ArmInfo.YOY inflation in Armenia reached 9.9% in September 2022. According to the forecast set in the basis of the draft state budget for 2023, 12-month inflation will exceed the target range (4% with a plus/minus 1.5% deviation) by the end of the year and will amount to 8.5%, and according to the forecast of the Central Bank, the country will complete 2022 with an inflation rate of 10%.
Meanwhile, since February of this year, the Central Bank has already raised the key refinancing rate several times, because of which it became the subject of sharp criticism by its partners, and the Armenian dram continues to appreciate against both the US dollar and the euro. Karlen Khachatryan, Head of the Chair of Management and Business of YSU Faculty of Economics and Management , spoke about the "active inaction" of the authorities and ways to curb inflation and its consequences in an interview with ArmInfo.
- Mr. Khachatryan, according to statistics, inflation in Armenia in January-September 2022 compared to the same period in 2021 has already reached 8.6%, and compared to September of this year to September 2021, to 9.9%. At the same time, in order to curb inflation, on November 1, the Central Bank of the Republic of Armenia raised the refinancing rate for the 5th time this year, from 10% to 10.5%, thus repeating the historical maximum of 2015. At the same time, the US dollar continues to fall against the Armenian dram: if before the Russian-Ukrainian crisis (February 24) it was at the level of 470-480, and in early March it reached to 520, then today it costs about 395 drams per dollar. Is inflation really an irreversible process, and is the key rate the only tool to control inflation?
-By and large, inflationary phenomena in the Armenian economy have intensified since December 2020 and have not mitigated their impact for almost two years, even against the backdrop of periodic revisions of the key refinancing rate by the Central Bank of the Republic of Armenia and its use of monetary instruments.
The whole problem is that the economy of our country is not in the best condition. Inflationary trends are largely due to the problems of the economy itself - ranging from security uncertainty to political instability and socio-economic challenges related, in particular, to low living standards and the purchasing power of the population. These problems are not going to be solved by themselves.
In parallel, we see unilateral attempts by the Central Bank to regulate inflation. The financial regulator the main task of which is to maintain price stability and curb inflation is going towards raising the key interest rate, raising the price of money, while the government looks at all this from the side, and being in the status of an observer, monitors whether it will succeed in the end fix prices. Such a course of action, of course, will not lead to the desired result.
In order to overcome inflationary problems in the economy, coordinated work is needed between the Central Bank and the Government of the Republic of Armenia, represented by the Ministry of Economy and the Ministry of Finance. Unfortunately, so far we have not seen such efforts. Everyone tries to solve problems within the framework of his position, and in case of failure - to shift the blame on the other. Meanwhile, the Ministry of Economy, in particular, is obliged to develop targeted programs and create a more predictable business environment. The government, in turn, should have tried to resolve security issues: even after two years, security challenges are acute in the Armenian economy, which is why businessmen, having not received security guarantees, do not dare to implement new projects or they do not dare to expand seriously. Meanwhile, the growth in production volumes could partially alleviate inflationary pressure, in some ways, "absorb" the increase in purchasing power, mainly due to the stay of visitors from Russia in Armenia.
As of today, inflation continues to form negative expectations among the population: citizens and business sector, observing the high inflation background, expect it to continue in the future as well, on the basis of which they form their behavior. As a result, inflation not only does not decline, but, on the contrary, continues to accelerate. In addition, if we take into account that the incomes of socially vulnerable groups of the population do not increase, while the prices of goods, especially for essential products, are growing, then this, in turn, leads to a decrease in living standards and new socio-economic problems.
- What consequences can the maintenance of the dram's depreciating position lead to for the country's economy?
The appreciation of the Armenian dram has a double effect on the economy: positive and negative. On the one hand, under the conditions of the "cheap dollar", the cost of imported goods, expressed in drams, decreases, which has a positive effect on the price of goods. Without the revaluation of the dram, inflation would be at a higher level today. On the other hand, local products (goods/services) that are exported become more expensive, making them uncompetitive in foreign markets. In addition, foreign exchange devaluation reduces the income of households receiving transfers from abroad, usually in US dollars, which leads to a decline in purchasing power. In my opinion, the negative impact of the appreciated dram still prevails over the positive.
- As you noticed, appreciated dram played into the hands of importers. Nevertheless, even after almost 8 months of a confident "offensive" of the national currency, the average consumer does not notice the decline in prices. What is the reason for this?
