Currency Shock Triggers Consumer Panic in Armenia

Overnight drop in value of dram feeds savers’ worries and sends shoppers rushing to stores to stock up.

Currency Shock Triggers Consumer Panic in Armenia

Overnight drop in value of dram feeds savers’ worries and sends shoppers rushing to stores to stock up.

A sharp devaluation of the Armenian currency has stunned not only businessmen and politicians but sent ripples of panic through society as a whole.

As shops and supermarkets rushed to put up prices, consumers indulged in panic buying, sweeping essential items off the counters.

“The dollar has jumped and they say prices will get even higher, so I’m buying all the necessary things, so as to hold out for a while,” one woman told IWPR, clutching several kilos of sugar and butter.

Even before the bank announced the devaluation on March 3, long lines formed at currency exchange points, as savers tried to get rid of stocks of dram and exchange them for US dollars. Significantly, banks would sell customers not more than 200 dollars each.

“My son-in-law got 100 dollars for 310 dram and just a few minutes later, he saw the rate going up to 380 drams,” exclaimed Evgeniya Khachatrian, a resident of Yerevan.

As a result of the devaluation, the value of the dram to the dollar fell sharply within hours, falling from 305 to 310 dram to a dollar to more than 360.

The decline in value in relation to the euro was no less dramatic as the dram sank from 387 per euro to 440.

Central bank president Arthur Javadian said the bank took the decision in order to let the economy cushion itself more effectively against the global downturn, which in Armenia has meant a marked fall in the inflow of foreign currency.

Armenia’s economy depends to a significant degree on remittances from Armenians abroad, which have recently declined largely on account of contractions in the economy in Russia, where many of them work. There was a need for “quick, urgent and right action”, Javadian said.

Politicians said they hoped the sharp devaluation would help exporters and stabilise the economy.

“A high [value] for the dram encourages imports and hits the pockets of local producers. Further development of this situation could have resulted in negative consequences,” Ara Nranian, a member of the ruling Dashnaktsutiun party, said.

Many economic experts said the devaluation decision was expected and justifiable but had come late in the day, and was not managed as smoothly as it ought to have been.

“This [devaluation] could have been done little by little,” Heghine Manasian, director of the Caucasus Research and Resource Centre, CRRC, said.

The currency’s plight had become increasingly obvious in recent days, as commercial banks restricted sales of foreign currency to individuals.

The fall in the dram, meanwhile, prompted panic buying of essential goods.

Fear of a wave of sudden price hikes made people rush to stock up on sunflower oil, butter, flour and sugar. Prices for some goods soared by up to 30 per cent in only hours.

According to one city store salesman, the price increases only affected the most recent imports.

But many shops specialising in cell phones, household appliances, electronics and stationery still stopped trading, awaiting approval for new prices before reopening.

One of Armenia’s biggest trade supermarket chains, Star, whose 12 outlets serve the needs of an estimated 200,000 people, closed its doors for several hours.

Following talks with major suppliers and representatives of the Commission for Fair Economic Competition, managers pledged that there would be no overnight hikes in prices in their shops.

“The company is planning to raise prices for some imported goods but this will depend on the price levels set by suppliers,” the head of Star’s product promotion department, Mariam Harutiunian, said.

According to some experts, the rise in prices could get out of control.

“No one has the right to dictate terms to business in a market economy, but price rises must be proportionate,” the press secretary of the State Commission for Economic Competition, Armine Udumian, said.

Udumian said the commission had been alerted to instances of unscrupulous behaviour by traders and was ready to act. “Any business units caught making unreasonable price increases will be brought to justice,” she added.

The commission said it would follow up any irregularities that it spotted, alongside anti-competitive agreements between businesses.

It had expanded monitoring prices of essential goods from 25 to 40 items and would carry out hourly spot checks.

In a move to counter the wave of panic buying, the chair of the commission, Ashot Shahnazarian, later said that after inspecting shops in central Yerevan, it appeared prices had jumped in only a minority of cases.

“Only about ten per cent of shops have raised their prices,” he claimed. Shahnazarian dismissed rumours that bread would also go up this week and urged Armenians not to stock up, saying consumer price inflation was under control.

The head of the World Bank in Yerevan agreed that the authorities needed to stop speculators from taking advantage of the crisis.

“It is important for state bodies… to be vigilant, independent and strong in preventing the devaluation of dram extreme from leading to price increases in imported goods, used for speculative purposes,” Aristomene Varudakis said on March 4.

Meanwhile, international financial organisations welcomed Armenia’s devaluation.

The World Bank said it was an important element in Armenia’s battle to withstand the world financial crisis, adding that it was “ready to support the reform process in Armenia in future”.

The International Monetary Fund said it would press ahead with approving a 540 million dollar stand-by loan.

Its permanent representative in Armenia, Ninke Omes, said the devaluation would not cause an overall foreign currency shortage in Armenia as the banks had held back enough dollars in reserve in expectation of the move.

The central bank said the country’s gross external reserves of 1.2 billion dollars were sufficient.

In the meantime, the budget will have to be revised now that key economic predictions no long apply.

The director of the central bank said the annual inflation rate might now creep up to eight or nine per cent, far in excess of the four per cent, plus or minus 1.5 per cent, that was planned.

Moreover, the World Bank said it expected Armenia’s GDP growth rate in 2009 to be zero instead of the 9.2 per cent that the government earlier predicted. The IMF has even predicted negative economic growth of 1.5 per cent.

Naira Melkumian is a freelance journalist in Yerevan.

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