The world is experiencing economic shocks as a result of the Russia-Ukraine War, and Armenia has not been spared the consequences. At the beginning of 2022, the U.S. dollar in Armenia was trading at 480-490 to the Armenian dram. Since May, it has been steadily declining, dropping to 405-410 in early July.
According to Hayk Mnatsakanyan, an economist and Chair of Finance and Accounting at Yerevan State University, the appreciation of the Armenian dram against the American dollar is the result of a number of key factors. One is the sharp increase of oil prices due to the war in Ukraine. The second key factor is that following the Ukraine war, transactions for almost 30 percent of Armenia’s exports to Russia are being done in rubles. As the third factor, Mnatsakanyan cites the fact that quite a number of Russian IT companies moved to Armenia after the start of Russian military operations in Ukraine, saying that these IT company employees get paid primarily in U.S.dollars, causing an influx of dollars into Armenia. Mnatsakanyan also adds the considerable number of tourists visiting Armenia this year to the list.
In July, Vahan Kerobyan, Armenia’s Minister of the Economy, announced on Facebook that according to preliminary data, 129,908 tourists visited Armenia in June 2022 alone––65,807 visitors more than for the same period last year; 57,000 of them came from the Russian Federation. In the first half of 2022, Armenia welcomed 594,139 tourists—a staggering 348,118 more than the same period in 2021.
According to the May 2022 Central Bank Statistical Overview, in the first five months of the current year, individual bank transfers from abroad to Armenia amounted to the equivalent of $612 million: that’s $330 million more than for the same period last year. The vast majority––$496 million, was transferred from Russia. This amount is $360 million more than for 2021.
Head of the Armenian Center for Socio-Economic Studies (ACSES) and economist Haykaz Fanyan attributes the devaluation of the dollar to the unprecedented increase in remittances to Armenia. He notes that the amount of remittances is currently the highest recorded for Armenia. This has also contributed to the appreciation of the dram.
Fanyan notes that the Russian ruble’s value keeps rising since most transactions for exported goods and services are conducted in rubles. Due to the West’s ongoing sanctions, Russia is unable to import a large quantity of goods, but it continues to export energy at an increased price. “The result is a larger surplus in the payments balance, meaning they have more dollars than they can spend. As a result, the ruble has gained in value,” says Fanyan.
Entrepreneurs Facing Challenges
Armenia-based entrepreneurs who have been doing business in dollars must now decide whether to operate at a loss or back away from prior commitments and sell exported goods at a higher cost price.
Samvel Machanyan, director of Allure Wines, which produces natural wines, says that his business is suffering significant losses due to the devaluation of the dollar, as they have already exported almost half of their products for the year. Since 2018, the company has been exporting its products to more than 11 countries. Machanyan notes that he faced a choice: to raise the price after an order was placed, something he didn’t feel ethically comfortable with, or to incur losses.
“We had a discussion with our partners and decided to wait a bit so as to not face a loss. Our partners understood. So we neither raised the price, nor exported the products. Thus, we didn’t bring in the income we had planned to receive,” Machanyan said. He also noted that Allure Wines recently received an order from Japan, but that they haven’t discussed the price due to currency fluctuations.
Machanyan is hoping that the Armenian authorities will take active steps toward a solution, and not leave businesses to their own devices while waiting for the exchange rates to stabilize. “They have all the tools and necessary information at hand, as well as the right––and certainly the obligation—to solve the problem. I personally cannot offer any solution, because whatever I suggest, will be perceived as self-interest.”
In the meantime, the Central Bank of Armenia has refrained from curbing the appreciation of the dram. The President of the Central Bank, Martin Galstyan, has stated on several occasions that they will not artificially depreciate the dram.
“We think that a more in-depth analysis should be conducted on the basis of which avoiding artificial devaluation and with tax revenues collected at the expense of additional inflation, the government should support companies or industries that have a potential for dynamic export development,” said Galstyan on June 15, 2022.
