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    Categories: 2022

If dram devaluation against dollar continues long, it will ease inflationary pressures, economist says

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 10:08, 21 June 2022

YEREVAN, JUNE 21, ARMENPRESS. If factors contributing to decline of US dollar exchange rate, in other words, if the devaluation of the Armenian dram lasts long, it could positively affect the inflationary pressures, however, in that case exporters could suffer somehow, Economist Edgar Aghabekyan, an expert at the Amberd Research Center, said in an interview to ARMENPRESS.

Commenting on the factors affecting the devaluation of the dram, the economist said they are many. “The main phase of dram devaluation started with the increase in foreign currency flows to Armenia due to the actions of Russia in Ukraine. The banking system has some restrictions in this sense, it cannot absorb foreign currency all the time, and this leads to the fact that the foreign currency exchange rate is regularly decreasing. And this is the main pressing factor leading to devaluation”, he said.

The season, the entry of tourists to Armenia are also factors for the devaluation of the dram. Thus, demand and supply are the main factors of the formation of dram-dollar exchange rate. The question is what boosts this supply-demand. There are sometimes emotional effects when in some situation people expect to get a big benefit from exchange rate fluctuations.  

“That emotional stage, for instance, was the beginning of the Russian-Ukrainian military operations when many people here were in panic and were buying dollar, assuming that the dollar exchange rate should rise. However, according to the Central Bank and in my view, the sensitivity of our population is certainly decreasing in that sense because they understand that making predictions and trying to get major benefits from exchange rate fluctuations in a short period of time is difficult, and as a result they are taking risks”, the economist said.

The economist notes that the norms of supply, demand formed in inter-bank markets could also be factors affecting the exchange rate. The export and import volumes should also be considered in the market as factors of supply and demand.

But in order to understand the results and consequences of the dram devaluation against the dollar, it is necessary to know how long this process will last.

“As there are a lot of uncertainties, the main reasons are the Russian-Ukrainian military actions and some regional processes. And in order to have an imagination on the end, it is necessary to understand when it ends, to understand whether a new situation comes with a new price, or after the stop of flows the market returns to forming a new, more balanced exchange rate”, the economist said.

Making predictions is difficult, therefore, the economist says some scenarios should be considered. If this situation lasts long, he says that it will have some positive effect on inflation.

“As the prices of imported goods depend on the foreign currency exchange rate, in my opinion, it will positively affect it in case of lasting long. On the other hand, the exports will somehow suffer. Everything depends on economic policymakers – the government, the Central Bank, who will take respective steps to normalize the situation”, he said.

Recently the dram has been appreciated in Armenia, but inflation comprised 9% as of May. Asked why the dram devaluation has not yet affected the prices, the economist says that first of all it is necessary to understand the causes of inflation.

“The cause of the inflation is mainly the increase in prices in international markets. If we compare the price increase in international markets with the price increase in the Armenian market, it could be turned out that the prices of some goods here have increased less than in international markets. Therefore, it is possible that the exchange rate had somehow affected the price increase. But assessing it is a difficult task, because one needs to understand which commodity groups they are, which part of these goods we import in Ruble, and which part in dollar: the Ruble exchange rate has not changed considerably, we also need to understand what changes these commodity groups have faced in international markets”, Aghabekyan said.

If the dollar exchange rate have not declined, whether a higher inflation was possible in Armenia, the economist assumes that this affects some commodity groups, but identifying concrete types of goods is still impossible.

The economist also commented on the question whether the prices of gas and electricity could be revised in the conditions of decline of dollar exchange rate and devaluation of the dram. Usually, the producer applies to the Public Services Regulatory Commission requesting to revise the tariffs, however, Aghabekyan doesn’t think that such a step is possible in the near future. It is necessary to consider how long these factors will stay in the market. “It could greatly affect the tariffs, the prices, if these factors remain unchanged for a long-run”, he said.

The economist believes that the devaluation of the dram will have its biggest effect on inflation. In all this situation, he highlights the right coordination of the policy of the government and the Central Bank, as well as support to some suffering sectors in the form of tax privileges or subsidies which will raise the competitiveness of the field in international markets or for exporters.

Interview by Anna Grigoryan




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