Armenian Government Under Fire Over Continuing Currency Appreciation

What's good for Armenia's currency, the dram, means tougher times for perhaps a majority of Armenians. The rapid rise of the dram's value against major global currencies, especially the US dollar and European Union euro, has hit a large part of Armenia's population hard, and threatens to stifle the country's exports.

The dram's mysterious rise began 16 months ago and gained fresh momentum in mid-April. One US dollar is now worth roughly 440 drams – a 30 percent rise in the Armenian currency's value since the start of 2004. The dram has appreciated against the euro at approximately the same rate.

Authorities attribute the phenomenon to a drastic increase in the amount of cash remittances that are regularly sent home by hundreds of thousands of Armenians working abroad. The Central Bank of Armenia estimates that about 40 percent of the country's households receive such aid.

Predictably, the dram's rise has emerged as a contentious domestic political issue. Politicians and economists critical of the government dismiss the official explanation, alleging instead that authorities themselves have engineered the exchange rate changes to siphon off part of the hard currency and benefit government-connected importers. Such allegations resurfaced after the dram rose from 450 to 420 in a matter of days before stabilizing at the current level.

Central Bank officials strongly deny any involvement in currency manipulation. They insist that the dollar remittances coming through banks and wire-transfer services, mostly from Russia and the United States, jumped by 50 percent to $760 million in 2004. The actual amount of foreign cash entering Armenia may have been twice the officially declared figure, government officials believe.

Given the relatively small size of Armenia's monetary base – with only about 117 billion drams (roughly $268 million) in circulation – the large volume of remittances from abroad would appear capable of causing currency-market volatility. "There are just too many dollars in circulation in Armenia," Smbat Nasibian, chairman of Converse Bank, a major commercial bank, argued on April 27.

Authorities also cite the dollar's overall weakness in international currency markets as a factor in Armenia's exchange-rate woes. "All complaints should be addressed to the US government," Armenian President Robert Kocharian told university students in Yerevan during an early April address.

Critics counter that the dollar has continued to depreciate against the dram since January, despite a greenback rally against the euro and other major currencies. They also question the credibility of official data on remittances, which have long served to offset Armenia's huge trade and current account deficits. "Armenians living in Russia or the United States could not have gotten 50 percent wealthier within a year," argued Eduard Aghajanov, the former head of the National Statistical Service.

Whatever the reason, the dram's appreciation has fueled anger among Armenians reliant upon money sent by family members working abroad. During the post-Soviet era, lagging economic conditions have prompted up to 900,000 Armenians to go abroad in search of work, with Russia being the primary destination for labor emigrants. In 2004, the number of immigrants to Armenia outnumbered those leaving the country for the first time since 1996, according to official statistics. [For background see the Eurasia Insight archive]. Even so, a significant number of Armenians remain dependent on remittances.

Nearly half of some 1,000 people randomly polled in January by the Armenian-European Policy and Legal Advice Center, a research agency funded by the European Union, said they have lost from the dram's strengthening. Only 27.6 percent claimed to have been better off as a result.

Armenian authorities downplay the extent of popular dependence on the remittances. Vache Gabrielian, a member of the Central Bank board, claimed on a TV talk show on April 28 that remittances make up only a quarter of the aggregate individual income in Armenia. Gabrielian also argued against strong Central Bank intervention in the currency market, saying the bank's main task is to ensure low inflation. The Central Bank has generally succeeded in this area, he added.

However, consumer price inflation in Armenia is clearly on the rise. Official figures put the inflation rate at 7 percent in 2004. The prices of basic food products, which account for the biggest share of household expenditures, were 11 percent up from the 2003 level. Food prices soared by another 8 percent last January, casting doubt on the authorities' pledge to keep the annual inflation rate within a 3 percent limit in 2005.

Many Armenians would say that the rise in the cost of living has been even higher than indicated by official statistics. Suspicion has been stoked by the fact that virtually no imported goods have become cheaper in the Armenian market since 2003. "I think the main reason for that is a very small number of importers," admitted Nasibian, the Converse bank chief. "Each of them seems to have monopolized a particular field, making disproportionate profits."

This only gives weight to conspiracy theories about the dram's appreciation. They are further reinforced by a lack of transparency in inter-bank currency trading which is supposed to set exchange rates in Armenia.

According to the most popular of those theories, Kocharian's administration has artificially boosted the national currency to let large-scale importers (virtually all of them having strong ties to the incumbent administration) make additional profits. The retail price of gasoline, for example, has barely gone up in Armenia over the past year despite the worldwide surge in oil prices. Wholesale gasoline traders have also cashed in on the fact that fuel import duties are set in dollar equivalents. The Armenian government only last month moved to fix them in drams.

Importers' gains contrast sharply with losses incurred by Armenian exporters. The latter are beginning to openly express concern about the dram's appreciation. A Yerevan-based factory that produces electrical lamps has reportedly suspended its manufacturing operations after discovering that its production is now too expensive in Georgia and other ex-Soviet states that formed its main market.

Meanwhile, there are signs that authorities are starting to worry about consequences of the strong dram. The Central Bank was reported late last month to purchase $25 million in hard currency from local banks in a bid to shore up the dollar. The intervention appears to have stabilized the exchange rate. It remains to be seen for how long.