Does a strong Armenian dram guarantee social stability?

Armenia entered 2016 with a huge number of unsolved economic problems. However, in the context of the reduction of small and medium-sized businesses, the decline of production, trade turnover, the growth of the unemployment rate, further impoverishment of the population and other socio-economic problems, the authorities state that the national currency – the dram – maintains stability. “Financial facilities, structures and markets, which have been existing for many years, are still functioning effectively. The financial system has always been and is stable now,” the head of the Department of Stability and Development of the Financial System of the Central Bank, Andranik Grigoryan, says.

In their assessments of the financial system, representatives of the authorities referred to the fact that due to the consistent financial and credit policy, devaluation of the dram was about 15% under the pace of inflation of 3-4% in Armenia; the indices were lower than similar figures in other countries of the region.

At the same time, experts believe the financial stability is artificial and call the policy on supporting the dram by the Central Bank “criminal and irresponsible”, especially in the context of the decision by the Federal Reserve System of the US to increase the refinancing interest rate from 0-0.25% to 0.25-0.5%. The US will go on increasing the basic interest rate, and by the end of the year it will be 1.5-1.6%.

“After the decision by the US Federal Reserve System, even China with its super powerful economy has to devaluate its currency to prevent capital outflow and a weakening of the economy. Armenia decided to support the dollar exchange rate by administrative measures at the level of 480 drams. As a result, the Russian ruble drastically fell against the dram. This damages transfers from Russia and our exports, as the main outlet for our exporters is Russia,” Koryun Manukyan, a columnist of 7or, believes.

Experts think that continuation of the policy of a fixed exchange rate in such conditions (when the real exchange rate is not 480, but 550-600 drams to the dollar) is very harmful for the already very weak economy of Armenia. Today, factors that encourage not a strengthening but a weakening of the dram are obvious even today. The first factor is that in 2015 the reduction of transfers from Russia fell by 40% in comparison with 2014. The second factor is a further reduction of investments in the country’s economy; and the third one is a reduction of the already small volumes of exports by 2.2%.

Many economic events in Russia are reflected in Armenia as well. According to PhD (Economics), the former minister of economy, Edward Sandoyan, due to devaluation of the ruble, Russia manages to get more revenues in rubles than in dollars for the same volume of exports. And if it manages to hold the growth of prices at the level of 15%, devaluation of the ruble by 76% and the 15-per-cent growth of prices may encourage recovery of the economy and an increase in exports. Moreover, the Central Bank of Russia hasn’t interfered with the formation of exchange rates during this period. Therefore, considering the current situation in the world economy, Russia maintains its trade balance due to the policy of the weak ruble.

In the Eurasian Economic Union, Armenia has the lowest dollar exchange rate against the national currency. “It seems that the President has decided to hold the dollar exchange rate at the level of 478-485 drams; this leads to a strengthening of the Armenian dram. Meanwhile, we have to carry out a gradual weakening of the dram exchange rate, otherwise the outflow of capital and people from Armenia will continue,” economist Andranik Tevanyan says.

Thus, the seemingly favorable situation would lead to a real weakening of the dram, reduction of exports, and an increase of the capital outflow from Armenia; and it is happening now – exports have dropped, and Armenia has lost a certain segment of the Russian market.

An even more serious situation concerns the capital outflow. According to the annual report by the American nongovernmental organization Global Financial Integrity, which was published in December 2015, about $983 million was annually taken out from Armenia in 2004-2013. From 2010 the illegal capital outflow was constantly growing; in 2013 it reached $1.8 billion. According to the opposition, the annual shortfall in the budget is about $750 million, while the shadow economy is no less than 40% of the Armenian GDP. Such great volumes of illegal capital outflow could solve many socio-economic problems in small Armenia, including investment, creation of new industrial facilities and new jobs.

The opposition politicians are sure that the artificial support of the dram at the expense of foreign currency reserves, which is provided by the Central Bank under cover of a restriction of inflation, has political grounds, i.e. the idea of continuation of the authorities' power. Furthermore, the political component is directly connected with the social sphere. The policy of a strong dram is aimed at prevention of possible social protests by the population. Therefore, the policy becomes a guarantee of social stability. However, this approach doesn’t solve the problems, but makes them worse. The Armenian economy is being sacrificed in favor of the upcoming parliamentary elections in 2017.