Poverty Racks Armenia as Economy Stabilizes

YEREVAN, Armenia -- A stable currency and falling inflation are Armenia's main economic gains after three years as an independent state, but thousands live below the poverty line and only a third of industrial capacity is being used.


The former Soviet republic is racked by severe energy shortages and troubled by long-standing ethnic conflict with neighboring Azerbaijan. Officials admit they made mistakes when they abandoned the Soviet-era ruble and introduced the dram.


"There was no such thing as a central bank in Armenia before," bank chairman Bagrat Asatryan said. "We had no knowledge and no reserves at all. We have been thrown into cold water and had to learn to swim or drown."


But the dram, introduced 18 months ago, is now holding its ground at about 405 to the dollar. Monthly inflation was just 3.7 percent in January, down from 82.5 percent one year ago.


"The dram is stable because the government and the central bank have managed to maintain control over the budget and curb expenditure. They have a responsible policy in printing money," said Vahram Nersesyants, head of the resident World Bank mission in Armenia.


"They achieved all that on their own, before international financial institutions came here with their aid and loans."


The dram was introduced in November 1993 at 14.7 to the dollar, but it came under pressure very early on.


"The dram crashed through the floor immediately after we introduced a floating rate. It slumped by 400 percent in one week," said Asatryan.


"The fighting in Karabakh was getting worse, and we had to prepare for winter, which is traditionally a hard time here."


Armenia and Azerbaijan have been in a state of virtual war for over six years, since the mainly-Armenian populated enclave of Nagorny Karabakh declared independence in 1988. Thousands of people have died since the conflict began, causing economic problems for both Armenia and Azerbaijan.


The conflict left Armenia without gas or electricity. Most firms closed although industrial output has recovered from all-time lows and was 6 percent above year-ago levels in January.


Asatryan said the dram stabilized after the central bank worked out a program which said the bank could not fund more than 25 percent of government expenditure.


A $24 million loan from the International Monetary Fund helped cement the new-found stability.


"The loan created central bank reserves. Previously we were getting enough money to exist, but not to build up reserves," Asatryan said. Central bank reserves now total $27 million and 312 kilograms of gold.


But the amount of dollars in circulation is about three times that of drams, with cash flooding in from Armenians' living and due to rising trade with Iran, where exporters prefer dollar cash deals.


Wages remain pitifully low, and monthly salaries averaged 5,200 drams ($11) in December, while the minimum wage was about 900 drams, enough to buy two dozen eggs. A loaf of bread costs 100 drams.


"Now we are simply poor," said a mathematician at Yerevan University. "Low inflation doesn't mean we live better. Inflation doesn't eat away at our savings, we simply don't have any."


"It normally takes time for living standards to rise after reforms start. It took time in Poland and the Czech Republic, but they live much better now. Armenia may recover in six or seven years," he said.