EDB: Services and trade are the main drivers of economic activity in  Armenia

ArmInfo. With a significantly stronger -than-expected Q2 indicator and continued observed activity in Q3, economic growth in Armenia this year will exceed EDB's baseline  forecast.

This is stated in the regular Macroeconomic Outlook of the  analytical group of the Center for Country Analysis of the  Directorate for Analytical Work of the Eurasian Development Bank  (EDB). It should be noted that in May, the Bank forecasted for  Armenia a slowdown in GDP growth to 1% in 2022, with an acceleration  to 3.5% in 2023.  According to the document, the Armenian economy is  supported by the service, trade, construction and, to a lesser  extent, industry sectors. The growth of the trade and services  sectors is explained by the active tourist season and the expansion  of demand from Russian citizens. This can be seen in the consumer and  financial sectors. The industry was supported by the manufacturing,  and construction volumes increased against the background of  strengthening lending to the industry and a steady increase in  mortgage lending.

According to analysts, the expansion of financial and insurance  activities, information and communications, transport, accommodation  and catering is associated with increased demand against the backdrop  of an increase in the number of non-residents, an influx of  international capital and labor resources, as well as support for  domestic demand by remittances. It is expected that the impact of  these factors on demand will continue during the third quarter of  this year.

Growth in the manufacturing industry is explained both by the  expansion of domestic demand and supplies abroad. The negative  dynamics of the mining industry continues. In January-May, the  decline was 12.1% y / y against the backdrop of the suspension of  works at the Teghut mine.

Meanwhile, the steady dynamics of the construction sector continue to  support Armenia's economy. The volume of construction works increased  by 18.1% y/y in May (by 11.4% y/y in January-May). The acceleration  was facilitated by construction financed by organizations. Works are  concentrated in real estate-related sectors amid strong growth in  mortgages and construction loans (up 32% y/y and 20% y/y,  respectively, as of May).  The trend of revaluation of the Armenian  dram against the dollar and the euro continued in May-June. At the  end of June, the dram appreciated against the dollar and against the  euro by 17.9% y/y and 28.2% y/y, respectively, and devalued against  the Russian ruble by 14.3% y/y. The revaluation of the dram was  facilitated by both an increase in supply and a decrease in demand  for foreign currency in the foreign exchange market, as well as an  increase in demand for the Armenian dram. This was influenced by the  increasing importance of the ruble in trade transactions with Russia  and the large number of foreign tourists who formed the demand for  the national currency.

The influx of remittances, in turn, further expanded consumer demand  and hence demand for the Armenian dram. The revaluation  of the dram  against the backdrop of a significant inflow of foreign currency may  have a negative impact on the income of exporters in the short term,  reduce price competitiveness, and limit the growth of exports.

Inflation in Armenia in June accelerated to 10.3% y/y after 9.0% a  month earlier. The dynamics of consumer prices in June was determined  by the rise in prices for foodstuffs (mainly grain products and  vegetables), services (transport and recreation) and non-food  products (fuel and lubricants).

The increase in the cost of services in May-June is mainly due to an  increase in demand from non-residents and the associated increase in  exports of services. The revaluation of the dram in May-June of the  current year became a restraining factor for the growth of prices for  imported goods.

The Central Bank of the Republic of Armenia kept the refinancing rate  at 9.25% at its June 15 meeting. The revaluation of the dram against  the backdrop of a significant increase in exports of services and the  inflow of financial resources is holding back inflation, allowing the  regulator not to change the rate level.

At the same time, external pressure on prices is maintained, an  additional pro-inflationary effect is exerted by the expansion of  consumer demand from non-residents.