ArmInfo.The Armenian dram has shown a steady appreciation against the currencies of the trading partner countries since the beginning of Q2 2022. In July of this year, compared to the beginning of 2022, the Armenian dram appreciated against a basket of currencies: - by 19.8% y/y against the dollar, by 21.7% y/y against the euro, by 32.4% y/y against the Russian ruble. In terms of the real effective exchange rate, the Armenian dram appreciated by 33.6% in 2022 and by 40% in June 2023 compared to the beginning of 2022.
This is stated in EDB's analytical Macroeconomic Review regarding the unprecedented appreciation of the Armenian dram, the state and prospects of the Armenian money market.
It is noted that the appreciation of the dram is mainly due to the large-scale inflow of financial resources into the country. This is due to the movement of individuals, the inflow of remittances and capital to Armenia. Net inflow of cross-border transfers through the banking system in 2022 totaled $2.6 billion, or 13.2% of GDP, 4-fold higher than the average for the last five years ($665 million, or 5.2% of GDP) . In Jan-June of this year, the indicator increased by another $897 million, or by 90% y/y. Growth in export revenue from the supply of goods (+80% in 2022 and +72.8% y/y in H1 2023) and services (+2.4-fold in 2022 and +2.2-fold y/y in Q1 2023), as well as net FDI inflows of $998 million (+2.7 times yoy in 2022) also contributed to an increase in the supply of foreign currency in the country.
The Review states that, according to the estimates of the Central Bank of the Republic of Armenia, as of the end of 2022, there were 99 thousand non-residents in the Republic of Armenia, 51 thousand of which are immigrants employed mainly in the IT sector. The number of tourists visiting the country in 2022 increased by 90% y/y, and in H1 2023 - by 70.3% y/y. Tourist activity and a generally large number of foreign visitors have created an increased demand for the national currency - in addition to the already increased demand for the Armenian dram after the expansion of consumption due to the influx of remittances.
At the same time, according to EDB analysts, significant volumes of remittances strengthen the national currency, which can adversely affect the competitiveness of exports and, according to studies (Anwar, Mang, 2022), provoke the "Dutch disease". A sharp increase in consumer income creates demand in non- exportable sectors of the economy (such as construction and a significant part of services and trade) and stimulates an increase in wages by a significant margin from other industries.
Analysts also note that over time, the role of the export-oriented industrial sector of the economy may decrease due to the transfer of production resources to non-exportable industries.
Such a scenario implies a fundamental strengthening of the national currency rather than a short-term overvaluation, which (Magud, Sosa, 2010), as a rule, is the cause of economic growth losses. However, shocks that can cause "Dutch disease", in the case of Armenia, it is a large influx of capital and remittances, usually associated with periods of economic boom. These are the consequences of an abundance of foreign exchange, which also has important beneficial effects, such as an overall increase in income, the availability of imports of capital and investment goods.
According to the base scenario of the EDB forecast, the nominal exchange rate at the end of the year will be close to 397 drams per dollar.This is somewhat weaker than the current level, but still significantly lower compared to the beginning of 2022 (482 drams per dollar). The dram will depreciate by gradual adjustment of external demand (partial outflow of immigrants, completion of the peak of tourist activity, stabilization of export volumes, growth of imports against the backdrop of appreciation of the dram, as well as an increase in demand for minerals [gas] (in the cold season) and lower rates in the RA money market.
According to EDB analysts, in the medium term, the dram will depreciate against the dollar in nominal terms, but the exchange rate will fall to the level of the end of 2021 to the beginning of 2022. This is due to the effect of the permanent component, the increase in the productivity of the Armenian economy, due to the fact that a significant part of the resettlers, from all appearances, intends to continue to stay in Armenia.
