Estudios Económicos
Armenia

Armenia

Population 3.0 million
GDP 3,533 US$
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Synthesis

major macro economic indicators

  2015 2016 2017(f) 2018(f)
GDP growth (%) 3.2 0.2 7.5 3.8
Inflation (yearly average, %) 3.7 -1.4 1.0 3.5
Budget balance (% GDP) -4.8 -5.6 -4.7 -2.7
Current account balance (% GDP) -2.6 -2.3 -3.5 -5.0
Public debt (% GDP) 48.7 55.1 56.1 57.0

 

(f): forecast

STRENGTHS

  • Significant mining resources (molybdenum, copper, gold)
  • Significant support from international organisations and the diaspora
  • Comfortable foreign exchange reserves and relative flexibility of the dram exchange rate
  • Member of the Eurasian Economic Union (EAEU); partnership agreement with the European Union

WEAKNESSES

  • Geographically isolated, aggravated by a lack of infrastructure
  • Strong dependence on Russia (trade worth 20% of exports and 30% of imports, FDI, loans, transfers of migrants)
  • High dollarisation of the economy (60% of bank deposits)
  • Persistently high level of unemployment
  • 30% of the population below the poverty line
  • Conflict with Azerbaijan regarding Nagorno-Karabakh; precarious calm on the border with the Azeri enclave of Nakhichevan

RISK ASSESSMENT

Economic activity dependent on external factors

After a technical recession at the end of 2016, growth rebounded in 2017, driven by the recovery of activity in Russia, of mining activity in line with the rise in prices, and a positive trend in construction after several years of decline. Over the course of 2018, the pace of activity should be determined mainly by three key factors: the economic health of Russia, world metal prices, and the weakness of domestic growth drivers. Even modest growth in Russia should boost exports (almost one quarter of Armenian exports are destined for Russia), and would also encourage household consumption through expatriate transfers (more than 15% of GDP, 70% of which are from Russia), which are set to return to 2007 levels after their fall in 2016. Industrial production, which is highly dependent on the metals sector (50% of exports and almost 10% of GDP, half of which is for copper), should continue to benefit from the moderate rise in world prices, even if the low prices compared to their pre-2014 levels will likely continue to constrain investment. However, the start of production in the Amulsar gold mine, planned for 2018 but delayed due to popular opposition, could promote industrial activity beyond its current growth rate.

 

For domestic determining factors, the degraded business environment, poor infrastructure and the competitive deficit will continue to weigh negatively on potential growth. Moreover, unlike other countries in the region, Armenia maintains an unemployment rate close to the level reached during the 2008-09 crisis (18.5%), despite a period of high emigration in 2011-2013. Low labour market pressures are holding back underlying inflation, which has been negative since 2016. On the other hand, total inflation should increase, driven by rising food and energy.

 
Continued budget consolidation but widening current account deficit

The reduction of the budget deficit is expected to continue through the consolidation efforts undertaken since 2016 with the support of the IMF. The implementation of the new Tax Code in 2017 has already led to an increase in tax revenue, equivalent to around 0.7 percentage point of GDP, for an estimated potential of 2 percentage points of the GDP over the medium term. Moreover, the fight against tax evasion is one of the priorities of the new government. In addition, the revision of the fiscal rule adopted in 2008, submitted to the National Assembly in October 2017, should make it possible to make adjustments at a pace more adapted to the position of the economy in the cycle, and at the lowest cost for potential growth – a victim of cuts to infrastructure spending in recent years. Finally, the government will likely continue to introduce major structural reforms, both in terms of social protection and public enterprises: the pension reform adopted in 2014 should finally be implemented on a large scale, with the introduction of mandatory contribution for all employees in July 2018, while the reforms initiated in the utility sector (electricity and water) should reduce the losses associated with certain public enterprises.

 

The current account deficit is expected to widen slightly further in 2018 due to higher imports linked to sustained domestic demand. However, this deterioration should be limited by the increase in export earnings and the good performance of remittances from migrant workers and the diaspora. This deficit is financed by foreign direct investment as well as by government debt. Given its largely concessional nature, public external debt service (half of total external debt estimated at 90% of GDP) weighs little.

 

The "Velvet Revolution" is changing the political landscape

The considerable but peaceful street demonstrations in April and May 2018 forced President Serge Sarkissian to relinquish the role he had held since 2008. The population did not accept that Mr Sarkissian ran for the post of Prime Minister during the transition from a presidential regime to a parliamentary system (adopted by referendum at the end of 2015), thereby circumventing the limit of two presidential terms. This led to former journalist Nikol Pachinian, leader of the protest, becoming Prime Minister. He has formed a new government that brings together representatives of the opposition and qualified personalities.

 

On the 7th June 2018, Prime Minister Pachinian obtained a vote of confidence from parliament on his programme, which focuses on the fight against corruption and the underground economy, the separation of business from politics, the end of monopolies controlled by people close to former leader Sarkissian and his party, the Republican Party of Armenia (PRA), the holding of new legislative elections one year after the amendment of the electoral law with a move to proportional representation. This task was facilitated by the defections suffered by the PRA within its parliamentary representation, which caused it to lose the absolute majority it had held since the September 2017 elections. Prime Minister Pachinian has ensured Russia's benevolent neutrality – present in the country militarily (on the Turkish and Iranian borders) and economically (energy, rail transport, supply of military equipment) – by ensuring the intangibility of foreign policy. The new government will have to manage the impatience and expectation of change, especially of young people facing unemployment four times higher in urban than in rural areas and twice as high in their age group than for the rest of the population. Mr Pachinian will need their support to counter possible obstruction by former power-holders who retain a power of nuisance.

 

At the geopolitical level, the armed conflict with Azerbaijan persists over the self-proclaimed independent enclave of Nagorno-Karabakh (officially Azeri but predominantly populated by Armenians), and adjacent Azeri territories occupied by Armenian-backed independence fighters. The ceasefire at the border with the Azeri enclave of Nakhichevan is precarious. While the Russian military base at Gyumri seems to be preserving the rest of the Armenian territory from an overflow of conflict, security in the region depends above all on the balance maintained by Russia and, to a lesser extent  by Turkey and Iran..

 

Last update : July 2018

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