Transitions on Line, Czech Republic
May 12 2005

The Damn Dram

by Emil Danielyan
12 May 2005

Armenian government under fire over continuing currency appreciation.
>From EurasiaNet.

What’s good for Armenia’s currency, the dram, means tougher times for
perhaps a majority of Armenians. The rapid rise of the dram’s value
against major global currencies, especially the US dollar and
European Union euro, has hit a large part of Armenia’s population
hard, and threatens to stifle the country’s exports.

The dram’s mysterious rise began 16 months ago and gained fresh
momentum in mid-April. One US dollar is now worth roughly 440 drams –
a 30 percent rise in the Armenian currency’s value since the start of
2004. The dram has appreciated against the euro at approximately the
same rate.

Authorities attribute the phenomenon to a drastic increase in the
amount of cash remittances that are regularly sent home by hundreds
of thousands of Armenians working abroad. The Central Bank of Armenia
estimates that about 40 percent of the country’s households receive
such aid.

Predictably, the dram’s rise has emerged as a contentious domestic
political issue. Politicians and economists critical of the
government dismiss the official explanation, alleging instead that
authorities themselves have engineered the exchange rate changes to
siphon off part of the hard currency and benefit government-connected
importers. Such allegations resurfaced after the dram strengthened
>From 450 to 420 drams to the dollar in a matter of days before
stabilizing at the current level.

Central Bank officials strongly deny any involvement in currency
manipulation. They insist that the dollar remittances coming through
banks and wire-transfer services, mostly from Russia and the United
States, jumped by 50 percent to $760 million in 2004. The actual
amount of foreign cash entering Armenia may have been twice the
officially declared figure, government officials believe.

Given the relatively small size of Armenia’s monetary base – with
only about 117 billion drams (roughly $268 million) in circulation –
the large volume of remittances from abroad would appear capable of
causing currency-market volatility. “There are just too many dollars
in circulation in Armenia,” Smbat Nasibian, chairman of Converse
Bank, a major commercial bank, argued on 27 April.

Authorities also cite the dollar’s overall weakness in international
currency markets as a factor in Armenia’s exchange-rate woes. “All
complaints should be addressed to the US government,” Armenian
President Robert Kocharian told university students in Yerevan during
an early April address.

Critics counter that the dollar has continued to depreciate against
the dram since January, despite a greenback rally against the euro
and other major currencies. They also question the credibility of
official data on remittances, which have long served to offset
Armenia’s huge trade and current account deficits. “Armenians living
in Russia or the United States could not have gotten 50 percent
wealthier within a year,” argued Eduard Aghajanov, the former head of
the National Statistical Service.

Whatever the reason, the dram’s appreciation has fueled anger among
Armenians reliant upon money sent by family members working abroad.
During the post-Soviet era, lagging economic conditions have prompted
up to 900,000 Armenians to go abroad in search of work, with Russia
being the primary destination for labor emigrants. In 2004, the
number of immigrants to Armenia outnumbered those leaving the country
for the first time since 1996, according to official statistics. Even
so, a significant number of Armenians remain dependent on
remittances.

Nearly half of some 1,000 people randomly polled in January by the
Armenian-European Policy and Legal Advice Center, a research agency
funded by the European Union, said they have lost from the dram’s
appreciation. Only 27.6 percent claimed to have been better off as a
result.

Armenian authorities downplay the extent of popular dependence on the
remittances. Vache Gabrielian, a member of the Central Bank board,
claimed on a TV talk show on 28 April that remittances make up only a
quarter of the aggregate individual income in Armenia. Gabrielian
also argued against strong Central Bank intervention in the currency
market, saying the bank’s main task is to ensure low inflation. The
Central Bank has generally succeeded in this area, he added.

However, consumer price inflation in Armenia is clearly on the rise.
Official figures put the inflation rate at 7 percent in 2004. The
prices of basic food products, which account for the biggest share of
household expenditures, were 11 percent up from the 2003 level. Food
prices soared by another 8 percent last January, casting doubt on the
authorities’ pledge to keep the annual inflation rate within a 3
percent limit in 2005.

Many Armenians would say that the rise in the cost of living has been
even higher than indicated by official statistics. Suspicion has been
stoked by the fact that virtually no imported goods have become
cheaper in the Armenian market since 2003. “I think the main reason
for that is a very small number of importers,” admitted Nasibian, the
Converse bank chief. “Each of them seems to have monopolized a
particular field, making disproportionate profits.”

This only gives weight to conspiracy theories about the dram’s
appreciation. They are further reinforced by a lack of transparency
in inter-bank currency trading which is supposed to set exchange
rates in Armenia.

According to the most popular of those theories, Kocharian’s
administration has artificially boosted the national currency to let
large-scale importers (virtually all of them having strong ties to
the incumbent administration) make additional profits. The retail
price of gasoline, for example, has barely gone up in Armenia over
the past year despite the worldwide surge in oil prices. Wholesale
gasoline traders have also cashed in on the fact that fuel import
duties are set in dollar equivalents. The Armenian government only
last month moved to fix them in drams.

Importers’ gains contrast sharply with losses incurred by Armenian
exporters. The latter are beginning to openly express concern about
the dram’s appreciation. A Yerevan-based factory that produces
electrical lamps has reportedly suspended its manufacturing
operations after discovering that its production is now too expensive
in Georgia and other ex-Soviet states that formed its main market.

Meanwhile, there are signs that authorities are starting to worry
about consequences of the strong dram. The Central Bank was reported
late last month to purchase $25 million in hard currency from local
banks in a bid to shore up the dollar. The intervention appears to
have stabilized the exchange rate. It remains to be seen for how long.