ArmInfo.Central Bank of Armenia downgraded Armenia's GDP growth forecast for 2021 to 1.4% from previous 2%. This is set out in the Central Bank's Monetary Policy Program for the first quarter of 2021, published on March 31, where expectations for economic growth in the medium term are estimated at below 3.5%.
According to the Central Bank's forecast, in 2021, in parallel with the reduction of uncertainty, private savings will slightly decrease, but still exceed the level of 2019. As a result, private spending will rise by 4.3% due to private consumption growth of 4.5% and gross private fixed assets formation by 3%, which will serve as the main driver of economic growth this year. The impact of government spending on economic growth will mostly be negative.
In the breakdown by industry, the greatest growth is expected in the construction sector and the main driving force will be construction funded by public funds, while some recovery is seen in the construction segment funded by organizations and the population. Relatively high growth is also expected in the agricultural sector due to the duration of the implementation of assistance programs. A slow recovery is expected in the industrial and service sectors. In particular, in the service sector, growth will be modest due to expectations of a very slow recovery of tourism, and in the industrial sector, a slow recovery will be due to a decrease in the volume of extraction and processing of precious metals since the beginning of 2021.
Over the medium term, economic activity will recover at a slower pace than previously forecast, largely due to a slower recovery in productivity and modest growth in private investment. Under these conditions, GDP growth in the forecast horizon will remain at a low level and at the end of the period will form close to the estimated long-term level of 3.5%.
According to the forecasts of international experts, the prospects for the recovery of world tourism are negative despite the vaccination against coronavirus, for which there is still high uncertainty in terms of the involvement of developing countries in this process and their possibilities for purchasing vaccines. In addition to these factors, the uncertainty in Armenia will also have some negative impact on the tourism recovery process in the medium term.
For the export of goods and services, forecasts for 2021 have been revised by the Central Bank towards an increase of 1-3%, while for imports a decline is expected in the range of 2-4%. The ratio of the current account deficit to GDP in 2021, according to the Central Bank's forecast, will be in the range of 2-4%, and in the medium term, in parallel with the recovery of the global and domestic economy, it will gradually approach and stabilize to the estimated balanced level of 4-6%.
Regarding the state budget, the Central Bank predicts for 2021: the tax / GDP ratio at 22.2%, which is 0.2 percentage points (pp) lower than the 2020 level, and the expenditure / GDP ratio at 28.5%, which is below the level of 2020 by 2.1 p.p. As a result, the ratio of the state budget deficit to GDP in 2021 will be 5.3%, which is only 0.1 percentage points below the level of 2020. Moreover, the deficit of the state budget will be financed from external sources and the dominant share will be 378.6 billion drams already received from the placement of Eurobonds. The impact of fiscal policy on gross demand is assessed as weakly expanding (by 0.3 percentage points). This will be driven by a neutral income signal and a weakly expanding spending signal. For 2022, the impact of fiscal policy is assessed as somewhat moderate, and in 2023 it will be neutral. In the medium term, in parallel with the economic recovery, from the point of view of macroeconomic stability, it is important, according to the planned scenario and in accordance with the tax and budget canons, to gradually reduce the ratio of public debt to GDP (according to the state budget for 2021, the ratio of government debt to GDP will be above 60%) by increasing tax revenues and improving the structure of expenses.
The unemployment rate, according to the forecast of the Central Bank of Armenia, will amount to 18.6% in 2021, and in the medium term will decrease to 18.3% due to the gradual neutralization of the impact from the economic recession and the coronavirus pandemic. To note, according to the World Bank's forecast for 2021 updated in March this year, Armenia's GDP is expected to grow by 3.4%, against the previously expected 3.1% and an actual 7.6% decline in 2020. In particular, according to the WB expectations, the growth of the agricultural sector will be 1.3% in 2021 (against the actual 1.4% growth in 2020), the industrial sector - 1.2% (against the actual 0.9% decline in 2020), the service sector - 5.1% (against the actual 14.7% decline in 2020). The WB also predicts an increase in exports of goods and services from Armenia by 8.7% for 2021, and an increase in imports by 8.3%, against the actual decline in exports by 3.9% and imports by 17.7% in 2020. The WB forecasts current account deficit in Armenia at 4.8% of GDP in 2021 (against the estimated 4.2% in 2020). On the state debt of Armenia, the World Bank predicts growth to 70.8% of GDP in 2021 (from actual 67.3% in 2020). The ratio of the state budget deficit to GDP, according to the WB forecast, will be 5.3% in 2021 (against the actual 5.1% in 2020). WB forecasts assume that in 2021 48% of the population (versus 51% in 2020), due to loss of income, will remain below the poverty line, taking into account the PPP-based poverty level at a cost of $ 5.5 per day.