Currency Fears in Armenia

Thursday, 21 October, 2004

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Naira Melkumyan

The first sharp strengthening of the Armenian dram against the US dollar in seven years is raising fears of economic damage, in a country where people depend not only on the national currency, but the greenback too.

Current official rates are about 512 drams to the dollar, while the market rate is about 505 drams. Just a few months ago, a dollar fetched 575 drams.

Finance and Economics Minister Vardan Khachatrian has tried to reassure the public, saying measures are being taken to reduce negative effects on Armenia’s state budget.

However, many are already feeling the pinch, primarily exporters and those depending on dollar transfers from relatives working abroad as migrant labour.

“It is a well-known fact that a considerable part of the population subsists on money sent by relatives working abroad,” Yerevan resident Rita Sarkisian, 49, told IWPR. “Out of the 200 dollars that my husband sends us from Krasnodar [in southern Russia], my family loses about 20 dollars every month, and that’s a large sum of money considering that prices of consumer goods have gone up.”

Similar stories can be heard anywhere in Armenia, where up to one million people, or more than a quarter of the population, have emigrated, according to official statistics. Though most have gone to Russia, the cash of choice remains the dollar.

Central bank head Tigran Sarkisian explains the strengthening of the dram by several factors, both internal and external. “Primarily, it is the 46 per cent growth of private transfers via the banking system alone in the first half of 2004, an increase in exports by 40 per cent and a growth in the number of tourists by 24 per cent, which has brought about a wide-scale influx of foreign currency into the country,” he said.

Economic growth averaging 10 per cent annually in recent years has also served to boost the dram.

Sarkisian told a parliamentary debate that Armenia was entering a new stage of economic development, which would be accompanied by rising incomes and, inevitably, a strengthening of the dram. “It is impossible to have rapid economic growth, productivity growth and yet have the devaluation of the national currency,” he said.

Other experts say it is external rather than internal economic factors that have made the dram so strong.

Former statistics minister Eduard Agajanov told IWPR that the central bank’s picture of a booming Armenia was unrealistic. “One gets the impression that Armenia has suddenly turned into a Mecca for tourists, and that the Armenians abroad have all got rich overnight and sent their money to relatives in Armenia,” he said.

“Armenia is not one of the rich and well-developed countries that are able to ensure a strong and stable national currency thanks to internal growth and development alone, however high those might be,” argued Karine Gevorkian, an economics professor. She pointed to tendencies on the international financial markets, which are boosting prices, as well as economic indicators in Russia, Europe and the United States, as the reason why there has been an influx of foreign currency to Armenia.

Sarkisian said that a liberalisation of foreign currency rules in Russia, where there is a large Armenian community, was important. For example, the limit on cash exports from Russia has been raised to 10,000 dollars.

Now Armenia faces a slowing of exports, Agajanov said. The foreign trade deficit this year amounts to 285 million dollars, with imports close to double the volume of imports.

Partly responsible, Agajanov said, are fuel, sugar and grain importers, who benefit from the currency strengthening. This view was backed by Areg Gukasian, director of the Avan salt works, who told IWPR that “the lowered rate is advantageous only for importers who reap super profits, while the exporters are suffering serious losses.” He said his plant had had suffered a 25 per cent drop in income.

However, the head of the permanent commission for financial, credit, budget and economic issues at the National Assembly, Gagik Minasian, told IWPR that any business could profit, “It would be wrong to paint the situation in dark colours only, especially since entrepreneurs can take advantage of the situation to import equipment on beneficial terms so as to produce goods that are competitive both on the domestic and foreign markets.”

He advised exporters to do their transactions in drams or in foreign currencies other than the dollar, and suggested that people making private transfers could do so in Russian roubles. However, several commercial banks that handle money transfers told IWPR that not all branches of Armenian banks in Russia carry out rouble transactions.

The economic row is taking on political dimensions.

“I am convinced that the situation at the foreign currency market suits very well a group of people close to those circles that influence the currency exchange rate,” Agasi Arshakian, a parliamentary deputy from the opposition National Unity party, told IWPR. “As usual, very few bother to think about ordinary people.”

Arshakian blamed the central bank for not intervening to keep the dollar stable.

Economist Levon Danieliants also believes that the central bank should have intervened, “Above all, they could have done an elementary monetary emission and purchased dollars cheaply, and thus increased their foreign currency supplies.”

However, central bank head Sarkisian argues against interventionist policies, warning, “artificial stimulation of exports is a dangerous phenomenon that can lead to a crisis.

“If the state begins subsidising production, it will become a heavy burden for the tax-payer, and after the subsidies are over, Armenian industry will become unable to compete.”

Sarkisian said the bank’s chief concern was to keep inflation contained. According to the official data, consumer prices in September were 1.3 per cent lower than in December last year.

Claims that inflation is being held in check are viewed with scepticism by many ordinary shoppers.

“Personally, I haven’t felt any price containment, because most basic foodstuffs such as bread, butter and meat have become more expensive, and fruit was very expensive throughout the summer season,” said Alla Hairapetian in the town of Sevan.

Experts believe that the government is not unhappy about the strengthening dram. The authorities would like to see an increase in the amount of savings held in drams, thus reducing the influence of the dollar and the shadow economy. Whether Armenians are ready to put their trust in the dram or not is another question.

Economist Karine Gevorkian admitted that she preferred to keep her own savings in dollars and euro, while businessman Areg Gukasian said he thought the dram’s rise did not reflect any real strengthening of domestic finances.

“It would be more accurate to call the situation a depreciation of the dollar, not a strengthening of the dram.”

Naira Melkumian is a freelance journalist in Yerevan.