The person who said these words is not a journalist who can be criticized for expressing non-professional opinions, but rather well-known economist and Nobel Peace Prize winner Morris Allen. He said this about the currency market of developing countries that have large amounts of dollars in circulation. We will write more about Morris Allen, but now let’s draw our attention to Armenian economists, who think that they are better than the Nobel Peace Prize winner.
You may have guessed that this article is dedicated to the dollar issue, but this one is the most detailed article about the dollar that we have ever published and we hope it won’t be boring for our readers.
Recently, the Central Bank has been criticized for the changes in the USD exchange rate. Two days ago parliamentarians joined the journalists that criticized them and criticized some more; they used terms like “cheater”, “speculator”, etc. The CB head, Tigran Sargsyan didn’t agree with Hmayak Hovhannisyan, Viktor Dallakyan and Artashes Geghamyan, who criticized him and he was trying to assure them that these changes were a result of the market economy regulations and that people’s welfare got better during that period. In order to prove his point, Tigran Sargsyan asked the parliament to pay attention to the estimations of international organizations.
In any case, MPs were not satisfied with the explanations of the CB head and started petitioning in order to found a commission on investigating the losses of citizens as a result of the changes. While deputies were collecting signatures, the CB spoke out and the International Currency Fund (ICF), which supports the CB, organized a seminar in the CB building.
“I will explain to you in details”
This is what the ICF general representative to Armenia, James Macque said. The most important issue that has to be explained now is why the USD exchange rate is falling down so fast these days.
Why has the USD exchange rate been going down since 2004? They said that the USD exchange rates fell down not only compared to AMD, but compared to other currencies too. For instance, in 2003 the price for one USD was 0,8 Euro, and now it is 1,3 Euro. This is logical if we look at it long-term. In spite of this, in one month alone, prices for the USD fell down almost by 9% (from 450 to 410 AMD). There were no serious changes in USD-Euro exchange rates during this time. Mr. Macque and T. Sargsyan say that the reason for these changes is the rise in foreign transfers to Armenia. According to Mr. Macque, most of these transfers come from Russia. Besides that, he says that the incomes of Russians and Armenians living in Russia have increased due to the oil export capacities and the money has increased much. As a result of that, they started sending more money to Armenia, thus increasing the USD capacity in Armenia rapidly and that led to the decrease in the rate. In spite of this, along with this growth, the negative balance of our foreign trade is growing as well, which according to specialists will reach one billion this year. This had to have an influence on USD exchange rates too and counterbalance it. Why didn’t it happen? No one could answer to this question. In response to the question as to who the market representatives are that decide whether the supply capacity has increased or not, Mr. Macque said that market was a hard concept, which involves banks, currency exchange points, the Western Union offices, where citizens get their transfers. So, how is it that the currency exchange point owners open their boutiques in the morning and fix the exchange rate at 440, and then decide to set it at 430 a couple of hours later? Do they conduct professional surveys to find out the world tendencies of currency exchange regulations and the number of foreign transfers? According to James Macque, these people want to get more profit and thus make the exchange rate go down. “Do you think that there is someone controlling the exchange rates and tells all the exchange points to go along with the set rates?” answered Mr. Macque. We don’t actually see what’s going on; we can only make predictions. As for the fact that the exchange point owners tend to get more profit, it is very amazing because some owners of such points earn little money, as a result of which the rates of the whole country change and many citizens suffer the consequences0. According to what he said, it turns out that currency exchange rates are controlled by exchange points. The market runs by the following system: the exchange points in the suburbs and remote places of Yerevan periodically get information from the points in Kasyan and Tigran Mets streets. The exchange points in remote districts usually have lower exchange rates and then, at the end of the day, they sell their currency that they have bought during the day at one of the exchange points of the mentioned streets. As for the exchange points working on those two streets, they work on the basis of the information given by trade banks and make deals with them. I don’t have any information as to how they control the prices, who does that and based on what principles.
