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)?