EBRD: Armenia s economy has sustained moderate positive growth despite external economic challenges

ArmInfo. The economy has sustained moderate positive growth despite external economic challenges, according to Transition Report for 2015-16, Rebalancing Finance released by the European Bank for Reconstruction and

Development (EBRD) on November 10, 2015.  According to the report, GDP growth in 2014 and early 2015 was maintained at close to the 2013 level despite spillovers from the recession in Russia, slow growth in Europe, the adjustment of regional currencies, the decline in remittances and lower copper prices.  Armenia progressed with reforms although challenges remain. Macroeconomic management has been sound and policy mistakes have been avoided; the pace of diversification of the economic base has been slower despite improvements in the business climate.

The key priorities for 2016 are as follows:

Further action is needed to improve the business environment.  Structural reforms, including a level playing field to foster competitiveness and diversification, streamlined regulations and enhanced cross-border regional connectivity, are critical for increasing potential growth rates.

Continued responsible macroeconomic policies are needed to enhance the economy's resilience to external shocks. Additional measures are needed to preserve economic stability and attract investments including: an improved tax administration, combined with continued prudent monetary, financial sector and public debt management policies.

Improved access to finance, local capital market development and de-dollarisation continue to be important priorities. The local capital market development momentum needs to be sustained to broaden access to finance and contain adverse balance sheet effects from currency movements.

The authors of the reports say Armenia's real GDP is estimated to have grown by 3.5 per cent in 2014 after 3.3 per cent growth in 2013.  Growth in 2014 was driven by household and government consumption (year-on-year real growth of 1.1 per cent) and an improvement in net exports. In contrast, gross capital formation is estimated to have decreased by 2.6 per cent in real terms in 2014. The mining and quarrying and construction sectors experienced negative real growth in 2014, but real growth in agriculture, manufacturing and trade was positive. In the first half of 2015, Armenia's economy is estimated to have grown by 4.0 per cent in real terms, mainly driven by the positive contribution of agriculture (15.5 per cent growth in the first half of 2015) and mining (46.0 per cent growth in the first half of 2015). Year-on-year inflation has increased slightly from 3.0 per cent in 2014 to 5.5 per cent year-on-year in June 2015, but moderated again to 3.6 per cent year-on-year in August 2015. The central bank refinancing rate increased several times from 6.75 per cent in August 2014 to reach 10.50 per cent from mid-February until 11 August 2015, when the rate was cut to 10.25 per cent.

The exchange rate stabilised in 2015 amid tight monetary conditions, after significant depreciation pressure at the end of 2014. The Armenian dram depreciated against the US dollar by approximately 20 per cent in one month between mid-November and mid-December 2014, before regaining almost half of the lost ground by the end of the year. In the first eight months of 2015, the dram-US dollar exchange rate was predominantly stable on the back of large central bank interventions early in the year and, more recently, favourable net foreign exchange inflows due to the large adjustment of the current account balance supported by an increase in exports to new markets, tourism gains and a large reduction in imports. In the same period in 2015, the dram appreciated by approximately 4 per cent against the euro and by approximately 5 per cent against the Russian rouble. Real and nominal effective exchange rates appreciated in the first quarter of 2015 and then declined by mid-2015, stabilising at levels somewhat higher than in mid-2014. Gross international reserves were on a downward path for most of 2014, declining from US$ 2.11 billion in January 2014 to US$ 1.26 billion in February 2015 and then rebounding to US$ 1.63 billion by September 2015 (more than three months of import coverage). The abatement of pressures on international reserves and the exchange rate stabilisation in the first half of 2015 were due, among other things, to the rally in the Russian rouble and the issuance of a sovereign Eurobond in March 2015.

Public finances remained sound, although fiscal space is limited. The budget deficit is estimated at approximately 2.0 per cent of GDP in 2014 and the public debt-to-GDP ratio is estimated at 44.4 per cent in the first half of 2015. In 2015, the budget deficit is expected to increase to between 3.0 and 4.0 per cent of GDP (up from the 2.3 per cent of GDP envisaged in the 2015 budget) on account of higher capital expenditure and revenue shortfall.

The short-term outlook depends on a combination of domestic and external factors. The positive contribution of agriculture and mining would continue for the rest of the year. On the other hand, Armenia is not immune to the regional economic slow- down. Remittances were down by 27.8 per cent year-on-year in the first eight months of 2015, including remittances from Russia which were down by 40.2 per cent year-on-year for the same period. Consumption decreased by 1.6 per cent year-on-year in real terms in the first half of 2015, imports decreased by 26.3 per cent in the first eight months of 2015, credit growth in the same period was negative (4.5 per cent year-on-year contraction).