Dollar vs. Dram, Fact vs. Fiction
In the last couple of years, the U.S. dollar has lost more than 40% of its value against the Armenian currency, the dram.
This devaluation has had a major impact on Armenia’s economy on several fronts:
- On-going projects in Armenia, funded in dollars from overseas, have considerably exceeded their allotted budgets, forcing investors and donors either to curtail their projects in order to remain on budget or substantially increase their planned expenditures.
- The stronger dram has reduced Armenia’s exports, as Armenian products have become more expensive for foreign buyers.
- A large number of Armenians, who have been surviving on funds sent to them from their families overseas, have had their incomes reduced drastically, as the dollars they receive are worth much less than before.
- On the positive side, imports from overseas have become cheaper, as the dram now buys much more in dollars.
The devaluation of the dollar has given rise to speculations as to the true reasons for the reduction in the value of the dollar vs. the dram. Some have alleged that by lowering the value of the dollar, the local oligarchs are able to import cheaper goods. Unfortunately, most of those who have written about this issue in the press have had no professional training on the subject of currency exchange, leading them to make uninformed judgments.
Recently, when an acquaintance asked this writer for his opinion on the alarming rate of the devaluation of the dollar in Armenia, he advised this individual to contact an expert in financial matters so that facts are separated from fiction. In response to his queries, Vache Gabrielyan, a Board Member of the Central Bank of Armenia, wrote a brief analysis, providing his reasons for the devaluation of the dollar vs. the dram.
Gabrielian explained that in the past 5 years, except for rising investment and trade flows, the inflow of dollars sent to citizens (not businesses) through the banking system alone has increased from $420 million in 2002 to $1.2 billion in 2006. These large amounts of transfers or remittances from overseas, along with other factors, such as productivity improvements, have lowered the value of the dollar. He said that "due to a high share of migrant workers in the workforce, as well as a widespread Diaspora, banking transfers (remittances) are among the most important."
Gabrielyan pointed out that "Armenia’s GDP last year was about $6 billion -- i.e., the transfers through the banking sector alone are about one-fifth of the economy, and the net inflow of banking system transfers to private citizens -- $450 million, is roughly equal to all the printed cash money in circulation. In such conditions, the Central Bank, under constraints of not allowing too much of local currency inflation has absorbed about one-third of the net inflow. You may have noticed that exchange rate volatility is less this year. Still, even after Central Bank intervention the amount of inflow is so large that it cannot not have an impact on the exchange rate."
He concluded by saying that "the exchange rate appreciation is going to continue, and this is not caused by domestic factors. Indeed, US weak dollar policy, growing oil prices and our regional economic relationships all have an impact on it. We hope, that appreciation will proceed at a slower pace, and we are trying to mitigate it the best way we can. Fixing the exchange rate is not a sustainable policy option, and none of our professional international counterparts (the IMF, World Bank, etc.) recommends such an action."
Not being an expert in the field of currency fluctuations, this writer cannot give a definitive assessment of the above analysis. It is hoped that the level of discourse on this and all other subjects would be taken out of the domain of gossip and speculation and turned over to those who are experts in their respective fields.
Just because the dollar’s value is falling in Armenia, one should not automatically jump to the conclusion that this is due to fraudulent activity. The Central Bank official provided a seemingly reasonable explanation for the devaluation of the dollar. If other experts are willing to present their analyses, this writer will publish them too, providing an opportunity for the public to have a more comprehensive understanding of the financial situation in the Armenia.
Unsubstantiated accusations, offered by those who have no expertise in currency fluctuations, only serve to blame the wrong parties and mislead a nervous Armenian public that is already under great financial stress.