ArmInfo. For the second year in a row, Armenia remains the fastest growing economy of the EEU. In 2018, it grew by 5.2% after 7.5% a year earlier. The main reasons for the slowdown in economic activity were a more moderate growth in household consumption than in 2017, and a decrease in consumption in the public sector. This is stated in the Eurasian Development Bank's Macro-Review published today in Armenia.
According to the document, the EDB forecasts a certain acceleration of GDP growth in Armenia in 2019, which is facilitated by an increase in investment activity, as the extractive industry gradually adapts to new requirements, restoring agricultural production and government policies that support investment, export and improvement of social conditions. In the medium term, GDP will tend to its potential level, which we estimate at about 5% per year.
During 2018, inflation remained below the Central Bank target of 4%; in December 2018, it was 1.8% YoY The main factor determining inflationary trends in 2018 was the volatility of food prices after the diminishing of yield According to our estimates, in 2019, inflation will accelerate to 2.8%, which is due to an increase in domestic demand as wages and credit increase. By the end of 2021, inflation will approach the target indicator of the Central Bank of Armenia (4%). Taking into account the economic background, the Central Bank of Armenia did not change the refinancing rate (6%) in 2018 and, thus, supported a stimulating monetary policy. Interest rates on loans and deposits decreased during the year. According to our forecast of the baseline scenario, as inflation gradually accelerates and the target level is reached, the CBA will begin a series of rate increases, which, we expect, will have a neutral impact on economic growth and inflation.
In 2018, in the face of growing economic activity, the government pursued a tight fiscal policy to maintain debt and sustainability of the budget. In the medium term, the focus of fiscal policy will remain the same.
To note, contrary to the EDB forecast, on January 29, 2019, the Central Bank of Armenia lowered the refinancing rate to 5.75%, causing this decrease to weaken economic activity, lower gross demand due to the restraining process of fiscal policy and slowdown in private spending.