Armenian National Currency Grows Into Teenage Years

The dram's first exchange rate was set at 14.5 per U.S. dollar, and current Central Bank Chairman Tigran Sargsyan says the Central Bank of Armenia had no more than $500,000 in its reserve, nowhere near enough to be able to support the national currency in any way.

According to the chief banker in 1993 Isahak Isahakyan, it was then that the Central Bank officially adopted the policy of the so-called "floating rate" and the dram could not be fixed to anything. This policy has been upheld to date.

One person was allowed to convert no more than 50,000 rubles into drams at the fixed rate of 1 dram for 200 rubles, making it 250 drams per person.

Some Russian banknotes were used as small change until currently defunct lumas were introduced in February 1994.

Since its introduction the dram began to depreciate dramatically within a short space of time dropping 20 times and eventually, less than a decade later it reached its lowest of 589 drams per U.S. dollar. In 2002 it rebounded and its appreciation has been observed ever since, increasing by nearly 40 percent in the past three years. (This week central Yerevan exchange offices have offered 370-374 drams for a dollar.)

Chief banker Sargsyan says that the depreciation of the national currency until 2002 was as logical as its appreciation, as the dram was simply responding to changes in the economy.

The Central Bank adheres to the policies of the so-called "floating rate" and does not fix the dram rate to the dollar. It explains the appreciation of the dram by the global fall of the American currency and excessively growing currency remittances from abroad. It also says that intervention through emission of drams to keep its value down may result in hyperinflation and affect a larger part of the population than suffers now as a result of the dram appreciation. Critics, meanwhile, say the Central Bank policy of 'monetary non-intervention' is leading the country's economy into a deep crisis.

Meanwhile, Levon Barkhudaryan, Armenia's finance minister in 1993, argues that the priority for the Armenian government should be creating favorable conditions for exporters as the country's domestic market is rather small. "If the dram continues to appreciate, exporters will face serious difficulties and investments into the country's economy will dwindle," he stated.

The ex-finance minister finds that a 3 percent inflation is not expedient in conditions of rapid economic growth. He argues that it is possible to keep inflation within 7-10 percent in conditions of an annual economic growth of 14 percent.

Tigran Sargsyan says that preserving macroeconomic stability and thus creating favorable conditions for the private sector is a major objective of the Central Bank. "The debate over the rules of macroeconomic stability ended last century and there is no such debate in the 21st century anymore," Sargsyan said, summing up the principles which he said have become a textbook axiom: a state's budget gap should not be more than 3 percent of the GDP and that index should be maintained for a long term; it is important to control inflation and not the exchange rate and as a result long-term inflation expectations form more favorable conditions for economic development. It is advisable that the Central Bank should have coverage of 3.5-month import to ensure macroeconomic stability. "These rules must be unchanged on a long-term basis. If problems emerge in your economy, these problems cannot be solved by means of changing the rules of macroeconomic stability, because it leads to a crisis," Sargsyan said.

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