9% Inflation in Armenia, Central Bank Reports

As of May, inflation in Armenia has reached 9%. According to Central Bank President Martin Galstyan, barring any extraordinary developments, inflation is expected to be lower by the end of the year. He made this statement during a session of the National Assembly's Standing Committee on Financial and Budgetary Affairs, responding to questions from lawmakers.

“We have a 9% inflation rate in May, which is an exceedingly high figure considering Armenia's economy and our historical developments. Of course, the inflation rates in neighboring or partner countries are much higher than in Armenia, but we must understand that a 9% inflation rate, which represents a 9% increase in the consumer price index, implies that the prices of essential goods have increased significantly more,” Galstyan stated.

Addressing the developments observed in the exchange rate market, he emphasized that the Central Bank has no influence over the formation of the exchange rate. The Central Bank could only have an impact if it sold foreign currency; however, during the year, the bank has done the opposite, purchasing about $100 million worth of foreign currency from the market. “We have intervened only when we have noticed certain distortions in market mechanisms,” Galstyan noted.

The exchange rate is formed based on free supply and demand in the market. Galstyan is confident that if the Central Bank goes against its mandate and enters the market to artificially devalue the dram, Armenia would face another wave of inflation. Regarding potential solutions, the Central Bank president suggests that international best practices indicate that implementing sectoral policies is crucial in such situations.

“There are sectors that are either adversely affected by the current situation or have experienced a decline in competitiveness; these sectors need to be supported. This could involve certain government policies,” he said, mentioning the possibility of additional subsidies and certain tax reductions.

Galstyan pointed out that inflation brings additional tax revenues, and through the redistribution of these new revenues, a response to the created issue may be warranted. Addressing the question of why prices are not adjusting despite the appreciation of the currency, the Central Bank president explained that two factors are at play. At this stage, since the exchange rate has appreciated, international prices for goods have sharply increased, exemplified by the historical peaks in grain prices influenced by the Russo-Ukrainian war. There is a significant rise in international prices for essential goods. The second issue is that exporters are facing transportation problems.

“For them, the exchange rate is not the primary issue; rather, it is the capacity of the Lars crossing or the overall increase in transportation costs,” Galstyan stated. He assessed that geopolitical events indicate that the inflationary environment is likely to continue in the coming months.

“However, according to our forecasts, the current 9% inflation may show certain upward trends in the next few months, yet, unless any extraordinary events occur, we will have a lower inflation rate by the end of the year compared to the current rate,” he said. He also announced that the Central Bank will hold a council meeting on June 14.