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.
