Wednesday, 4 March 2009
“The wisest course is to abide by a balanced approach.”
“The resources will go to welfare problems, infrastructure development and small and medium-size business support”
- Mr. Prime Minister, what happened yesterday? What changes did the Central Bank operate?
- As you may be aware, on March 3, the RA Central Bank issued a statement on its comeback to the policy of “floating” rate. During the past few months, the Central Bank declared repeatedly that our country had not given up the policy of “floating” rate; only financial stability was prioritized for a while. Why was this strategy prioritized? Why did the Central Bank prefer exchange rate stability to price stability? Sustained exchange rate promotes financial system stability, as a whole. Our economy was getting ready to the “floating” rate. What does this mean? For some period, Armenia’s national currency was appreciating against the dollar. Due to the global financial and economic crisis, our economics found itself in a situation where the national currency needed depreciating and a transitional period was necessary to this end. It is impossible to drastically cool a heated body. A preparative stage was needed, and the Central Bank came up with several statements by explaining the proposed policy. What does this mean? First of all, this means that commercial banks should build up extra capacity. Over the last few months, the commercial banks replenished their forex resources at the rate of USD 120 million. This implies that the owners of the banks invested additional 120 million dollars in their banks to safeguard deposits. In other words, our banks grew in reliability. Secondly, they were able to engage additional 250 million in liquid dollars. And thirdly, at this point of time, our commercial banks have USD 700 MN in cash money to cover their customers’ needs and the requirements of Armenia national economy. This was crucial at this stage. You may ask whether it was not more expedient to move to a cooler regime by means of smooth and daily depreciation of the national currency instead of using the corridor allowed by the central bank. This issue was examined in all detail by experts from the Government, Central Bank, the IMF and the World Bank. The point is that any one inclusive of the State has to pay a price during the transition. We had to ensure that all of the actors – economic entities, ordinary citizens and the State – could pay a minimum price. The smooth transition scenario, which has been tested in some countries, bears some specific risks. Firstly, the determination of a keynote value for the real balanced rate, as there is some uncertainty in this matter. Secondly, black marketers may appear to prevent the country from making a smooth transition. As a result, the central bank and the commercial banks prove to be unprepared and incur greater losses. We have seen Ukraine and Russia make sizeable injections into forex markets, nonetheless they did not manage to ensure a smooth transition. After all, they had to indicate those intervals in which their currencies, for instance, the ruble should fluctuate. This lead to market stability with minimum interventions needed on the part of the central bank. After an in-depth consideration of the foregoing scenarios, we chose the one stated by the CBA, namely the balanced exchange rate corridor between 360 and 380 drams for a dollar. This is a predictable scheme for all market actors and minimizes the risk of market panic.
- Mr. Prime Minister, I am convinced that our consumers wonder about what may happen tomorrow. Those who went shopping early today had a feeling of uncertainty about the future of their families and their living standards. In your capacity of head of government, what can you say to persuade our people that the situation is not going to worsen tomorrow.
- Prioritizing financial stability, we have facilitated the financial system’s smooth passage from higher temperatures down to lower ones. This was also a possibility for the government to adapt itself to this new regime. This means we completed the talks with the IMF, the World Bank and other strategic partners in order to have a more accurate idea about our country’s financial status for the next 3-4 years and such achievements as we may record allowing for all the negative aspects of the global financial and economic crisis. As a result, we could outline a medium-term action plan and our needs in financial assistance. In particular, yesterday the IMF issued a statement indicating that we have agreed upon the medium-term program. We expect to get 540 million dollars, with USD 240 MN to be made available at once and the balance – in quarterly installments. The World Bank declared to allocate USD 525 MN in loan resources covering different sectors of economy. The Russian Prime Minister stated his government’s readiness to provide USD 500 MN to the Armenian government to help us cope with the global financial and economic crisis. Other partners, too, will support us in financial terms. Coming back to your question, I would like to note that the spending items will be reconsidered accordingly. First of all, welfare programs will be high on our economic policy agenda. We declare that priority will be given to the settlement of pensions, benefits so as the pensioners, the teachers are paid in a timely manner. Infrastructure and utilities constitute a second priority. And finally, we will use these resources to boost economic growth countrywide. In particular, we are going to support such enterprises as are facing temporary hardships. Of course, we will strive to mitigate the existing social tensions. In a word, our strategy is quite clear: protecting the vulnerable, developing infrastructures and generating now jobs. The best proposed methodology is to prop up small and medium-size businesses.
- Mr. Prime Minister, can we conclude from your answer that our country is safe of social disturbances and that we can rest assured in this respect.
- This is our primary task indeed. We have repeatedly declared and can state now that the vulnerable layers of our population will get their benefits in full and in a timely manner.
- Yesterday it looked like the importers were celebrating a feast in anticipation of an imminent crisis. Prices soared in all the supermarkets and hypermarkets of Yerevan simultaneously for almost the whole range of products, inclusive of gasoline and consumer goods. The head of the economic competition protection commission declared that they were going to be strict and would penalize all those behind any ill-grounded rise in prices. What will happen to market prices? While it is clear that they are sure to go up, still there is uncertainty as to what extent and until when they will be augmenting?
