First, let me express my thanks to Hetq Online for the ongoing discussion regarding currency matters and the more comprehensive issue of macro-economic policy in Armenia. I believe that the subject is quite important and deserves to be reviewed in a professional and non-politicized approach.

For this reason the initiative of Hetq Online is to be welcomed. Naturally, while the pages of the mass media may not be the best place for a detailed analysis of industry specific and quantitative data, they may serve as a forum for clarifying the issues involved and the formulation of questions. I’d like to reflect on some of these formulations that were raised in my interview, that of Hrand Bagratyan, the reflections of Tatul Manaseryan, and in the article of Njdeh Melkonian.

1. While the aforementioned individuals have expressed a variety of opinions regarding the Central Bank or the results of the monetary policy carried out by the Central Bank, I am glad to see that they all share the view that both fiscal and structural policies have an essential impact on both currency and inflation and that in this context to solely review monetary policy is insufficient. I would hope that future discussions would be broader in scope than that of my interview, which, while touching on this issue, focused solely on monetary policy. I would also like to see knowledgeable individuals from other spheres offer theses outside the realm of monetary policy.

2. One of the readers expressed the view that transfers decide monetary policy; something that is not linked to the domestic economy. In reality, I also noted the tens of millions of dollars in investments solely into the banking sector. Direct investments in the economy account for even more.

3. I would also once again like to comment on the status of the Central Bank    and its powers. In accordance with legislative statues (including the Constitution, which was formulated without the Central Bank’s input), the authority of the Central Bank is quite limited. It only has operational independence and cannot decide neither policy objectives nor targets for these objectives decided by the legislature (in this case, inflation). In the Republic of Armenia it is the National Assembly and the government that define general macro-economic framework. The Central Bank actively participates in these discussions and is asked to express an opinion. However, it does not have the right to either initiate legislation or make decisions. The Central Bank actively develops laws but these are presented to the National Assembly on behalf of the government. Here, the role of the Central Bank is to provide technical expertise. I would venture to state that the debates in the National Assembly regarding legislation affecting the operation of the Central Bank are just as intense as the discussion of legislation regarding, say, economic development and trade issues. In this context the authority of the Central Bank is comparable to other government ministries or independent committees.

4. I have made my arguments based on the figures published by the National Statistical Service of Armenia, the Government and the Central Bank. If some of the developments cited by the commentators are neither officially recorded nor are assessed in qualitative terms, I cannot evaluate them.  

5. According to National Statistical Service data, the amount of exports from Armenia has indeed grown in the past few years. The figures are presented below.

EXPORTS (millions of dollars)

I have never asserted that net exports have grown. Moreover, I noted in my interview that the imports growth rate is twice that of export growth rate. Naturally, since from the very start exports were larger, the balance of trade could not improve. One can discuss the structure of exports and the role of mining products in exports. However, it is impossible to neglect the fact that a certain portion of import growth has been financed through the proceeds of export growth.

6. If we only take a look at the balance of trade, we see a growth in outflows, but when we look at the balance of payments we come up with decrease in the Current Account balance: From (-) $161.6 million in 2004 to (-) $86.8 million in 2006.

7. As of May 2006, the Central Bank of Armenia began publishing information regarding the amounts of transfers received through the banking system. The dynamics indicated by this data was also mentioned in my interview. If we also account for those transfers sent outside the banking system (as the National Statistical Service does when finalizing the Balance of Payments), then, according to representative demographic surveys, these amounts grow by some 30-40%. Let me add that the average transfer amount of non-commercial inflows in the past few years has fluctuated between $700-$800, while very large, billion-dollar operations (that is to say not even single, but multiple transactions), do not occur in our banking system and it would be impossible not to spot if they did. Assets of all the banks in Armenia are about the one-fifth of the banking sector, and comprise about 1-1.5 bln dollars--a single billion dollar transaction would be extremely large and immediately followed upon. Let me again assert that while individual instances of money laundering do take place and will do so, it is clearly not the case that the flow of transfers is in any way dependent on them.

8. Both the Central Bank and the ROA government have always implemented a de-dollarization policy, and not only in 2004. Secondly, mere nomination of prices in drams cannot induce significant changes anyway. It would be neither possible nor desirable to fix or peg the exchange rate in Armenia (due to trade and other financial flows), and in these conditions everybody considers dollarization as a vulnerability. In particular, the both Fitch & Moody’s--international rating companies that assign sovereign credit ratings, have mentioned in their reports that a high dollarization is a serious vulnerability. There are several standards by which one can measure the rate of dollarization in Armenia (all the data can be drawn from the monetary survey published by the Central Bank), but let me present the simplest: the ratio of foreign currency deposits to overall deposits dropped from 70% in 2003 to around 40% in 2007.

9. Let us now turn to an issue that many readers raised, perhaps the most important one, regarding the mistakes made by the Central Bank and the Bank taking responsibility for them. Contrary to other commentators, I do not believe that the Bank suffers from a superiority complex or notions of infallibility. Our internal discussions are quite heated and extensive and we are always receptive to substantiated argumentation. I have noted that from a tactical viewpoint, in the course of policy implementation, naturally mistakes have been made. Specifically, in 2004, it was not possible to correctly anticipate the duration and impact of the flows. Naturally, had we known then what we do know today, matters might have been done differently. In this context, I would have liked to see more quantitative data presented in this series of discussions. For example, Njdeh Melkonian views the reaction of the Central Bank to be late and weak. I would find it very interesting and helpful to see this evaluation quantified in time. However, in general, these developments cannot change trends. I want to again repeat that in the context of the existing macro-economic situation and institutional solutions I do not see any alternative to the chosen monetary policy. Yes, there are changes that are both drastic and painful. They benefit some and hurt others. Sadly, however, it is not always the case that such a juxtaposition of issues presupposes a better set of solutions.