On September 23, the Pressing club of “168 Hours” organized its second discussion, which was dedicated to the issue concerning the AMD exchange rate increase and the results. From the beginning, it was expected that most of the questions would be addressed to the Central Bank. The head of the Central Bank, Tigran Sargsyan, was not present during the discussion. However, a board member of the bank and an advisor to the CB head were present and they answered to all the participants’ questions.
Either inflation or AMD exchange rate increase
At the beginning of the discussion Vache Gabrielyan, CB board member, said that the current exchange rate policy has been around since 1996 and since that time Armenia has had floating rates: “For over ten years the authorities have been implementing a policy of floating rates. Generally, I think that this policy is successful since it has helped us several times to avoid possible shocks. Besides that, we have had rapid economical growth too, where the policy of floating rates has also played a role since it provided flexible exchange rates”.
According to Mr. Gabrielyan, the CB has a choice to make: either inflation or AMD exchange rate increase. “There are countries that can handle these two issues together, but in that case we will have to close the sources of money inflow. For instance, China, however we don’t have that opportunity”.
Concerning the mentioned issue, the CB is protected by the law too, since the law states that that the main goal of the CB is to provide stability of prices. “In contrast to other countries, our law states clearly; if anything contradicts that provision we should forget about anything and it doesn’t depend on anything else. This is the only case when the CB is independent”, said Mr. Gabrielyan.
He also noted that the CB is not that independent and can’t regulate prices on its own, since it is done by the parliament, “We have only several tools that we can use to reach those goals. It means that the CB can implement its monetary policy as far as it coincides with the inflation rate fixed by the parliament”.
V. Gabrielyan says that the difference was so much in our country because of the fact that we have huge money inflow. If it didn’t lead to currency exchange rate changes, it would lead to inflation.
However, V. Gabrielyan thinks that it is possible to resist the influence of money transfers on currency exchange rates and notes that the CB has bought over $90 million from the market. “We have bought, we haven’t sold. We have bought as much as it was possible in the framework of the ranges prescribed by the parliament. We have been varying near the range of 3%, but we will definitely end this year with a higher mark than foreseen”, said Mr. Gabrielyan.
Kahchatur Sukiasyan, NA deputy, head of SIL concern, wondered what kind of program the CB had implemented jointly with the government. As for the problems caused by the exchange rate changes, Mr. Sukiasyan thinks that there are many big problems as a result of those changes, “It is almost 4 years that the price for energy is 25 dram. Back then, the exchange rate for one dollar was 580 dram, please tell me how much energy you could buy for one dollar and compare it to what you can buy now. Besides that, please note that the prices of communication and gas have influenced the prices of other products as well”. Khachatur Sukiasyan said that he wondered why there were over 100 new natural juice brands in the market since the time when those changes started.
“The issues you mentioned are very important, however, those are not the responsibilities of the CB”, said V. Gabrielyan to Khachatur Sukiasyan. In regard to why the capacity of imported products doesn’t go down as a result of the exchange rate changes the CB board member said, “We can’t even approach this field with our monetary policy. We have neither adequate tools nor detailed information. We are periodically asking this question to the government and they are preparing programs to work it out”.
Ashot Osipyan, an advisor to the CB president, says that it is important to cut down the dram capacity in circulation, “The Armenian economy is very “dollarized”. The CB knows this. There is a lot of money flowing in and the capacities are 50% more than the capacities of last year according to banks”.
V. Gabrielyan added that almost all exports are in dollars. In regard to the issue of energy proposed by Khachatur Sukiasyan, Mr. Gabrielyan says that the mentioned issue concerns the government and independent regulating commissions only.
“Why didn’t the Central Bank complain when the commission on regulating public services allowed the “ArmRusGazard” company to sell gas in dollars? That was a law violation. They take money from citizens in dram, but fix it in USD in the production”, asked head of AEPLAC, Tigran Jrbashyan, to which V. Gabrielyan answered that it wasn’t a law violation and it concerned also the goods for export such as copper, etc., and there are international prices for such products.
Generally, V. Gabrielyan thinks that if the production does not grow in parallel to the dram rate increase, we will have losses, “An economy based on only cheap labor is not compatible. Asian countries that have started that policy long before have changed their course. The expansion of cheap labor in Armenia can continue for more two years, but not more. The only solution is to provide production growth and increase the expenses for that purpose”.
Khachatur Sukiasyan said that businesses could implement a policy aimed towards fighting back the process, “One year ago I told companies to forget about the dollar. When we are exporting products and getting money in dollars, we have a problem with getting that dollar later in order to not suffer any losses”.
