World Bank worsened its forecast for Armenia`s GDP growth for 2022 to  1.2%, expecting decline in exports and imports by 8.5-12%

ArmInfo.The World Bank has worsened its 2022 forecast for Armenia's GDP growth from the previous 4.8% to an updated 1.2%, expecting a decline in exports by 8.5% and  imports by 12%. For 2023, the World Bank forecasts an acceleration in  Armenia's GDP growth to 4.6%, with exports growing by 6.5% and  imports by 8%, and in 2024 GDP growth is expected at 4.9%, with  acceleration of export and import growth up to 7.7% and 9.3%  respectively.

This is noted in the Europe and Central Asia Economic  Update "War in the Region" published by the World Bank on April 11.

Thus, according to the source, "the impact of the war in Ukraine and  sanctions on Russia is likely to be significant given Armenia's  strong economic links with Russia. The economy rebounded by 5.7  percent year on year (yoy) in 2021 but is forecast to grow at only  1.2 percent yoy in 2022, with an uncertain outlook subject to high  downside risks.  Lower growth and remittances are likely to slow  poverty reduction and increase vulnerability.

Prudent macroeconomic policies, including a more-effective inflation  targeting regime, a robust fiscal rule, sound financial sector  oversight, and pro-competition reforms helped Armenia weather the  twin crises in 2020 with a lower-than expected increase in poverty  rates. While domestic political uncertainty has subsided since snap  elections in mid-2021, Armenia still faces significant structural  constraints, such as weak connectivity, closed borders and no  economic relations with two of its four neighbors and challenges  related to high unemployment, skills mismatches and firm  competitiveness.

 After contracting in 2020 by 7.4 percent yoy, the Armenian economy  started to recover in 2021, growing at 5.7 percent yoy. Growth was  driven by private and public consumption with smaller contributions  from investment and net exports. On the production side, services  rebounded from a sharp slump in 2020, and industry and construction  contributed modestly to growth. Agriculture contracted for the sixth  straight year, reflecting unreformed land markets, uneven access to  irrigation and low resilience to changing weather patterns.

The fifth wave of COVID-19 infections abated in Armenia by  end-February. After a slow start, the pace of vaccination picked up  in late 2021, after mandatory requirements were introduced for  workers to produce proof of vaccination or to submit to weekly  testing.  Still, only 43 percent of the adult population was fully  vaccinated as of March 13, 2022.  After a prolonged period of low  inflation, price levels picked up in late 2020 and remained elevated  in 2021. Inflation peaked at 9.6 percent yoy in November before  moderating to 6.5 percent yoy in February 2022. Food inflation peaked  at 17 percent in November 2021, driving two-thirds of overall  inflation. In response, the Central Bank of Armenia (CBA) increased  the policy rate nine times by a cumulative 500 basis points between  December 2020 and March 2022. The budget deficit declined from 5.1  percent of GDP in 2020 to 4.3 percent in 2021. Revenues were up 8  percent yoy due to higher VAT and state duties, following the  introduction of a new export duty for minerals. 

Expenditure was up 5 percent yoy driven by current expenditures.  Public debt to GDP declined to 63.4 percent as at end-2021 from 67.4  percent a year earlier. The external balance improved due to a  quicker rebound in exports than imports, and a sharp increase in  remittances. FDI also rebounded, albeit from a low base. The exchange  rate stabilized following the decline in political uncertainty in  mid-2021 and reached pre-COVID levels in February 2022. However, the  onset of the war in Ukraine brought fresh volatility.

The national absolute poverty rate rose to 27 percent in 2020 from  26.4 percent in 2019.  Existing social protection and social  assistance mechanisms (pensions and the Family Benefits Program)  provided a critical buffer preventing a further increase in poverty.

The impact of Russia's invasion of Ukraine on Armenia's economy is  likely to be significantly negative, although the magnitude remains  uncertain. Armenia has strong economic links with Russia, which  accounted for 28 percent of Armenia's exports and 30 percent of its  imports on average from 2018-2021 and is the source of all of  Armenia's wheat and gas imports. In 2021, remittances from Russia  amounted to 5 percent of GDP, 41 percent of net FDI stock was  associated with Russian entities, and Russian tourists accounted for  40 percent of all tourist arrivals. In addition, Armenia will also be  impacted by elevated global food and fuel prices, with fuel imports  accounting for 9 percent of imports in 2021. 

The growth forecast has been downgraded for 2022 from 5.3 percent  pre-war to 1.2 percent, with lower remittances and real wages  impacting consumption; heightened uncertainty impacting investment;  and exports contracting due to the projected contraction in Russia  and slowing global and regional growth. On the production side,  agriculture will continue to be weighed down by structural  challenges; industry will be impacted severely by uncertainty; and  services will slow along with consumption. In the mediumterm, growth  is expected to pick up in 2023 and 2024, but at a slower pace than  projected pre-war. In line with slower growth, revenue collection is  expected to decline, and spending pressures are expected to rise,  particularly through increased social assistance, leading to a delay  in fiscal consolidation. This will push up the debt to GDP to about  67 percent of GDP at the end of 2022, further away from statutory  limits. The current account deficit is projected to widen due to  lower exports and net remittances.  Exports may be boosted by an  increased tourism revenues associated with an inflow of Russian  citizens following the onset of the war. Higher commodity prices will  keep inflationary pressures elevated in 2022, but CBA's inflation  targeting is expected to anchor inflation in the medium-term as  external price pressures subside. Based on the forecasted  macroeconomic impact, poverty (using the upper middle income poverty  line) could reach 39.6 percent of the population in 2022, which  represents a 3 percentage points increase relative to a  counter-factual scenario in the absence of the war. 

Vulnerability may increase due to decreased remittances, increased  utility bills and increased food prices. The forecast is uncertain,  with possible downgrades, given the evolving global and regional  environment. Risks include protracted conflict in Ukraine, a  prolonged and more significant slowdown in Russia, further disruption  in global commodity markets, and still unresolved geopolitical issues  around Armenian borders.  On the upside, the inflow of persons from  Russia, if sustained, may have a positive impact of the economy," the  WB report concludes.

Note that according to the updated on March 17 this year, according  to the IMF forecast, Armenia's GDP growth in 2022 will be 1.5%, and  according to the updated March 15 this year. According to the  forecast of the Central Bank of the Republic of Armenia, GDP growth  will be 1.6%. According to actual statistics, Armenia's GDP in 2021  reached a 5.7% growth (from a 7.4% decline in 2020).