- In general, it should be noted that this kind of behavior is no news to us: we have repeatedly met with it in recent years when economic entities foster agitation by creating panic and so on. I believe that this will come to an end during the next couple of days. Today we can see commercial banks making financial transactions at a regular pace with no serious problems available in the banking and financial system. Stability from the financial sector will be communicated to the importers and exporters as they usually work with the commercial banks in exchanging currency. It goes without saying that a 20% depreciation of the Armenian dram will force many importers and exporters to reconsider their pricing policies. The importers have some resource as they enjoyed quite favorable conditions over the past few years thanks to appreciating dram. Therefore, the current shift should not be too painful for them as they should have built up sufficient resource to provide for a smooth transition. I feel they will apply more accurate pricing arrangements in a couple of days. As far our exporters are concerned, it should be noted that depreciating national currency will help them get out of today’s standstill. They can now think of the possibility of increasing output levels and making profits. Thus, we have anticipated the current course of events, and they are under our control. During the last two days the tax authorities were busy assessing the stocks available with domestic importers in order to prevent the occurrence of any speculations whatsoever. Mr. Shahnazaryan, too, has declared that the situation will be strictly controlled and that the importers will have to answer for any speculations or undue rises in prices as in that case the existing stocks will prove offered at much higher prices than imported. They will face higher fiscal liabilities and will run the risk of losing sales markets and clients which does not suit their interests. Therefore, the wisest course is to abide by a balanced approach. This is also true for the ordinary citizens. We have estimated some 8% inflation for this year in consumer basket terms, which is the same as last year.
- Mr. Prime Minister, as noted above, a 20% depreciation of the dram will objectively lead to price changes on the consumer market. It is obvious that the socially vulnerable will be the ones to suffer most from these changes. If we add to this the planned increase in utility fees, we can see that we are in for a background of social tension. What steps will the Government undertake to mitigate social tensions as much as possible?
- You are right to state that the rise in utility fees will affect the family budget of average households. The estimated rise in utility bills will be 2000 drams approximately for a medium-income family. We are going to offset this negative impact by means of a 14% increase in pensions. Secondly, we have agreed with our strategic partners that the fees will be increased after the first quarter of this year, which means that the adverse effect of this change on family budgets will be minimized as the winter season is the most burdensome in this respect. Gas and electricity consumption will go down sharply starting from April to differ greatly from that of January-February. This and increased pensions will make up for the rise in utility bills. The point is that after all the poor and the vulnerable are the first ones to pay for these economic and financial problems, allowing for the recorded nearly 20% fall in the level of remittances in January alone. This means we should continue with our targeted social policy with the assistance having to reach out first of all those 118.000 poor families registered in our country. Should they increase in number extra budget funding will have to be allocated for the settlement of family benefits.
- Mr. Prime Minister, you mentioned that depreciated dram will benefit domestic producers and exporters. Did you mean that heavy industry will start operating under these new conditions? What can we expect from both such large entities as Agarak, Kajaran, Alaverdi and the medium-size facilities?
- You may be aware that last month meetings were held with the representatives of all economic sectors in the Office of Government. We met to discuss their problems inclusive of the ones caused by the global crisis. Quite naturally, our exchange policy is the problem number one for our producers and exporters. If the national currency depreciates they will be favored to implement some projects. We discussed this with them, so they were aware that the dram was going to depreciate. Many frozen projects are supposed to resume in this case. Secondly, we have agreed that those enterprises facing temporary difficulties may turn to the operational headquarters for assistance. Priority is given to such entities as are going concerns, employ several thousands workers, have fixed sales markets and whose problems are truly ephemeral. We also assist such enterprises as have developed capacity building programs and enjoy good export potentialities. Many such entities have already been supported publicly. This process shall be under close public control. The operational headquarters keeps on working. Tens of new business proposals have already been discussed and given a favorable consideration. On the one hand, we provide for an export-conducive environment and on the other, the Government uses its toolkit to help the domestic operators cope with their temporary problems and build up export capacity.
- No country seems to have escaped the adversities coming from the global crisis. The effectiveness or the flexibility of policies used is measured by the amount of losses incurred. Has the Armenian government developed an anti-crisis strategy, based on most serious research and analysis, as well as on the international experience, which can guarantee a smooth exodus from the current situation of global emergency.
- Indeed, we will strive to minimize the impact of the shock. It is not a secret that still there are some difficulties and that the no signs of stabilization have been traced as yet. Now, we are facing the second tide which stems from the real sector, and we have to do everything so as to minimize losses. The World Bank issued a corresponding statement on Armenia’s comparative assets, namely and firstly, our highly efficacious macroeconomic policy; secondly, low foreign indebtedness which allows us to mitigate the shock by means of new loans and, lastly, our stable banking system. So, we are going to meet with some difficulties during the year for which we have prepared by developing an anti-crisis program with the technical assistance of the World Bank and the IMF. On a regular basis, we will be informing the public about the developments, with all our programs having to be given a broad media coverage. Our tasks will be put up for public discussion. All capable forces will be mobilized by the Government and we will clarify the logic of our undertakings.
- Now, I would like to ask you a question which seems to be rather irrational but which worries the population: are we going to give up the dram and enter the ruble zone.
- This is a non-sense. Not of course as this is unfeasible. In conclusion, I wish to note that serious problems may arise during a global downturn, especially for ordinary citizens. The Government’s approach is as follows: we must do everything to protect the vulnerable and shift the burden towards the larger business. This means that the well-off will lead the way in struggling against the crisis.
