Everyone proposes scenarios concerning these changes, as for the Central Bank (CB), it’s not saying anything and is simply going along with the chaos. Whose fault is it? What can they do for stopping the rates from changing? With the purpose of getting information concerning these changes and the reasons, “168 Hours” interviewed pro-rector of Russian-Armenian Slavonic State University, candidate of economical sciences, Edward Sandoyan.
What can make the AMD rates go up?
“In a country where people and economies become interested in foreign currency, first of all it is worth understanding the macro economical reasons for that, and then keep that free from political, and often absurd and targeted announcements and interpretations. The currency market plays an important role in financing, which is in direct contact with economies and families”, says Mr. Sandoyan. He thinks that since the developments in the currency exchange market depend on external factors, people should not make prompt decisions and assume what the real reasons are. “I can officially announce that all that’s going on (exchange rate changes) is a normal process, these kinds of things have always happened in all countries”, says the economist. Currently the prices for AMD are high because the USD capacity in our market has increased and the balance has moved. The problem is where this money actually comes from. Mr. Sandoyan says that theoretically, there are several options for this. He says that among the possible reasons are export increase, tourism development, money transfers from abroad, and cosmopolitan developments. According to Sandoyan these things could serve as a firm basis for the change. “I don’t think there are serious reasons for the recent changes because, as far as I know there is no information saying that the bank deposit capacities have increased, which could be a reason for such changes”, assures Mr. Sandoyan. The only factor that he is not informed about is the capacity of money transfers. “Maybe Armenians have gotten richer in another country. We may also assume that some processes are going on in the real estate market, which is a reason for increasing financial investments in that field too. But there aren’t any rapid changes and developments in this field, which may help clarify the reason for the change”, says the economist. He doesn’t think that cosmopolitan changes may seriously influence our economy. Instead, Mr. Sandoyan thinks that the reason is the “expectations in the speculative market”. And if this is the reason, he thinks that the exchange rate will go back to its regular rate in a matter of days.
“I am surprised when I see people entering this field and making assumptions. The only institutional body that has such information and can analyze the developments is the Central Bank. I don’t consider the other “professionals” serious. In times like these there is no need to look for guilty people, because this creates chaos and such announcements are often not accepted as they are, I mean the announcement of Tigran Sargsyan saying that “if there is anyone in the world, even Soros, who can say that he knows about the future changes in the foreign currency exchange market, he is either mad or a speculator”.
Is it good that the AMD prices are growing or not? There are different approaches to this issue too. According to the specialist, the more AMD prices go up, the more people that get income in AMD will benefit because their real income capacities will grow. As for people that get money transfers from abroad and people that export goods, they will have losses, but this may be temporary because they can change their position and proportion of expenses in a short period.
“If we pay attention to the global economical strategy, the main goal of our state is to develop the export potential. From this perspective, it turns out that this process tends to affect the strategic goal of our country. In this case we are also creating a bad business environment for foreigners to invest in Armenia”, says Sandoyan.
The CB’s policy
The only exclusive goal of the CB is to keep the prices stabile. The CB doesn’t have any other goals and it can’t either, because this is confirmed in the law. “The CB must keep balance in the financial market and must avoid any risks of changing the exchange rates. At least the regulation of inflation helps solve other problems, included the strengthening of investments and economical development. Accordingly, this strategic goal can’t contradict another goal, which is the stability of the national currency. I think the activities of the CB are good and well-planned. I have nothing to criticize”, says Sandoyan. The monetary policies implemented by Central Banks are aimed towards having an influence on currency markets and not to let any rapid changes occur. Does the RA CB have any tools to influence? According to the economist, it doesn’t. His explanation is connected with the fact that financial institutions are not formed yet in Armenia. Back in 1994-95, our CB chose a policy, which was based on the principle of floating rates. And later, they applied the model of monetary base targeting. In that period there were no financial institutions, capital market, out-of-banking sectors, i.e. institutions that could issue financial tools. In developed countries these tools give an opportunity for the CB to influence the abovementioned market, thus trying to follow its main policy and goal. “Starting this year the CB is implementing a policy of targeting inflation, which has the highest level among the monetary policy models. The previous model gave an opportunity to operate in primitive market conditions, where tools were not developed enough, and the CB could indirectly control the financial tools and follow its policy through influencing their inflation tendency. Of course, sometimes indirect influence is not effective, but this was the only way they could do it”, says E. Sandoyan.
