RECENT ECONOMIC DEVELOPMENTS
Growth slowed considerably to 0.2% in 2016 from 3% in 2015, due to the protracted slump in global metal prices, falling remittances, and an unexpected cabinet reshuffle, all of which affected market sentiment. A 20% expansion in the non-resource tradable sectors failed to offset a double-digit contraction in construction and a substantial decline in agricultural output. Domestic demand weakened significantly. However, in January 2017, the economy was showing some signs of renewed dynamism, as the activity index grew by 6.5% year-on-year.
The fiscal deficit widened to 5.4% of GDP in 2016 from 4.8% in 2015, driven by expenditure overruns and weak revenue collection. The higher deficit brought public debt to 55.4% of GDP at end-2016, triggering the fiscal rule and consolidation at the beginning of 2017. Tax reforms have strengthened revenue performance; changes to the excise tax regime in January 2017 have more than doubled excise revenues, although the new Tax Code (approved in 2016) will fully take effect only in 2018.
In view of the weak economic activity, the central bank cut the policy rate gradually from over 10% in January 2016 to 6% in February 2017. However, the high levels of dollarization (63% of total loans and 66% of deposits) limit the effectiveness of the monetary stimulus. Weak domestic demand, a reduction in utility tariffs, a continued decline in import prices, and the appreciation of the dram caused a cumulative deflation of 1.4% between December 2015 and December 2016.
The financial sector remained stable throughout 2016. Enhanced bank capitalization standards (in line with Basel III) have been met by 17 banks (93% of total banking assets). Total credit to the private sector grew by 15% by December 2016 (y-o-y), while lending in domestic currency rose by 24%. However, the ratio of nonperforming loans (NPLs) rose to 10%. The current account deficit remained narrow at an estimated 2.4% of GDP in 2016, supported by a 20% increase in exports coupled with anemic import demand. Remittances, after falling by 35% in 2015, dropped a further 10% in 2016. Declining wage and remittance income increased the poverty rate from 22.6% in 2015 to 23.9% in 2016.
Growth is projected to accelerate to 2.7% in 2017, reflecting the sustained expansion of the tradable sectors and a modest recovery in domestic consumption. Medium-term growth is projected to average 3% a year, given uncertainties in the external environment. The Government’s planned expenditure restraint and full implementation of the Tax Code are expected to keep the fiscal deficit below 3% of GDP over the medium term.
Policy changes envisaged in the Tax Code would boost revenues by 2 percentage points of GDP by 2021. Future poverty reduction will hinge on the recovery of the domestic economy, labor market dynamics, and remittance inflows. Low growth rates, unfavorable external conditions, and limited fiscal space could slow the pace of poverty reduction; as a result, the poverty rate is projected to fall from 23.8% in 2017 to 22.2% in 2019.
Armenia’s medium-term outlook remains sensitive to internal and external factors, which entail both upside and downside risks. Growth prospects depend on the Government’s ability to speed up structural reform, challenged by parliamentary and presidential elections in April 2017 and May 2018. Domestic political pressures could compound the negative impact of external shocks.
Upside risks include a new Framework Agreement with the European Union (EU) and an increase in trade with Iran. The recent mandatory increase in capital-adequacy ratios is strengthening the financial sector, but the rise of NPLs poses new challenges. Specifically, poverty is projected to decline to 23.8% in 2018 from 25.2% in 2016.
Last Updated: Apr 20, 2017