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IMF Warns Yerevan Over Dram Support

The International Monetary Fund (IMF) warned on Thursday that it could freeze further financial assistance to Armenia if the authorities in Yerevan continue to heavily intervene in the local financial market to prop up the national currency, the dram.

The Central Bank of Armenia (CBA) admitted intensifying its monetary interventions this month but insisted that the dram’s exchange rate remains market-based.

“Whereas we only once intervened in the market in October, we have done so five or six times this month,” Vache Gabrielian, the CBA’s deputy governor, told RFE/RL. “The volumes of our interventions have not been terribly high. We consider that a normal practice.”

The dram has slowly depreciated since the end of this summer after months of exchange rate stability fuelled by multimillion-dollar loans provided by the IMF and other foreign sources. It lost almost 3 percent and 6 percent of its nominal value against the U.S. dollar and the euro respectively in September, falling below a minimum target rate projected by the authorities in March.

The dram is currently trading at 388 per dollar, down by 0.7 percent from the late September level. The Central Bank of Armenia (CBA) appears to have slowed down its weakening with substantial dollar injections in the currency market.

“We have an actual target that we believe by the end of the year the Central Bank needs to have a certain level of [hard currency] reserves,” said Nienke Oomes, the IMF’s resident representative in Yerevan. “If they intervene too much, if they sell too much, they will miss this target and they will certainly not get the next tranche of the money.”

“So far they are still on track to meet the target. But if they continue like in the last two weeks, they may be in trouble,” she warned at a news conference.

Oomes referred to the next installments of a $830 million “stand-by” loan approved by the IMF earlier this year. The launch of the 28-month lending program followed a nearly 20 percent devaluation of the dram engineered by the Armenian authorities in early March. The authorities had controversially spent an estimated $700 million of the country’s external reserves on keeping the dram’s value virtually unchanged in previous months.

The IMF has already disbursed three tranches of the loan worth $479 million in total. The money has been used for replenishing Armenia’s hard currency assets and financing its widening state budget deficit.

The CBA’s Gabrielian insisted later on Wednesday that Oomes’s remarks were not a threat to suspend IMF funding to Yerevan and that she only noted that “we have been in the market a bit more often than last month.” “She didn’t say that if Armenia continues to behave in the same fashion it will be stripped of IMF loans,” he claimed.

“I’ve spoken to Ms. Oomes and she stressed that the IMF has never been against frequent interventions in small markets but believes that if they become too frequent and result in artificial behavior that can create problems in terms of the understanding of the Central Bank policy. So the problem is not with the IMF,” said Gabrielian.

The CBA vice-governor further asserted that Armenia currently has “hundreds of millions of dollars” in excess of the minimum reserve requirement mentioned by the IMF official. “We continue to insist that there will be no drastic exchange rate fluctuations in the coming months, but are saying at the same time that because the exchange rate is floating it can go both up and down,” he said. “The bottom line is that it won’t change drastically.”

The CBA is believed to provide a large part of dollars and euros sold in inter-bank currency trading as well as at Yerevan’s NASDAQ OMX stock exchange. The latter has reported a daily turnover averaging between $4 million and $5 million this month. It is lower than the trading volume of late 2008 and early 2009 but higher than that of the pre-crisis period.