economic overview

Macroeconomic performance

After several years of double-digit economic growth, the global financial crisis hit Armenia in the final quarter of 2008, moderating real GDP growth to 6.8 per cent for 2008 as a whole. Since then, a significant reduction in external demand and dwindling remittances have further constrained growth, with GDP contracting 16.3 per cent (year on year) in the first half of 2009. The non-tradeable sector – particularly services (diamond processing), retail trade and construction – which has been the main driver of growth, was seriously affected by the crisis, with output declining by over 40 per cent in the first five months of 2009. At the same time, the tradeable sector, particularly manufacturing and agriculture, continues to lag behind in terms of productivity levels.

While trade with Iran has intensified in 2009, the continuing closure of the Turkish and Azerbaijani borders remains a major impediment to Armenian trade flows. Falling prices for base metals over the past year have put additional pressure on Armenia’s external position. The move towards a flexible exchange rate and the subsequent 22 per cent depreciation in relation to the US dollar by the end of March have boosted the competitiveness of Armenia’s exporters.

Despite the depreciation, inflation amounted to only 3.5 per cent in August compared with a year earlier and is expected to remain within the central bank’s inflation target of 4 per cent (+/- 1.5 per cent) for 2009. Although prices for a number of other imported commodities have fallen, limited competition among commodity importers has meant that only part of these price declines has been passed on to consumers.

Slower growth has resulted in a substantial decline in tax revenues to the government since the beginning of 2009. As a result, the government’s expenditure plans have come under pressure and, with the exception of certain categories of social spending, have been either scaled back or postponed. The government was forced to raise the legally allowed maximum budget deficit from 5.0 to 7.5 per cent of GDP for 2009. However, low debt levels and concessional financing terms are helping the country to achieve sustainable medium-term fiscal and external debt.

Outlook and risks

Armenia’s economy is expected to contract by about 12 per cent in 2009 in the wake of the global economic downturn. However, it is expected to record positive growth in 2010, partly as a result of the significant concessional finance packages from the International Monetary Fund (IMF), the World Bank and Russia. The main risk stems from the possibility of an even more dramatic decline in remittances than already envisaged, combined with a more severe decline in base metal prices and a significant slow-down of FDI. Further improvements in relations with Turkey could, on the other hand, make a significant positive contribution to Armenia’s trade balance. Continuing the ambitious pension reform agenda and safeguarding key social expenditure will be the main fiscal challenges in 2010.