ArmInfo. According to the baseline forecast of the EDB, Armenia's GDP in 2023 will increase by 4.2%.
This is stated in the "EDB Macroeconomic Outlook: the region's economies to continue adapting to the new environment", published today. Bank analysts believe that demand in Armenia will gradually stabilize next year and economic growth will slow down near the balanced rates of 4.2% and 4.3%, respectively, in 2023-2024. At the same time, monetary conditions will have a neutral impact on demand in 2023, while the impact of fiscal policy is estimated to be weakly stimulating.
As stated in the Macroeconomic Outlook, there are both positive and negative factors on the part of external demand that will affect the Armenian economy. The slowdown in business activity in the world in 2023 will generally have an adverse impact. This will be expressed in weak external demand for exported goods, in problems with their supplies. A decrease in the volume of money transfers, including from the USA, is possible. At the same time, the losses will be compensated, firstly, by the reorientation of exports to Russia, where, in the context of restrictions on exports from other countries, new opportunities are opening up for the supply of goods and services from Armenia. Secondly, in the context of the easing of pandemic-related restrictions in the world, tourist flows to the country will recover. The inflow of remittances from Russia is also expected to continue.
In the baseline scenario, inflation in Armenia is projected at 4.6% y/y at the end of 2023. It will return to the target range only in Q4 2023. Disinflationary factors will be the weakening of external price pressure against the backdrop of tight monetary conditions in the world, adjustment of demand in the country and overvaluation of the dram.
By the end of 2024, price growth in Armenia may slow down to 3.3%. This will be facilitated by the exhaustion of external inflationary pressure and the stabilization of external and internal demand. In the medium term, inflation will form within the target range of the Central Bank of the Republic of Armenia (4 + - 2%, ed. note).
EDB experts in monetary and exchange rate policy forecast that the interbank lending rate (IBC), according to the baseline forecast scenario, will decrease following the refinancing rate and will average 7.6% in 2023. <We forecast the end of the refinancing rate increase cycle in the first quarter of next year in the context of a gradual adjustment in consumer demand and easing inflationary pressures. The rate is projected to decrease to 6.6% by the end of 2023. In 2024, the interbank loan rate will be formed near 6.5%, which will correspond to the stable location of inflation in the target range of the Central Bank of the Republic of Armenia>, the analytical report emphasizes.
The average y/y exchange rate of the dram against the dollar is projected at 438 in 2023. The outstripping growth rates of imports of goods and services compared to exports, devaluation expectations due to the geopolitical situation, as well as expectations of the devaluation of the ruble against the dollar next year will contribute to the gradual depreciation of the dram. At the same time, the national currency will be supported by the inflow of remittances, foreign capital and the continued high level of tourist activity. As a result, in 2023, dram overvaluation will be maintained, but it will gradually start to decrease. The exchange rate will be near equilibrium values until the end of 2024.
In the field of fiscal policy, bank analysts note that it has a weak stimulatory. "The impact of fiscal policy on demand in the current year, according to our estimates, will be restraining, given the reduction in spending by 1.9 percentage points up to 27.1% of GDP. At the same time, the government plans to increase the level of capital expenditures by 1.6 percentage points to 4.7% of GDP in the current year and by 1.2 p.p. to 5.9% of GDP in 2023, maintaining them at 6% of GDP until 2025. The implementation of this plan will help improve productivity and increase the potential growth of the Armenian economy in the medium term. As part of the smooth fiscal consolidation envisaged by the "RA Government's Medium-Term Expenditure Program for 2023-2025", the level of expenditures will stabilize around 28% of GDP, and tax revenues will grow by 0.4 percentage points in year.
The bank's analysts see the main risks for the Armenian economy in the external sector. This is the likelihood of a deeper and longer recession in the world's largest economies. With weak external demand, exports and remittances will slow down. GDP growth in this scenario is projected at 3.7% in 2023, followed by a 4.6% increase in 2024.
It is worth reminding that the majority of international donors and the financial authorities of Armenia also forecast GDP growth in the range of 4 to 5% next year.
