Discussion
PART 1
Armenia's
inflation recently crossed 10% year-over-year. This is not a lot more than many
other countries in the west, for example the US has hit 9.6%, the UK is in the
double digits, etc.
● What are the fundamentals of Armenia's
inflation? What's driving it?
● Is inflation dragging down the Armenian economy,
is it slowing down the Armenian consumer? What percentage of the Armenian economy
is based on consumer spending? (The US: 70%)
We
see that some industries are more affected than others. For example,
agricultural output was down during a time when the government says that the
economy is roaring forward at almost 12%. But with agriculture down 5.5%, which
is a key sector for Armenian exports, and the fact that 4 of the top 10
Armenian taxpayer corporations are mining operations, meaning that significant
industrial output is concentrated in a very narrow band within the economy, is this 12% growth benefiting the country’s
population equitably?
● What are the industries that are most affected?
Why?
● Do you think these causes are transitory or
systemic?
They
say inflation causes inflation. The consumer’s fear and expectation of
inflation causes a run on goods and services, which
lead to shortages and increases prices.
● Are you seeing this in Armenia?
Monetary Policy on Inflation
There
are two major components to managing inflation: monetary policy and fiscal
policy.
Most
Central Banks have a mission to keep inflation at a target level; for example,
in the US the Fed's goal is to keep inflation at 2%. The Armenian Central
bank’s strategy states that the primary objective is to ensure “price stability”.
● Is there a target optimal inflation rate for the
Central Bank of Armenia (CBA)?
● What do you think about the current policy
stance of the CBA? Do you think that it supports their objectives?
● Does it also have a mission to keep unemployment
at a certain target level?
● In general, how successful is the Central Bank
in meeting its goals?
Just
in the past week the CBA set the refinance interest rate to 9.5%. I'm not sure
if this is an adjustment towards their goal to manage inflation, or to manage
the strength of Armenia's currency, the Dram. They say that the appreciation of
the Dram has actually kept inflation in Armenia down, by at least a percentage
point.
● Can you explain the relationship?
During
the current currency exchange rate crisis, the Armenian central bank has been
hesitant to intervene heavily in the market.
● Can you explain the reasoning? How is it
different from 2008?
Fiscal Policy and the Economy
The
other component of managing inflation is the government’s fiscal policy, which
basically comes down to the annual budget, the priorities it outlines, and
supports through planned spending.
I
don’t have a strong grasp on Armenia’s budget. A few priorities are outlined,
but money constantly moves and is reallocated from bucket to bucket; there is
constant aid money from the US and the EU; the national debt is 50% more now
than it was at the start of 2018; there is Artsakh, which is no longer
self-sustaining and needs extensive renovation and support since the war in
2020, and so on; and then there are remittances from Russia, from the US, and they flood the Armenian economy with cash
and keep up the demand and value of the Dram, and they always fluctuate based
on global developments.
● What fiscal policies is the government deploying
right now? Are they focused on keeping inflation down?
● Security as an element of fiscal policy
● Russia, Georgia have raised minimum wages,
pensions, etc. to compensate their vulnerable groups for the inflation in their
countries. Has Armenia done so?
○ Why not?
● You mentioned debt briefly. Can you talk a
little more about how Armenia's foreign debt is affecting its fiscal policy?
And what should our policy be towards managing debt?
Ukraine War “Dividends”
At
the start of 2022, most economists, including the CBA, lowered their
expectations of Armenia’s economic growth. Roughly predictions were revised
down from around 6% to 2%.
But
the war in Ukraine has upset that math: Armenia has - at first glance -
benefited from unexpected war dynamics, in the form of Russian and Ukrainian
emigres into Armenia, together with their own remittances, jobs, and so on.
Their
short-term effect on the economy has been a large pop, on the order of around
10-11% in the first half of the year.
● On balance, economically, how great a benefit is
the influx of Russian/Ukrainian emigres. Are there any gotchas or hidden side
effects that we should worry about?
● Is it a sustainable phenomenon? Can Armenia
position itself for longer term benefits, once the war
in Ukraine dies down? How?
