US embassy cable - 05YEREVAN1044

UNCLAS SECTION 01 OF 02 YEREVAN 001044 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EAID, AM 
SUBJECT:  REMITTANCES DRIVE UP ARMENIAN CURRENCY, HAMPER 
EXPORTS 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY. 
 
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SUMMARY 
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1. (SBU) A recent upward trend in remittances and capital 
inflows into Armenia has led to significant real 
appreciation of the national currency, the Armenian dram, 
since July 2003.  These cash inflows enable Armenians to 
finance higher consumption and investment, but the nominal 
appreciation of the currency and the inflationary pressure 
on prices is challenging Armenia's macroeconomic 
environment.  While importers and traders in basic consumer 
commodities gain from the dram's appreciation, Armenia's 
weak export industry and the many Armenians who have their 
incomes fixed in foreign currency stand to lose.  The 
Central Bank told us that they expect the dram to appreciate 
further over the next few years as remittances and cash 
inflows continue to grow.  End Summary. 
 
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REMITTANCES FROM ABROAD CONTINUE TO CLIMB 
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2. (SBU) According to the Central Bank of Armenia (CBA), 
bank transfers to private individuals in Armenia amounted to 
USD 740 million (21 percent of GDP) in 2004, up from USD 600 
million in 2003.  Private individuals transferred USD 470 
million out of Armenia, making the net private transfer to 
Armenia USD 270 million, or 8 percent of GDP.  Although the 
CBA does not characterize the transfers to and from 
individuals, Citibank (which manages international transfers 
for six correspondent banks in Armenia) told us they believe 
most transfers to Armenia are worker's remittances and most 
transfers out of Armenia are consumer spending.  Central 
Bank board member Vache Gabrielyan told us that the bank did 
not try to estimate the amount of transfers that came by 
unreported means, such as people carrying cash into the 
country.  A recent study based on household surveys 
estimated that remittances to Armenia could be as high as 
USD 1 billion per year, finding that 18 percent of Armenian 
households receive, on average, USD 200 per month from 
abroad. 
 
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INFLUX OF CASH DRIVING UP EXCHANGE RATES 
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3. (SBU) Since 2003 when both foreign direct investment and 
private bank transfers began to climb, the dram has 
appreciated by 28.8 percent on the dollar (14.4 percent on 
the euro).  Gabrielyan told us that the CBA expects the dram 
to appreciate more over the next few years, as remittances 
and capital inflows continue to increase.  He added that the 
CBA's policy is to intervene on currency markets only to 
smooth out volatility, not to change trends, and even then 
only in cases where inflation is under control. 
 
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WHILE IMPORTERS GAIN... 
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4. (SBU) Importers and enterprises that use imported raw 
materials benefit most from a stronger dram.  Although 
importers pay less in dram terms for basic goods like 
petroleum, cigarettes, flour, sugar, coffee, and 
construction materials, consumers are paying the same price 
in the Armenian market.  This is largely because a few 
traders control large market shares of imported goods, and 
informal barriers to entry keep would-be competitors out. 
Gabrielyan refuted the argument (we believe, disingenuously) 
that a stronger dram should bring lower prices on imports, 
adding that remittances raise consumers' disposable income, 
increasing demand for imported goods.  That foreign 
transfers ultimately finance Armenia's consumption of 
imports is apparent in Armenia's national income accounts: 
Armenia's trade deficit (-15.2 percent of GDP) is financed 
by transfers and concessionary loans, allowing total 
consumption to nearly equal GDP at 95 percent.  In other 
words, Armenia is spending its foreign transfers on 
consumption of foreign goods, rather than investing it in 
domestic growth. 
 
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...EXPORTERS STRUGGLE 
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5. (SBU) Although the National Statistical Service reports 
that exports grew by 30.8 percent for January-April 2005 
against January-April 2004, a closer look shows that a 
nominal increase in exports of precious and non-precious 
metals (due to rising prices for copper and molybdenum) are 
behind the growth.  Excluding Armenia's niche market for 
diamond polishing and the mining sector, exports of other 
products have decreased.  Businesses are starting to notice: 
the Armenian Chamber of Commerce and Industry unsuccessfully 
petitioned the CBA to support the dollar against the dram in 
order to help Armenian producers and exporters.  Foreign- 
backed exporters (who typically kept their costs in 
dollars), have had to compromise with employees, often 
adjusting wages upwards.  Chairman of the Central Bank of 
Armenia, Tigran Sargsyan, was unsympathetic saying, 
"exporters should try to improve the quality of their goods 
instead of seeking 'greenhouse conditions' from the Armenian 
authorities."  Nevertheless, Armenia's weak export industry 
is worse off now than it was before. 
 
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COMMENT: IS CASH FROM ABROAD ARMENIA'S DUTCH DESEASE? 
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6. (SBU) Remittances, foreign aid, and foreign direct 
investment lead to an appreciation of the dram, and 
therefore reduced competitiveness in foreign markets for 
Armenia's developing industries.  The large cash inflows may 
also exert some pressure on prices, since many goods do not 
enjoy a competitive market environment in Armenia.  While 
the capital inflows raise the disposable income of 
Armenians, most of this income is going to consumption of 
imports rather to investment in domestic industry.  If the 
trend continues as the CBA suggests it will, remittances and 
cash inflows from abroad (as well as much of Armenia's 
foreign investment, which often has as much a humanitarian 
as profit motivation) may do as much harm as good to 
Armenia's economic development and long-term sustainability. 
EVANS