Central Bank Raises Base Rate Amid Dram Fluctuations

YEREVAN (RFE/RL)–The Armenian Central Bank has drastically raised its benchmark re-financing rate–following a three percent depreciation of the national currency–the dram–and steep rise in yields on state treasury bills–it was announced on Monday.

The Bank’s board decided to increase from 39 to 53.5 percent the interest rate at which it lends money to commercial banks–in a sign of impending financial woes. The move came after the dram’s exchange rate fell from 525 to an average of 545 per one US dollar last Friday. The drop is also believed to have been responsible for growing yields on short-term T-bills that have hit 67 percent on average.

According to Bagrat Asatrian–president of the Armenian Bank Association–by raising the re-financing rate the Central Bank tried to prevent excessive speculative borrowing of its funds by commercial banks for their eventual investment in the increasingly lucrative T-bills. Asatrian said the fact that the government engages in expensive internal borrowing means it is in desperate need of money and is of particular concern.

"We are only entering a phase of problems. We will face even more serious problems after one or two months," Asatrian–himself a former Central Bank chairman–told RFE/RL on Monday.

The rising interest rates and bond yields come against the background of low inflation and relatively robust growth in the Armenian economy. Government figures indicate that annual inflation was less than three percent and the gross domestic product growth exceeded six percent last year. The government expects a continued economic growth this year as well.

Asatrian said underlying the shakiness of Armenia’s macroeconomic stability is the extremely high current account deficit–which was well over 20 percent in 1998. "We haven’t been able to overcome the previous years’ problems related to the current account deficit," he said. In his words–pressure on the dram may increase in the spring–a period high seasonal imports.

Last month–the Central Bank received a strong boost to its foreign exchange reserves with the International Monetary Fund’s approval of $59 million in new loans to Armenia.


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