Tuesday, March 3, 2009

Currency depreciation in Armenia

According to reports from Yerevan on March 3-4, the Dram to $ exchange rate has settled at about 372 to $ after briefly shooting up to as high as 400, a devaluation of between 22 to 30%. On initial news there were instances of panic buying with some supermarkets suspending sales.

The talk of depreciation has been in the air for months now that most of the world economy is in recession. Most currencies, including the Euro, have devalued relative to USD since last summer.

From a non-economist's perspective this is how it works: since most of the world trade is pegged to USD, economic slowdown = decline in production = decline in income for individual countries puts pressure on their currencies to devalue relative to USD, unless the relevant financial authorities use their dollar reserves to continue to buy their currency thus propping it up.

In Armenia's neighborhood, Ruble devalued from about 25/$ last September stabilizing at 36/$ between January and today (50% depreciation over 4 months). Russia had $600 billion in foreign reserves before the crisis; now that fund has shrunk to nearly half after much of it was spent on propping up the ruble and "stimulus" injections elsewhere in the economy.

In Ukraine, Hryvnia devalued from 4.7 to $ in September stabilizing between 8 and 8.5/$ this month (a 90% drop).

Meantime, Georgia and Kazakhstan followed scenarios more similar to Armenia's.

In one or two days in November 2008 - shortly after Georgia secured promises of billions in Western aid - the Georgian Lari fell by 10%; with overall depreciation since last September at about 20 percent. (Considering the regional picture another correction is likely there).

And on February 6 2009, Kazakh Tenge fell by 20 percent relative to USD, with overall depreciation since September at about 25 percent.

All this time, Dram remained steady at 305/$, propped up by the Central Bank, which spent an estimated $400 million in the process. This is being criticized now but without a large economy and with not much cash in the bank – the government probably feared the devaluation would get out of hand.

In the last several weeks, having secured promises of more than $1 billion in credit lines from Russia and IMF (which is almost as much as Armenia's existing foreign currency reserves), the government has decided to let the Dram depreciate, now being in a better position to be able to stabilize it.

Both the government and IMF are predicting the new rate will settle at about 360-380 dram/$. But the general tendency of people to panic, including the run on exchange shops and banks underway since last week, is making the process more volatile and painful that it already is.

If the process stabilizes as promised this will be a temporary shock, but end result will still be that most Armenians will be 20-30% poorer in dollar terms and prices for many imports traded in dollars will go up (that's one of the reasons behind the talk of switching transactions with Russia to rubles, misconstrued by some as Armenia "entering the ruble zone").

If devaluation gets out of control PM Tigran Sarkisian will probably be the one – unfortunately – taking the blame. Unfortunately, because he is one of the few officials who actually understands the problem and is focused on trying to temper the impact of the global crisis on Armenia.


According to IMF forecasts, devaluation of AMD will make from 17 to 30%-03.03.09

Yerevan, March 3. /Mediamax/. According to IMF forecasts, recession in Armenia in 2009 will make 1.5%.

Mediamax reports that IMF representative in Armenia Ninke Omes said this today. She welcomed the crisis prevention measures by the Armenian government and the decision of the Central Bank to shift back to the policy of floating exchange rate, noting the importance of market regulation of AMD exchange rate.

“According to IMF assessments, devaluation of AMD will be within the range of 17-30%”, Ninke Omes stated, adding that in 2009 inflation in Armenia is expected at the level of 8%.--0--

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