While the EU ponders its fate, Armenia continues on the road to recovery

PanARMENIAN.Net - The Central Bank of Armenia also deserves a share of the credit for this economic turnaround. Central banks are typically the “fulcrum” that stands between a local economy and the economic events on the international stage, absorbing both good and bad “shocks” before they can wreak havoc on a much smaller financial market. In today’s modern era of globalization where our economies are totally interconnected and interdependent, it is much more difficult to shield local activity from the harsh realities across our national borders. This task, however, falls directly on the central bank.

The Central Bank of Armenia was formed in 1993, following the accepted global design for an independent group managed by a board of financial professionals. Aside from tending to the distribution of local currency, the primary responsibilities of the bank is to bring stability to local prices, manage the national currency’s position in the international marketplace, oversee the nation’s foreign exchange reserves and gold, and generally promote growth and employment through its monetary policies and actions.

Before the recent “Great Recession”, Armenia had benefited from years of double-digit growth, but 2009 brought a severe cutback of 14.2% in domestic business activity. A gradual return to growth, some 2% in GDP, took place in 2010, followed by 4.6% in 2011. Inflation peaked at 7.6%, but higher discount rates from the central bank has brought consumer prices back in line. Current price indexes are well below 4%, the designated target for 2012, while GDP is expected to come in at 4.2% for the year.

The primary balancing act for a small country is to encourage foreign investment for the development of domestic business opportunities, promising the necessary legal infrastructure to protect those investments and local price stability to allow for reasonable projections for future profitability. The other variable in the mix is the country’s foreign exchange rate. Since imports currently exceed exports for Armenia, one would expect the Armenian Dram (“AMD”) to devalue with respect to other major currencies. This result has been the case over the past five years. The U.S. Dollar can now purchase 400 Drams, as opposed to roughly 300 in 2009. This depreciation is not that great in the scheme of things.

Foreign exchange reserves, however, facilitate international trade, establishing a basis for credit in exchanges with other governments. The central bank literally settles daily with other central banks around the world, either by accepting or paying foreign exchange deposits or securities to finance the daily capital flows. Armenia has nearly $2 billion in foreign exchange reserves, easily enough to cover seven months worth of imports. Many other peripheral countries to the EU have far less.

Deficits are also an issue, but far less of one that can be found with weaker member states of the EU. Funding has come from Russia, the IMF, and other international financial institutions. Over time, Armenia has managed to reduce poverty, slash inflation, stabilize its currency, and privatize many business enterprises, but economic reforms are still on the table. The country is also leaning towards becoming a member of the EU in future, but for now, economic prospects remain bright while the EU continues to flounder.