Central Bank tries to regulate inflation on its own, while RA  government watches process from side

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.