InternationalArmenian dram is stable after sharp fall
Prices of imports rose quickly
Fitch sees “stable outlooks” as IMF pledges $540 million in emergency loans
Published: Friday March 06, 2009
On Wednesday, March 4, 2009, a dollar cost 378 drams, down from 400 on Tuesday and
up from 305 on Monday. Photolure
Yerevan - After propping up the value of the dram for several months by selling foreign currency reserves, the Central Bank of Armenia on Tuesday, March 3, allowed the dram to float. The price of a U.S. dollar went from 305 drams to 400 at once. After that initial panic, in which many people lined up to buy dollars, the rate stabilized on Friday to 359 drams to buy a dollar and 355 to sell.
Prices of many goods rose sharply. Some shops closed briefly to adjust their prices. Panicked buyers on Tuesday emptied the shelves of grocery stores. Drivers complained about the new price of petrol, which was up by 60 drams a liter, or 20 percent. A mobile phone that sold for 155,000 drams in the morning was on offer for 200,000 drams a few hours later.
The head of Armenia's Central Bank, Arthur Javadian, announced on Tuesday that the bank was returning to its previous policy of allowing the dram to float without heavy intervention. He expected the dollar exchange rate to fluctuate between 360 and 380 in 2009. Prime Minister Tigran Sarkisian said he expected the price of goods to drop in the next few days.
According to official sources, Armenia sold $500 million of its foreign currency reserves in the past two months. Experts say the Central Bank sold $730 million since October, about a third of the country's reserves.
The World Bank and the International Monetary Fund had urged the government to stop propping up the dram, and they welcomed the dram's devaluation. IMF Managing Director Dominique Strauss-Kahn immediately pledged to disburse $540 million in emergency loans to Armenia.
The currency has lost value over recent months because of a significant fall in Armenia's export revenues and a decrease in remittances from Armenians working abroad. In 2007, Armenians abroad had sent close to $1 billion home.
The lower value of the dram will tend to benefit exporters, whose foreign-currency revenues will go further. The dram was as its lowest value in summer 2003, when it took 580 drams to buy a dollar. As the dollar weakened under President George W. Bush, remittances increased, and foreign investments grew, the relative value of the dram came close to doubling, reaching 300 drams to a dollar in 2008.
"Armenia's decision to seek a precautionary IMF program and allow a freer float for the currency is a welcome signal of the authorities' cautious approach to managing current difficulties," Andrew Colquhoun, a director at the Fitch credit rating firm, said in a statement. "However, the reserves loss to end-January indicates the scale of the shock, and suggests there is little room for policy missteps which could undermine macroeconomic stability and increase downwards pressure on the ratings."
Citing the rescue package promised by the IMF, Fitch on Thursday gave Armenia a currency-issuer default rating of BB. That indicates "stable outlooks" for the country's monetary system.
Speaking to the Bloomberg news agency, Michael Ganske, of Commerzbank welcomed the decision to float the dram. "It gives them the flexibility to adjust to new economic scenarios," he said, adding, "In the current global environment it's very, very hard to maintain an overvalued currency."
Critics of the government faulted it for taking action late and suddenly, rather than allowing the exchange rate to change gradually over the past few months. But the prime minister said such an approach would have only caused more uncertainty and speculative currency trading.
According to IMF projections, the Armenian economy will contract by 1.5 percent in 2008 after 14 consecutive years of robust growth, RFE/RL reported. The latest official statistics show the gross domestic product falling by 0.7 percent in January 2009.
