RECENT ECONOMIC DEVELOPMENTS
After stagnating in 2016 with only 0.2% growth, the Armenian economy showed renewed strength during the first half of 2017, as real GDP grew by 6% above the same period in 2016. Growth was driven by industry, services, and retail trade, which were 12, 11, and 13% above their 2016 levels, respectively. Agriculture remained weak while construction continued its decline, coming in 10% below 2016 levels.
Growth was supported by exports of extractives (copper, molybdenum), processed food, beverages, jewelry, polished diamonds, tobacco, and textile products, which together contributed to a 21% growth in exports, year on year (y-o-y). Terms of trade remained stable, as export prices increased by only 2.4% over 2016. Although exports experienced a strong boost of over 20% (y-o-y), net exports put a brake on growth, as imports spiked on the back of rising recovering investment and consumption.
Having registered high fiscal deficits of 4.5 and 6.0% of GDP in 2015 and 2016, respectively, the authorities initiated fiscal consolidation through the 2017 state budget with a deficit target of only 2.7%. The fiscal situation was stable during the first half of 2017, supported by improved tax collection and more disciplined public spending, which has helped contain the budget deficit at a lower-than-projected level.
With the public debt-to-GDP ratio still close to 60% (well above the mandated 50% threshold), the Government will need to maintain tight fiscal policy for the next few years and comply with the agreed fiscal rule of limiting the deficit to 3% of the average GDP of the previous three years.
The banking sector began the year in a stronger capital position and in compliance with the new capital requirements set by the Central Bank (in line with Basel III). The average capital adequacy ratio for Armenia’s 17 banks was 20%, well above the minimum of 12%. Dollarization rates for bank deposits and loans declined from over 70 and 66% at the beginning of 2016 to about 63 and 62% by June 2017, respectively. Banking sector lending to the economy, almost stagnant in 2015, grew by 15% in 2016 and expanded a further 13% during the first half of 2017.
After registering a historically low deficit of 2.4% of GDP in 2016, the current account deficit widened in the first half of 2017 as imports grew faster than exports. The 26% (y-o-y) expansion in imports was partly the result of recent improvements in the transparency of customs administration.
Trade data show greater penetration into Asian and Middle Eastern markets (a roughly 30% increase, y-o-y) and the Commonwealth of Independent States (CIS)/Russia (22%), followed by the European Union (EU) (18%). After a cumulative 35% decline during 2015–16, remittances have grown 11% compared to the first half of 2016,while private transfers from Russia grew at a much faster 24%.
Growth and poverty reduction prospects for the remainder of 2017 and over the medium term are positive but subject to significant uncertainties, as risks on both external and domestic political fronts remain high. The presidential elections in April 2018 (and formation of a new government), new western sanctions on Russia, and the still unclear situation with Iran justify a cautious forecast of 4.5% growth in 2017 overall, with average growth over 2018–19 projected to be about 4%.
The most recent period shows strong growth in the industry and service sectors but only minor improvements in agricultural output and a continued decline in construction. These growth trends reflect a rebalancing of the structure of the economy that may widen disparities between the capital city, secondary towns, and rural areas if labor mobility remains low. As the structural transformation of the economy continues, secondary towns will play an important role in creating job opportunities for people leaving the agriculture sector.
Macro Poverty Outlook (PDF in Armenian)
Last Updated: Oct 06, 2017