DOLLAR VS. DRAM – FACT VS. FICTION
By Harut Sassounian, Publisher, The California Courier

AZG Armenian Daily
15/08/2007

In the last couple of years, the U.S. dollar has lost more than 40%
of its value against the Armenian currency, the dram.

This devaluation has had a major impact on Armenia’s economy on
several fronts:

– On-going projects in Armenia, funded in dollars from overseas, have
considerably exceeded their allotted budgets, forcing investors and
donors either to curtail their projects in order to remain on budget
or substantially increase their planned expenditures.

– The stronger dram has reduced Armenia’s exports, as Armenian products
have become more expensive for foreign buyers.

– A large number of Armenians, who have been surviving on funds
sent to them from their families overseas, have had their incomes
reduced drastically, as the dollars they receive are worth much less
than before.

– On the positive side, imports from overseas have become cheaper,
as the dram now buys much more in dollars.

The devaluation of the dollar has given rise to speculations as to
the true reasons for the reduction in the value of the dollar vs. the
dram. Some have alleged that by lowering the value of the dollar,
the local oligarchs are able to import cheaper goods.

Unfortunately, most of those who have written about this issue in the
press have had no professional training on the subject of currency
exchange, leading them to make uninformed judgments.

Recently, when an acquaintance asked this writer for his opinion on
the alarming rate of the devaluation of the dollar in Armenia, he
advised this individual to contact an expert in financial matters so
that facts are separated from fiction. In response to his queries,
Vache Gabrielyan, a Board Member of the Central Bank of Armenia,
wrote a brief analysis, providing his reasons for the devaluation of
the dollar vs. the dram.

Gabrielian explained that in the past 5 years, except for rising
investment and trade flows, the inflow of dollars sent to citizens
(not businesses) through the banking system alone has increased from
$420 million in 2002 to $1.2 billion in 2006. These large amounts of
transfers or remittances from overseas, along with other factors, such
as productivity improvements, have lowered the value of the dollar. He
said that "due to a high share of migrant workers in the workforce,
as well as a widespread Diaspora, banking transfers (remittances)
are among the most important."

Gabrielyan pointed out that "Armenia’s GDP last year was about $6
billion — i.e., the transfers through the banking sector alone are
about one-fifth of the economy, and the net inflow of banking system
transfers to private citizens — $450 million, is roughly equal to all
the printed cash money in circulation. In such conditions, the Central
Bank, under constraints of not allowing too much of local currency
inflation has absorbed about one-third of the net inflow. You may
have noticed that exchange rate volatility is less this year. Still,
even after Central Bank intervention the amount of inflow is so large
that it cannot not have an impact on the exchange rate."

He concluded by saying that "the exchange rate appreciation is going
to continue, and this is not caused by domestic factors. Indeed,
US weak dollar policy, growing oil prices and our regional economic
relationships all have an impact on it. We hope, that appreciation will
proceed at a slower pace, and we are trying to mitigate it the best way
we can. Fixing the exchange rate is not a sustainable policy option,
and none of our professional international counterparts (the IMF,
World Bank, etc.) recommends such an action."

Not being an expert in the field of currency fluctuations, this writer
cannot give a definitive assessment of the above analysis. It is hoped
that the level of discourse on this and all other subjects would be
taken out of the domain of gossip and speculation and turned over to
those who are experts in their respective fields.

Just because the dollar’s value is falling in Armenia, one should not
automatically jump to the conclusion that this is due to fraudulent
activity. The Central Bank official provided a seemingly reasonable
explanation for the devaluation of the dollar. If other experts are
willing to present their analyses, this writer will publish them too,
providing an opportunity for the public to have a more comprehensive
understanding of the financial situation in the Armenia.

Unsubstantiated accusations, offered by those who have no expertise
in currency fluctuations, only serve to blame the wrong parties
and mislead a nervous Armenian public that is already under great
financial stress.