At the same time, Mnatsakanyan says that by assessing inflationary expectations, the Central Bank is consistently contributing to appreciating the dram by keeping refinancing rates high. According to Mnatsakanyan, by doing this, the Central Bank is slowing down economic growth while curbing inflation.
Mnatsakanyan notes that according to Chapter 14 of Armenia’s Constitution, the main objective of the Central Bank is to ensure price and financial stability. Mnatsakanyan adds that in addition to monetary policy, the Central Bank must also manage fiscal and economic policy. The consistent appreciation of the dram does not contribute to the development of the economy in any way.
“No one is suggesting to artificially appreciate or devalue the currency, what we are talking about is implementing a viable economic policy,” says the economist. “This includes but is not limited to harmonizing monetary and fiscal policies. In the long run, the appreciation of the dram and curbing prices is not a prospective, long term solution.” In his opinion, price stability will continue over the next year or two, however, it will at some point begin to affect the country’s development.
According to Mnatsakanyan, you cannot build up a short-term policy that harms exporters who create jobs, pay taxes and salaries, and contribute to the country’s development.
“Statistics show that a country can develop only when it has production capacity and exports, whereas importing countries are developing countries, not developed,” he explains. “You should create an economic policy that not only addresses the issue of price stability, but also promotes exports. Currency appreciation does not contribute to the promotion of exports, but rather the opposite.”
Fanyan thinks that the government, and in particular the Ministry of Economy, should identify exporters who are suffering financial loss from currency fluctuations and provide them with support. He thinks that if the Central Bank devalues the dram, the inflation rate will rise.
“It’s a dilemma: do we protect the interests of 2,800,000 people conditionally or only those of exporters? But they are also consumers and will suffer as well. I think that the issue is the Ministry of Finance and Economy’s responsibility in particular. If entrepreneurs have serious concerns, the Ministry should take corresponding measures to mitigate the risks facing them,” says Fanyan.
Matevos Barseghyan is the Founder of One Way Tour agency, which provides packages for local tourism, as well as outbound and inbound tourism. He says that in the case of inbound tours, rates are agreed upon with the tourists months prior to their arrival. However, even a month after the payments are made, the agency loses because of the dram’s appreciation.
“The client makes an order and we charge them at the currency rate for that day,” Barseghyan explains. “When they pay a week later, the received sum is totally different. For instance, 100 dollars can range from 40-55,000 AMD. These fluctuations hurt a lot.”
However, the businessman does not expect much from the government in terms of addressing the issue.
Several entrepreneurs have written an open letter to the government with a request to curb the appreciation of the dram or to set up subsidy programs for exporters. In response to an inquiry by EVN Report, the Deputy Prime Minister, Mher Grigoryan, replied that the Central Bank’s approach in regard to exchange rates is acceptable. “In the meantime, I consider it necessary to develop a support tool to mitigate the existing risks for exporters of products and services. I am sure that the Ministry of Economy is keeping the issue on its radar and will implement targeted support measures in the near future,” the deputy PM added.
Inflation and Economic Growth: Forecasts
According to the June 2022 inflation report published by the Central Bank, the Russia-Ukraine conflict as well as COVID-19 restrictions in some industrial and cargo centers in China have caused concern amid the slowdown of global economic growth and expansion of the global inflationary environment.
According to the Central Bank’s report, domestic inflation has continued to climb in the second quarter of 2022, stemming from inflation in almost all international commodity and raw material markets as well as high demand in Armenia. In May, the 12-month inflation rate was at 9.0 %. Nevertheless, the report notes that “from March to May, it became possible to partially mitigate the effect of external inflation in Armenia, particularly that of food products due to the exchange rate appreciation.”
According to the Central Bank’s second quarter monetary policy program for 2022, the 12-month inflation rate will remain above the target level for the short term, and from the second half of 2023, it will gradually decrease and stabilize, coming closer to the target level of 4%.
The Central Bank’s economic forecasts are more encouraging. According to the same report, economic growth in 2022 has been revised and instead of 1.6%, it is currently estimated at around 4.9%.
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