US embassy cable - 04YEREVAN1781

UNCLAS YEREVAN 001781 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EUR/CACEN-ESIDEREAS, EUR/ACE-MLONGI, EB/CBA 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, AM 
SUBJECT:  ARMENIAN INFLATION: CENTRAL BANK IN A CORNER 
 
Ref: Yerevan 1651 
 
1. (U) Sensitive but unclassified.  Please protect 
accordingly. 
 
2. (SBU) Summary.  A rising tide of dollars in the 
economy is forcing Armenia's Central Bank to choose 
between an appreciated local currency or increased 
inflation.  Although it is choosing to let the Dram 
rise, inflation nevertheless exceeds the 3 percent 
target.  End Summary. 
 
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EXTRA DOLLARS DRIVE DRAM APPRECIATION 
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3. (U) Extra dollars are coming from both outside and 
inside the country, raising the value of the Dram 
against the dollar.  From inside, a significant 
increase in dollar-denominated commercial and consumer 
lending by banks has taken dollars from bank vaults and 
put them on the street.  Recent economic growth and 
better business expectations have attracted non-bank 
dollar savings from houses into investments.  From 
outside, foreign investments, remittances and private 
transfers, as well as tourism income have contributed 
to the expansion of the dollar supply. The Dram's rapid 
appreciation against the dollar, which makes exports 
uncompetitive and causes instability in the heavily 
dollarized economy, makes matters difficult for the 
CBA.  There is political pressure on the CBA to 
intervene to stabilize the Dram but it cannot put Drams 
on the market without further fueling inflation or 
raising interest rates, both undesirable. 
 
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CENTRAL BANK UNLIKELY TO MEET INFLATION TARGET 
--------------------------------------------- - 
 
4. (SBU) Although the CBA decreased the real (Dram) 
money supply by 3 percent for the first half of 2004, 
the economy posted 7.6 percent year-on-year inflation, 
due to an expanding economy and increases in the price 
of imported staple goods.  Nerses Yeristyan, Advisor to 
the Chairman of the CBA, told us recently that meeting 
the inflation target of 3 percent is going to be "a 
very difficult task."  The CBA claims that 50 percent 
of the money transactions in the economy are in 
currency other than the Dram, and are thus outside the 
CBA's control.  Whether or not political pressure 
forces the CBA to intervene to keep the Dram from 
appreciating, if will be difficult to meet the 3 
percent inflation target. 
GODFREY