Armenian expert says government, Central Bank cannot control financial market
Iravunk web site, Yerevan
30 Jul 04
The devaluation of the dollar against the Armenian dram in recent
months has no economic grounds and proves that the government and the
Central Bank cannot control the situation and the financial market,
well-known Armenian economist Eduard Agadzhanov has said. He stressed
that the Central Bank is unable to maintain the stability of Armenian
currency and the rate of the dram will finally plummet as a result of
its policy. The following is the text of Kerob Sargsyan’s report by
Armenian newspaper Iravunk web site on 30 July headlined “Millions of
dollars of dubious origin come to Armenia and are ‘laundered’ here”.
Subheadings have been inserted editorially:
Addressing the devaluation of the dollar against the dram in recent
months, well-known economist Eduard Agadzhanov maintains that this
phenomenon has no economic grounds. In addition, Mr Agadzhanov casts
doubts on the explanations by the Central Bank of the Republic of
Armenia about this issue and specifically, on the fact that the fall
in the exchange rate of the dollar is caused by a major influx of
tourists. Rejecting this explanation, Agadzhanov noted that if the
influx of tourists can influence the country’s currency, the budgets
of the countries with tourism-based economies should be in quite an
unimaginable state. He then developed his thesis.
The Central Bank fails to maintain stability of Armenian currency
Agadzhanov When the Central Bank of the Republic of Armenia says that
the reason for the fall in the exchange rate of the dollar in Armenia
is tourism and the influx of foreign currencies, it forgets that the
main goal of the central banks all over the world is to stabilize the
currencies of their countries. The question arises what the Central
Bank of the Republic of Armenia could do to neutralize the surplus of
the dollar. There are elementary financial technologies. First and
foremost, the Central Bank of the Republic of Armenia could issue more
money and buy up dollars cheaply. The government of the Republic of
Armenia also had to take this step because it has international
obligations and it would be profitable to honour them by buying
dollars cheaply. And the Central Bank of the Republic of Armenia could
expand its hard currency reserves thanks to the low exchange
rates. Let me bring an example: tens of billions of dollars were
accumulated in Russia due to the unprecedentedly high oil prices in
the world. Why did this not make the rate of the rouble surge? The
point is that the Central Bank of the Russian Federation acted in a
more flexible and clever way, bought up the surplus of foreign
currency, neutralized the soaring rate of the rouble and
simultaneously replenished its hard currency reserve. The Central
Bank has another opportunity to neutralize the surplus of the dollar
as well. According to our information, Armenia abandoned this method
back in 1998, but it is still used in all the CIS countries. An
obligatory reserve fund, which applies to hard currency as well,
should be created. In other words, all banks have to create a hard
currency reserve to comply with the Central Bank’s decision. And there
is yet another mechanism which is used all over the world. For example
in Russia, every company that performs an import transaction is under
obligation to insure 50 to 100 per cent of the amount of hard currency
to be used in the transaction for a period of several months. In
short, there are numerous financial technologies which prevent the
influence of the growing amount of foreign currency in a country on
the stability of the home currency there.
I regret that that our Central Bank is taking no measures in the
current conditions, in other words, it fails to honour it main
obligation of maintaining the stability of the dram. The question
arises then: What is the Central Bank of the Republic of Armenia
needed for? Why does it submit its annual monetary policy to the
National Assembly for approval? This is only a formality, it seems.
Millions of dubious origin
Journalist Do you think that the Central Bank of the Republic of
Armenia is not honouring its main obligation?
Agadzhanov I think that this means that millions of dollars of dubious
origin make their way to Armenia and are “laundered” here. Perhaps the
Central Bank of the Republic of Armenia, realizing that it is unable
to neutralize the huge amounts of money, is taking no steps. Also, let
us not rule out that the bank could simply be instructed not to
intervene.
Journalist It is hard to believe that the dubious dollars that you
mentioned started to infiltrate into Armenia in the last few months,
when the “triumphant march” of the dram started. Do you think that
there could be more profound reasons?
Agadzhanov I repeat: this situation has no economic justification
whatsoever. In other words, it is of a speculative nature: gamblers
buy dollars to sell it for a higher price, or this is done to meet the
importers’ interests. Let us not forget that in the country’s main
financial document – the 2004 state budget, which was submitted by the
government of the Republic of Armenia and approved by the National
Assembly of the Republic of Armenia – the average exchange rate of the
US dollar was set at 589.3 drams.
Journalists What consequences might this situation have from that
perspective?
Agadzhanov One fine day, when this agitation subsides, the rate of the
dram will suddenly plummet, with all the negative consequences that
ensue. But the current situation has shown that our authorities – the
government, the Ministry of Finance and the Central Bank – cannot
control the situation and the financial market. When the government
submits a budget in which the average annual exchange rate is set at
589.3 drams, the country, state government structures and private
businessmen plan their annual programmes based on that figure. In
reality, however, a totally different exchange rate is set, and
thousands of people and businessmen (especially local exporters)
suffer because of this disgraceful situation.