Not Worth a Dime: Dollar drops to historic low vs. dram

The dramatic fall of the U.S. dollar continued in Armenia over the last two weeks reaching its record low of 407-412 drams per dollar at exchange offices in the capital, before rebounding to 420 Friday – still some six percent lower than a year ago and about 27 percent lower than its peak three years ago.

Overall, the Armenian national currency, the dram, has gained nearly 8.5 percent against the U.S. dollar since the middle of May, when it was trading at some 445-450 drams per dollar. Meanwhile, other major world currencies also slightly dropped against the Armenian dram.

The dram has now consolidated by more than 30 percent against the dollar since the American currency began to lose in value in late 2003. The Central Bank of Armenia explains the situation by the increased dollar remittances sent by relatives living or working abroad. According to the official information of the Bank, the cash transfers totaled at least $1 billion in 2005 and that figure rose by 26 percent during the first quarter of this year.

The general weakening of the U.S. currency observed in the world is also cited as a reason for the weaker dollar.

Interestingly, Central Bank Chairman Tigran Sargsyan still late last year predicted that the dollar would drop to the level of 420 drams, which was a forecast for the state budget in 2006.

Meanwhile, some economists cast doubts on the natural course of the dollar/dram correlation.

Opposition lawmaker and economist Tatul Manaseryan, in particular, thinks that the Central Bank’s explanation of the situation by the supply/demand rule is obviously incorrect.

“The factors cited by the Central Bank cannot lead to such drastic changes,” he said in a recent interview with

Armat NGO economist-expert Eduard Aghajanov thinks that the high dram and the low dollar is an auspicious combination for importing companies, in particular the highly lucrative imports (such as gasoline, granulated sugar, coffee, grains, etc.). He also thinks that the inflated rate of the Armenian currency hits the country’s economy, promoting the reduction of rates of export growth.

“The strengthening of the dram has a heavy consequence for the economy. First of all it affects the industry and the level of exports, and on the contrary creates favorable conditions for importers,” he told ArmeniaNow.

One of the reasons why Armenia is so sensitive to the dollar is that it has a dollar economy.

Chief banker Sargsyan admitted in a recent interview with Arka news agency that the high level of “dollarization” of Armenia’s economy remains a major issue to tackle.

“A high level of dollarization is one of the weak points in Armenia. We must change our people’s way of thinking and attitude to the national currency. For most of us the national currency must be not only the principal means of payment, but also a means of saving,” he said.

“Our major task is smooth de-dollarization during the next 2-3 years. Armenia’s citizens must give priority to the national currency. Exchange rate fluctuations will be less appreciable, and the population will be less sensitive to them.”

Major deals in Armenia continue to be made in the American currency, such as purchase of property or cars and the population continues to save money in foreign currency, apparently not trusting the Armenian dram.

Still last year Sargsyan advised the population to keep their savings in drams or at least diversify them, keeping in different currencies, including the Armenian dram.

But the recent drastic fall of the dollar has made some people in Armenia quote prices in drams.

Seda Gabrielyan, 76, is selling her 3-room apartment and says that she chooses to bargain the price in drams.

“First I quoted the price in dollars, 35,000 for my apartment. But now I will definitely fix the price at some 15,000,000 drams and then recalculate it in dollars when I find a buyer,” she says.

Gabrielyan also says that she feels the increase in the cost of living in Armenia compared to a few years ago. “After several years of my absence from Armenia I came here to live on a budget of 100 dollars a month, but now I feel it is too little for me. The dollar is cheaper and prices in drams are higher.”

Price increases have affected a great variety of goods and services. And for those sectors where there has been no increase in price (such mostly transportation), a stronger dram also means more profit for owners in dollar terms. Officially, an inflation of 5.6 percent took place in Armenia in January-May 2006.

In particular, a common resident of the country will say that in the last half a year prices went up, for example:

* meat - from 1,400-1,600 to 1,800-2,200 drams per kilo;
* granulated sugar – from 240 to 330-350 drams per kilo;
* salt – from 100 drams to 120 drams per kilo;
* gasoline – from 320-340 drams per liter to 380-400 drams.
* utilities bill – including water (a sanctioned increased tariff for water to be effective beginning on July 1 – in increase by 38.2 percent – from 125 to 172.8 drams per cubic meter), telephone (subscription fee from 900 to 1100 drams a month);
* services – an average increase in prices by 30-50 percent;
building materials – cement (from 22-24,000 drams to 34,000 drams per ton); sand (from 15,000 drams to 22,000 drams per truck); gravel (from 18,000-30,000 drams to 23-43,000 drams per truck); metal (from $250 to $400-500 per ton).
* construction labor – increased several times: unskilled labor – 3-5,000 drams a day, medium qualification labor – 5-10,000 drams a day; qualified labor – up to $50 a day.

Vegetables and fruit are said to be more expensive in the market than they are usually at this time of the year. Shops trading in clothes and shoes have mostly changed price tags and now ask more for what they sell. And real estate prices, as always, are steadily growing.

Against this background, the World Bank considers the strengthening of the Armenian dram to be a sign of the strengthening of the nation’s economy.

World Bank Yerevan Office Head Roger Robinson told a press conference in Yerevan on June 5 that the stronger dram, contrary to anticipations, did not affect the competitiveness of Armenian products. “According to our estimations, Armenian goods continue to remain competitive,” he said. “I don’t think that the recent appreciation of the dram was artificial.”

He added that it is also conditioned by the depreciation of the dollar against major world currencies, including the euro and the British pound.

But Aghajanov paints a different picture as he cites official statistics: it says that in the first four months of this year exports from Armenia fell by 7.8 percent, industrial output by 2.9 percent, and imports grew by some 13.8 percent (see at “If it continues like this we will have a foreign trade deficit of a billion dollars by the end of this year, and that’s a lot for a small country like Armenia,” Aghajanov said. (Last year Armenia’s foreign trade deficit was $636 million).

The expert unequivocally thinks that this situation is created artificially and blames the monetary policies of the Central Bank. As for the purpose of this policy, he claimed: “Oligarchs are now collecting money for their election campaigns and that’s done at the expense of the population.”

As for the Central Bank’s role, Aghajanov says that still last October Tigran Sargsyan admitted that Armenia has a governed and not free “floating” rate. “And this shows that the current situation is the result of the monetary policy of the Central Bank,” Aghajanov concluded.