– During the past three years, many people are asking why the price of the Armenian dram is growing, while the USD is falling. Why is the USD going down and is this only going on in Armenia? Do you think the Central Bank is able to solve the problem of inflation while solving the problem concerning currency exchange rates at the same time?
– It’s no secret for anyone that the price of the USD is in a downfall compared to all national currencies. The world markets of currencies feel a huge lack of payment balances and long-term economical savings thanks to the U.S. Meanwhile, the influence that world processes have on different countries differs. For countries that mainly export raw materials (oil, metals, etc.) the fall of USD prices in the international markets may serve as a positive factor for trade (increase of world prices stipulated by USD). Otherwise, for instance, the low interest rates provided by the U.S. may encourage the circulation of capital in markets where those interest rates are high. Generally, in countries that have huge capacities of transit transfers, its capacities are growing, due to the fact that USD inflation is growing internationally. It means that the salaries of those people that work abroad and get their incomes in dollars are growing too, thus they are making more and more money transfers. In the past couple of years, we have registered a rapid economical growth, which is a result of a rapid growth in production. As for the growth of production, it leads to a growth of the real exchange rate. The abovementioned shows that there is nothing strange going on. As a result of the downfall of the USD prices, world trade is going down too. Since the capital is growing and the real currency exchange rates are also growing, the people in charge of the flow of money can do two things: they can either let the nominal rate increase and keep a low inflation rate parallel with that or they can let inflation increase and keep the nominal exchange rate stable. The nominal exchange rates are growing in countries that prefer keeping the prices stable. However, inflation is growing in countries that consider the exchange rate issue important.. Experience shows that it is important to reach these two goals at the same time and that policy may lead to crisis. The experience of the recent years in CIS countries is a best example of this hypothesis. In fact, all the countries that fixed a system of fixed exchange rates have registered high rates of inflation. Only in Armenia the fixed inflation limits have not exceeded the limits defined beforehand, but instead of that the national currency has grown in price. I don’t say that I am a very good specialist, but, anyhow, I am for the method of keeping prices stable. Please draw on the following examples: 1. Exchange mark changes mainly affect those businesses involved in foreign economic relations, since inflation affects everyone, especially the poor groups of citizens, 2. It is impossible to provide a stabile exchange rate limits in a long-term period, 3. Exchange rate is a more flexible tool to correct foreign disproportions than inflation is, 4. For providing a long-term economic growth, stability of rates is a more important factor than the stable exchange rate. In conclusion, the growth of national currency prices, which is predictable and stabile, is a positive development. However, this is the point where there are disagreements connected with imports and exports. First, please note that Armenia is not one of the countries that exports a lot of goods and a country where the economy depends on that. Of course, Armenia receives foreign transfers, but this money is not what exporters bring to Armenia, but it is what Armenians send to Armenia. It is not the most important point. As for domestic production, the stability of the local currency supports the development of local production. You can’t provide a stable level of prices without a stable national currency. It means that you should either fight in order to keep the USD prices stable or cut down inflation capacities. In other words, for that policy you should thank the the Central Bank of Armenia, which establishes that policy. Besides that, you should not forget that the mentioned process has nothing to do with the policy of the Central Bank, but rather with all that’s going on with the USD price.
– Is there a need to fight against the “dollarization” of the economy?
– Does Armenia need independence? If yes, you should fight against “dollarization”. Low level of “dollarization” may help the country easily get out of a tough situation in times of international financial crises. Low level of “dollarization” would give banks the opportunity to implement a more effective monetary policy.
– What would you suggest for cutting down the “dollarization” capacity and increasing the trust of citizens towards the national currency?
– First of all, you should figure out what the reasons are for that, whether they are due to finances or production. If the reasons for “dollarization” are based on production, that leads to “dollarization” in the financial field as well. However, it can’t be vice versa since “dollarization” in the financial field may be a result of open economy. If the reasons of “dollarization” are based on production, on the one hand, you should provide a macroeconomic stability and low level of inflation in a long-term period, on the other hand, you should not put limits on the variation of nominal exchange rates. In that case the expenses in national currency will be reduced, but in case of transactions in foreign currency, those expenses will grow. Besides that, you should develop the national financial markets, import new tools in national currency, develop the market of corporative stocks, etc. for the purpose of cutting down the capacities of financial “dollarization” Economies should have other opportunities to keep their savings besides keeping it in national currency. Besides that, there are administrative methods as well on how to fight against “dollarization”. You can either put limits on transactions in foreign currencies or just fix high percents for depositing money in foreign currency. This policy should be implemented and followed carefully. If those steps are taken in a country where the economy is not stable, it may lead to a financial crisis.
P.S. Generally, in order to fight against “dollarization” Mr. Tosunyan advises to do what is being done now. In other words, he advises not to do anything, to let the AMD prices grow, let the domestic producers be punished so that they start trusting the USD more. As for the administrative methods, the CB can accept those advice freely since our economy is “too stable”.