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Central Bank Holds Firm On Fiscal Policy

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  • Central Bank Holds Firm On Fiscal Policy

    CENTRAL BANK HOLDS FIRM ON FISCAL POLICY
    Haroutiun Khachatrian

    EurasiaNet, NY
    Aug. 31, 2006

    Armenia's Central Bank is holding firm on its fiscal policy in the
    face of criticism about the strength of the country's currency, which
    has gained about 40 percent in value against the US dollar in recent
    years. In defending itself against its critics, Central Bank officials
    are pointing to recently released data concerning the impact of cash
    remittances on the country's economy.

    It had long been believed that money sent home by Armenians abroad
    plays an important role in the Armenian economy, but the survey,
    prepared by the Armenian Central Bank with support from the World Bank,
    contained some surprising results. The total amount of remittances
    in 2005 was pegged at $940 million, a figure that exceeded earlier
    estimates, and which was higher than the state budget of $912 million.

    The other surprise is that the bulk of remittances goes to middle-class
    families in Armenia, contradicting the widely held perception that
    money from abroad went mainly to the poor and played a vital role in
    keeping poverty in check. Overall, only 37 percent of Armenian families
    benefited from remittances, according to the data, which was compiled
    between February and April of this year. Central Bank officials have
    relied on these findings to fend off calls for devaluation, insisting
    that the poor have not been severely impacted by the strong dram. They
    add that taking action to reverse the dram's rise could spur inflation,
    which would hurt all Armenians.

    The dram's value has been a hot topic in August. It was trading at
    around 396 to the US dollar on August 31. In late 2003, the dram
    traded at about 570 to the dollar. Opposition politicians have long
    suspected authorities of keeping the dram artificially strong in order
    to divert dollars into pet projects that primarily benefit members of
    the governing elite. [For background see the Eurasia Insight archive].

    "A group of people gains millions of dollars when ordinary citizens
    incur serious financial losses," the Noyan Tapan quoted opposition
    politician Artur Baghdasarian as saying August 12. Baghdasarian,
    who formerly served as parliament speaker, split with President
    Robert Kocharian's administration earlier this year and is now seen
    as a potential challenger to the incumbent in the next presidential
    election. [For background see the Eurasia Insight archive].

    Meanwhile, some economists, including Eduard Agajanov, say the strong
    dram is damaging Armenia's export capabilities. According to the
    Regnum news agency, Armenia's deficit during the first six months of
    2006 approached a half-billion US dollars.

    The average per capita income in households receiving remittances
    is $78 per month, well above the poverty line, which officially is
    at $42.3 a month. However, an August 11 commentary in the Iravunk
    newspaper suggested that the Central Bank's characterization of such
    households as middle-class might be misleading, given that without the
    remittances a large share of the beneficiaries might tumble into the
    "poor" category.

    Almost three-quarters of the remittances were sent from Russia. The
    United States was also an important source of funds, accounting for
    14.3 percent of remittances. Germany, Greece and Ukraine rounded
    out the top five source countries, collectively accounting for 5.2
    percent of remittances.

    Out of the total of all cash remittances, roughly 76 percent was spent
    on daily necessities, including food and clothing, according to the
    Central Bank's data. Another 6.1 percent was earmarked for education
    expenses. The remainder was allocated in a variety of ways, including
    1.2 percent spent on real estate investments, 2.0 on investments in
    small businesses, and 1.1 percent held in savings.

    The Central Bank intends to carry out additional research on remittance
    patterns, according to Karin Karapetian, a representative of the
    Central Bank Statistical Department. The new survey will be conducted
    from September-November and will focus on remittances designed to
    pay for luxury goods, or to fund investments in real estate and/or
    businesses.

    The August 9 data indicates that remittances will continue to be
    a significant factor in the Armenian economy for the foreseeable
    future. Almost 85 percent of respondents expressed the belief that
    they will continue to receive remittances in the coming year. Less
    that 10 percent said they expected to receive no money down the road.

    The situation was the same on the sending end well, with 91 percent
    of Moscow respondents saying that they intended to keep sending money
    home. The Central Bank projected the overall total of remittances
    for this year would be about 17 percent higher than the 2005 figure.

    Editor's Note: Haroutiun Khachatrian is a Yerevan-based writer
    specializing in economic and political affairs.
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