Currency Curve: U.S. refinancing rate increase expected to have impact on Armenian economy

Currency Curve: U.S. refinancing rate increase expected to have impact on Armenian economy


The decision by the United States Federal Reserve System (FRS) on raising its refinancing rate by 0.25 percentage points is likely to have an effect – direct or indirect – on Armenia’s economy, too, and analysts say it may be more in the negative.

The first change in the key rate in the U.S. in the past 10 years already impacted Armenia’s closest trade and economic partner, Russia, whose national currency, the ruble, continued to lose ground against the U.S. dollar and other international currencies. Minutes after the December 16 decision of the FRS on raising the “price” of the U.S. currency international oil prices fell by 1.5 percent, with further downward tendencies dominant at the moment.

The U.S. refinancing rate increase will also have an impact on Armenia both directly and indirectly, says Informed Citizens Association NGO financial expert Hrair Manukyan.

“In conditions of the U.S. economy getting more active, the dollar value will be rising against almost all currencies in the world, including against the Armenian dram. Because a higher interest rate means relatively fewer dollars in circulation both in the U.S. economy and around the globe. In other words, pressure on the dram towards depreciation will increase in the wake of this latest decision,” Manukyan told ArmeniaNow.

The economist thinks that in case of Armenia the best policy is to adhere to a floating exchange rate and not to prevent the dram from devaluating, as “otherwise there will be more negative consequences for the economy.”

It is remarkable that over the past week the Armenian dram (AMD), in contrast to the Russian ruble, somewhat gained in value against major international currencies. While the average dollar exchange rate on December 10 was 485.24 AMD, then a week later it was down to 482.85 AMD.

Economists say, however, that the appreciation of the dram is a traditional phenomenon during the New Year holiday season as Armenians start preparations for celebrations and spend their hard currency savings, as well as rubles wired back home by migrant workers from Russia. They believe a clearer judgment on the real currency patterns will be possible to make at the beginning of next year.

Nevertheless, economists say it is beyond doubt that a further devaluation of the Russian ruble will affect Armenia’s economy, too, not least because it will result in the decreasing value of private remittances. During the first 10 months of this year private remittances to Armenia from Russia calculated in dollars have fallen by 38 percent.

“If the Central Bank remains committed to its floating exchange rate policy and does not keep the dram from the expected devaluation, then an increase in the prices of certain imported goods. That would be better than the losses that our economy will incur as a result of trying to restrain dram depreciation,” said Manukyan.

The economist believes that restraining dram devaluation will also worsen conditions for exporters, will reduce Armenia’s international reserves and lead to lower economic growth.

“When currency depreciation is restrained it is done including at the expense of reducing the quantity of drams in our economy, or cutting the growth of the quantity of drams in our economy. When there are fewer drams in the economy, banks raise interest rates on loans, as a result, businesses borrow and invest less,” Manukyan added, explaining that this is the main reason for economic slowdown.