Hello and welcome to the Armenian News Network, Groong.
In this Conversations on Groong episode, we’ll be talking about economic issues facing Armenia in 2022. This two-part episode was recorded on Friday, August 5, 2022.
PART 1 will focus on the topic of inflation and fiscal and monetary policies associated with managing inflation and related issues.
PART 2 will focus on bank secrecy laws and Armenia’s continuing initiative to reduce cash transactions in its economy.
Armenia is facing a number of evolving economic and financial challenges in 2022, yet in the first half of 2022 the economy popped up 11.8%. What are these challenges, are they so-called “transitory” or systemic? And how is the current government navigating through them?
To talk about these issues, we are joined by:
Mr. Vardan Aramyan, who is a former Minister of Finance of the Republic of Armenia, serving from 2016-2018. He is currently Senior VP of Finance and Economy at Vallex Group in Yerevan.
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(With minor rounding of numbers)
● Overall Economic growth: 11.8%
● Trade: 44% - Exports 36%, Imports 49%
● Industrial output: 6%
● Services: 27%
● Trade turnover: 11%
● Construction: 13%
● Agriculture: -5.5%
● Consumer inflation: 8%
● Industrial product inflation: 8%
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?
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?
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?
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?
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?
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?
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?
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?
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.
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,