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THE FALL IN THE CURRENCY MARKET
Yerkir.am
June 16, 2006
Hundreds of currency exchange units in Armenia seem to be skillfully
using the signal sent by the Central Bank that "there will be no
interference into the currency market". The exchange rate continues
to flow, therefore they can gain significant profit from the endless
fall of the exchange rate.
The fluctuations in the currency market
Currently the currency exchange units buy US dollar costs at a rate
of 410-415 drams, and sell it at 420-425 drams. In the beginning of
this year the exchange rate was 450-460 drams for one dollar. In the
course of the last month the US dollar depreciated by 35-40 drams. What
is the reason for this depreciation?
In the beginning of the year experts anticipated that the dollar-dram
exchange rate would fall to 400 drams for one dollar by June if
the Central Bank does not interfere. The prognosis turned out to be
true. So far the Central Bank does not want to interfere by collecting
the extra dollars from the market and replacing them with drams. As
a result, currency traders, and not only them, make profit.
In the meantime, the appreciation of the Armenian dram and the parallel
depreciation of the dollar take anecdotal scales. Even though trade
and financial transactions take place during the working day and the
exchange rate valid at the end of the day should be preserved at least
till the morning of the next day, the exchange rate in our country
changes even during the night (the dollar depreciates). This is why
some people say that the Armenian economy grows during the nighttime.
What are the Central Bank's arguments?
The Central Bank representatives keep explaining that it is
unacceptable for the fiscal authorities of the country to interfere
into the currency market.
The main argument is that the Central Bank's main function is the
preservation of price stability in the country while stabilization
of the exchange rate is a secondary issue.
The second argument derives from the first one. The Central Bank's
monetary policies derive from the interests of Armenian citizens who
receive their income in Armenian drams. Those citizens who receive
their income - salaries, profits, interests, etc. - in foreign
currencies can think that their incomes are of secondary importance.
The Central Bank believes that our society would not agree to have
a fixed or regulated exchange rate while the price level would
be higher. If the Armenian dram depreciates the prices will rise
significantly, the Central Bank states.
It turns out that the appreciation of the Armenian dram has suppressed
the rise of prices. If the exchange rate is fixed then the prices
will inevitably rise. Therefore, there is only one solution ... to
accept the fact of further appreciation of the Armenian dram since
it is impossible to pursue two mutually exclusive goals of monetary
policies - to stabilize both the prices and the exchange rate.
However, a number of simple questions arise in this respect. What is
the limit after which it will make no sense to speak about the role of
foreign currency in our market? At what point will it become possible
to state that the Armenian dram is the only currency in which all
calculations and transaction would be made?
Why is it that the central banks in Georgia or Russia can afford
to interfere into the currency market, a tool regularly used in
monetary-fiscal policies? Why is this impossible to do in Armenia?
The next question is why is it possible to allow a moderate inflation
(8-10%) in Georgia, Azerbaijan, Russia and a number of other CIS
countries? Why is it that in these countries no terrible things happen
because of such inflation and the economy and people's real incomes
continue to grow while the same thing is impossible in Armenia?
Yerkir.am
June 16, 2006
Hundreds of currency exchange units in Armenia seem to be skillfully
using the signal sent by the Central Bank that "there will be no
interference into the currency market". The exchange rate continues
to flow, therefore they can gain significant profit from the endless
fall of the exchange rate.
The fluctuations in the currency market
Currently the currency exchange units buy US dollar costs at a rate
of 410-415 drams, and sell it at 420-425 drams. In the beginning of
this year the exchange rate was 450-460 drams for one dollar. In the
course of the last month the US dollar depreciated by 35-40 drams. What
is the reason for this depreciation?
In the beginning of the year experts anticipated that the dollar-dram
exchange rate would fall to 400 drams for one dollar by June if
the Central Bank does not interfere. The prognosis turned out to be
true. So far the Central Bank does not want to interfere by collecting
the extra dollars from the market and replacing them with drams. As
a result, currency traders, and not only them, make profit.
In the meantime, the appreciation of the Armenian dram and the parallel
depreciation of the dollar take anecdotal scales. Even though trade
and financial transactions take place during the working day and the
exchange rate valid at the end of the day should be preserved at least
till the morning of the next day, the exchange rate in our country
changes even during the night (the dollar depreciates). This is why
some people say that the Armenian economy grows during the nighttime.
What are the Central Bank's arguments?
The Central Bank representatives keep explaining that it is
unacceptable for the fiscal authorities of the country to interfere
into the currency market.
The main argument is that the Central Bank's main function is the
preservation of price stability in the country while stabilization
of the exchange rate is a secondary issue.
The second argument derives from the first one. The Central Bank's
monetary policies derive from the interests of Armenian citizens who
receive their income in Armenian drams. Those citizens who receive
their income - salaries, profits, interests, etc. - in foreign
currencies can think that their incomes are of secondary importance.
The Central Bank believes that our society would not agree to have
a fixed or regulated exchange rate while the price level would
be higher. If the Armenian dram depreciates the prices will rise
significantly, the Central Bank states.
It turns out that the appreciation of the Armenian dram has suppressed
the rise of prices. If the exchange rate is fixed then the prices
will inevitably rise. Therefore, there is only one solution ... to
accept the fact of further appreciation of the Armenian dram since
it is impossible to pursue two mutually exclusive goals of monetary
policies - to stabilize both the prices and the exchange rate.
However, a number of simple questions arise in this respect. What is
the limit after which it will make no sense to speak about the role of
foreign currency in our market? At what point will it become possible
to state that the Armenian dram is the only currency in which all
calculations and transaction would be made?
Why is it that the central banks in Georgia or Russia can afford
to interfere into the currency market, a tool regularly used in
monetary-fiscal policies? Why is this impossible to do in Armenia?
The next question is why is it possible to allow a moderate inflation
(8-10%) in Georgia, Azerbaijan, Russia and a number of other CIS
countries? Why is it that in these countries no terrible things happen
because of such inflation and the economy and people's real incomes
continue to grow while the same thing is impossible in Armenia?