Noyan Tapan Highlights #29 (531)
26 July, 2004

ARMENIA HAS CAUGHT THE DUTCH DISEASE

By Haroutiun Khachatrian

When summing up the results of the economy growth of Armenia in 2003,
the government said the per capita GDP has rose 10 percent to 871
dollar by the end of that year, a more than ten percent growth against
the previous year.

This, by the way, means that Armenia is no longer among the poorest
countries of the world. However, if one decides to calculate the same
ratio in early July, 2004, he will get 1027 dollars per capita, or 18
percent above the level of the preceding year, despite the fact, that
the GDP itself had grown only 9.1 percent. The miracle was due to
another fact, which was not expected or planned by the Armenian
authorities, namely, the growth in the dram rate against the US dollar
(and other currencies circulated in Armenia as well). This year, the
US dollar has dropped almost ten percent to its value of 1999.

The drop of the dollar rate was not expected for the participants of
the market either. This can be seen from the events of the last week,
when the dollar dropped more than 20 drams in three days (causing
almost a panic among the population), then recovered almost as quickly
(see fig 1). The immediate impression was that this is a confusion
among the market participants themselves, although interventions of
some players cannot be ruled out as well.

However, what is more surprising is that not only the participants of
the market, but also the authorities failed to realize the real trend
of the currency market. The fact was really not predicted by any of
the Armenian officials, enough to say that the budget was projected
for the average rate of 580 drams per dollar during the year. It is
evident from the chart placed monthly by the Central Bank (see the
respective chart for May 2004 in fig 2) that the rise of the dram
against the US dollar started as early as in March 2003. There are two
main reason for it, an increase in exports and the even more sizable
rise in private transfers to Armenian residents from abroad (see the
material on this page for more details).

Whatever the reason, the analysts say that the phenomenon is a typical
case of the so-called Dutch disease, the increase of the national
currency. It is usually caused by huge exports of oil (as it was the
case of the Netherlands in 1950s, from where the name arouse) and
which is usually harmful for all other branches of the economy of that
particular country. Armenia is not an exporter of oil, “but we are an
exporter of people instead” a businessman said with smile. In fact,
the reason why the transfers of Armenians abroad have grown so
significantly, and how long this growth will continue, is probably the
most intriguing question to be replied.

Meanwhile, the consequences of this rise in the dram rate (and of
course, the “storm” of the last week) are seen in the economy. In
fact, the exporters are not the only businessmen to suffer, as it
happens usually in the case of the Dutch disease. It has become a
tradition that business partners conclude their deals in dollars, with
payments to be performed in drams “according to the official rate of
the Central Bank of the payment date”. Due to this fact, the number of
those who suffered losses is much larger. An the authorities have no
leverages to protect them.