RECENT ECONOMIC DEVELOPMENTS
Armenia’s economy performed better than expected in the first half of 2016, with 3 percent growth year to year, driven by increased exports of agri-products to Russia. Domestic demand remained weak, reflecting decreasing remittances, and monetary policy conditions remained soft, as deflationary trends continued. Fiscal policy is under pressure; revenue performance has been disappointing due to continued decline in VAT collection, driven by sluggish domestic demand and imports, as well as deflation, which led to 4 percent under-execution. In 2015, public debt amounted to 45 percent of GDP, but is highly concessional and denominated in foreign currency.
In the first half of 2016, the current account deficit remained below 3 percent of GDP, due to higher exports and subdued imports. The continued improvement of external accounts has eased pressures on the currency, and the Central Bank reduced forex interventions, maintaining official reserves at 5 months of import coverage.
The banking sector is undergoing a major recapitalization, and most banks have already met the new capital requirement, which comes into effect in January 2017. Dollarization rates for bank deposits and loans have remained broadly unchanged. The nonperforming loan ratio steadily increased from 10.6 percent in December 2014 to 17 percent in March 2016.
In contrast to 2010-2014, when poverty reduction was driven by a combination of strong income growth in agriculture, employment and wage growth in manufacturing and services, and sustained increases in remittances and public transfers, the 2014-2016 period has seen slowdown in the pace of poverty reduction. The combination of lower labor income and employment growth, resulting from slower economic growth and increased pressures in labor markets from returning migrants, and a marked decline in remittances, resulted in the poverty rate (measured at 2005 PPP US2.5/day) dropping by only 1 percentage point between 2014 and 2016 (from 26.3 to 25.2 percent).
With the expected recovery of the global economy and bottoming out of Russia’s recession, Armenia’s growth is expected to pick up over the medium term, reaching approximately 3 percent in 2016 and staying at similarly modest levels for several years. Growth will be hampered by structural weaknesses and slow recovery of domestic demand because of the diminishing role of remittances.
The lifting of sanctions against Iran creates a window of opportunity for Armenia. Access to new markets, including a transit corridor for goods and services between Iran and Russia/Europe, raise expectations for further growth. At the same time, access to additional energy resources from Iran may increase competition.
The relatively weak revenue collection, sluggish growth projection and increased demand for social spending will keep fiscal pressures elevated for the rest of 2016. The fiscal deficit is projected at 4.3 percent of GDP, in 2016. Over the medium term, however, the fiscal position is expected to improve to a sustainable level of about 2 percent of GDP, as an economic recovery boosts revenues. Public debt is expected to increase above 50 percent of GDP, in 2016. The tax code, which is expected to be approved by mid-October, 2016, will facilitate the medium-term fiscal consolidation through domestic revenue mobilization at about 3 percent of GDP over 2017-19. The Code aims at expanding the tax base, rationalizing tax rates, and closing major loopholes.
Modest but positive projected growth in agriculture and industry, combined with an increase in real wages in the public and private sectors and a recovery in remittances are likely to support continued poverty reduction in 2017-2018. Specifically, poverty is projected to decline to 23.8 percent in 2018, from 25.2 percent in 2016.
Last Updated: Oct 03, 2016