The Banking System's Starry Days: 43.5% Growth Recorded Over 8 Months

The newspaper "Hraparak" reports that during a joint meeting of the Permanent Committees of the National Assembly on the discussion of the draft law on the state budget for 2023, the President of the Central Bank, Martin Galstyan, announced forecasts indicating a predicted economic growth of 12.9% for this year and 4.5% for the next year. We discussed with economist Suren Parsiay regarding the current monetary policy of the Central Bank and its impact on the economy.

Suren Parsiay believes that under current conditions, the Central Bank of Armenia needs to change its monetary policy and separate certain functions from the Central Bank. “For years, the Central Bank pursued a strictly conservative policy, trying to curb the risks associated with banks as much as possible. In general, the Central Bank encourages investment in less risky assets. In fact, the banking system has invested about 35-40% of its total assets in government bonds, which are low-risk assets. There are banks that have invested 50% of their assets in government bonds, which are low-risk but ensure a relatively high return of 10-11%. This is happening at a time when there is a severe need to finance the real sector of the economy. Banks are now hesitant to fund businesses, particularly those related to manufacturing and agriculture. In addition, in recent years, banks have focused on the mortgage market, financing the offer to builders while also financing the demand, meaning financing people to buy homes with mortgage loans. As a result, the mortgage index has increased in recent years, making the banking system considerably riskier,” he noted in an interview with "Hraparak", emphasizing that despite the fact that banks are still profiting from this, risks may exist.

“Let me remind you that the financial crisis of 2008-2009 began precisely in the mortgage market. When this market collapsed, people stopped paying their mortgage loans, and several large banks and financial corporations went bankrupt. One of the characteristics of our banking system is that funds are primarily invested in government bonds and the mortgage market, and the Central Bank essentially encourages this. Moreover, the Central Bank also lobbies for the banking system. For example, as a result of the Central Bank's policy, many exchange points in Armenia ceased their operations, transferring that entire turnover to the banking system. In the first nine months of this year, the banking sector had a threefold increase in income, which is attributed to revenue from exchanges. Since a large number of exchange points simply stopped functioning, the banking system has strengthened its positions in the currency exchange market,” Suren Parsiay emphasized.

According to the economist, in our economic system, banks have always had a privileged status. “They have often benefited from various tax privileges, and their risks have been lower over the years through the Central Bank. For example, when metal prices increased last year, the government introduced a draft law imposing export duties on copper and molybdenum, and additional taxes are also being collected this year. While the banking system's profit has increased threefold this year, there is no new tax burden. This also indicates that the profitability of the banking system is considered normal and encouraged. It is noteworthy that their profits have tripled while their tax contributions have increased by only 17%,” he pointed out.

In addition, the Central Bank aims to conduct a policy of curbing inflation within the framework of its monetary policy. An inflation target has been set at 4%. However, in 2019 and 2020, inflation has been between 2-3%, which has been favorable for the banking system. The primary beneficiary of the Central Bank's inflation suppression is the banking system because loans provided by banks must become more expensive in conditions of high inflation, and when the inflation level is high, their profit's purchasing power decreases,” he emphasized.

Suren Parsiay stated that currently, Armenian banks have quite high profitability. “The high profitability recorded this year will also contribute to further strengthening their financial stability and increasing their equity capital. We can say that this year marks the starry days for the banking system: just based on the assessment of the first eight months of this year, the banking system recorded a 43.5% growth compared to the previous year. No other sector of the Armenian economy, except perhaps public catering, has recorded such growth,” he said, adding that the Central Bank must now pursue a policy to encourage the real sector. “At this time, it doesn’t matter to the Central Bank whether the bank is granting loans towards mortgages or to businesses or consumer loans. The Central Bank applies the same criteria in all cases. Revisions are needed here. The Central Bank should encourage banks to finance the business sector. Higher reserve amounts should be expected for consumer loans and mortgages than, for example, for business loans, which will allow for more business loans to be granted. One of the most important tasks for the Central Bank is to ensure that monetary policy is clear and effective. For the second year now, the Central Bank has announced a target inflation rate of 4%, but it is constantly being revised, and inflation exceeds the anticipated target. For instance, last year inflation was 7.7%, and this year the Central Bank forecasts that we will close the year at 8.5%, but that is also not going to happen; as of September, inflation had already reached 8.6%, and in September, compared to September of the previous year, inflation was recorded at 9.9%. Thus, it is evident that the Central Bank has failed in its monetary policy,” he pointed out, stressing that this issue is more a matter of governance than of legislation. “The Council of the Central Bank must operate effectively. I also consider it very important that the Central Bank should take steps towards enhancing financial literacy, as the current level is not sufficient. The Central Bank should exit from the realm of securities regulation. Currently, it is the Central Bank that controls this, which is incorrect. As a result, the banking system profits, while the securities market is degrading, stagnating, and no new organizations are emerging. The functions of the Central Bank should also be separated in this regard, which would solve the issue of financial system stability. The Central Bank's policy should be harmonious with the government’s policy. If the target inflation rate needs to be raised, it should be raised. It should not be declared that they will not deviate from the target level. All these lead to an emerging problem for the government. For example, at this stage, many central banks of different countries are revising their monetary policies, whereas our Central Bank has a petrified mindset, following more the directives of international institutions than the real processes of the economy,” he concluded.

For more details, refer to today’s issue of the newspaper.