Foreign concern about Armenia’s economy

An article that appeared in the June 19 edition of ArmeniaLiberty.org 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.