RECENT ECONOMIC DEVELOPMENTS
Economic growth continued to be strong in the first half of 2019, expanding by 6.8 percent. Growth was supported mainly by private consumption that was fueled by rising real wages (up 3.5 percent) and consumer lending (up 40 percent), in contrast to 2018 when a substantial buildup of inventories (investment) accompanied growth.
On the production side, the main driver was the 10 percent growth in services. In the industry sector, manufacturing had the highest growth in the first half of 2019 (7 percent), with mining growth emerging in the second quarter. Agricultural output fell by 7 percent year-on-year (y-o-y) in the first half of the year, extending a three-year contraction in sectoral output. Construction growth remained modest at 4 percent y-o-y.
The external balance deteriorated in the first quarter of 2019 due to a larger trade deficit and lower remittances. The export of goods has started to improve since the second quarter of the year, as the base effect of the closure of a large mine (Teghut) in early 2018 dissipated.
The fiscal accounts over-performed in the first half of 2019, recording a surplus, in stark contrast to the budgeted deficit for this period. The surplus was due mainly to the under-execution of expenditure (in particular, capital expenditures) but also a 10 percent over-performance of tax revenue
The baseline scenario for Armenia’s growth envisages a continuation of recent trends, with GDP expected to expand by 5.5 percent in 2019. Private consumption will remain strong, with an additional stimulus from higher government spending that offsets the weakening external environment.
Continued structural reforms and sound macroeconomic policy will keep inflation low and attract investment, supporting healthy GDP growth rates of over 5 percent for the medium term.
Due to the over-performance of tax collections, the budget deficit is expected to stay below 0.5 percent of GDP in 2019 and will accelerate to around 2 percent in the medium term. Strong commitment to fiscal consolidation will contribute to a reduction of the debt-to-GDP ratio to around 50 percent in 2021. Supported by the higher export of goods and tourism, the external balance will improve.
As the economy continues to grow and with sustained social transfers, poverty will continue its decline, with the poverty rate, measured at the lower-middle-income poverty line of US$3.2/day (2011 PPP), reaching roughly 7 percent by 2021.
The risks related to the global growth outlook remain firmly in the downside, including the possibility of escalating trade tensions as well as rising debt and its subsequent risk to emerging markets.
Domestically, the concerted effort to restructure the economy toward a sustainable export-led growth path remains a challenge that will require an efficient government, better connectivity, a more reliable infrastructure, and higher investment in human capital.
The Government’s strong commitment to reducing corruption and improving the business environment, along with prudent macro-fiscal policies, provides an opportunity for a vibrant response from the private sector.
Last Updated: Oct 18, 2019