However, there are some companies that are flexible and can make adequate decisions. “How can you explain the current situation to small and medium businesses?” asked Khachatur Sukiasyan.
Vache Gabrielyan thinks that it is very important, however he says that the CB does not have enough information to report about the profitability of the relevant fields, i.e. it is not informed well about the fields.
Where is our economy going?
MP, economist Tatul Manaseryan wonders whether the government has considered the economic structure of our economy when implementing the monetary policy. “Does anyone know what kind of economy we want to have, what we have now and where we are going? The parliament has discussed the monetary policy several times and we have had hearings. We should figure out what kind of economy we tend to have”, said T. Manaseryan and added that the budget does not have any programs that would show where we are heading towards.”
To this Ashot Osipyan said that the CB wasn’t involved in that, “You are a member of the parliament and are one of those MPs that deals with discussing and adopting the budget”.
Khachatur Sukiasyan talked about the trade policy and the economy ministry because in his opinion, the state must function as a system and the subsystems must collaborate, “The state must figure out what to do in order not to lose the money coming from abroad and to get as much profit as it can. What can we do if the price for one dollar goes down to 150 dram? Our economy will collapse. We are exporting products in spite of the fact that we are not getting adequate income; we are doing that only for the purpose of not losing our markets. We are waiting to see what will happen”.
Recently minister of trade and economy, Karen Chshmarityan, announced that if the exporting companies didn’t want to lose their markets they had to lose a part of their income.
Concerning this announcement Mr. Sukiasyan says, “I agree with that, but only one part as he said. I don’t mean working with a negative balance. I think we have crossed that red line already”.
Tigran Jrbashyan thinks that the current situation is like when the country receives huge money transfers from abroad. He says that such money inflow forces the country to make a choice; either inflation or exchange rate stability. “It’s not about the CB policy, rather the fact that the tools that the CB has to implement its monetary policy are not enough for it to control the mentioned processes. The CB is not able to implement an adequate monetary policy at the moment. The problem is deeper than we understand”, says the economist.
T. Jrbashyan says that one of the problems is the fact that the level of “dollarization” is high, the financial sector is not developed enough and the technological development level is not adequate. He says that in that framework we are 20 years behind from the necessary development phase. “As a result of these changes people are starting to understand that the dram rate will never be low again. I think we will not be able to solve this problem during the next 3-4 years. This process will continue regardless of anything. The CB does not have the adequate tools to control that process”, says T. Jrbashyan. The latter thinks that the CB has now fixed an optimal position, which sounds like, “If I am not able to regulate the changes, I will try to resist inflation as much as I can”. The latter thinks that the problem is the fact whether our economy will be able to adapt to the existing situation and how well it can make structural changes. Besides his estimations, head of the AEPLAC proposed two solutions, which he thinks are troublesome and are unacceptable, “If we are not able to implement an effective monetary policy, we’d better not have it at all. Several countries have done this and were successful. We can fix our foreign reserves in Euro and not use dram at all. Secondly, the CB can collect large amounts of resources and do the following: it can provide privileged rights to banks to provide financial support for supporting technological advances and export. We must learn from other countries and be able to apply them”.
As for the low level of technological advances, Mr. Jrbashyan said that the companies producing natural juice have bought “second hand” technical lines that are almost 20 years old.
Concerning this, Tatul Manaseryan said, “I don’t think that the natural juice imported from Ukraine or other countries is better than the Armenian juice and is compatible in the Armenian market”.
Khachatur Sukiasyan agreed with Mr. Manaseryan and said that there are companies in Armenia that have imported high quality technical lines from Germany to produce natural juice.
Mr. Suksiasyan said that there isn’t any secondary stock market in Armenia, which would help the allocation of money received from abroad. “There is no secondary stock market in Armenia. For instance, it would be better to give 20% of the stocks of Armentel to the society. This deal would cost $500 million. If we did that, we would be able to allocate $100 million. People would have a chance to allocate $100 million. That sum is not only transfers. Building blockhouses provides $10-15 million income per building. Where are they going to allocate that money? During the period of Bagratyan’s term the government did the right thing by giving 20% of stock companies (he means vouchers) of that time to citizens, however, later those stocks were bought from citizens. The only business type in Armenia that provides accountability, discussions and transparency to the stock holders is the banking system”.
Who is responsible?
