INSTRUMENTS USED BY CBA TO COMBAT INFLATION PRESSURES WILL NOT CHANGE, CBA DEPUTY CHAIRMAN SAYS

Noyan Tapan

M arch 5, 2009

YEREVAN, MARCH 5, NOYAN TAPAN. The forecast of 8% inflation in Armenia
under conditions of a floating exchange rate includes the rise of
the dollar’s exchange rate from 305 to 360-380 drams, as well as
the rise in prices of power-bearing substances from April 1 and the
continuing deflationary effects of global economy. "We will combat
inflation pressures consistently, by using our usual monetary and
credit instruments, including interest rates and regulation of the
amount of money," the deputy chairman of the Central Bank of Armenia
(CBA) Vache Gabrielian stated at the March 4 press conference.

According to him, a growth of interest rates of deposits and credits
is also expected because "the inflationary environment will result
in a general growth of interest rates". To recap, on March 3 the CBA
raised the refinancing rate by 1%, fixing it at 7.75%, whereas in
recent period it was changed by a 0.25% "step".

As regards the question of why the CBA did not shift to a floating
exchange rate policy earlier and in a smooth way, V. Gabrielian said
that the shift is temporary and it was made when some problems related
to financial stability arose. He added that in the countries which
made a gradual shift, it was a costly and less efficient process. It
was mentioned that "the policy of gradual reduction of the exchange
rate is conducted in Russia, and one of its major shortcomings is
that although considerable resources are spent, which Russia as a
rich country with large external reserves can afford, a change of
inflationary and exchange rate depreciation expectations is not
made there". The same is true for Kazakhstan, Belarus, Azerbaijan
and Uzbekistan. In those countries where the policy of shifting
to a floating exchange rate is conducted more or less sharply,
"the exchange rate depreciation expectations disappear quickly".

V. Gabrielian said the pressures on the exchange rate began in Armenia
in the autumn of 2008. In September, following the Georgian-Russian
"August war", no goods entered Armenia (70% of imported goods enter
Armenia through Georgia). The deputy chairman of the CBA underlined
that after that period, not controlling the depreciation of the
exchange rate in Armenia might result in serious problems related to
financial stability. He added that the monitoring of the developments
in the Armenian banking system in February 2009 showed that the
financial system of the country is stable, while the potential of
the possible impact of the majority of existing fluctuations on the
financial system has declined.

In his opinion, under the new conditions the risks of the banking
system become apparent in the fact that "in conditions of changes in
the banks’ liabilities (if liabilities are more expressed in foreign
currency), the assets do not change at the same speed and the banks
are suffering and will continue to suffer losses related to the change
of the exchange rate".

However, the CBA’s calculations show that "the financial system is
not under threat, and no bank will have any problems with insolvency,
lack of resources or considerable waste of capital".

V. Gabrielian expressed an opinion that the expectations of further
depreciation of the dram have considerably declined, and the results
of bargaining on NASDAQ OEMEX ARMENIA stock exchange also show it:
sales-purchases of 7 million 390 thousand dollars were made there
on March 4 at the weighted average exchange rate of 372.98 drams a
dollar. The closing price made 372 drams. On March 3 sales-purchases
of 3 million 420 thousand dollars were made at the weighted average
exchange rate of 372.11 drams a dollar. The closing price made
372.49 drams. At the same time, in the words of V. Gabrielian,
"the population’s tendency to exchange drams for foreign currency
has declined. Our view is because the exchange rate adjustment was
quite considerable, these tendencies will probably stop soon". He
also expressed a hope that a new equilibrium level will soon form in
the foreign currency market (without interventions of the CBA), which
will eliminate the uncertainty that economic entities have regarding
the exchange rate, and the situation in the commodity markets and
the trade sector will improve.