WHERE ARE THE CURRENCY ASSETS OF THE CENTRAL BANK ALLOCATED?
Lilit Poghosyan

Hayots Ashkhar Daily
24 Oct 2008
Armenia

And how does the CB control its resources?

At yesterday’s Q&A session between the Government and the National
Assembly, RPA member A. Davtyan addressed the following questions
to the Prime Minister: in what way and to what extent has the global
economic crisis impacted the economy of Armenia? Has the Government
assessed the possible risks and what measures does it take to reduce
the negative impacts of the global crisis to a minimum?

The answer of Prime Minister T. Sargsyan did not sound convincing to
the author of the question; moreover, the MP was surprised. Below we
present Artak Davtyan’s considerations regarding the subject matter
of the issue.

"The NA Regulations-Law does not envisage any possibility for turning
the NA-Government question and answer session into a debate. And
naturally, it cannot contradict the clarifications of the Prime
Minister and discuss to what extent the arguments of the Government
are right or wrong, admissible or inadmissible. But I cannot help
saying that I am not, mildly speaking, satisfied with the answers of
the Prime Minister.

Especially considering his categorical accentuations and instructive
tone by which Head of the Government introduced the 4 clauses of the
"recommendations" of the World Bank and the International Currency
Fund.

According to the Prime Minister, the first recommendation or
"proposal" of the specialists is the following: to avoid, to the
greatest possible extent, speaking about the impending crisis or
disaster so as not to arouse negative expectations and anxiety among
the private entrepreneurs and citizens and hence, not to increase
the possible risks and negative consequences.

In my opinion, this approach is not absolutely acceptable. If the World
Bank and the International Currency Fund were convinced that the best
way out of the existing situation was not to see those risks and avoid
speaking about them, they would first of all give recommendations to
the countries that gave birth to such crises. First of all, I mean
the United States where all the media unanimously speak about the
global crisis and the ways towards overcoming its impacts.

I don’t know what goals the Prime Minister pursues by insisting that
everything in our reality is all right, and there are no threats to our
economy and financial system. He doesn’t even say to what extent those
recommendations will help overcome the possible negative consequences.

Personally I am not optimistic in that respect. After all, if there
is a problem, it is necessary to raise it, understand the causes and
then find solutions, instead of concealing everything and pretending
that nothing has happened.

Especially considering that we have had that experience. Just a
few months ago when the Georgian-Ossetian war had just begun, the
possibility of the so-called "global crisis" was not even sketched. The
general opinion at that time was that the Georgian crisis would not
produce any impact upon the economy of our country. And that happened
in a situation when it was obvious that the problem did really exist,
and it was necessary to undertake certain steps for mitigating the
negative impacts of the Russian-Georgian conflict.

Today, everybody already admits and the Government confesses that
we have really suffered serious losses. The events in Georgia have
caused a damage of 670 million dollars to our country. Had that
reality been presented to the international community in time, the
millions of dollars allocated to Georgia might have been partially
allocated to Armenia as well.

Therefore, regardless the clarifications of the Prime Minister, I stick
to the viewpoint that silence is not the best way for overcoming the
situation with minimum losses."

"While making remarks, you considered the approach adopted by the
World Bank vulnerable. According to that approach, it is senseless
to exchange some part of the CB reserves for gold because that is
not only unjustified but also harmful. Do you again consider the
clarifications of the Prime Minister unconvincing?"

"In my question, I did really mention that in the opinion of some
analysts, there were some discrepancies between the real and legal
status of gold, and those discrepancies did not absolutely contribute
to the viability of the financial system. It is also in consideration
of this factor that many countries keep some of their reserves in
the form of gold as a permanent value. Unfortunately, the humanity
has not invented a more reliable and permanent value yet.

And the problem here does not absolutely consist in whether or not
the Central Bank has sold its reserves of gold or whether it acted
the right way by getting rid of them or whether the country has lost
or gained anything as a result, considering the sharp devaluation of
the dollar over the recent years."

My question was the following: whether it isn’t time for us to keep
some part of our currency reserves in the form of gold. In contrast
to that, the Prime Minister referred to some simple copybook truths
and explained that the gold in the reserves of the Central Bank does
not simply fulfill the function of accumulating wealth. Secondly,
he pointed out the issue of profitability and realization.

I believe we really have a problem in this regard. In the 2007 report
of the Central Bank, "Assets in Currencies" are defined as follows:
"Financial tools measured by their real value; the gains and losses
obtained as a result of their repeated measurement are determined
by the report on the financial results." According to that article,
we had similar assets in the amount of 79 billion 440 million drams
at the end of 2006 and 318 billion 671 million drams or more than 1
billion dollars at the end of 2007. In such conditions, a question
arises as to where those assets were allocated.

Our currency reserves have been increasing since 2003, when the
valuation of the Armenian dram began. After such increase, relevant
sums are added in the sections concerning the expenses and losses as
a result of the re-evaluation. Is that clear? But if it is said that
keeping the reserves in the form of gold is not profitable, there
arises another question: what profitability is meant if the losses of
the Central Bank made up 28 billion 970 million drams in 2006, and 43
billion and 794 million drams in 2007? As regards the valuation of the
dram, the picture here is more awful. Those losses made up 37 billion
927 million drams in 2006 and 52 billion 984 million drams in 2007.

So the issue is how does the Central bank maintains, controls and
uses its currency assets? If everything in our reality is perfect,
then you are welcome to open the brackets and prove that it is true.