Finding Common Ground: Armenia’s Cope with a Floating Currency Rate

YEREVAN–The dram saw its first depreciation in nearly 12 months two weeks ago, sending Armenian consumers into a frenzy.

On March 3, the dollar devalued 80 dram within the time span of an hour. At noon, the panic that would throw consumers into a whirlwind of uncertainty and confusion had blossomed.

What followed was a mad rush by many consumers to grocery stores where they purchased large quantities of basic foodstuffs like flour, sugar, and cooking oil–which had spontaneously increased 200 dram–out of sheer panic. By day’s end, store shelves were bare of essentials. Dollars were either in short supply or were completely unavailable.

In response to the depreciation, some businesses reacted to the point of desperation. The entire chain of Star Supermarkets closed entirely for two hours to adjust prices. Some stores closed altogether, like the newly opened Nike franchise on Hanrabedutyan Street, which removed merchandise from display windows and shut its doors for nearly a week. Consumer goods became more expensive because distributors were deliberately raising prices in expectation of further devaluation and increased short-term demand. At one point during the first week in March, one dollar bought 400 drams on the street.

The dollar-to-dram exchange rate had held steady at around 305 for a year. The Central Bank of Armenia repeatedly denied that it had fixed the rate. Despite the slight strengthening of the dollar during the last half of 2008, the dram’s worth would not drop.

The shortage of dollars was first evident on Feb. 27 when the currency could not be bought in exchange kiosks and banks. But as of this report’s filing, the situation had already normalized.

Perhaps the catalyst of the nationwide panic revolving around the exchange rate fiasco was the dismal forecast presented in late February by the World Bank representative in Armenia, Aristomene Varoudakis, who predicted zero economic growth for 2009.

Yet the dollar-to-dram rate has maintained steady at around 370 dram, with a margin of five dram. Depending on the day and place of currency exchange, between 368 to 378 dram buys one dollar. However, a well-known economist loyal to the opposition, Hrant Bagratian, believes that there is the possibility of the national currency falling to a rate of 850 dram against the dollar by year’s end.

The nationwide panic of March 3 is mainly due to the stipulation by the International Monetary Fund that the Central Bank allow the dram to have a floating exchange rate so that it would provide $540 million in loans to Armenia repayable in 28 months. The plan was approved only six days after the dram was devalued.

Despite the concern that the price of food would drastically increase, the opposite has happened. For instance, a kilo package of lavash bread only one month ago sold for 350 dram at Star Supermarket, or about $1.15. That same bread with the current rate of 370 dram to the dollar sells for 290 dram, or about $0.78.

Yet with the drop in price for wheat comes a decrease in domestic production, which is expected to taper off this year. Furthermore, farmers will have a harder time this year raising crops with a 75 percent increase in fertilizer. A 50 kilo container has increased to 7,000 dram from just 4,000 dram a year ago.

The Armenian economy has been largely dollar-based since independence. The Central Bank primarily relies on dollars in its vaults to prop up the national currency, although it has recently also invested in the Euro.

Some economic analysts believed that the eventual crash of the dram was inevitable, putting the Armenian consumer at blame, as the demand in foreign currencies has been on the increase. The Armenian Economist blog, which publishes commentary and analytical data related to the Armenian economy, made a connection between the dram’s depreciation and a steady loss of faith in the currency.

The blog writes that “;depositors seem to have developed a preference for foreign exchange and shifted away from the dram. In January, demand deposits denominated in drams fell by 26 percent. In contrast, foreign exchange (FX) denominated deposits grew by 34 percent.”

Much of Armenia’s economy is dependent on money transfers made by family relatives living abroad. In the last quarter of 2008, the Armenian economy saw a sharp decline in foreign remittances. From January to November 2008, just under $1.5 billion had been transferred in cash to Armenia, according to statistics provided by the Central Bank. Yet in November, only $102 million was transferred, a seven percent drop from the same period in 2007. With people returning from Russia jobless in recent months and more expected due to the country’s own economic woes, the amount of remittances is expected to drop even further in 2009.

“We don’t know what’s going to happen from one day to the next,” said Sergey Hovsepyan, who supports his wife, two daughters and mother with the help of nearly $600 collected every month in rent paymen’s. He rents out his three-room apartment in central Yerevan where he was raised and now lives in the home of his wife’s parents who reside in Moscow.

“Prices are going up, and people say they’ll keep increasing. Some say they won’t,” Hovsepyan said. “With the things the way they are in the world, we don’t know who to believe.”

Authors

Discussion Policy

Comments are welcomed and encouraged. Though you are fully responsible for the content you post, comments that include profanity, personal attacks or other inappropriate material will not be permitted. Asbarez reserves the right to block users who violate any of our posting standards and policies.

*

Top