Continued strengthening of the dram may provoke a “Dutch disease” in the Armenian economy

Continued strengthening of the Armenian dram may adversely affect the competitiveness of this country’s exports and provoke the “Dutch disease” in its economy (when the rapid growth of incomes in one sector of the economy causes the strengthening of the national currency, which negatively affects the development of other sectors), the Eurasian Development Bank (EDB) notes in a review. .

Let us clarify that the dram began to strengthen after the start of a large-scale influx of money into Armenia in the second quarter of 2022 (one of the consequences of the Russian military operation in Ukraine). This process is still going on. The net inflow of cross-border transfers last year amounted to $2.6 billion, or 13.2% of the country’s GDP. For comparison: in the last five years, this figure averaged $665 million, or 5.2% of GDP. As a result of July, the dram in annual terms strengthened by 19.8% against the dollar, by 21.7% against the euro and by 32.4% against the ruble.

The EDB believes that an excessive supply of foreign currency can lead to negative consequences – a sharp increase in income caused by the influx of money from outside creates demand in non-exportable sectors (services and trade) and stimulates a significant increase in wages in them. The role of export-oriented sectors is decreasing due to the strengthening of the national currency.

Armenian entrepreneurs have repeatedly appealed to the authorities of the country with a request to take measures to prevent further strengthening of the dram. Business pointed to a decrease in the competitiveness of local companies and a weakening of their positions in foreign markets. Armenian Minister of Economy Vahan Kerobyan, however, stated that exports “do not feel so bad” and emphasized that it was the strengthening of the national currency that played a key role in curbing inflation (now, however, it has already been replaced by deflation). At the beginning of this year, the authorities finally acknowledged the problem and promised to help the most affected industries with subsidies from the budget.

According to the EDB forecast, by the end of 2023, the dollar will cost about 397 drams, which is more expensive than now (see chart), but still noticeably cheaper than at the beginning of 2022 (482 drams per dollar). The base scenario of analysts assumes some weakening of the national currency after the partial return of people who came from the Russian Federation, the peak of tourist activity and the stabilization of export volumes.

Christina Borovikova