RECENT ECONOMIC DEVELOPMENTS
In 2017, GDP growth in Armenia outperformed expectations, recording the highest rate of growth in the past decade at 7.5% after a flat economic performance in 2016. Growth was driven mainly by a recovery in the external environment and supported by a strong rebound in domestic demand. Consumption benefited from higher incomes and recovery in remittances, particularly due to the moderate recovery in Russia. On the production side, growth in 2017 was driven by a significant expansion in trade (16%), industry (10%), and services (9%). The construction sector showed modest growth (3%) after continuous construction over the past several years, though the output remains below its 2008 pre-crisis level. The agriculture sector shrunk by 4% due to unfavorable weather conditions. The high pace of growth continued in the first two months of 2018, and economic activity grew by about 9% year-on-year.
The period of deflation came to an end in 2017 and inflation began rising, reaching an annual rate of 2.6% by year-end, within the Central Bank of Armenia (CBA) inflation target of 4% (+/- 1.5 percentage points). Recovering domestic demand, gradually rising commodity prices, and excise tax hikes resulted in higher prices for food, beverages, cigarettes, and transport. Inflation continued to rise in 2018, reaching 3.3% in February, mostly pushed up by a significant increase in petrol and diesel prices, as a result of the upward adjustment in excise tax rates that became effective with the new tax code in 2018. Another factor contributing to inflation in January 2018 was the increase in customs duties for some 40 types of imported products as a result of Armenia’s membership in the Eurasian Economic Union (EEU), which sets higher uniform tax rates for a long list of imported items from countries outside the union.
The fiscal deficit narrowed slightly from 5.5% of GDP in 2016 to 4.7% in 2017 due to a contraction in current expenditures as a percent of GDP, though the deficit remained wider than planned. Tax collections increased by 7.3%, driven by excises, customs duties, and environmental taxes. Current spending was lower than the previous year by 1%, while capital expenditures grew by 36%, mostly due to the acquisition of machinery and equipment. At the end of 2017, the fiscal rule outlined in the Public Debt Law was revised to help avoid pro-cyclicality. The amendments also introduced specific expenditure rules that become effective as public debt levels reach certain thresholds. Government debt at the end of 2017 reached AMD 3 trillion (about 55% of GDP).
The current account deficit continued to narrow for a third consecutive year and is estimated to have fallen to under 2% of GDP in 2017. The improvement in the current account was driven by a strong increase in export earnings (up 25% year-on-year), particularly from minerals and processed food products, robust growth in tourist arrivals, exports of other services, such as ICT, and an improvement in the income account. With the recovery of domestic demand, imports also grew significantly (28%) and partially offset the strong inflows. The import of machinery and capital goods comprised 15% of total imports in 2017. Exports by destination show that in 2017, the share of exports to Russia and the European Union increased compared to the same period in 2016, while the share of exports to Canada, Iran, and Iraq fell.
The banking sector remains well capitalized and liquid. The capital adequacy ratio was 18.6% on average for the banking system at end-2017, well above the minimum requirement of 12%. At the end of 2017, the non-performing loan ratio stood at 5.5%, its lowest level since the 2014 Russian crisis. The stock of credits and deposits grew by 10 and 9%, respectively. The dram lending and deposit rates decreased by 350 and 260 basis points over the course of 2017. Dollarization ratios for bank deposits and loans declined slightly but remained high at around 60%.
The economic recovery in 2017 is expected to have supported a further reduction in poverty rates, which have been on a declining trend since the global economic crisis. The absolute poverty rate (measured at the 2011 purchasing power parity [PPP]-adjusted US$3.2/day poverty line) is estimated to have fallen from 14.1% in 2016 to 11.6% in 2017.
The economic outlook remains positive. The strong economic performance in 2017 suggests a window of opportunity to tackle and accelerate the challenging reforms to make the growth inclusive and sustainable in the medium term. On the back of sustained favorable external economic conditions and subject to robust structural reforms, medium-term growth is forecast to be around the potential growth rate (4%), based on private sector, export-led activity; the agribusiness, ICT, and tourism sectors in particular are expected to deliver solid growth as efforts to increase competitiveness and connectivity start to deliver results. Inflation is expected to edge up in the near term, particularly due to higher customs duties and excises on fuels starting in 2018 envisaged in the new Tax Code, though it is projected to remain within the CBA inflation target range.
Implementation of the upgraded fiscal rule (approved in December 2017) will result in stronger discipline for current spending and provide some room to increase growth-friendly capital expenditures, while also stabilizing and eventually lowering the public debt.
Macro Poverty Outlook (PDF in Armenian)
Last Updated: Apr 17, 2018