Hrant Bagratyan, RA former prime minister, head of “Liberty” party, also noted that the policy of floating rates was adopted ten years ago and added, “We did that for the first time ever and adopted a policy of floating rates, founded 3 stock markets and started selling 1-2 million foreign currency; we asked money from others. Thank God, in 1996 our foreign actives already covered 350-450 million”.
Mr. Baratyan criticized the CB and said that before the Euro entered the market people wrote articles and warned them about the possible danger. “The problem is that you have lost the mutual contact with the society and specialists. If someone doesn’t represent a bank or the government, you don’t pay any attention to what he says. They warned you and petitioned to tell the businesses that Euro was entering the market and 60-70% of our foreign trade would be done in that environment so that they start using that currency in their businesses”, said Hrant Bagratyan concerning the Central Bank.
He also said that the first time the issue of money transfers was discussed was back in 1996 ($30-35 million) and it was evident that the capacities would grow. “This year the capacity of transfers will cover $1,5 billion, which will not help, but will cause problems. It turns out that the migration problem, for which we were criticized in the 90s, was a big investment. The reformations of that period are being done now too; people are going out and sending money from there”.
The latter spoke about the economic growth double-digit mark and said that the rapid growth in agriculture was phony (you can read the interview given by Hrant Bagratyan in the previous editions of “168 Hours”, www.168.am).
Mr. Bagratyan says that the answer to the question “where we are going” should be given in the budget. “If we are saying that the budget is targeted to reducing corruption, we will have to take money out of circulation and give it to the needy citizens. However, I don’t think that this is the best solution”, says Mr. Bagratyan.
The former prime minister thinks that first of all we should found investment funds and invest that money in nationwide programs such as the construction of the nuclear power station, etc.
Tigran Jrbashyan was surprised at the abovementioned recommendation proposed by Hrant Bagratyan: “You advocate the liberal economic policy and just said that the state should invest money, while you know very well that the state is not an effective investor. The problem is that the state should create adequate conditions for investors to invest money in technologies and businesses. But you are saying that the state would better collect that money and invest it. We have seen what kind of results that policy had in Russia. Now you are speaking as a socialist”.
To this note Mr. Bagratyan replied that “liberal” and “socialist” are categories, but he was just an economist, “Secondly, I said to develop with the help of investment foundations. The state may have 10% in the share and give the 90% to private businesses. I proposed a model”, explained Hrant Bagratyan.
Mr. Bagratyan also spoke about insurance and said that if there is no insurance in a country, the funds spent are always more than the saving funds, “You don’t have an opportunity to save money if you want to do so. The insurance system is not developed at the necessary level and is really weak”.
Mr. Bagratyan does not agree with the official information on inflation since during these two years the prices for goods and services in dollar have doubled. “How can you say after all this that the Central Bank is managing inflation? How can it manage while everything is two times more expensive now in dollars? It doesn’t matter whether things have become more expensive compared to dollar or to dram since everything has become more expensive”.
By the way, it is not the fault of the CB only, but as well as the other governmental institutions: “Why is gas imported by four companies only while in 1996 there were 27 companies that imported gas? They’d better let minimum 15 companies import gas. For instance, they can say that each company cannot import more than 5% of the total capacity of gas imported to Armenia. By doing this they will support competition. These issues are more important than the other procedures connected with poverty reduction”.
H. Bagratyan thinks that if the mentioned procedures are done, it will help to take a huge capacity of money out of circulation and resist the increase of AMD exchange rate. Mr. Bagratyan spoke about the CB as well: “When Euro entered the market the CB was late to diversify its funds. Why did they sell gold two years ago while it was better to buy than to sell? Why did they decide to exchange a part of that money to pound sterling instead of Euro? ”
Mr. Bagratyan thinks that the responsibilities and duties of the Central Bank and the government must be revised and must be clearly separated so that to make it clear who is responsible for what since they don’t want to take some responsibilities. The former prime minister concluded his idea with the following: “In fact you haven’t done much, you haven’t done almost anything”.
Be ready for dollar inflation
CB board member Vache Gabrielyan answered to the questions of Hrant Bagratyan and noted that the Central Bank was an apolitical institution and had one goal: “The activities you mentioned need political active participation and legal work and that is not one of our responsibilities. We often speak and explain things, but we do that only when the government is trying to develop draft laws. In other words, both the investment funds and the other issues you mentioned are not our responsibility.”
As for the issue of inflation Mr. Gabrielyan said that usually there is difference between inflation in dollar and other currencies in all countries.
“As for statistics, there are 15 ways to measure inflation in the world. In the given case inflation is measured on the basis of the index of prices in dram, which is accepted in 95% of the world countries. We can’t say whether those figures are correct or not since we are not the government and can’t calculate those numbers. It is not our duty.”
