Between 11.00 and Midday on March 3 the exchange rate on the Armenian Dram jumped from 307 to the U.S. dollar to 355, leaving Armenians facing a price shock, after the Central Bank announced a free floating currency.
Major supermarkets chains have closed their doors to customers to determine prices and avoid panic, after some grocery stores saw butter prices jump by 30% in morning trade, with cooking oil prices rising 18% and sugar climbing 8%. Other stores which remain open are seeing massive queuing as Armenians race to buy basic food items, with other goods such as cigarettes reported to be sold out. At the same time, petrol prices rose by more than 30% in the wake of the currency float.
Pressure on the Dram remains with exchange offices in Yerevan, the Armenian capital, rising from 307 to as high as 440 drams per dollar, as Armenians queue to buy dollars where they are available.
The head of the Armenian Central Bank, Artur Dzhavadyan, has sharply criticized private exchange offices which, he says, “do not fulfill the basic function of currency exchanging, and serve the shadow economy,” while accusing them of provoking the rush to buy dollars in recent days.
On Tuesday the Central Bank of Armenia decided to end it exchange rate interventions, which had been supporting the Dram, to move back towards a free floating exchange rate as part of a $540 million bailout agreement with the International Monetary Fund.
Central Bank head Dzhavadyan said that the decision was made to help the struggling economy of Armenia, and in the light of experiences of other countries in trying to defend a fixed exchange rate.
The IMF has supported Armenia’s decision to introduce a floating exchange rate. Managing Director, Dominique Strauss-Kahn, says the organization will recommend that the IMF approve Armenia’s application for a $US 540 million loan when the IMF Board meets later this week.
An artificially strong Dram was hindering Armenia’s economy and defending the currency had seen cost the Central Bank an estimated $300 million, bringing Armenia’s reserves to approximately $1.3 Billion. The Central Bank says that it may still intervene in the currency markets to avoid “sharp currency fluctuations,” and that it will raise the refinancing rate by 1% to 7.75% in a bid to limit inflation.