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Source: www.asiaecon.org |

ARMENIA CENTRAL BANK DEVALUES CURRENCY TO RECEIVE $540 MILLION BAILOUT


  Armenia's Central Bank has announced that it will stop supporting the national currency, the dram, in order to receive aid from the International Monetary Fund (IMF). In response to the news, Armenians rushed to buy bread, butter, and other staples on Tuesday, while stores panicked and shut down. Consequently, the Central Bank's actions have led the dram to be devalued by 22 percent against the dollar as part of the agreement with the IMF.


Armenia’s Central Bank has announced that it will stop supporting the national currency, the dram, in order to receive aid from the International Monetary Fund (IMF). In response to the news, Armenians rushed to buy bread, butter, and other staples on Tuesday, while stores panicked and shut down. Consequently, the Central Bank’s actions have led the dram to be devalued by 22 percent against the dollar as part of the agreement with the IMF.

The former Soviet republic is expecting to receive a $540 million bailout from the IMF. The IMF is expecting the dram to fall as low as 30 percent as the country moves towards a free-floating exchange rate. The Central Bank’s Chief,  Artur Javadyan, expects the dram to remain closer to the range between 360 to 380 drams per dollar this year. The currency last closed at 372.4150 drams to a dollar.

Presidential spokesman, Samvel Farmanyan, has asked for Armenians to stay calm, in spite of the response on Tuesday.

Due to the increased amount of investors who are withdrawing capital from emerging markets, Armenia is currently the fourth former Soviet Republic, following Ukraine, Belarus and Latvia, to request aid from the IMF. The lack of capital has caused banks to lose access to financing because of credit squeezes. The severity of the problem has led the IMF to allocate more than $35 billion towards propping up and assisting ailing banks in Eastern Europe and Central Asia.

Armenia is a landlocked country between the Black and Caspian seas and has a population of 3 million people. Turkey, Iran, Azerbaijan and Georgia border Armenia. In the last year, the economy grew 6.8 percent and is mainly dependent on diamond-processing and the manufacturing of machinery, clothing and some food.

Due to its previous relations with Armenia, Russia has usually provided financial support to the country, but the global economic crisis has forced Russia’s support to dry up. Last year, Armenia had resisted weakening its currency as the Russian ruble slumped against the dollar. The Armenian dram fell just 0.9 percent to the US dollar, compared to the Russianruble’s  fall of 16 percent and Ukrainian hryvnia’s drop of 37 percent to the US dollar.

The Armenian Central Bank’s decision to devalue the currency comes from the advice of the IMF. The strategy is  to allow for the free floating currency to eventually adjust to future economic scenarios. Maintaining an overvalued currency would be more detrimental to the Armenian economy in the present economic environment.

Most recently, the overvalued dram was in fact affecting negative economic growth and boosting unemployment. The IMF wanted the dram to be able to correct itself based on  market values. Armenia’s Central Bank had been astutely monitoring the dram for the last couple of months. The Central Bank wanted to ensure financial stability and limit the impact of depreciation on local companies and exporters. Last year, Armenia used about $360 million of its reserves to manage the dram. The country’s reserves consequently dropped to $1.3 billion. The Armenian Central Bank is still monitoring the situation very closely in order to protect Armenia’s currency and national economy and to control inflation.

The loan between the IMF and Armenia is set to be approved later this week, when the fund’s executive board meets. The IMF Managing Director, Dominique Strauss-Kahn, believes that the loan should be a 28-month stand-by agreement. The agreement and loan, according to the Managing Director, should also address the issue of the deterioration of Armenia’s external outlook, restore confidence in the currency and financial sectors, and protect the poor.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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