Besides the statistic services, the CB also calculates price statistics, however, it is not done officially. Nevertheless, the CB believes the statistic services (SS). “I assure that the price statistics in Armenia are totally correct. The SS makes its calculations on the basis of the current basket of goods and does that with a variation of 0,2-0,3%”, assures V. Gabrielyan.
However, most of the participants say that there are shortcomings in the basket of goods since it is not updated. V. Gabrielyan thinks that in the nearest future there will be a big difference between the inflation marks in dollar and dram. “The inflation mark in dollar will be 2-3 times more, be ready for that. We don’t have an alternative. It is a fact”, said the CB representative. Mr. Gabrielyan agreed with the fact that Armenia should lure investors, improve the institution of insurance and informed that they were preparing bills so that the Swedish stock market and big insurance companies can work in Armenia. However, Mr. Gabrielyan thinks that if the money inflow continues inflation will grow again. According to the latter, the only solution is to develop productivity: “Given the strong competition we may say that companies will go bankrupt if they are not modernized. This is the point that stipulates the foundation and operation of stock markets. It doesn’t depend on any institutional conditions; if the business does not need to be enlarged, if the businessmen don’t realize that they will lose their place in the foreign and domestic markets, they will never think about improving the productivity”.
Suren Bakirski agrees with the abovesaid, however, he thinks that the mentioned solutions are successful only in a country where people think objectively.. “I appreciate the policy of the CB board since it is the only institution that bears responsibility and is more accountable and answers to questions in a duly manner. I used to argue with the CB, but later I understood that it’s doing its job well. I wonder how the domestic exporters can compete in the market while a minimum 50-60% of the net price has increased by 15-20%. You are speaking about modernization. In order to go abroad one should be able to run his own business, enter shops, buy clothes and go to the public looking new. However, if that person is sick and takes medicines, he does not feel strong enough to do that on his own and try to be modernized. Now let’s try to figure out which fields are able to export products and at least keep their positions. The CB and the government are not the only ones to blame, but the society since the law is applied differently for separate subjects”.
Lawyer Sargis Aghabekyan is involved in in the real estate market of Armenia. He thinks that we don’t need serious legal changes. “The fact that the exchange rate is changing so rapidly is very bad for the economy. The huge capacity of money that is transferred to Armenia goes to the pockets of several importers. The real sector is not compatible. I think that a part of the foreign currency in circulation may be taken out of circulation with the help of emissions and I don’t think it will create any serious problems. That foreign currency taken out of circulation may be paid to cover foreign debt and implement state programs. Today it is possible to do that without any big legal reforms. Otherwise, production will not develop and it will be more profitable to work on import only”.
Those who buy sugar are not interested in monetary policy
Politician Tigran Hakobyan thinks that the most important factor that can help solve the problem is the political will of the current authorities. Mr. Hakobyan advised the participants to leave professionalism aside and discuss the issue as ordinary citizens. “I will bring an example concerning a small shop. The price for sugar was 110 dram in Petak market while the price for one dollar was 550 dram. Now the price for one dollar is 380 dram, but the price for sugar is 310 dram per kilo. The CB can reach success by implementing its monetary policy effectively, but citizens don’t care about it. There are very good specialists in the CB, however, the country does not develop. I don’t see any common ideology and, what is more important, there isn’t a political will to solve the problem. If the gold was sold and the state got losses, the “coward” that sold that gold must be punished for the loss. Citizens want to see the results. You advised to produce and export products. How can they buy new technical lines and produce if their income has gone down from 15% to 2%? As for the citizens, they don’t care about the government; governmental bodies don’t differ from one another,” says Mr. Hakobyan.
Tatul Manaseryan said that they were not concerned and didn’t have policy initiatives. “When importers are getting income, no one tells them to leave that income. However, the monopolistic super profit of the shady businesses leads to the fall in productivity and doesn’t let the domestic producers compete in fair conditions. It is the government’s responsibility and the authorities to create fair conditions in the market to compete. Responsibilities are not distributed. If there is a big program, the government will be responsible. If importers don’t reduce the prices of the goods they are importing while the prices of dram are growing, the state should tax them and take more money from them”.
One of the participants wondered why Tatul Manaseryan didn’t propose such a recommendation to the parliament. “I have proposed that issue for several times. Where have you seen an example where the recommendations of an oppositional politician are considered?” said Mr. Manaseryan.