There are two factors here, purely objective, an economic factor, which is expressed as follows: Along with the devaluation of the dollar, the demand for products has increased - there are more people who want to buy these products, since a large number of visitors arrived in Armenia, and with high purchasing power. In particular, according to official data, in the first 10 months of this year, the number of tourists who came to Armenia amounted to 1.4 million people, about 46% - from Russia. And demand, as we understand it, leads to higher prices.
The second factor is related to the improper work of the controlling state bodies, when the authorized state departments, in particular the inspection body for market supervision, are literally inactive. It should constantly monitor and analyze the market situation and, if necessary, severely punish unscrupulous entrepreneurs, etc.
- Mr. Khachatryan, you noted the need to develop targeted assistance programs by the Ministry of Economy. Recently, the department launched an initiative to introduce support measures for IT companies, in order, as noted, to reduce the risks caused by foreign currency devaluation, as well as support the ability of sector organizations to compete effectively with companies in other countries. How expedient is this measure, given that not only "IT people" have suffered from the revaluation of the dram?
The IT sector is undoubtedly important for the country's economy and requires special attention. Since 2000, the government of the Republic of Armenia has declared the sector a priority sector of the economy, for more than 5 years, start-up companies benefited from tax benefits, and a favorable environment has been formed for them. However, it is necessary to objectively assess the situation, because it is the IT sector that is characterized by high profitability and an appropriate level of wages. Therefore, perhaps it is worth thinking even more deeply about this - how expedient is it for the state, with its meager financial capabilities, to support a sector where there are already high incomes.
It is my deep conviction that in the real, export-oriented sector of the economy, the use of state assistance tools can be much more effective than in the IT sector. For example, companies in the processing industry, for example, winemaking, which have been working for years to enter foreign markets, have spent huge financial and human resources, today find themselves in a rather difficult situation. With this in mind, if the state, with its small capabilities, is faced with a choice - to support the IT sector or exporters of the real sector, I think it should make a choice in favor of the latter.
- The Chairman of the Mantashyants Entrepreneurs Union recently called on the authorities of the Republic of Armenia "to devalue the dram at any cost", stating that due to the sharp revaluation of the national currency, Armenia is at the initial stage of the "Dutch disease". It was noted that all sectors, with the exception of HoReCa (Hotel, Restaurant and Catering - hospitality industry. ed. note) and banking, suffer losses, and in the future the fall of the dollar and the revaluation of the dram will lead to the collapse of the economy. Do you share this point of view?
-I find it difficult to say how correct it is to project the situation in another country to our realities, without taking into account the specifics of the Armenian economy. Obviously, on the basis of statistical data, we can say with confidence that today, only the service sector is in an advantageous position, and this is not only HoReCa, but also banking services. Thus, in Armenia, the growth of economic activity in January- September 2022 accelerated to 14.1% per annum. The growth of economic activity was largely determined by the service sector - by 27.1%, to a slightly lesser extent by the energy complex - by 16.9%, the trade sector - by 14.5%, and the construction sector - by 14.3%. In January-September of this year, commercial banks recorded a net profit of 188 billion drams, which is three times higher than in the same period last year. Recorded figures indicate that the growth is a direct result of an increase in the number of Russian visitors.
Unfortunately, during the period of active growth this year, the authorities have not been able to capitalize it, form certain reserves, "airbags" in order to ensure the viability of the economy in the event of a cessation of the flow of visitors and the capital coming with them. At the same time, I am against the idea of depreciating the national currency <at any cost>. The economy is a self-regulating organism, and the market economy involves the relationship of supply and demand. Artificial revaluation or devaluation, of course, will not lead to anything good. At this stage, the panacea is the coordinated work of the Central Bank and the government to develop targeted assistance programs, as well as long-term planning. The proposed solutions should not focus on two or three months, but on the long term.
ArmInfo. Armenia will complete 2022 with an inflation rate of 10%. Chairman of the Central Bank of Armenia Martin Galstyan voiced a similar forecast during a press conference on November 1. "We expect that inflation will be at the level of 10% at the end of the year, even taking into account the use of restraining mechanisms," he stressed. At the same time, the head of the Central Bank indicated that without the use of these mechanisms, the inflation rate in the country would have reached 15%.
ArmInfo. Armenia is showing the initial signs of Dutch disease, says Vahram Mirakyan, Chairman of the Mantashyants entrepreneurs union.
ArmInfo.The level of annual inflation in Armenia reached 9.9% in September, equaling the indicator of the EU countries.