External and internal factors of Armenian dram’s devaluation

There is a new wave of the dram devaluation in Armenia. The last noticeable drop in its rate was observed in November and December last year, when the dollar rose from 410 drams to 550 and above. Then, thanks to the efforts of the Central Bank, the stabilisation of the national currency at the level of 440 drams per dollar was achieved. Now this figure has reached 480 drams. Experts predict further devaluation up to the level of 600 drams per dollar.

The most significant external factor that impacts the dram has become the difficult situation in the Russian economy, on which the economy of Armenia is heavily dependent. "The course of the dram will depend on further events in Russia and the oil price," the economist Ashot Yeghiazaryan says. According to local experts, the logic of economic development suggests that the ruble will continue to fall as long as the Russian economy recovers.

Another important factor that has both external and internal focus has become the reduction in Armenian migrants’ transfers from Russia to their homeland. The volume of remittances from Russia to Armenia is 80-90% of all transfers. In 2013, Russia received $2.302 million dollars, while in 2014 the volume of transfers amounted to $2.123 billion. And this year experts predict a volume of $1.5 billion. This is a significant loss to the economy of Armenia, where transfers are one of the main incentives for the development and a source of increasing trade.

The reduction of transfers is not the only reason for the decrease of the dollar supply in the country. Exports to Russia are carried out not in dollars but in rubles. Calculations for gas deliveries and payments on loans made are in dollars, and in adverse conditions, including reductions of both foreign and domestic investment, there is an export of the capital from the country. According to the former Minister of Economy and Finance, Professor of the Slavonic University, Edward Sandoyan, the scale of the capital flowing from Armenia may be between 700 million dollars up to a billion dollars.

Another problem of the dram’s devaluation lies in the reduction of the already small Armenian exports, and most importantly on its structure. Armenia mainly exports raw materials, and today there is a tendency to reduce prices for these in the world.

All these reasons have led to a reduction in money supply and, accordingly, a new wave of devaluation of the dram. This forces the Central Bank to resort once again to its favorite policy of intervening with the dollar rate. The Central Bank's foreign exchange reserves declined by $700 million due to the dollar intervention in December last year. The possibility of intervention is limited due to the reduction in the reserves. Meanwhile, the Central Bank intervened to the amount of $20 million dollars to prevent the fall of the dram on August 25,. This monetary policy of the Central Bank aimed at artificially maintaining the AMD exchange rate has led to a significant reduction in the foreign exchange reserves, encouragement of imports to the detriment of exports, and that is very dangerous to the loss of sales volumes of certain goods on the domestic market.

Russian imports to Armenia have increased significantly today

The ruble has depreciated by half, and the Armenian dram, thanks to the policy of the Central Bank, has only decreased by 20%, which leads to higher costs for Armenian products and hence  their lack of competitiveness, so it is cheaper to import any product from Russia to Armenia. Exports from Armenia to Russia have reduced because of the difference in rates of the monetary units.

Volumes of imports of meat from Russia have significantly increased, imports of dairy products have grown by 61.1%, imports of Russian beer and ice cream have increased, which have not been observed for a long time, corn imports have grown almost 7-fold, although Armenia has huge uncultivated territory,  imports of salt have increased, even though Armenia has high-quality stocks of its own.

The whole chain, the first link of which was artificially maintaining the dram, strikes a serious blow to local producers. "Once we have entered a certain economic environment, we should be guided by its rules and ensure equal and competitive conditions for exports and not restrain the further devaluation of the AMD", the Central Bank’s former head, Bagrat Asatryan says, explaining that the term economic environment means the Eurasian Economic Union.

Experts forecast further depreciation of the dram.

According to the economist Ashot Yeghiazaryan, the AMD will devalue to a certain point, after which, perhaps, equilibrium will be established: "The devaluation itself implies a decline in living standards, increasing poverty, over time a balance will be set, but on another, lower level."

Some experts suggest the Central Bank gradually allow the rate of the dram to improve the situation in the financial and economic sphere. "We once advised the Central Bank to free the rate of the dram, which was dictated by the situation on the market. During this time, our economy had time to improve its condition. In addition, the economy still  had an internal capacity at that time, due to which it was possible to confront different challenges. But now the shortage of transfers, high growth rates of poverty and rise in prices could be a serious blow. Therefore, the state should gradually float the national currency," the chairman of the Union of Employers of Armenia, Gagik Makaryan, said. But it is unlikely that the government or the citizens themselves are ready for such a scenario.

Against the backdrop of the difficult socio-economic situation and the general discontent of the population with the policy of the authorities, even a gradual depreciation of the dram could cause panic and another round of tension between society and the authorities.

It is likely that the policy of interventions will be continued. Meanwhile, the interventions do not help to solve the problem with the depreciation of the dram. According to economists, today the country has such a rate of the dram that is not conducive to economic development, and all the possibilities of economic growth are artificially held back to prevent a sudden rate increase, to prevent a rise in the price of imported gas, a rise in the price of electricity, so there is no social unrest. Solving this ‘bouquet’ of problems requires serious and deep reforms, due to which the dram and prices will be regulated by the market and not by officials in their offices.