The World Bank in Armenia

Country Context

Despite several significant shocks in recent years, Armenia’s economy continues to perform well thanks to sound macroeconomic policies (active inflation targeting, adherence to prudent fiscal policy, and sound financial sector oversight). Armenia has also pursued significant reforms, particularly aimed at reducing corruption and increasing transparency. However, structural challenges persist, which results in weak productivity. These include low investment rates, weak attraction of FDI, limited human capital, an undiversified economic structure, and a narrow export base and export destinations. 

In 2022, Armenia absorbed a significant inflow of migrants, businesses, and capital following Russia’s invasion of Ukraine. These developments fueled domestic demand and led to an appreciation of the currency; inflows of money transfers increased reserve levels and reduced credit dollarization. However, these positive developments are subject to a risk of reversal, which raises uncertainty in the economic outlook. 

Inflation averaged 8.6 percent in 2022 compared to 7.2 percent in 2021. Fiscal performance was robust in 2022, with the budget deficit narrowing from 4.6 percent of GDP in 2021 to 2.2 percent in 2022. Driven by robust economic and fiscal performance and the appreciation of the AMD, government debt to GDP declined sharply from 60.3 percent in 2021 to 46.7 percent by end-2022. 

Last Updated: Apr 07, 2023

Strategy

For 30 years, the World Bank Group (WBG) 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 CPF is well 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 WBG 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 (US$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). 

Key prior actions and areas of reform under this operation include the reform of the public investment management framework to ensure systematic climate screening of public investments; approval of state subsidy program to support energy-efficient renovation of apartments and dwelling houses, amendments of the Environmental Impact Assessment (EIA) and Atmospheric Air Protection (AAP) laws; deployment of a new system for improved targeting of social assistance; modernization of the education curriculum, including for Science, Technology, Engineering, and Mathematics (STEM) and green education, strengthening the state aid evaluation system and amendments to the laws on whistleblowing system, public gift and mediation and arbitration to enable greater efficiency in the implementation of anti-corruption strategy and functioning of the justice system.

Last Updated: Apr 07, 2023

Recent Economic Developments

Economic performance in 2022 was unexpectedly strong, with real GDP growth reaching 12.6 percent. Robust 18 percent growth in services (mainly driven by the finance, IT, transport, and hospitality services) contributed to approximately three quarters of total growth. On the demand side, growth was driven largely by private consumption fueled by exceptionally high inflows of people and funds from Russia, and by a 10 percent increase in real wages. The unemployment rate fell to 11.6 percent in Q3 2022, down from 15.5 percent at end-2021, and this is expected to drive a substantial reduction in the UMIC poverty line (USD 6.85/day, 2017 PPP) from 51.7 percent in 2021 to 41.8 percent in 2022. 

Inflation eased from a peak of 10.3 percent (yoy) in mid-2022 to 8.1 percent (yoy) in January 2023. Fiscal performance was robust in 2022, mostly due to 21 percent higher tax collection. While current spending grew only by 4 percent, capital expenditures increased by 193 percent (year on year), accounting for 4.6 percent of GDP, the highest level in the last decade. The external balance improved significantly in 2022 with an unprecedented increase in exports of goods and services, partly driven by re-exports of goods to Russia. Receipts both from tourism-related services and money transfers tripled (year on year) in 2022, mostly due to a significant increase in inflows from Russia. International reserves were at a historically high level of $3.7 billion (4.4 months of import cover), at end-January 2023. As a result of high financial inflows in 2022, the average exchange rate against the USD appreciated by 14 percent in nominal terms. 

Economic Outlook

Growth is expected to ease to about 4.5 percent in 2023, due to the high base of 2022 and a slowdown among trading partners, with a pick-up in the medium- term supported by consumption and higher private investment. On the production side, services are expected to remain the main driver of growth, followed by industry. Inflation is forecast to decline gradually to its target level of 4 percent by 2025. In line with the Government’s medium-term expenditure framework, the fiscal deficit is expected to decrease from a planned 3.1 percent in 2023 to 2.5 percent in 2025. The current account deficit is forecast to deteriorate in 2023, after the sharp improvement in 2022, and to stabilize at around 3 percent of GDP over the medium-term. 

A reversal in inflows coupled with persistent inflation and further monetary tightening in advanced economies would put pressure on the currency, potentially resulting in balance sheet pressures and refinancing challenges. A possible extension of sanctions to Russia's main trade partners as well as geopolitical developments are another source of downside risks. On the upside, stronger inflows from Russia could lift growth above the forecast.

Last Updated: Apr 07, 2023