Notes From Hairenik
An article that appeared in the June 19 edition of states that the European Bank for Reconstruction and Development (EBRD) is concerned that the continued appreciation of the dram may have dire consequences sooner rather than later. One line of a report that will be read at the parliamentary assembly of the Council of Europe next week reads that “Without faster productivity gains, a further appreciation of the Armenian currency would threaten the country’s competitiveness.” There is also concern that Armenian production companies, for example cigarette manufacturing firms, will suffer continued losses citing the weakening dollar and thus, the inability to compete with large-scale importers of goods, which are reaping ever-increasing profits.

In previous entries I have complained that the appreciation of the dram has caused drastic inflation on goods and services, not to mention the real estate market that is currently resembling that of the northeastern United States in terms of market values.

The article points out that since 2003 the dram has appreciated by 50 percent against the dollar. Then it goes on to state that:

“Central Bank [of Armenia] officials say the exchange rate fluctuation has also suppressed inflation which has remained in single digits despite the country’s robust economic growth.”

This claim by the Central Bank is dead wrong. If any one of the officials even bothered going shopping they would realize that is a boldface lie. A couple of hours ago I went to the local grocery store in my neighborhood to buy Russian dark rye bread. The last time I bought a loaf two weeks ago the price was 130 dram, as it had been for quite a while. Today I paid 180 dram for the same loaf baked in the same bakery. And the exchange rate was the same then as it is today, about 345 dram to the dollar. That means all food costs will either hover around the same price or will increase even more. When the dollar gets weaker, prices for goods and services inflate across the line here. Gasoline prices hover at about 370 dram for one liter of premium grade, up from 350 about six weeks ago (even though the exchange rate was 360 dram to the dollar then), but now that summer is in full swing and people will want to get away from the city, the price will keep increasing.

In the meantime, the Central Bank, International Monetary Fund, and the World Bank representatives here will keep cheering that the dram’s never ending appreciation is fantastic for the economy, while other financial institutions that actually try to predict what will happen at some point down the line argue against the enthusiasm. The EBRD is also concerned about Armenia’s continued dependence on low-interest loans, support from wealthy philanthropists, and the construction boom.

I have concluded, although I do not claim to be an economist by any means, that Armenia’s economy is dollar based and probably always has been. Even though dram is being exchanged on the street people still think in dollars and even quote figures keeping the US currency in mind. In the meantime, money I suppose will keep pouring in from foreign remittances but it won’t circulate here. The continued shortage of dollars on the market is a clear indication that something is dreadfully wrong somewhere. And I would not be surprised if Armenia sees a depression in its “booming” economy in the short-term, God forbid. In fact I am expecting it.


Anonymous artashes said...
Thank you for this post! Can somebody explain to me how on earth "inflation" (whatever that means) is non-existent in Armenia, if we listen to the Central Bank? Last summer prices were obviously and substantially higher than in the Summer of 2005, while the dram only appreciated during that period of time. I am in the best position to judge since I do it on the year-to-year (or summer-to-summer) basis and I convert my dollars to drams.

So, when for the same amount of drams I had to spend more dollars and that dram amount didn't suffice for the same goods and services I purchased the year before (forcing me to convert MORE dollars to drams last summer than the summer before), how is it possible to speak about any positive developments, and especially "no inflation"??

Appreciation of drams did NOT make imported goods cheaper (as it is supposed to happen according to the theory); as a matter of fact, those goods got even expensive in dram terms (and think of it, even if their price remained the same in drams they WOULD actually get more expensive only because of appreciation; but NO, their price in drams did not stay the same, it went UP, spitting in the face of all economic theory!!)

If this is not a manipulation of market I don't know what is! Those guys in the IMF and World Bank, if they had honor, would commit kharakiri - Japanese honor suicide. Oh sorry, I used the IMF and honor in the same sentence... (I don't make that mistake with regard to the Armenian government institutions already since long).

And I would welcome a comment from a qualified economist, by the way.

Anonymous armen said...
You don’t have to be an economist to figure out that such quick appreciation of dram in such a short period can not be anything but manipulated by the ruling elite. In Armenia, gov't connected businessmen with monopolies on imports have every incentive to manipulate a strong dram which favors their imports. Unfortunately, much needed export economy of Armenia including IT sector suffers as a result. In most developed countries the central bank chairman or who ever is accountable, would have been fired by now for his/her inability to control such chaotic fluctuation. It’s just too bad Armenia’s leaders continue to talk about export and IT development while the same time they ruin any chances by quick short term profits for themselves.

Blogger nazarian said...
My philosophy is to let the market regulate itself. The CB should only be concerned about inflation.

I think if the CB had interfered with the exchange rate the inflation would have been much higher. The CB would have to inject more drams into the economy increasing the money supply and causing inflation and who knows what the consequences of that would have been.

Anonymous ara said...
Although, ideally it would be best for the free market to determine the value of the currency, in this case free market argument is not sufficient due to extremely rapid fluctuation which is destabilizing Armenia’s economy and its exports. Moreover, there have been some sectors in Armenia that are having deflation (prices going down) even though in reality if the dram’s appreciation was not manipulated, we should be seeing deflation across the board. So in this case where dram’s value is rising, interference by central bank would be a counterbalance to deflation and not necessarily cause inflation. US federal reserve and other developed countries and currently China always interfere with their currency value for the benefit of their country’s economy and stabilization. In Armenia this doesn’t seem to be the case yet, perhaps because of Armen’s argument mentioned above.

Anonymous artashes said...
Nazarian, you are either taking us for idiots, or ... you know.

It insults even a schoolchild's intelligence when she hears pontification like "let the market regulate itself" - in conditions of current Armenia.

Anonymous artashes said...
Ara, yes, there should have been deflation in all imported goods' prices, IF "the market regulated itself". Big "if"!

Now, could you please detail, one by one, all the "sectors in Armenia that are having deflation (prices going down)"? I am very curious. With price examples, please.

General remark: could anybody show me a single country in the world (just one, not even two) where there is a real "free market economy", without state's regulation, interference, and coercion?? Find it, gentlemen, find that country on the map!

I rest my case...

Blogger Observer said...
Nazarian - sadly enough Rob and his gang of connected businessmen together with the CB wonder-workers are meddling so much with the Armenian economy, dram exchange rates, etc., that it is completely out of context to speak of "free market" here... you see, there's none in Armenia! :(

Blogger nazarian said...
observer and Artashes, sadly I have to agree with you that the Armenian economy is manipulated by a few people or clans (whatever you want to call them). But it doesn't mean that the CB should manipulate it further. The solution to this is not more CB interference but reducing the interference of the above mentioned oligarchs. You cannot fix a wrong by committing wrong yourself.

Anonymous ara said...
Artashes, below is where i got the note that there has been some deflation in certain sectors. Of course i agree with you and any sane person that due to monopolies and manipulation of dram, we are not seeing deflation across the board as we would in normal market environment. Below example is indeed unique for current situation in Armenia.

Armenialiberty.og on Tuesday 7, November 2006

"According to economic agents, the appreciation of the dram has impacted gasoline and diesel fuel prices. In particular, they say it precluded a hike in fuel prices. Flash’s deputy director announced that gasoline prices will go down by 10 drams (2.6 cents) in the republic beginning next week."

Anonymous artashes said...
Ara, thank you for the reply! Could any motorist living in Armenia in the Fall of 2006 and reading this blog confirm the report that the gasoline prices went down at that time? And what was the price dynamics since then? Thank you!