Recent Economic Developments
Armenia’s economic contraction of 5.7 percent in the first half of 2020 was driven by a 9 and 31 percent sharp contraction of private consumption and investment, respectively, which was only partially offset by higher government spending and import compression.
Among the sectors, construction and services were most affected, with the financial and information and communications technology sectors remaining more resilient due to their greater reliance on digital technologies. Agricultural output grew by 1.8 percent y-o-y in the first half of 2020, and a low base in 2019 pushed growth in mining to 21.7 percent y-o-y.
In the first seven months of 2020, current budget spending increased by 19 percent y-o-y, while capital spending was up by 62 percent from a low base in 2019. Revenues fell by 6 percent y-o-y, resulting in a deficit of around 1.7 percent of projected annual GDP in the first half of the year.
The smaller trade deficit, due to a larger contraction in imports than exports, partly offset the decline in services (particularly tourism) and income accounts (remittances). Despite slowing inflows of foreign direct investment, support from international financial institutions financed the deficit and kept reserves at around US$2.7 billion at the end of August.
The Armenian dram, after depreciating by 5.5 percent in March following the initial COVID-19-related shock, recovered in April and has remained largely stable since.
The financial sector entered the pandemic with strong capital and liquidity levels. As a result, banks have been able to offer moratoria on debt servicing to borrowers while continuing to extend credit. Credits and deposits expanded by 17 and 11 percent y-o-y, respectively, as of end-July.
The economy is projected to contract by 6.3 percent in 2020 before rebounding by 4.6 percent in 2021. Output is projected to recover to pre-COVID levels only in 2022. However, the risks are firmly on the downside, particularly from a potential pickup in COVID-19 infections in the upcoming winter and from the lack of or delay in the availability of vaccines in 2021. In this downside growth scenario, the economy will contract further in 2020 with a slower rebound in 2021, which will postpone the recovery of output to pre-COVID levels to 2023.
Inflation will remain muted and converge on the Central Bank of Armenia’s 4 percent target gradually over the medium term.
The rise in the budget deficit to 5.4 percent of GDP, coupled with the decline in GDP, is expected to push public debt up by 10 percentage points to 63 percent of GDP in 2020. The Government’s 2021–2023 Medium-Term Expenditure Framework envisages a strong fiscal consolidation that brings the deficit below 2 percent of GDP by 2023. This corresponds to a gradual decline in the debt-to-GDP ratio, consistent with the fiscal rule.
The economic contraction in 2020 is expected to cause a sharp increase in unemployment. The upper-middle-income poverty rate could increase by 4.8 percentage points.
Last Updated: Oct 12, 2020