One of the participants said that besides the monetary policy it was important to pay attention to the fiscal policy too. Concerning this recommendation one of the participants said, “It is not correct to speak about increasing productivity in a short-term period. There are two tools in Armenia that can regulate the demand; one of the tools is the budget with its deficit balance, and the other one is the monetary policy with its enlargement. The lowest budget deficit mark was registered in 2003 (1,3%). After that it has been growing. This means that we demand is going up and there is a lot of demand from abroad. We need fiscal tools to control those flows. It is pressure on demand. As for the budget, it has a deficit since it had to create stabilization funds for bad times”.
No governmental support
Samvel Marmudyan, head of “Gamma” company, spoke about the issue too. His company is producing metallic boxes for cannery and other products, which is mostly exported. “Armenia is producing 1.300 million boxes of cannery, which has high quality. The only problem is the design of boxes and the external view, which has been partially solved. Please believe me that technology is not that important. By buying food from farmers we are doing what the government is doing. Now I have a problem. Last year I spent a lot of money in Georgia so that I could enter the Georgian market, but now I am faced with a problem since everything has gotten expensive and it is not profitable to work, says S. Mardumyan. The businessman says that the role of the government is very important and it shouldn’t let producers and farmers find themselves in such difficult situations and feel like slaves: “farmers work like slaves. At this moment I am a slave, when I’m really not suffering from hunger. Of course, it is better to be a slave than to be hungry. I am exporting products and have never been supported by the government. The only solution to this problem is the political will that we spoke about”.
H. Bagratyan thinks that if things keep going at this rate, there will be an outflow of capital and later outflow of people since it will be better for their relatives abroad to call them and take care of them in the other countries than send money to them to live here. The former prime minister said to businessman Mardumyan, “If you want a tactical solution but not a strategic one, a normal government would respond to you by saying that the exchange rate has changed and that is the reason that you are having losses. You can ask the government about your problem and ask them why you are having so many losses since you have made business plans and other programs. However, our government will not do that at the moment”.
Suren Bakirski noted that even though politicians are always speaking about producers, it has been over ten years that businessmen are taking care of themselves and they are not supported. “The situation in the country is bad for everyone. It is bad even for those people that have private houses. The time will come when my neighbors and I will be afraid to let our children go to school by themselves because another neighbor is “starving”. The civic groups are alienated from each other so much that it is even dangerous. It is not enough to speak about tactical issues only. The ongoing policy that we have now will leave producers out of the domestic and foreign markets”, said Mr. Bekirski.
What are the obstacles?
During the discussion it was clear that all the participants saw the problems, agreed with the fact that those problems exist and that actions should be taken to find solutions. For instance, Tigran Jrbashyan said that the country was faced with serious problems: “It is clear that those problems are connected with institutional changes. The country will not develop until the rules of the game are fixed and applied in a duly manner. The society should realize now that if we don’t make institutional changes we will fall in 2-3 years”. What is the reason that politicians don’t want to leave the political problems aside and take necessary steps to resist the results of the currency exchange rate changes and stop the process. Aren’t there good specialists? Are there any obstacles or isn’t there will? Tatul Manaseryan thinks that the problem is the fact that there isn’t a good will to solve the problems. H. Bagratyan thinks that one of the main problems is the fact that the corresponding bodies don’t want to see the problem and are trying to ignore it.
What should citizens do? Anyhow, some of the participants came up with recommendations. Hrant Bagratyan recommended several methods to solve the problem. One of the participants recommended changing the policy of deficit in the budget and put limits on domestic demand. Some of them were even joking and saying that people should look for relatives living abroad, ask them to send their money in dram, etc.
In fact, it is very difficult to answer to that question. The president of the Central Bank has officially petitioned people to get their incomes and save their money in Armenian dram. People can’t work it out well since they don’t believe that the national currency is stabile either. We think that citizens should pressure the government in order to make them change the economic policy to comply it with their interests, but not with the interests of a small group of businessmen. However, these actions will not bring to any results if not done and followed in a duly manner. We should discuss the issue, protest to the authorities to find a solution. We should do that as soon as possible; the more we wait the more problems we will have.
The discussion had positive results and the participants agreed to continue the discussions and meet later to go deeper into the issue and come up with new solutions. One of the participants even recommended asking specialists to propose their own recommendations about the problems and possible solutions. “168 Hours” accepts any recommendation with pleasure. Please send your recommendations to our email address (not more than one page). We will coordinate your letters and publish them later. We are even ready to organize one more discussion on the same topic and hope to go deeper into the problem and find effective solutions.
Photos by Hovik Melikyan