World Markets Research Center
Global Insight
May 30, 2008

Armenian Government Pledges Efforts to Control Inflation

by Venla Sipila

No efforts will be spared as the Armenian government seeks to curb
inflation, the country’s prime minister Tigran Sargsian has assured,
as reported by ARKA News. In particular, Sargsian analysed that
elasticity of Armenian prices is insufficient, with downward movements
taking place too slowly compared with price rises. He concludes that
the government needs to intervene and will intensify the efforts of
the State Commission for Protection of Economic Competition, while
also involving the tax bodies in the task. The premier added that the
government will pay special attention to price developments of goods
for which international price decreases have not led to comparable
easing in domestic prices. Inflation regarding both fully and
partially imported goods will be investigated in such cases. The
economy and finance ministries, the Central Bank of Armenia (CBA) and
the State Commission for Protection of Economic Competition, are to
work together in finding the appropriate measures to curb price
rises. Armenian consumer price inflation ended 2007 at 6.6%, averaging
4.4% for 2007, while the latest data show that consumer prices in
Armenia soared by 10.7% year-on-year (y/y) in April, mainly driven by
sharply increasing food prices (seeArmenia: 5 May 2008:). The Armenian
budget targets 2008 inflation at 4%, with a corridor of 1.5%
percentage points on either side.

Significance:After several years of remaining remarkably low in
comparison to soaring economic growth, Armenian inflation has recently
accelerated sharply, largely because of soaring international food
prices. These have a strong bearing on Armenian inflation because food
still plays a large role in the typical consumption basket of the
households. The CBA has fended of inflation pressures by repeated
interest rate hikes, but as the effect of these remains limited in the
undeveloped financial environment, its key means for curbing inflation
has been letting the dram appreciate considerably in response to
strong foreign currency inflows in the form of workers’ remittances
and FDI. In addition to inflation being pushed upwards from the cost
side due to high prices of food, demand-side price pressures also
continually play a role, as the robust GDP growth has proved somewhat
more reluctant to cool than Global Insight previously expected, even
if the first quarter finally saw some moderation in overall
growth. Domestic demand is partly boosted by fiscal spending. Indeed,
the International Monetary Fund (IMF) recently cautioned that the
Armenian government should tighten its fiscal stance in order to
support monetary policy in anchoring inflation expectations (see
Armenia: 22 May 2008:).