When AMD learned how to float, USD started to sink
James Macque and Tigran Sargsyan say that exchange rates are set on the basis of market regulation principles. The CB has adopted a policy for floating rates.
According to James Macque, the policy of floating rates is more “successful”. “If the CB does what some journalist thinks is better and states fixed exchange rates, that will lead to negative results”, said Mr. Macque. According to him, if the CB adopts a policy of fixed rates, it can only control the national currency, but not the others. “It may have a negative influence on exporters as well”, said Mr. Macque.
We don’t think that the CB should do what journalists advise them to do because they have very good specialists who don’t need such advices. The only thing they should do is explain to people and assure them that the exchange rate changes are not done artificially and nobody can do that. Many economists don’t agree with what Mr. Macque says. Now let’s get back to Morris Allen, whom I mentioned in the beginning of the article.
“The floating rates regime not only creates instability, but also the exchange rate is not formed in the market as a result of that”, said the economist, who was given a Nobel prize and didn’t know anything about the Armenian market.
We can, but won’t do it
The CB has already adopted its strategic floating rates policy and if it replaces this policy, it will have negative results. If the USD capacity increases, the CB can buy the extra capacity from the market. But if it does, it will have to issue AMD. If it issues extra AMD, that may lead to inflation. In other words, here the CB is making a choice between inflation and making the USD exchange rates go down. According to the RA law, the main goal of the CB is to keep prices stable. Besides that, the official marks on inflation are very suspicious, but this article is not about that.
T. Sargsyan and Mr. Macque say that it is more important to stop inflation because citizens who have their savings in USD have more money than others. “Inflation mostly affects poor people because they get their stipends in the national currency”, said J. Macque. We wonder whether he can make a living with only 10.000 dram a month. Hardly, because he knows that it is impossible and citizens with no money get financial aid from abroad.
Now let’s talk about local producers who, according to Macque, will suffer from having a fixed rate policy. In response to the fact that industry fell down as a result of the changes in the exchange rate, he said, “GDP rise is more important than industry”. He doesn’t care about that, but we do, because since 1989, industry levels have gone down a lot, while the number of services has gone up; this means that our economy is moving from industry to service. Foreigners may not care about this because the main goal of the ICF is not to help Armenia’s economy grow, but rather financial stability.
We understand why the ICF is protecting the policy adopted by the CB-it’s because they are also to blame. This is the reason why they don’t take any steps to prevent the rates from falling and claim that this is a positive process. “Increasing AMD prices will make the citizens trust national currency”.
Trusting the national currency
Tigran Sargsyan has talked about this “trust” at the National Assembly too. T. Sargsyan petitioned people to keep their savings in AMD and said, “The citizens that followed my advice benefited by almost 30%, and those who didn’t, lost almost 30%”.
Why should we believe it? Should we do so only due to the fact that its prices are more stable compared to the USD? This is not enough. The national currency must be insured with something. Before it used to be insured by gold, but now, like many other countries, Armenia insures it with its property, goods and services produced inside the country. Money is a means of expressing the worth of goods and services, and it must correspond to the real sector of economy. Otherwise, when the national currency is not secure, it is just a piece of paper, which may be lost at any moment.
In order to trust the national currency, citizens should first of all trust their country and state. Citizens of Armenia don’t trust the state; most of them are even ready to leave the country as soon as they get the chance.
The ICF and CB assure that AMD is a stable currency and its price is fixed in the market. As for the participants of the market, banks offer higher interest rates for AMD than USD. When they do this, they are the main players in this market. Does this mean that they don’t trust the national currency either?
In a word, sticking posters in shops saying that money is to be paid only in AMD is not enough; whatever they do it will be the same; people will keep their savings in USD, if not in USD, they will keep them in Euro or any other currency, but not in AMD-even the citizens who say that they trust the national currency. People will start trusting again when industry levels grow and people start working, instead of losing trust in the country and hoping to get a job somewhere in Russia. For the time being, citizens are afraid of keeping their savings in AMD… Besides that, it is impossible to save a lot in AMD because there is not much of the Armenian dram.