Based on the data of the National Statistics Service of Armenia (NSS), we Armenians may just believe that we are really living in a land of miracles. The service always shows us numbers and makes us stand in awe just like famous cartoon figures.
Currently, there is nothing surprising about the consumer price index (inflation) study conducted in April, but we’re sure there will be some things to surprise us…
Based on official data, there was a 3% difference between the inflation rate of April 2006 and the month before. Compared to 2005, prices have gone up by 3.2% during the past four months. The prices for cultural products and services (4.7%), groceries (4.5%) and household appliances (4.3%) have gone up the most. The second table of the consumer price index of the NSS is compared to the prices during the same time last year. The consumer price index for the months of January-April 2006, compared to last year, has made up 98.5%.
At first sight, it may seem a little illogical. Compared to 2005, as of the end of April this year there was a 3.2% inflation rate, while prices were down by 1.5% in April 2005. We can explain this by the fact that prices for products during the first couple of months last year were pretty high, then they gradually started to go down and we ended the year with a deflation.
Economic specialists say that this has to do with the rather high specific weight of agriculture in Armenia, however agriculture is seasonal. Prices for vegetables are generally high in the beginning of the year and then gradually go down. The Central Bank of Armenia (CB) says the same thing. As you know, this year the CB had foreseen a 3-4% inflation rate. After the first four months, we already see a 3.2% rise and if it continues at this rate, we may just see that percentage exceed the limit by the end of the year. But the Central Bank is not really worried about this. The bank’s press department informed “168 Hours” that things are going smoothly and the prices are even 2% lower than they had expected. The CB specialists are certain that the prices will “be the same” as last year.
But there is a difference. Prices in January 2005 have gone up by 5.4% compared to the previous month and have gradually lowered at a stable rate until August. However, we don’t see this trend for the first four months of 2006.
As already mentioned, the CB considers this dynamics as normal.
“Prices correspond to our expectations for the first trimester-prices for oil and other raw materials, as well as the Euro exchange rate and international interest rates, are moving at the same pace,” as stated in the Central Bank press department’s release on May 11, 2006. But the Central Bank specialists also say:
“…We are facing some risks for the inflation rate this year what with the rise in the Euro exchange rate and oil prices.”
It’s obvious that international oil prices have an influence on inflation rates. But it’s rather interesting in Armenia. Experience has shown that the price of the dollar goes down in Armenia when oil prices go up. Just a couple of days after the Central Bank’s message, the USD exchange rate started “misbehaving” and began to go down from 450 AMD to 428 AMD.
The CB explains that the reason for this is market prices. First of all, there is a 26% rise in money transfers during the first trimester of 2006 compared to the first trimester of last year. Among other factors, the bank also states the increase in exports during April. But that isn’t that convincing, especially if we go along with the same logic-even if there was a decline in exports during the month of April, the dollar rate had to go up. But this, of course, wasn’t the case.
Economic specialists describe the relation between international oil prices and the dollar exchange rate by one point of view, which the CB specialists don’t like to hear. According to them, if international oil prices are going up, then Armenian fuel importers must raise the price for fuel in the country. This will lead to the overall rise in prices. However, this doesn’t benefit the authorities and that is why we “lower the dollar”. Fuel importers either don’t raise the price or raise it just a little. Instead, the Armenian importers buy the dollars sold abroad for lower prices and keep the balance. The CB denies this because this means that the dollar exchange rate doesn’t “float”, rather it is controlled and can change at any given time. If it is controlled, then it’s quite possible that it will go up and down as certain people want.
I can’t really say that this is the truth, but the Central Bank hasn’t convinced me that the tendencies of the dollar exchange rate are due to market prices.
If the CB really has an influence on the USD-AMD exchange rate, then we can assume that the bank’s politics is not aimed towards satisfying a certain group of people, but rather keeping the inflation rate the same. It’s obvious that importers get huge profits. However, we can also consider this by chance because in this case the Central Bank’s aim towards keeping the inflation rate stable and the importers’ profits coincide. The bad thing is that the people’s purchasing capacity is decreasing and money transfers make up most of the income of citizens. Why is it that important for Armenian authorities to keep the inflation rate low or at least present it like that?
A high inflation rate is normal for a county with a two-digit economic growth, however the rise in prices doesn’t benefit the authorities during the pre-election period. We can consider the sale of the Hrazdan fifth energy block from the same perspective and the subsidization of gas prices. Secondly, based on official statistical data, consumers shopping in stores or markets say that prices have actually gone up. What’s actually behind the fake decrease in prices?
We hear a lot about the two-digit growth, but that growth doesn’t end in itself. If the country has economic growth, then living standards must be high and poverty must reduce. Poverty reduction is also very important. The authorities feel proud of this, spread the news to international organizations, their effective work and expect to get extra money from them. Here is where the statistics service achieves more. Compared to 1998-1999, the number of poverty-stricken people has gone down from 56.1% to 34.6% (in 2004), while the number of extremely poor has gone down from 21% to 6.4%.
Everything becomes clear when you see how the poverty level is estimated. Based on the World Health Organization’s standards, each person living in Armenia must eat 2.232 kilo calories each day. Based on that, you get the exact quantity of grocery foods, which is the equivalent to the number of calories. This is the consumer basket. Then we estimate the price based on the current market prices and after some clarifications (depending on the price differences in the city and villages, age of consumers), we get the general price for each extremely poor citizen. For example, in 2004, the average price was 12.952 AMD. The people who spend less than that are considered extremely poor. Since people have other demands besides eating, we have the “general price for poverty”, which includes non-grocery products. That price was estimated to be around 20,000 AMD in 2004.
If an inflation rate is fixed, then prices for groceries also go up and more people find themselves incapable of buying the products. So, the low inflation rate allows us to keep the poverty level low. The following sentence is stated in the NSS 2006 report entitled “Armenia’s social image and poverty”:
“Poverty reduction in Armenia is mainly due to the country’s economic growth.”
The authorities will pay more attention to these kinds of sentences during their pre-election campaigns.
It turns out that we are living better than we imagined. At least that’s what the NSS is trying to convince us.
P.S. According to Central Bank specialists, Armenian economy will skyrocket this year too. “By following up on the developments in the macroeconomics field during the first months of 2006, the Central Bank board has once again confirmed the possibility of a two-digit economic growth this year…”. To tell you the truth, I don’t doubt that.