EDB: Growth rates of Armenian economy will total 2.9% in 2017

ArmInfo. Growth rates of Armenian economy will total 2.9% in 2017 and will accelerate to 3.9% in 2018 according to the Macroreview of the Eurasian Development Bank.

According to the source a gradual recovery of domestic demand amid expantionary monetary, budgetary and tax policies held in 2015-2016 along with measures taken by the government to stimulate exports and investment will contribute to the acceleration of Armenia's economic growth in 2017-2019. GDP growth is forecasted at 0.6% at yearend 2016, which is lower than the previous forecast for 2016, and is determined fist and foremost by more significant decline of gross production of agriculture in 2016 than it was expected.

Growth of domestic demand and a rise in the price of imported primary commodities and goods will lead to further recovery of inflation processes in Armenia in 2017-2018. At the same time planned reduction of tariffs on gas and electricity, low inflation expectations as well as planned restricted tax-budgetary policy will have restricting influence on recovery of prices in 2017. It is expected that the growth of prices in 2017 and 2018 will total 1.8% and 2.8% respectively in case there are no new shocks.

The experts of EDB note that there is a trend of reduction of the degree of dollarization in Armenia. The share of residents' deposits in foreign currency in the total volume of residents' deposits was 60.1% by the end of November 2016 (versus 65% in the end of November 2015). Aiming to maintain economic activity and reduce deflation the Central Bank took a decision to reduce refining rate by 0.25 percentage points to 6.25% on December 27. Since May 2016 the Central Bank had reduced the rate 6 times from 8.75% to 6.25%. If there are no additional domestic and external shocks the Central Bank may continue its policy of mitigating monetary-loan terms. Stimulating monetary policy since the beginning of 2016 and reduction of external deflationary factors led to further slackening of deflationary processes in the Armenian economy in Sep-Dec 2016.  As a result, the country's annual deflation rate was 1.1% in December 2016. As a result inflation remains lower than the target figure of the Central Bank- 4% for 2016.

Total budget expenditures grew by 2.2% in Jan-Sep 2016 versus the same period of 2015 due to growth of payments of interest on public debt, growth of social securities and pensions, as well as significant growth of subsidies. Such factors as reduction of capital expenditures (-34.6%) and expenses on purchase of goods and services (-35.4%) prevented growth of deficit. As a result of 2016 Armenia is expected to show a higher state budget deficit than early forecasted 4.1% of GDP. The state budget posted a deficit of 93.6 billion drams in Jan-Sep 2016, which is by 40% higher than in the same period of 2015. Total reduction of budget revenues totaled 0.8% due to decline of VAT payments (by 11.6% in Jan-Sep 2016 versus the same period of 2015) and drop of non-tax revenues by 17.8%. Growth of budget deficit was partly neutralized by growth of profits tax (by 5.4%) and income tax (by 28.6%).

Armenia's public debt continued to grow in Sept-Nov 2016 and totaled $5,596.3 million on December 1. As a result debt burden grew to 52.9% of GDP (versus 48.2% of GDP in the end of 2015 and 51.9% of GDP in the end of August 2016). The increase was largely due to rise in domestic debt and public debt. State bonds issued in national and foreign currency were the main sources of the growth.

Since the beginning of the year real effective exchange rate of the dram fell by 5% while the nominal exchange rate remained at the level it had at the beginning of the year (according to the data of October 2016). At the same time the national currency strengthened by 1.5% against the U.S. dollar (in Jan-Nov 2016), but weakened by 19.1% against the Russian ruble (Jan-Nov 2016). The real effective exchange rate of the dram in Q3 2016 was slightly overvalued (by 1.6%) against its equilibrium exchange rate, but it was undervalued (by 0.3%) against the U.S. dollar.

The current account deficit decreased in Jan-Sep 2016 to $110 million (1.5% of GDP) from $185 mln (2.5% of GDP) in the same period of 2015 at the background of significant growth of exports and improvement of terms of trade. Growth of the country's international reserves registered in May 2016 continued in Aug-Nov, totaling $668 million within May-Nov, increasing the level of reserves to $2.2 bln as of December 1 2016 due to purchase of foreign currency by the Central Bank. Decline of cash remittances from Russia slackened to 12.7% in Jan-Nov 2016 versus Jan-Nov 2015 (the decline totaled 35.1% in the yearend 2015 and 14.8% in H1 2016). The impact of the decreased amount of remittances on domestic demand was partially offset by the government's expansionary monetary and fiscal policies. Along with recovery of economic activity in Russia it is expected that the cash remittances from Russia will gradually grow. Dynamics of exchange rate of dram against Russian Ruble will contribute to improvement of external competitiveness of the Armenian goods. Decline of current account deficit has contributed to growth of international reserves.