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.


nazarian said...

I think the BEA ( in the US calculates the spending by the tourists as part of the exports. I don't know how they do it, though.

Christian Garbis said...

I have been suspecting for some time now that the inflation of the dram has been artificial, meaning that its appreciation does not coincide with the actually currency markets, no to mention that the rise in the dram's worth could also be the result of importers putting pressure on the Central Bank to boost their own profits. Then again, I could not say for sure but I have been looking for objective opinions about this situation from people in the know such as yourself.

David said...

the us dollar was worth about 400 drams in 1994. today, the economy is some 20 times larger and is far more vibrant. so why are some of us shocked that the dollar is worth less than 400 drams today? Indeed, why shouldn't it be worth 300 or even 250 drams?

obviously importers benefit from the appreication in the dram. but this cannot be sustainable in the long run if it is brought about by gov't action. as the country's foreign exchange get depeleted, the dram will plummet. however, the real picture is much different. foreign exchange reserves are about USD one billion, and have been growing rapidly over the past few years the importers don't need to lobby for a higher exchange rate. remittances and the growing influx of diasporans and foreign visitors, as well as the growing confidence in the economy/currency, are the major contributors to the steady appreciation in the currency. it's all about demand and supply, and unless you curb the appetite for drams by visitors and locals as well, the upward march may very well continue.

I wouldn't read much into the analyses in the local media and blogs.

David said...

Data on tourism may be reflected in the service figures (under current account) reported in the External Economic Activity chapter of the Statistical Yearbook, 2006 ( But these strike me as perhaps too low. Again, it will be good to confirm.

andranik said...

I agree that Dram's appreciation started with the dedollarization policy in armenia.. and continues due to failure of proper fiscal and monetary policy to combat this rapid appreciation. See comments on

David said...

I think it is the other way around. The dedollarization or more correctly dramatization was brought about because of complaints that the Dram was appreciating and people were getting hurt because they were holding dollars and not Drams. Of course this may reinforce the strength of the currency, but the economic forces behind the rise of the Dram are very clear.

I read the comments on the link you have cited. While I empathize with the author, there is little of value in it. What is "the proper fiscal and monetary policy to combat this rapid appreciation"? Should the CBA intervene, and for how long? What is the cost of this intervention, with and without sterilization? Perhaps more in a future article.

Unfortunately, financial markets are not well developed in the country, and businesses can't easily hedge against exchange rate fluctuations. Finance education is critical, but unfortunately I don't see anyone investing in it.

In any event, the Dollar weakness is a global phenomenon, and not just local to Armenia. Experts believe that the dollar is overvalued and will further depreciate ( The advice is to hold Drams for the time being!