Money Velocity

One would expect that the money velocity should have gone up significantly in Armenia over the last decade or so. Money velocity is basically a measure of how fast each dram in circulation turns over in the economy. When businesses and consumers are confident, they are willing to spend their money faster, which leads to an increase in velocity, and vice-versa. Introduction of ATM machines and various electronic payment systems in turn enhance the circulation of money and increases its velocity.
However, the existing data suggest that the money velocity of Dram, measured as the ratio of GDP to monetary base, has a downward trend. As the figure below suggests, there are also large seasonal fluctuations.
Are there any studies exploring the reasons for this trend?

Exports and Imports of Armenia

Imports into Armenia stood at USD 1768 million in 2005, which represents an increase of 31 percent over 2004. Armenia exported USD 950 million in goods in 2005, also representing an increase of 31 percent. Perhaps this rapid growth in trade is not surprising. However, the recent emergence of Germany and the Netherlands as major trading partners of Armenia was quite unexpected. These two countries are the leading export markets for Armenian goods, and account for almost 30 percents of all exports. Below are the exports to the top 10 markets over the past five years.

Exports ...... 2001 2002 2003 2004 2005
Total ........... 342 505 686 723 950
Germany.... 11 28 44 83 147
Netherlands 1 11 22 26 130
Belgium ..... 46 92 124 108 125
Russia ........ 61 65 94 78 119
Israel ......... 33 88 142 98 112
USA ........... 52 46 56 71 62
Georgia ..... 12 17 19 29 39
Switzerland 9 8 33 45 35
Italy ........... 6 12 19 28 26
Iran ............ 32 31 22 31 25

What is Armenia exporting to Germany and the Netherlands? I suspect much of this is perhaps metal products such copper and aluminum. Exports of non-precious metals, for instance, expanded from USD 138 million in 2004 to USD 315 million in 2005. Is there anyone who can shed light on this? I presume much of the exports to Belgium and Israel are polished diamonds.

Imports also kept pace with exports, but with some reshuffling of the leading trade partners. Russia is the leading exporter to Armenia, and the primary source of energy imports. Russia, Belgium, and Israel are also important sources of uncut diamonds. Not sure what Armenia imports from Germany, UK, and Switzerland. Again, it will be great if anyone out there can shed light on this. Below are the imports from the top 10 leading countries over the past five years. What is Panama doing on this list, and what does Armenia buy from it?

Imports .... 2001 2002 2003 2004 2005
Total ........... 877 987 1279 1351 1768
Russia ......... 174 193 203 180 259
Belgium ...... 42 91 129 109 162
USA ............ 84 53 111 105 116
Germany ... 34 43 44 74 114
Israel ......... 28 83 124 100 102
Iran ............ 78 63 70 76 102
UAE ........... 47 43 60 65 98
UK .............. 91 28 83 107 91
Switzerland 27 10 53 46 86
Panama ..... 19 3 38 46 71

Imports are likely to expand as Armenia’s economy expands. Growth in exports is more tricky to predict as it depends on supply factors or constraints. Indeed, other than cut diamonds and the recent surge in non-precious metals, Armenia exports very little. Is there a good explanation for this? Has anyone looked at how sensitive exports and imports are to the appreciation of the Dram? Is anyone aware of any studies or business surveys of future trends in trade?

[Please email me if you are interested in contributing.]

The Value of the Dram

The continued appreciation of the Dram is very much in the news in Armenia. It recently hit the 400 Drams to the USD mark, continuing the appreciation began in 2004, and reversing the trend observed in the previous 10 years (see below).

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
406 414 491 505 535 540 555 573 579 533 458

What are the determinants of the exchange rate ?
The value of the Dram is likely to be determined by supply and demand for the currency. On the demand side, remittances from migrant workers, and the diaspora, old and new, maybe as high one third of GDP. Some 300,000 tourists visited Armenia in 2005, up from tens of thousands only 5-6 years ago. FDI is growing and may account for at least some 5 percent of GDP. On the supply side, imports exceeded exports in 2005 by some USD 800 million, or some 18 percent of GDP. Of course there is this whole question about the growing confidence in the Armenian economy and its currency which may not be reflected in any of the underlying economic trends. Some of the media in Yerevan have been making the case for government manipulation of the currency. It is hard to envision how a country of USD 4 billion GDP can manipulate for so long the value of the US currency. Do we know anything about the state of the foreign currency reserves at the CBA? Is there any outstanding research on the subject?
Also the value of the Dram may have serious economic implications. Are there any studies on the impact of the currency on the competitiveness of the Armenian economy (imports, exports, capital account)?

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