According to CBA Forecasts, Inflation To Make 4.1% In 2007

ACCORDING TO CBA FORECASTS, INFLATION TO MAKE 4.1% IN 2007

YEREVAN, JANUARY 12, NOYAN TAPAN. According to the forecasts of the
Central Bank of Armenia (CBA), inflation will make 4.1% in December
2007 on December 2006, whereas it made 5.2% in December 2006 on
December 2005.

NT was informed from the CBA press service that the CBA forecasts that
in 2007 the euro’s smooth appreciation will continue, and the exchange
rate of the euro will make 1.35 USD in late 2007. These forecasts are
made based on the US state budget and current account deficits, which
are at quite a high level. Besides, the difference between the
interest rates of the US Federal Reserve and the European Central Bank
will continue to decrease in favor of the euro. Oil prices are
expected to reach 80 USD for a barrel instead of the current price of
61 USD.

International financial terms will be stricter in 2007 in connection
with a rise of interest rates by the central banks of almost all
developed countries. The exception will be the US economy where a
decline in interest rates is expected in the first half of 2007 under
conditions of low economic growth and high but already declining
inflation. The structer terms will result in some reduction of capital
inflows into developed countries, as well as Armenia.

As for grain prices, it is noted that inflation risks have somewhat
weakened in connection with good harvests in Russia and a small
reduction of grain exports from this country.

In 2007, a slow-down in the economic growth rate is expected in
Armenia compared with the previous years: the capital construction
growth rate will decline, the growth rates of construction and
services will be the same, some growth is expected in industry. At
the same time in the gross demand structure, a decline in the growth
rate of domestic demand and an increase in export growth rate are
expected in 2007. Out of the components of domestic demand, the real
growth rate of private expenditures will decline in parallel with an
increase in the real growth of state expenditures. As in the previous
years, it will be conditioned by a continuous growth of the
population’s incomes and a considerable inflow of remittances. Private
investment growth rate will remain high, mainly in such sectors as
house construction, transport and communication, energy, metallurgy,
mining and chemical industries.

Export growth is expected in 2007 through industry growth and solution
of structural problems in the diamond cutting sector. Real import
growth rates will remain the same as compared with last year under
conditions of a slow-down in the growth rate of dollar prices of
imports and the forecast demand.

In 2007, the labor market indices will continue their behavior as
displayed in the last five years. Particilarly, the level of
unemployment will continue to fall, especially in the construction and
service sector, due to an increased labor demand. As the above
mentioned sectors are the main ones to secure GDP growth and these
sectors do not require a large productivity growth, the salary growth
in the economy will continue exceeding the productivity growth
indices. As a result, some inflation pressures will appear in the
consumer market.

Remittances (their growth rates will a bit decline) will also have an
extending impact on inflation.

A slight extending impact of the tax budgetary policy on the gross
demand is expected in 2007, mainly due to an extending impact of
expenditures.

Dramization registerted in the last two years is expected to continue
in 2007 as well because of a number of measures aimed at dramization
of the economy.

Financial intervention growth tendencies will continue in 2007, which
will manifest themselves in a growth of the dram multiplicator and
dramization coefficients. At the same time there will be a decline in
dollarization of the economy.

The high growth rates of the economy’s crediting will also be
maintained this year, which is conditioned by considerable profits of
banks last year, as well as by implementation of big credit programs
in 2007 at the expense of authorized capital replenishment resources –
in particular, considerable mortgage crediting.