The World Bank in Armenia

Country Context

Armenia has experienced significant socio-political and economic shocks in recent years. These events have included the 2018 Velvet Revolution, the 2020 twin shocks of the COVID-19 pandemic and the conflict with Azerbaijan, and more than 100,000 ethnic Armenians fleeing into the territory of Armenia in 2023.

Despite these challenges, the economy has continued to demonstrate resilience, which can be attributed to prudent macroeconomic policies, including active inflation targeting, adherence to fiscal responsibility, and effective oversight of the financial sector.

In the last five years, Armenia has made substantial development gains. In March 2023, Armenia became an IDA donor, only nine years after graduating from being an IDA recipient itself and four years after attaining upper-middle income (MIC) country status. Armenia has been actively engaged in wide range of reforms, including in the justice sector, healthcare, and social protection systems. 

However, Armenia needs to unlock key constraints to achieve inclusive and sustainable growth. Operating in a turbulent and uncertain geo-political context, the country struggles with low investment rates, weak attraction of foreign direct investment, limited human capital, connectivity constraints both within Armenia and with other countries, and limited diversity in its export base and destinations. Armenia is also vulnerable to climate change. 

In addition, Armenia has recently grappled with the arrival of over 100,000 displaced Armenians from Nagorno-Karabakh in September 2023, posing a significant challenge for the nation. The immediate challenge involves addressing the urgent humanitarian needs of the displaced population, including providing shelter, food, healthcare, and psychological support. Additionally, the country faces substantial uncertainty arising from geopolitical circumstances. Balancing the immediate needs of the displaced population with long-term development amidst uncertainty is a considerable challenge.

Last Updated: Oct 11, 2023

Strategy

For 30 years, the World Bank Group has been a key partner for Armenia, with a sustained history of successful investments in various sectors of the country’s economy and an equally deep history of policy reform dialogue.

The current Country Partnership Framework (CPF) for FY19–23 supports the rebalancing of Armenia’s economy toward a new growth model focused on boosting exports, enhancing human capital, and sustainably managing natural resources and the environment. The new CPF for FY24-28 is under preparation and will be aligned with the Government Program for 2021–26 approved in August 2021.

The World Bank and International Finance Corporation (IFC) have a rich and diversified portfolio in Armenia and have financed projects across a range of sectors, including financial markets, manufacturing, agribusiness, services, and mining. The World Bank Group is also focused on sharing country knowledge and operational experience to leverage other development partners’ resources for effective public investment.

Key Engagement

On March 24, 2023 the World Bank’s Board approved a new EUR 92.3 million ($100 million equivalent) loan for the Armenia Green, Resilient and Inclusive Development Policy Operation (DPO).The development objective of this operation is to promote green, resilient, and inclusive development in Armenia, by (i) fostering climate change mitigation and adaptation and improving the regulatory framework for environmental management, (ii) enhancing equity and promoting human capital development, and (iii) strengthening the anti-corruption framework and justice sector efficiency. The objective of program is consistent with Armenia’s Government five-year Program (2021-2026).  The operation supports critical reforms to support Armenia’s human capital, including the adoption of the education strategy and improving the targeting of social assistance. 

Last Updated: Oct 09, 2023

Recent Economic Developments

In 2022, Armenia experienced impressive economic growth, emerging as the fastest-growing country in Eastern Europe and Central Asia. With a growth rate of 12.6%, this expansion was fueled by the influx of migrants, businesses, and increased capital following Russia's invasion of Ukraine. This positive momentum continued into the first half of 2023, with a double-digit GDP growth rate of 10.5% (YoY) in real terms. As in 2022, the services sector, particularly in IT, trade, and transportation, played a significant role in driving this growth.

On the demand side, private consumption and investment were the primary drivers of growth in the first half of 2023. Inflation dropped from 8.6% in 2022 to 3.1% during January-August 2023 which can be attributed to a slowdown in food and transport inflation.

Armenia's budget demonstrated a surplus of 1.4% of projected GDP in the first half of 2023, surpassing the planned deficit of 1 percent of GDP, mainly driven by a 6% overperformance in tax revenue collection. Armenia's government debt to GDP ratio thus continued to decline, reaching around 44% of projected annual GDP by end-July 2023.

In the first half of 2023, the growth of both exports and imports of goods remained robust, with a year-on-year increase of 73% in USD value, primarily due to the rerouting of exports to Russia. The deterioration in the trade balance was partly offset by a 70% YoY increase in the number of tourist arrivals during the same period. Nevertheless, the dram continued to appreciate during the first half of 2023.

Economic Outlook

Growth is expected to ease to 6.6 percent in 2023. Looking ahead to the medium-term, growth is projected to further moderate, averaging 4.3% in 2024-2025. Average inflation is expected to be close to the target of 4% in the medium term. 

The budget deficit is expected to reach 2.4% of GDP in 2023, which is lower than initially budgeted, thanks to tax revenue overperformance. The current account deficit is projected to widen in 2023, influenced by an increase in goods imports, a slowdown in exports from a high base in 2022, and a deterioration in income accounts. The current account deficit is expected to be mostly financed by foreign direct investment inflows.

Due to the continued strong economic growth experienced in 2022-2023, poverty is projected to decrease from 51.7% in 2021 to 37.6% in 2023, as measured by the upper middle-income country poverty line of USD 6.85/day (2017 PPP).  

However, these projections do not yet capture impacts related to the Nagorno-Karabakh crisis.

The outlook is subject to significant downside risks. Recent developments related to the influx of 100,000 ethnic Armenians and the related humanitarian crisis, tensions at the Armenian border, the potential reversal of money transfers inflows, and a possible slowdown in trading partner economies pose significant risks to the economic outlook. 

Last Updated: Oct 09, 2023