than scientific evaluation, one factor is tangible: The State Budget.

Between 2000 and 2006, the State Budget of Armenia more than doubled—from 222 billion drams (about $411 million) to 475 billion (about $1.4 billion). One result of the increase is that the government was able to raise the salaries of budgetary employees, including teachers.

WHO GROWS WITH THE GROWTH?

For those who have lived through the dark years and into the current light of progress, economic statistics simply put numbers on what is commonly observed. Yerevan itself has become one sprawling construction site. While it is unfortunate that few locals can afford the properties now changing the face of their city, it is not merely the "elite" who are better off in today's economy.

Consider, for example, the number of taxi services in Yerevan. Some taxi services that started with about 20 cars now have more than 100 in their fleet. The fact that they have flooded Yerevan (fighting for position among an also increased number of mini-buses) shows that a sizable part of the population can afford paying at least 500 drams (about $1.50) for convenience. These are not the rich, who have their own luxury automobiles. These are made up of the same people who protested some 10 years earlier when the bus fare went from 50 to 100 drams (from about 10 to about 20 cents).

Mobile phones can also be seen as an indicator.

Before 2000, having a mobile phone was a luxury, in popular opinion comparable to having a fancy car. This was, in part, because mobile phone service was abnormally expensive. Armentel, which monopolized the communication sphere, not only kept the prices high (an international call from a mobile phone in Georgia to Armenia was cheaper than an internal mobile phone call in Armenia), but also failed to meet rapidly growing demand.

In 2005, there were about 260,000 mobile phone users in Armenia. That year, Armentel's monopoly was broken by VivaCell and in the following two years more than one million new users (according to VivaCell) bought mobile phones. In other words, every third person living in Armenia now has a mobile phone. Of course, the price of service has gone down due to the competition between the two operators, but a mobile phone (with units starting at $100 at least) is still far from being an essential good, as its use is 10 times as expensive as a fixed-line phone call.

In short, the living standards of the population have evidently grown along with the mentality that money needn't only be spent for essential goods. A large part of the population can afford more, and their expenditures have grown both quantitatively and qualitatively.

Official statistics substantiate anecdotal measures. Between 2000 and 2005, Armenia's poverty zone decreased from 56 percent to 29 percent, as some 700,000 no longer fit the demographics of "poor." The shift took Armenia out of the World Bank's "low income" category and put it among "lower middle income" countries.

And this took place in a country which has been in a transport blockade for 14 years now. The blockade of all land routes by Azerbaijan during the war for Karabakh, to which Turkey joined in 1993, failed to reach its goals, and Armenia has not only survived, but thrived, without trade with these neighbors, which form more than half of its borders.

Still, 29 percent of the population was poor, according to data for 2005 (the latest available). Supposing, optimistically, that since then another five percent of the inhabitants of Armenia have started to earn more than the so-called poverty line, it would mean that a quarter of the population is still poor. The new government led by Prime Minister Serge Sargsian has declared its ambitious plans to move Armenia further up to the category of "upper middle income" by 2012. To that end, the poverty level should be lowered to 12 percent.

Experts have said it is a realistic goal.

THE PERILS OF EXCESS MONEY

For countries like Armenia, small and strongly dependent on turnover with the outer world, a crucial factor is the availability of "hard currency." For Armenia, that currency was the American dollar, and the little republic struggled in constant fear of not having enough for foreign purchase of goods it could not produce itself. The IMF controlled the foreign currency reserves in Central Bank of Armenia, establishing a minimum supply equivalent to two months of Armenia's imports.

Not surprisingly, the stimulation of exports has been a premium task of the government; otherwise it would not be able to have enough hard currency in the country. The assistance of foreign donors, whether individual countries or organizations (e.g., World Bank), had among their main purposes the provision of the minimum amount of hard currency.

Through Armenia's first decade of independence, everything was about the dollar and around the dollar. The dollar was a treasure, so much so that Armenians visiting the United States during those years were surprised to see American notes treated so cavalierly, crumpled and crammed into pockets, while at home they were carefully placed between the leaves of notebooks or even in passports to avoid folding.

Seemingly no one believed that the Armenian dram would have any fate other than to devaluate against the dollar.

We were all wrong. In 2004, the dram's dramatic U-turn began and has continued since.