Why did we decide to follow a policy of floating rates? Maybe we’d better to fix it or make a currency corridor like Russia did. “We can’t do that because we don’t have stabile sources of foreign reserves. I think that Armenia will continue having a negative payment balance for a long time. This is the reason why this issue was not discussed initially”, assures the specialist.
As for the lack of financial tools, it keeps the CB from acting independently. Mr. Sandoyan says, for instance, that most of the U.S. state reserve system actives are stocks, due to which they can influence monetary market through open market operations, thus solving the problem of interest rates, which is the main way of reaching its main goal. As for Armenia, we don’t have the necessary tools to implement such a policy. There is also a lack of capital market in Armenia. “There are no tools in our capital market that have more liquidity and less risks, which is the main necessary factor for implementing an inflation targeting policy. The only tool that we have is the governmental short-term and long-term obligations, which has a very small capacity and can’t seriously influence our market. As for other countries, for instance they have mortgage credit obligations, which have a high level of liquidity. We don’t have more financial tools that have a high level of liquidity and low level of risks”, says E. Sandoyan. In fact, the CB does not have enough tools to function actively in the open market. It can’t have an influence on interest rates, monetary aggregates, keep balance in currency market, and prohibit inflation risks at the same time. “This is the problem-not understanding what it means to get financial aid from the CB to do something that you can’t do institutionally. Currently the CB does all that it can in the current situation”, says the economist.
According to him, when there is extra capacity of USD in the economy, many people start blaming the CB for not buying that extra money with the purpose of keeping balance and stability of rates. If the CB does this, it will have to issue AMD with the same capacity in the market. Concerning this, MR. Sandoyan thinks that our economy has some characteristic factors, which are an obstacle for this and don’t let us do that. Armenia is a poor country, it has a low level of living standards, and as soon as the incomes grow, the money is spent directly in the market, thus creating inflation. “They shouldn’t let this occur because inflation is more important than exchange rates. If the CB had enough stocks with a high level of liquidity (for instance, governmental obligations), it could issue these obligations in the market targeted to cover this extra capacity of money. In this case it could keep balance again. But I think this is possible. On the other hand, if the CB had stocks in its reserve, it had to buy them in the secondary market anyway. At that moment, the money capacity would increase, and thus create inflation”, says Sandoyan.
Instead of this he suggests another option, which may overcome some of these problems. “We should analyze the inflation factors in Armenia in more detail. This is a subject for serious research and analysis both by the CB and statistical services. We should find out whether the consumer basket, which is considered during the calculation of inflation, is optimal for Armenian reality or not. We see that prices are going up, but the index doesn’t change, sometimes we even have deflation. I think the methodology of calculating the consumer price index should be revised taking into account what kind influence goods and services have on inflation”, says E. Sandoyan.
In regard to the CB policy in the currency market he says that he doesn’t like the fact that “the CB often uses administrative tools to enter the market”. “They start checking up on the activities of currency exchange points, find violations there and take their expired licenses from time to time. They can’t solve the problem like that”, says the economist.
“Street” exchange rates
Sandoyan hasn’t changed his opinion concerning one issue since 1994.
“I can’t understand and even don’t want to understand why exchange rate points are found on “streets” in a transitional country and where people talk about money laundering and fight against that. The exchange points on streets are not a part of the banking system. In fact the foreign currency capacities that are in circulation in exchange points form a very small part of the total circulation capacity. But it turns out that the exchange rates are fixed on “streets”. The whole banking system implements its policy taking into consideration these processes. As for these processes, for instance, several exchange points may implement their policy on the street. And no one can blame them because this is their business. That is why I think that only banks can fix the foreign currency exchange rates”,says the economist. He says that it’s good that the CB handed the currency management over to the stock market last year, but he doesn’t understand why the CB doesn’t move the whole field to the banking system. “I believe that banks will fix much more objective exchange rates”, assures Edward Sandoyan.