Currency fluctuation causes concern in Armenia

Eurasianet Organization
Aug 5 2004

Haroutiun Khachatrian: 8/05/04

Rapid exchange-rate fluctuation, in which the Armenian currency has
significantly strengthened against the US dollar, is a source of
concern in Armenia. Many local economic observers suspect the
country’s currency market is being manipulated by speculators.

Following its introduction in 1993, the Armenian currency, the dram,
steadily declined in value against the US dollar – until this spring.
So far in 2004, the dollar has lost roughly 7 percent of its worth
versus the dram. Whereas early this year the exchange rate stood at
about 563 drams to the dollar, the rate is now hovering at about

Many economists in Yerevan say there is no sound basis for the dram’s
appreciation, sparking suggestions that artificial pressure is
responsible for the sudden currency rate change. Most believe that
speculators are responsible for the recent fluctuation. The fact that
during a three-day span in mid July the exchange rate went from 520
drams to one US dollar to 495-to-one has helped fuel such suspicion.
The exchange rate shortly thereafter returned to the 520-to-one

Concern about the exchange rate reached such a point that President
Robert Kocharian convened a special session of top government
economic officials to discuss ways to stabilize the dram. Meanwhile,
Central Bank officials said the dram’s appreciation is the result of
a dramatic rise in the influx of US dollars into Armenia. According
to the bank, there are three sources for rapid growth of dollars
circulating in the Armenian economy: an increase in exports; the
growth of the tourist industry; and significantly more cash
remittances coming into Armenia from Armenians living and working
abroad. Remittances have reportedly jumped 40 percent so far this
year over the same period in 2003.

Some economists now suggest Armenia is suffering from a form of
“Dutch disease” in which a country’s economy is overly dependent on
one export commodity, ultimately creating unfavorable exchange rates
that cause other economic sectors in the country to stagnate. In most
cases, those countries that have suffered from “Dutch disease” are
oil-and-gas exporters. In Armenia’s case, the country’s main export
appears to be skilled workers, who find work abroad and then ship
back a portion of their earning to relatives at home. [For background
see the Eurasia Insight archive].

Central Bank chairman Tigran Sargsian, in statements concerning the
exchange rate fluctuation, has downplayed the possibility of
manipulation by speculators. He also has expressed a preference for a
hands-off approach by the Central Bank, adding that, in his view, the
dram’s value is not near a point where it could frustrate exports.

The Central Bank position has been attacked by some economists. In an
interview published July 30 on the Iravunk web site, economist Eduard
Agajanov accused the Central Bank of negligence. In taking no action
on the exchange rate, the bank “forgets that the main goal of central
banks all over the world is to stabilize the currencies of their
countries,” said Agajanov, who formerly headed the State Statistics

Agajanov said there were several options open to the Central Bank.
One way to prevent such sudden exchange rate fluctuations, he added,
would be for the Central Bank to increase the money supply to counter
the influx of dollars.

The dram’s sudden and unexpected rise could benefit the government.
The 2004 state budget was calculated on the basis of a dram-dollar
exchange rate in the range of 580-to-one. If the rate remains at
present levels, the government may have a far easier time keeping
spending levels within budgetary projections.

The flip side is that dollar’s loss in value has somewhat damaged
commerce inside the country, and has eroded the savings of many
Armenians. This is because many Armenians have a greater level of
trust in the dollar than in the national currency. A significant
number of business transactions in the country are calculated in
dollars, while roughly two-thirds of Armenian bank account holders
maintain their savings in the US currency. The drop in the dollar’s
value has caused many entrepreneurs to incur losses in recent months.

Some economists, including Agajanov, worry that the lack of Central
Bank action to stabilize the exchange rate may be setting Armenia up
for financial upheaval down the road. They point to the fact that the
amount of remittances coming into Armenia could fall just as fast as
they have risen in recent months, rendering it impossible to rely on
the dram’s current relative strength.

Agajanov predicted that the dram is headed for a crash. “One fine
day, when this [present-day] agitation subsides, the rate of the dram
will suddenly plummet, with all the negative consequences that will
ensue,” he said.

Editor’s Note: Haroutiun Khachatrian is a Yerevan-based writer
specializing in economic and political affairs.