Monday, September 03, 2007

Is the trade deficit overstated?

Armenia's trade deficit is reported to widen over the past few years. For January through July of 2007, the volume of exports and imports stood at USD 631.1 and 1631.8 million, respectively, for a deficit of one billion.

Reported imports have consistently exceeded exports. This should not be surprising given the stage of development of the country and the heavy reliance on imported raw materials and intermediate goods. Reported exports typically include diamonds, metals and mining products, food, and alcoholic beverages.

Perhaps it should not be surprising that the country experiences trade deficits. However, this is not to say that the reported volume of exports and the concomitant trade deficit figures should be accepted at face value. In particular one needs to address how consumption by non-residents visiting the country is treated. Exports are generally defined as purchases of domestic goods by foreigners. It should not matter whether these goods are shipped outside the country or foreigners acquire them while visiting Armenia. With the increasing number of tourists visiting the country -- some 400,000 lately -- this treatment takes on an increasing importance. Think of the hotels, transportation, and the rest of the hospitality industry among other services!

If my thinking is correct, consumption by non-residents is treated as part of total private consumption of residents and is not reflected in the export figures. Of course, the computation of GDP is not affected regardless which treatment is applied. But if this treatment is correct, which I assume is the convention employed currently, then the trade deficit figures are overstated. If true, and besides getting the figures straightened out, this can have interesting implications. For instance, could this be another reason why the Dram continues its upward march? Is the appreciating Dram hurting the country's competitiveness, or is it just the outcome of this additional source of exports?

It will be good to hear your thoughts on this. Also, further confirmation of the treatment of purchases by foreigners would be appreciated. I understand the difficulty of quantifying the volume of purchases by non-residents.