Unannounced and at first hardly noticed, the dollar indicators on exchange boards began a slow and steady drop—from 580 drams per dollar in March 2003, to 335 by summer of this year. Analysts expect the dollar to go as low as 320 (the rate at which this year's State Budget was calculated) by the end of this year, while street rumors predict it will bottom out at 270 next year.

With the drop of the dollar came the predictable rise in rumors, speculating that the government of Armenia and Central Bank conspired to artificially raise the dram for the sake of favoring importers (as a high national currency makes exports more difficult). A fallacy of the conspiracy theory, though, is why the government would wait more than a decade to tamper with the dram, if doing so would prove so immediately profitable.

In fact, it took several months for Central Bank to analyze the situation and conclude that the reason for the dram's appreciation was in the simple increase in the inflow of foreign currency (more than 80 percent are dollars) into the country.

The inflow has three main avenues: The first one is connected with foreign investments in Armenia, which have been growing at roughly 20 percent a year for the past five years.

The second is the improvement of the trade balance, i.e., decreasing the gap between imports and exports. For example, in 2000, Armenia imported nearly three times (2.97) as many goods as it exported. By 2004, the ratio had fallen to 1.89. This meant that Armenian traders earned more dollars from selling Armenian goods abroad than before, and needed to sell fewer drams to purchase the American currency in Armenia. Thus the dollar/dram ratio went up, making the dollar cheaper.

The first two factors are not only the natural consequence of economic growth, they are also easy to predict and calculate. A third reason exists, however, which complicates assessment and clouds prediction—monetary transfers, sent from abroad by Diaspora and migrant workers (an estimated 900,000, mostly in Russia and Ukraine).

The random inflow of transfers is practically impossible to predict, as it depends little on the situation in Armenia and is related, rather, to the success of the senders. It is, in other words, dependent on economic conditions in countries of high migrant labor residency.

Though hard to calculate, Central Bank predicts this type of money inflow will keep growing at about 20 percent per year (based on forecasts of the Russian economy performance, as 70 percent of private transfers originate there).

Central Bank estimates that, on average, Armenians get about one-third of their monetary income from personal transfers—far exceeding benefits either from import/export, or from foreign investment, and having the greatest impact on the dollar depreciation.

Since 2006, Central Bank started buying dollars, to keep devaluation slow, whereas in the past its policy was to sell dollars to banks to prevent accelerated devaluation of the dram. As a result, it has accumulated dollars well beyond the levels which IMF finds necessary for security.

Comfortable currency reserves, though, have brought an unexpected problem, paradoxically similar to that in neighboring Azerbaijan, which, like many other oil-exporting countries, faces the danger of excessive strengthening of its national currency due to rapid inflow of foreign money.

This phenomenon is known as "Dutch disease" (so-called because it was first observed in the Netherlands in the 1950s, when the economy suffered from extensive money inflow resulting from oil exports) and usually creates danger for non-oil sectors of the national economy, as a high rate of the national currency makes exports difficult. In place of oil, experts say, Armenia's version of the "Dutch disease" is caused by export of labor.

So far, the dram appreciation has not reached the level where it restricts Armenian exports. The phenomenon has, however, resulted in psychological and economic impact on citizens who rely on transfers for their livelihood.

Seven year ago, an Armenian felt comfortable getting $100 from relatives abroad, as it was worth about 54,000 drams, which was then about two average monthly salaries. Now, $100 is worth only 33,000 drams, and is less than half of a monthly salary, which has grown to 70,000 drams.

The conclusion is that, among other effects, Armenia is no longer as attractively inexpensive as before for foreigners. Additionally, production demands will grow concurrent to rising wages, as Armenian workers approach salaries comparable to those of Eastern Europe.

On the level of everyday life in Armenia, the economic phenomena of the past six years have brought about rising costs of assets in Armenia, first of all, real estate. Also, for the first time in independent Armenia, the total value of bank deposits in drams grew to equal or exceed the amount of deposits in "hard currency." Until the very recent past, more than two thirds of bank deposits in Armenia were in US dollars.

Haroutiun Khachatrian is an editor at Noyan Tapan news service in Yerevan, and a specialist in economic reporting. His reports also appear on EurasiaNet.

Originally published in the November 2007 ​issue of AGBU Magazine. Archived content may appear distorted on your screen. end character

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