Q: The devaluation of the dram in March was a shock. Is the situation stable now?
A: Armenia experienced a situation of an overvalued real exchange rate until March of 2009 that was an outcome of fixing the nominal exchange rate. It was a hard decision, but we chose a drastic adjustment, which I think was successful since the exchange rate margin, which is usually served as a leading indicator of public expectations on exchange rate behaviour, came back from 10-15% to 1-2% in a couple of days - it was a signal that expectations on future exchange rate behaviour had stabilized in the economy. So if you use the term shock, then this is in a very narrow meaning of the word, as the currency adjustment was well organized and we made the economy return to its equilibrium stance at minimum expense, without jeopardizing financial market stability.
The deal signed with the [International Monetary Fund] for a credit of about $540m was an additional signal for the financial markets, that the central bank had the necessary reserves to ensure stability in the financial markets.
I think now after the liberalization of the exchange rate there are two important conditions in our economy: firstly, there are no distortions in the economy and the real exchange rate is close to its equilibrium level, which means that the public does not have irrational expectations on any drastic changes of the nominal exchange rate. Secondly, there is stability in the financial markets and there are not [the] necessary conditions to organize speculation. In other words, macroeconomic stability is now ensured.
There is a lot of talk of a possible "second wave" in the crisis, which is linked to the behaviour of non-performing loans of the banking system. However, I think in our case there is a small chance that it will take place. This is due to the fact that the banks constitute the major part of our financial system and their financial indicators are strong enough.
Q: The international crisis is such that it has accelerated reform in the smaller countries of the CIS. What are your main reform goals now?
A: The crisis is a challenge for all countries, but on the other hand it is also an opportunity for different countries to overtake the countries they compete with. But to achieve this, you need to be more flexible and rapidly adapt to the situation as well as to implement the actions for the short run that will rapidly return the country's economy to the rising stage. Secondly, you need to be more aggressive in terms of implementation of fundamental reforms, which will help the economy to become more competitive in a long-run prospective.
Generally, the philosophy of short-term reforms is creating favourable environment for [small and medium-sized enterprises], which will increase their capacity for confronting the crisis. Without these steps, the economy will return to the recovery phase slower, as SMEs are the intermediary clusters connecting the different sectors of the economy with each other.
As for long-term reforms, among the priorities of the government is to become a business excellence centre, which means that Armenia will be one of the most simplified places to do business, according to the criteria of the World Bank's "Doing Business" report.
If in our economy the operation of the business in our country is simple and the necessary system of incentives is implemented, this will make our economy more competitive and attractive. Tax and customs reforms are the highest priorities of the reforms, including introduction of e-taxing. The experience of countries shows that for countries like Armenia, where the scale effect from investments is limited as compared to large economies, the business environment acts as an attractive incentive for investments. Therefore, the aggressive reforms directed to the improvement of the business environment will lead to the increase in investment inflows and rapid restoration of the economy.
Remittances from Armenians that live overseas is a major source of revenue. Nevertheless, the amount being sent home has fallen in the crisis to AMD44bn [$122m] in the first quarter from over AMD180bn last year. Is this a serious problem? The problem is serious to the extent that remittances in the form of private transfers and factor income play an important role for the Armenian economy. During the recent years, private transfers and factor incomes averaged 13-14% of GDP and if we take into account their equal redistribution in a society, we can say that their multiplier effect on the economy is not small.
The net inflow from private transfers and factor income amounted to $1.9bn in 2008, 16% of which, $311m, was received in the first quarter of the year. Concerning this year, non-commercial transfers by physical entities through the banking sector decreased by 33.6% in net terms in January-April compared to the same period of the last year. Nevertheless, the increase of the international price for oil allows us to expect further improvement in the Russian economy, which will have its positive effect on the inflow of transfers to Armenia.
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