There
has been a 10-11% inflation in the real-estate market, particularly in Yerevan.
In addition, rent has gone up around 30%. This is mostly due to the influx of
immigrants, as we mentioned.
● What will happen after the war goes away?
● Is there a risk for a general “pop down” of the
economy and maybe the real estate market in Armenia?
PART 2
Bank Secrecy
Recently,
the Armenian public revenue committee has submitted a proposal
to change banking secrecy laws to allow the agency to inquire on banking
secrets of citizens without their permission and without an order from the
court (which is the current legal requirement).
● What is your opinion on this?
● What is the motivation behind this law?
○ The proposal cites France and Germany, where
taxation bodies have access to bank data of citizens and legal entities. Is
this true?
● How will it affect businesses in Armenia?
Especially foreign investors?
● What is the current status of this proposal?
Cash Transactions
Foreign currency bank charges
Recently,
we noticed an increase in rates that banks in Armenia are charging for
converting and cashing out foreign currency. Perhaps this was there but my
memory is failing me.
For
an Armenian business owner that focuses mainly on exporting, this means business
income is in foreign currency while most of my expenses are in AMD. To receive
$10,000 dollars, let’s say to pay salaries, you need to convert it to AMD.
Banks
will happily convert it to dram at a very high commission. Recently they
offered to do this for AMD 409 for 1 USD, while cash exchange points offered to
buy the Dram from me at AMD 423 for 1 USD. Essentially, the bank would make a
profit that is approximately 3% higher than a cash exchange point.
To
withdraw $1000 and take it to the cash exchange point, banks will charge a 3%
cashing out fee, basically making it unprofitable to do this.
This
amounts to a huge penalty for export-based businesses that we don’t remember
being there in the past. This basically also means that Armenian banks are
eating up 3% of all remittances sent to Armenia.
What
is driving Armenian banks to charge such high conversion rates? Is it collusion
among banks or central bank requirements?
Limits on Cash Transactions
On
July 1, a new law came into effect that will limit cash transactions for most
citizens and businesses to AMD 300K, or basically about USD 730.
This
seems to be a VERY restrictive amount. In the US, for instance, there are no
limits on the transaction but a requirement to report cash transactions over
USD 10K. Some EU countries have limits but also many members such as Austria,
Cyprus, Estonia, Ireland, and others, don’t have any limits.
The
argument is that limiting cash transactions helps reduce money laundering and
corruption. But what are the downsides to such laws? Critics argue that this
law will be a huge additional boon to banks.
If
all these transactions are now funneled through the banking system, considering
that banks have fees for cashing out, then wouldn’t this have an inflationary
effect on prices of goods?
Coupled
together with removal of bank secrecy laws, do you believe that concerns around
this law, whether it is by political opponents of the government or businesses
concerned around commercial secrets, are unfounded?
Post-war
Paradox
Last
question Vardan, some political and economic analysts claim that it is very odd
that after a capitulating loss in Artsakh our currency is relatively stable,
and not in freefall as what would be expected from other postwar examples.
Another
attribute of what is called a "paradox" is that since 2020 there's
been unprecedented activity in the real estate market (this is even before the
Russo-Ukrainian war). Arthur Hambardzumyan claims
that in 2021, we've had 200K transactions in the real estate market, out of
which 55K were purchase/sale transactions. By contrast he says that in 2017,
when our economy was doing much better, there were about 35K transactions.
Do
you agree that there's a paradox here? If not, how do you explain these
surprising statistics?
Wrap-up
That
concludes this Conversations On Groong episode.
As always, we invite your feedback, Thanks to Laura Osborn for the music on
our podcasts. Don’t forget to subscribe to our channel on YouTube, Like our pages
and follow us on Twitter. On behalf of everyone in this episode, we wish you a
good week, thanks for listening and we’ll talk to you soon.
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Keywords
Vardan Aramyan, Armenia, Economy, Ukraine War, Russia, Inflation,
Fiscal Policy, Monetary Policy, Bank Secrecy, Cash Transactions, Ukraine War,
War Dividend, Azerbaijan, 44-Day War, Post War Paradox, Remittances, Foreign
Remittances,
