Friday, April 23 2021 14:51

ArmInfo. The International Monetary Fund (IMF) forecasts GDP growth of 1% for Armenia in 2021, with an acceleration to 3.5% in 2022. This is stated in the report of  the IMF following the results of the virtual discussions held by the  Fund's team led by Nathan Porter with the Armenian authorities  regarding the latest economic developments, prospects and political  priorities for the future.

The economic recovery will be delayed

At the end of the discussions, Mr. Porter said: "The recovery  is likely to be delayed. Despite the uncertainty about the pace of  economic recovery, the IMF forecast is conservative. Inflation is  projected to peak in the first half of 2021 and then decline to  around 4% by the end of the year, with the temporary impact of  imported food inflation and the recent currency depreciation  disappearing.

The current account deficit will widen to about 5% of GDP in  2021 as economic activity and imports gradually recover. It is  expected that the reserves will remain sufficient, which will be  facilitated by the Eurobonds issued at the beginning of this year.   Short-term growth risks are associated with a faster - than-expected  rollout of vaccination, while additional waves of infection,  increased global financial volatility, and trade tensions will delay  the recovery and increase external pressure.

Immediate policy priorities

According to him, the immediate policy priorities are to  protect vulnerable households (including displaced residents of  Nagorno-Karabakh), accelerate planned capital expenditures, and  accelerate large-scale vaccinations to support economic recovery. N.   Porter believes that these items should be prioritized within the  existing spending package for 2021.

"The budget deficit for 2021 of 5.25% of GDP properly balances  the need for political support to ensure an acceptable level of  government debt. Without significant new macroeconomic shocks, any  other initiatives related to current expenditures should be taken  into account within the approved budget envelope by changing  priorities, " he said.

Looking ahead.

N. Porter stated: "It is important that Armenia maintains a  strong medium-term fiscal framework, supported by measures to expand  the tax base, such as turnover and environmental tax reforms, as well  as income tax declarations and current spending restrictions, in line  with the authorities' goal of ensuring debt sustainability. This will  reduce the debt-to-GDP ratio below the 60% target by the end of 2026.   These measures are critical to ensure that there is sufficient space  for future priority social and forward-looking spending." He  recommended continuing efforts to strengthen the fiscal framework,  including expanding the scope of monitoring fiscal risks, creating a  pipeline of ready-to-build public investment projects, and  implementing the strategy of the State Revenue Committee on tax  compliance.

The expert believes that strengthening the state investment  management system is a priority for ensuring high-quality short - and  medium-term growth. "And despite the fact that priority projects  under development should move forward without delay, guarantees are  needed to ensure an adequate assessment of public investment  decisions. In particular, procurement, project management,  implementation and supervision of all projects should be effective,  transparent and equal for all projects and suppliers, " explained N.   Porter.

Monetary policy remains adequate.

The Central Bank of Armenia (CBA) preemptively raised the rate  by 100 basis points (bps) in December 2020 and by another 25 bps in  February 2021, anticipating an increase in inflation due to a sharp  rise in world food prices and the depreciation of the dram. The CBA  should continue to closely monitor the inflation outlook and be  prepared to adjust its monetary policy as needed, allowing the  exchange rate to be a shock absorber. While there are no signs of  financial sector tensions, the full impact of the pandemic is still  ongoing, underscoring the need for continued vigilance by supervisors  when action is taken. Despite the growth of non-performing loans to  7.3% in January, banks remain well-capitalized and liquid.  For  faster inclusive growth in Armenia, we need to accelerate structural  reforms aimed at further strengthening public administration,  improving the business environment and access to finance, and  expanding economic integration.

The IMF sums up its forecast with three main points:

Armenia's economy will begin to recover in 2021 from the  effects of the COVID-19 pandemic and the military action at  the end of 2020; 2. The policy priority is to support economic  recovery, including by fast-tracking large-scale vaccinations,  implementing planned government investments in a timely  manner, and protecting vulnerable households; 3. Maintaining  strong policies and advancing fiscal and structural reforms in  the coming months will be critical to building confidence and  supporting a long-term and inclusive recovery.  The IMF notes  that the decline in Armenia's GDP in 2020 was 7.6% (largely  due to the sagging volumes of the service sector and the trade  sector), reflecting the impact of the COVID-19 pandemic and  the military actions. Annual inflation in 2020 (December to  December 2019) was 3.7%, accelerating to 5.8% per annum in  March 2021 on the back of recent global food inflation and the  depreciation of the dram. The budget deficit widened to about  5.5% of GDP in 2020, reflecting the impact of government  support for vulnerable firms and households and higher health  spending. The national debt reached almost 63.5% of GDP by  2020. The current account deficit shrank to 3.1% of GDP in  2020. Gross reserves, despite some reduction, remain adequate.

Recall that according to the World Bank's forecast for 2021,  Armenia is expected to grow GDP by 3.4%, against the  previously expected 3.1% and the actual 7.6% decline in 2020.   The World Bank also forecasts an 8.7% increase in exports of  goods and services from Armenia in 2021, and an 8.3% increase  in imports, against an actual decline in exports of 3.9% and  imports of 17.7% in 2020. The World Bank forecasts a current  account deficit of 4.8% of GDP in Armenia in 2021. In terms of  Armenia's public debt, the World Bank forecasts growth to  70.8% of GDP in 2021 (from the actual 67.3% in 2020). The  ratio of the state budget deficit to GDP, according to the  World Bank forecast, will be 5.3% in 2021 (against the actual  5.1% in 2020).

According to Fitch's forecast, Armenia's real GDP growth in  2021 will be 3.2%, and the average annual inflation rate will  be 3.5%.

The EDB's forecast for the baseline scenario predicts GDP  growth in Armenia in 2021 at 3.8%, and inflation at 4.8%.

The Central Bank of Armenia, in parallel with the predicted  GDP growth of 1.4% for 2021, predicts export growth of 1-3%  and import decline of 2-4%. The ratio of the current account  deficit to GDP in 2021, according to the Central Bank  forecast, will be in the range of 2-4%. The ratio of the state  budget deficit to GDP in 2021 will be 5.3%.

The state budget of Armenia for 2021 includes GDP growth of  3.2% and inflation of 4% (+/-1.5). According to the state  budget, the ratio of government debt to GDP will be above 60%.

The most optimistic forecast was expressed several times by  the Minister of Economy of Armenia Vahan Kerobyan. He believes  that the growth of the Armenian economy in 2021 can reach  double-digit values.