Armenia’s Central Bank may raise its refinancing rate further if the government fails to take steps to curb inflationary pressures, former Finance Minister Vardan Aramyan told NEWS.am. He said that both global developments and domestic government policies were contributing to inflation, and that a more expansionary fiscal policy could prompt a tougher response from the Central Bank.

Aramyan said the Central Bank typically takes a forward-looking approach in setting monetary policy and must act now if it sees risks of accelerating inflation. He noted that he had expected the regulator to begin raising the refinancing rate much earlier, as the factors contributing to inflationary pressures were already evident.

The former minister explained that inflation was on the rise globally, with these trends being transmitted to Armenia’s economy through higher food prices on international markets. He also pointed out that governments in various countries, including the United States and European nations, were increasing public spending amid military conflicts, putting additional pressure on the global economy and prices.

Aramyan noted that there were also domestic factors driving up prices in Armenia. “First and foremost, this is related to the government’s policies. This is an indisputable fact. The government has recently made several decisions that contribute to inflation, including those concerning universal health insurance and pension increases,” he said.

The former minister also recalled that salaries for public-sector employees and senior government officials had recently been raised, which he said was another inflationary factor. When wage increases are driven not by higher labor productivity but by policy decisions, he explained, they trigger a chain reaction, pushing up wages in other sectors as well.

According to Aramyan, a significant share of public-sector salaries is already higher than in the private sector. This, he said, would prompt employees earning less to demand higher pay. He stressed that public-sector wages are lower than private-sector wages in countries around the world, not only because of limited resources but also because public employees enjoy greater job security, have more opportunities to exert influence, and benefit from a certain reputational advantage.

“Consequently, public-sector pay increases will drive up wages in the private sector as well, which is also an inflationary phenomenon. Against this backdrop, the Central Bank’s policy is justified. I have previously said that the government is not taking sufficiently tough, coordinated measures that would help the Central Bank bring inflation down quickly. The more expansionary the government’s fiscal policy, the tougher the Central Bank’s response will be in terms of raising the refinancing rate,” the expert said.

He explained that any further increase in the refinancing rate would depend on the government’s actions. Aramyan noted that the financial sector was generating substantial profits and urged the government to take this into account when shaping tax policy, while proceeding cautiously.

“Furthermore, tax policy in non-export sectors needs to be adjusted. The government should also pursue a sterilization policy and help the Central Bank prevent the dram from appreciating sharply amid large inflows of foreign currency. Otherwise, if the government does not support the Central Bank, the latter may allow the dram to appreciate in order to achieve its ultimate objective,” the former finance minister said.

Aramyan also noted that consumer loans accounted for the largest share of Armenia’s total loan portfolio, describing this as an unprecedented situation.

“When government representatives say that the population’s standard of living has improved significantly, I disagree, judging by this indicator. The financial situation of the overwhelming majority of the country’s population has deteriorated, and their standard of living has declined amid the growth in consumer lending,” he said.

At the same time, he did not rule out the possibility that commercial banks might take steps to prevent the Central Bank’s decision to raise the refinancing rate from affecting interest rates on consumer loans. Aramyan said he believed commercial banks understood that the overwhelming majority of consumer loans were problematic. Since 2018, he noted, the volume of consumer lending had increased approximately eightfold, while average wages had risen by 30%.

On November 3, the Central Bank of Armenia’s Board raised the refinancing rate by 0.25 percentage points to 7%.