The dram has lost almost 3 percent and 6 percent of its nominal value against the U.S. dollar and the euro respectively since September 1, falling below a target band set by the authorities in March. Much of the losses occurred over the past week.
The dollar bought 385.5 drams at the close of trading at Yerevan’s NASDAQ OMX stock exchange on Wednesday, up from 381.75 drams registered during the previous trading session on Friday. The Central Bank of Armenia (CBA) is by and large avoiding heavy intervention in the local currency market, a radical change from its earlier exchange rate policy strongly criticized by opposition politicians and economists critical of the government.
The CBA spent an estimated $700 million of the country’s hard currency reserves on keeping the dram’s value virtually unchanged from last October through the end of February before allowing its nearly 20 percent devaluation on March 3. The measure was a necessary condition for the release of a $540 million stand-by loan by the International Monetary Fund (IMF).
Most of that loan, which the IMF increased to $823 million in June, is to be used by the CBA for preventing further exchange rate fluctuations. The bank forecast in March that the dram’s average exchange rate will vary from 360 to 380 per dollar this year.
CBA officials are now downplaying the significance of the Armenian currency’s renewed depreciation, saying that its average exchange rate for the whole year will remain close to 360 per dollar. “We do not expect serious fluctuations,” bank’s deputy governor, Vache Gabrielian, told the “Hayots Ashkhar” daily last week.
According to Gabrielian, the dram’s weakening is primarily caused by currency speculation. “There are some market players who are cashing in on the dollar’s strengthening [in Armenia,]” he said without naming anyone.
Another newspaper, “Kapital,” quoted Gabrielian as saying that local commercial banks have accumulated “a large amount of liquidity” that puts the dram under growing pressure. But he insisted that the CBA will not resort to massive dollar injections to shore up the national currency.
Another possible factor behind the weaker dram is a continuing easing of the authorities’ monetary policy which is aimed at stimulating Armenia’s recession-hit economy. The CBA cut its refinancing rate by an additional 50 basis points to 5 percent in August and early September. The benchmark rate stood at 7.75 percent in early March.