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Armenia Has Caught the Dutch Disease

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  • Armenia Has Caught the Dutch Disease

    Noyan Tapan Highlights #29 (531)
    26 July, 2004


    By Haroutiun Khachatrian

    When summing up the results of the economy growth of Armenia in 2003,
    the government said the per capita GDP has rose 10 percent to 871
    dollar by the end of that year, a more than ten percent growth against
    the previous year.

    This, by the way, means that Armenia is no longer among the poorest
    countries of the world. However, if one decides to calculate the same
    ratio in early July, 2004, he will get 1027 dollars per capita, or 18
    percent above the level of the preceding year, despite the fact, that
    the GDP itself had grown only 9.1 percent. The miracle was due to
    another fact, which was not expected or planned by the Armenian
    authorities, namely, the growth in the dram rate against the US dollar
    (and other currencies circulated in Armenia as well). This year, the
    US dollar has dropped almost ten percent to its value of 1999.

    The drop of the dollar rate was not expected for the participants of
    the market either. This can be seen from the events of the last week,
    when the dollar dropped more than 20 drams in three days (causing
    almost a panic among the population), then recovered almost as quickly
    (see fig 1). The immediate impression was that this is a confusion
    among the market participants themselves, although interventions of
    some players cannot be ruled out as well.

    However, what is more surprising is that not only the participants of
    the market, but also the authorities failed to realize the real trend
    of the currency market. The fact was really not predicted by any of
    the Armenian officials, enough to say that the budget was projected
    for the average rate of 580 drams per dollar during the year. It is
    evident from the chart placed monthly by the Central Bank (see the
    respective chart for May 2004 in fig 2) that the rise of the dram
    against the US dollar started as early as in March 2003. There are two
    main reason for it, an increase in exports and the even more sizable
    rise in private transfers to Armenian residents from abroad (see the
    material on this page for more details).

    Whatever the reason, the analysts say that the phenomenon is a typical
    case of the so-called Dutch disease, the increase of the national
    currency. It is usually caused by huge exports of oil (as it was the
    case of the Netherlands in 1950s, from where the name arouse) and
    which is usually harmful for all other branches of the economy of that
    particular country. Armenia is not an exporter of oil, "but we are an
    exporter of people instead" a businessman said with smile. In fact,
    the reason why the transfers of Armenians abroad have grown so
    significantly, and how long this growth will continue, is probably the
    most intriguing question to be replied.

    Meanwhile, the consequences of this rise in the dram rate (and of
    course, the "storm" of the last week) are seen in the economy. In
    fact, the exporters are not the only businessmen to suffer, as it
    happens usually in the case of the Dutch disease. It has become a
    tradition that business partners conclude their deals in dollars, with
    payments to be performed in drams "according to the official rate of
    the Central Bank of the payment date". Due to this fact, the number of
    those who suffered losses is much larger. An the authorities have no
    leverages to protect them.