Several days ago, Armenian society learned about an interesting thing. Currency exchange points were suggesting 370 AMD for one USD on Monday, however, the price went down to 360 AMD during the day and then started growing again. Yesterday they were suggesting 375-376 AMD for one USD already.
Generally, it is almost impossible to explain the exchange rate changes and the relevant processes in Armenia. You can’t predict the changes and what may happen in that field. We can’t explain that process either, however, it is worth bringing several examples that happened in the recent period.
Several days ago the government developed recommendations and a draft of changes in the RA law on budget, according to which they changed the 3% inflation limit and made it 5%, +/- 1.5%.
Following the mentioned process that national statistical services published the inflation marks of these 9 months. The inflation mark of September compared to the one of August is 0,3%. The inflation mark of September compared to the one of the same period of the previous year (12 months) is 5.9%. It is worth mentioning that the CB has informed that they thought the inflation mark would cross the limit of 6% and would reach 6%. On October 3, the CB made an announcement concerning the repurchasing interest rates and inflation.
We will discuss the amendments proposed by the government, however, now we will write the CB statement concerning inflation without changing anything in the text. “Even though the world prices of oil have gone down in the recent period, the foreign risk factors of inflation still exist and those are connected with energy and other production (base metallic, sugar), which prices have been high during this year, as well as with the expected reduction of grain harvest in Ukraine and Russia. The CB board concludes that the rapid growth in the fields of construction and public services, being combined with the rapid fall in the field of agriculture resulting increase of agriculture products, will create inflation risks and pressure. The influence of budget expenses within the framework of budget and tax flows will be seen in the first part of 2007. Even though the CB predicts that the inflation will not cross the limit of 3%, however, it is expected that it will cross the limit of 3% at the end of the year”, writes the CB statement.
It is strange that the statement does not write anything about transfers. Nevertheless, the rapid growth of transfer inflows in the country is one of the most important economic factors that create inflation risks. Inflation is caused in case when the market is not able to meet the demand. As for the demand, it is stipulated by the income. Why do they discuss the incomes caused by the rapid growth in construction and public services and meanwhile they ignore the money transfers that are by several times more than the mentioned income capacity? Definitely the problem is the fact that the fields of construction and public services speak about economic growth, but the money transfers -the vice versa.
The CB statement has another very interesting point too: the CB is ready to meet the increased AMD demand in the domestic market by buying foreign currency from the market. Please pay a due attention to the following sentence; “increased AMD demand”. The purpose of issuing AMD is clear; the exchange rate changes are causing confusion and the CB is trying to regulate the process. However, the explanation looks different. The CB explains that step in the following sentence; “the board thinks that the “de-dollarization” process has become faster in the economy”.
It means that people are starting to trust the national currency more and exchange their money to AMD, and the CB is going to meet the demand and issue AMD in the market buy buying foreign currency.
For your information, the CB has already started that process. We were informed by the press department of the CB that during the previous week the CB bought almost $32 million from the market. According to our information, it bought a huge capacity of dollar at the end of this week too. However, we don’t have any concrete information about the capacities bought. The only thing we can do is comparing the existing data with the data of the Armenian Stock Market (ASM), according to which the USD trade capacity in August covered $38,769 million. According to the ASM director, Karen Zakaryan, the CB makes currency trade in the domestic market only with the help of their organization (however, it can do it by other means as well). It turns out, that during the whole month the trade capacity covered $ 38,769 million, $32 million out of which was done by the CB only. According to the information of the ASM, the trade capacity as of October 2 was $4.1 million, and as of October 3 – $1,795 million. We couldn’t find it out what the CB share was in it. However, taking into account the fact that since Monday the exchange rate change has become stabile, and even AMD has fallen a little, we may assume that the mentioned trade (almost $6 million) during those two days was done by the CB. One more fact: according to our information, several banks have benefited much during these days by buying USD for 370 AMD and selling for 381 AMD. Please note that the circulated money was not small.
However, it is clear the CB is worried about the negative results of the currency exchange rate changes and is trying to do something to work it out. However, those actions may bring to inflation. Nevertheless, the CB has insured this risk too by increasing the repurchase interest rates up to 4.75%. However, it is not enough yet to resist inflation.
Now let’s return back to the beginning and try to imagine what is happening. Now the CB is doing what it has to do; it is trying to resist inflation growth. However, in parallel with that there is a huge inflow of money into the country, which has its influence on the economy. As for the influence, it may affect either inflation or exchange rates. The CB preferred inflation so far. Nevertheless, the exchange rates changed so much that it may affect the governmental policy. Besides that, there is a political factor too; if AMD price continues growing, it will give an opportunity to the opposition to criticize the governmental powers in a bad policy during the coming elections. Of course, the governmental powers are not interested in that.
Now let’s try to imagine a dialogue between the government and the CB:
Government – AMD prices are going up much; we have to do something.
CB – We can’t. If we do that, inflation will cross the limit of 3% (it has already crossed). As for that 3%, it was defined by you and approved by the parliament.
Government – Not only we; we did that together. What should we do? OK, please do something to regulate the exchange rates and we will revise that 3%. What is the percentage of inflation that you can provide?
CB – About 5.5-6%.
Government – 6 percents? OK, we will make it 5%, +/- 1.5%. However, the only one that will be responsible for explaining the revision of the inflation mark limit is you and you will have to explain it in a duly manner.
Hardly this dialogue could be done so openly (if it has been done). Probably there were specialists as well and they used specific terms too. However, the meaning does not change. Basing on the ongoing processes, we may assume that they have reached an arrangement: the government has proposed amendments and the CB is actively buying USD. A little bit inflation, and a little bit exchange rate change. It is hard to say how long this process may go on and what the results will be. As for the prices, it is clear that the prices will be increased in AMD too (that fact will be registered even by the official statistics).