World Bank: Prospects for economic growth and poverty reduction in Armenia are marked by significant uncertainty

ArmInfo. Prospects for  economic growth and poverty reduction in Armenia are marked by  significant uncertainty, the short overview on Armenia, which was  updated in early October, says. According to the World Bank experts,  the risks remain in the country, related both to the internal  situation and external factors.

As such, the forthcoming presidential elections are scheduled for  April 2018 and the formation of a new government, as well as possible  new Western sanctions against Russia. An unclear situation remains  with Iran. This justifies the caution of the forecast of the growth  of the Armenian economy at the level of 4.5% in 2017, about 4% in  2018-19. During the last period Armenia shows significant growth in  industry and services sector and minor improvements in the production  of agricultural products. At the same time the decline in  construction continues. According to experts, the growth trends  reflect a rebalancing of the economic structure, and as a result,  disproportions between the capital of the country, secondary towns  and rural areas in conditions of low labor mobility can be increased.  The experts believe that structural transformations in the country's  economy will continue, secondary cities will play a more important  role in creating jobs for those who leave the agricultural sector.

As noted in the survey, after the economic stagnation in 2016, when  GDP growth was only 0.2%, the Armenian economy in the first half of  2017 showed a 6% increase compared to the same period in 2016.  The  growth was due to the strengthening of industry, services and retail  trade, which accounted for 12%, 11% and 13% yoy. Agriculture remained  weak, and construction continued to slow down - 10% below the level  of 2016. Growth was supported by exports in extractive industries  (copper, molybdenum), in the production of food products, jewelry, in  the facet production, in the production of tobacco and textiles. All  this contributed to an annual growth of exports by 21%. At the same  time, the terms of trade remained stable, as export prices increased  by only 2.4% compared to 2016. Although exports have increased  significantly, net exports have slowed down as imports have increased  amid a growing recovery in investment and consumption.

Having registered a high budget deficit of 4.5% and 6.0% of GDP in  2015 and 2016, in 2017 the authorities started fiscal consolidation  of the budget, reducing this figure to 2.7%. Due to the improved tax  administration and increased discipline of government spending, it  was possible to contain the deficit at a low level and ensure a  stable financial situation. At the same time, the survey notes, the  ratio of public debt to GDP has approached 60%, which is well above  the established threshold of 50%. The government will need to  maintain a tight budget policy for the next few years and comply with  an agreed fiscal rule that limits the budget deficit to no more than  3% of the average GDP level for the three previous years.

The banking sector, the survey notes, started the year in a stronger  capital in accordance with the new requirements set by the Central  Bank in accordance with Basel III criteria. The average level of  capital adequacy for 17 Armenian banks was 20%, which is much higher  than the 12% minimum. The level of dollarization has noticeably  decreased: the currency components of deposits and credits decreased  from more than 70% and 66% in early 2016 to 63% and 62% to June 2017,  respectively. The banking sector resumed lending to the economy,  which was in a state of almost complete stagnation in 2015. In 2016,  lending increased by 15% and expanded by 13% in the first half of  2017.

After registering the historically low deficit for Armenia - 2.4% of  GDP in 2016, the current account deficit widened in the first half of  2017 as imports grew by 26%, which exceeded the growth rate of  exports, which, according to experts, was the result of an  improvement transparency of customs administration. At the same time,  trade data show a greater penetration of Armenian goods to the Asian  and Middle Eastern markets (approximate growth of 30%, year-on-year),  to CIS countries (Russia) (22% growth), as well as to EU countries  (18% growth year on year). After a 35% reduction in remittances  during 2015-16, they increased by 11% year-on-year in the first half  of 2017, and private transfers from Russia grew by 24%.