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


by Suren Musayelyan

When the Armenian currency, the dram, first began to show signs of appreciation in late 2003, few could have predicted the dramatic impact that exchange rates would continue to have on the daily business of buying and selling in the country.

The dollar traded as high as 585 in 2003. By mid-October of this year it had hit 328—a drop of more than 40 percent and by late October it hit 320, dropping 10 drams (3.3 percent) in one three-day period. Central Bank of Armenia says that the dram's rise has not peaked.

The exchange rate had been stable for a time at 570 drams to the dollar before it began its relentless appreciation in April-May 2004. Since then, the currency has appreciated by 41 percent against the dollar. Inflation in Armenia has pushed up prices in drams by 11 percent in that time, meaning that the dollar's value is also impacted by a rise in overall expenses.

Simply put: the dollar is now worth 50 cents in buying power compared to four years ago.

The usual explanation of the strengthening of the dram against major currencies is that Armenia is absorbing an increased number of private remittances from Armenians who live and work abroad.

Some data suggests that private transfers from Armenians abroad to relatives in Armenia have tripled in the past five years to some $1.2 billion a year. The tendency is expected to continue, since more and more dollars are needed to bridge the gap in purchasing power caused by the decline of the American currency.

Multimillion-dollar investments in the construction industry, which represents 26 per cent of Armenia's gross domestic product, have also produced an inflow of foreign currency. The dram has room to strengthen further against the American currency, some economists say.

The situation has had major impacts on Armenia's economy:

While exports are up (in absolute figures), they are dramatically outpaced by imports.

Local producers of some types of goods find it increasingly difficult to compete with imports whose price is falling as a result of the currency rate.

Some monopolistic importers of goods such as fuel, sugar and tobacco are enjoying bumper profits by taking advantage of the situation to increase their income by holding prices in drams steady.

Some projects funded in dollars (including the US aid package under the Millennium Challenge Program) have had to revise their budgets and, in many cases, curtail their operations.

Some Armenian families living on remittances sent from abroad suffer increased hardship because the amount they have to spend has gone down.

A "flight" from the dollar has started among ordinary citizens, who prefer to keep savings in drams now to protect against currency depreciation.
The devaluation of the dollar has inevitably given rise to speculation that exchange rates are being manipulated to enrich local oligarchs controlling importation businesses.

An illustrative example: The dollar is the universal trading currency of petrol. A motorist who paid 400 drams for one liter of petrol paid less than a dollar when the exchange rate was 420. Now, even when petrol prices have gone down to 370 drams, the cost is more than a dollar.

Central Bank of Armenia has dismissed rumors about manipulation, saying that it adheres to a "floating rate" policy, which means it does not fix the dram rate against the dollar. It explains the appreciation of the dram by the global decline in the value of the American currency and excessive inflows of foreign currency from abroad.

The pattern creates a "Catch-22" for those who rely on dollar remittances: the more cash they receive, the less it is worth. Armenia's expanding tourism industry is seen as an additional factor.

The Bank's position is backed by major international donor organizations, including the World Bank and the International Monetary Fund (IMF). They are supportive of Central Bank's monetary policy, which makes macroeconomic stability and the fight against inflation its priorities.

A household survey commissioned by Central Bank last year found that 37 per cent of Armenian families relied on money sent regularly from relatives abroad. (A Gallup poll found that more than 50 percent received money from abroad, though not all depended on it.) Most of these families are from Armenia's middle class, contrary to the widely held belief that those getting money from abroad are mainly low-income families.

Central Bank says that the survey demonstrates that poor families are mostly unaffected by the dollar's depreciation. The study suggested that a strong dram meant low inflation, which was far more important for the poor. (Armenia's annual inflation rate of 3 to 4 percent is seen as a sign of a healthy economy.)

The Bank's president, Tigran Sargsian, says that preserving macroeconomic stability creates favorable conditions for the private sector, a major objective of official policy.

"If we fixed the dram rate to the dollar and artificially stopped the strengthening of the dram, in conditions of the current economic growth and rising salaries and wages, it would result in the following: Central Bank would have to put a large amount of drams into circulation, which would result in a drastic devaluation of salaries and wages," he explains.

"The number-one goal for the government is to reduce poverty. Isn't it better if this problem affects a few dozen exporters rather than hundreds of thousands of workers?"

Sargsian also argues that the "cheap dollar" market provides a good opportunity for local producers to modernize their production by importing new equipment. However, critics say that the policy of "monetary non-intervention" is leading the economy into a deep crisis.

Official figures put the Armenian economy on track to expand at a double-digit rate for a sixth consecutive year, but they also reveal that the negative trade balance remains huge and growing..

Exports for the first quarter of this year were up by 25 per cent over the same period in 2006, totaling $231 million. But they were greatly outpaced by imports, which increased by 52 percent to $645 million.

With these statistics at hand, Eduard Aghajanov, an independent economist and former head of the National Statistical Service, challenges the integrity of Central Bank and of Armenian authorities. He says that "official explanations are simply fairy tales that no serious economist will believe."

"The dram's rate is artificially inflated to serve the interests of certain groups of large importers, which greatly damages exports. This is very serious. It could spell bankruptcy for Armenia," says Aghajanov, who predicts that the negative trade balance by the end of this year could reach $1.5 billion.

Most local producers and exporters fear that a further upsurge in the dram will have a crippling effect on their businesses. Even those companies that export modest quantities of their production say that this is their number-one business problem.

Murad Beglarian, head of a local leatherwear producer, Manul, says that any serious company working in Armenia needs to consider exports. However, the strengthening of the dram makes business difficult at home and hampers export potential.

"But for the drastic appreciation of the dram, we would have three times as many exports today. Bags that cost some $70 four years ago now cost $140," explains Beglarian, adding that in recent years the company has seen good sales prospects in the US, New Zealand, Australia and Russia dashed by currency movements.

"We could reduce our production costs but that would be at the expense of quality, which is unacceptable to us," says Beglarian, who predicts that the situation will worsen in the coming year.

Some economists believe that the effect on Armenia of the inflow of currency from Diaspora Armenians and the booming construction sector is comparable to the petrodollars received by neighboring Azerbaijan.

Armen Yeghiazarian, Associate Professor of Economics at Yerevan State University, sees similarities in the analogy, but supports Central Bank's "floating rate" policy as a mechanism to regulate the situation.

"It is not bad when you import more than you export. The question is where this money comes from. If we have this money and a high certainty that it will continue, there is no problem," Yeghiazarian said in a televised interview.

"If we cannot finance this deficit, if something changes, the market will respond automatically because of the ‘floating rate' policy and the dram will depreciate again."

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

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