ArmInfo.The day Russian relocated employees go back to Russia with their capital, Armenia's economic growth will "burst like a soap-bubble," economist Suren Parsyan said in an interview with ArmInfo.
Too much money
In the rich pre-crisis years of 2004-2008, money transfers to Armenia by means of the banking system alone exceeded $5.3bln. As a result, in 2002-2007, Armenia saw 2-digit economic growth - 12.9%, 14%, 10.5%, 13.9%, 13.2%, 13.7% respectively. In 2008, Armenia saw the first signs of economic decline. At first, the 2-digit economic growth was followed by a 6.8% growth. Later, in 2009, Armenia's economy recorded a 2-digit decline. Only after that did the government admit the fact that it was not the crisis alone that was the cause, and the 2-digit growth had been ensured due to a number of non-export branches of economy and money transfers from abroad.
In 2022, Armenia "excelled itself" - private transfers to the country set a historical record, $5.2bln (against the previous record of $2.3bln in 2013).
"By preliminary estimates, 14.2% economic activity was recorded in 2022. While the economic growth in the first decade of the 2000s was due to investments in the construction sector, the current growth is only due to relocated employees and money transfers. Specifically, the 14.2% economic activity was mainly due to trade and services sectors (17% and 28.2% respectively), with the share of both sectors being 12% in the economic growth," Mr Parsyan said.
Besides, the construction sector recorded a 12.5% growth - largely due to the income tax reimbursement programme on the primary mortgage market. The industrial sector recorded a 7.8% growth, with the agricultural sector recording only 0.4% growth against the previous decline.
"Thus, the present economic growth is not based on sound economic grounds - it is strictly temporary. And as soon as the 'relocated employees-capital' chain gets broken, Armenia will face the risk of recording a 2- digit decline within a year, which was the case in 2009," the expert said.
He points out a deplorable fact that very few people or businesses are actually benefiting from the growth now - the banking system, hotels, restaurants, major importers. A decline, however, will affect all the sections of population, with the low-income sections to suffer most as a result of inflation and depreciation of Armenia's national currency.
Saving for a rainy day Mr Parsyan is sure that "the easy money" never enabled Armenian economy to build up its potential and ensure inclusive growth, as, during that favorable period, Armenia's government should have made effective steps to ensure "safety cushions." The result is economic degradation in Armenia.
"As its first step, Armenia's government should have proposed amendments to the Tax Code. When the year before last saw a rise in global metal prices, Armenia's authorities, by means of amendments to the Tax Code, ensured additional budget revenues. That model should have been applied to the country's financing and banking system, which would make banks' superprofits taxable (in 2022, Armenia's commercial banks' profit reached AMD 255.6bln, about three times as much as the previous year) and direct the funds to the state budget to make the economy more resilient. Moreover, the authorities should have paid more attention to industry, and the Ministry of Economy should have got down to work, as subsidized lending can by no means resolve competitiveness and logistics problems," Mr Parsyan said.
In announcing a growth in exports reaching 80%, the officials remained silent about the fact that it was mainly due to reexport. In fact, the problems at the Upper Lars checkpoint caused tremendous financial damage to Armenian exporters last May, June and October, and the government-announced possibility of using the Poti-Caucasus ferry service remained in the air. The food industry is on the decline as well. The 20% AMD appreciation and high energy carrier prices make domestic products non-competitive as compared with their imported counterparts. As a result, during last year, the importers' links with supermarkets got stronger, and supermarkets are now preferring imported products, which is gradually forcing local producers out of the market.
However, neither the government nor the Central Bank is getting ready for the "X hour". Rather, the government is confident they can ensure at least 7% GDP growth this year, even with the "high base" of last year, whereas the CBA's forecasts are more cautious (4.6%). However, the CBA is stating that the targeted inflation, 4%, will be ensured in Armenia within a year. "But is it for the three successive years that the CBA has been promising to ensure the longed-for 4%, с 1.5%. By making such forecasts, the CBA is deceiving both the population and businesses," Mr Parsyan said.
Thus, according to the expert, easy money has actually weakened the potential of Armenia's economy. The result is a situation similar to that in Armenia back in 2009.
Who's afraid of the big bad wolf?
All the grounds are available to believe that 7% GDP growth will be ensured in Armenia this year, Armenia's Premier Nikol Pashinyan stated at a January 10 press conference. He admits various risks - security and others. However, Azerbaijan's aggression against sovereign Armenia last September showed that it might not have such a negative effect on Armenia's GDP growth - high economic growth was recorded in Armenia last October and November.
"The Armenian government's guideline is the presumption that the relocated employees will continue staying in the country," Mr Parsyan said. On the other hand, it cannot be claimed that the protracted conflict in Ukraine is to the benefit to Armenia's economy. "The Russian-Ukrainian escalation has both positive and negative effects on Armenia's economy. On the other hand, we have an inflow of funds. On the other hand, the demand for a number of Armenian products in shrinking in Russia because of the decline in the population's purchasing power. That is, the economic situation in Russia influences Armenia's economy, with the positive effect still prevailing," Mr Parsyan said.
He does not share the confidence that the security risks are controllable and may not have a decisive negative effect on economic growth rates. "The escalation last September did not much influence the economic growth in Armenia, as the partial mobilization in Russia last September caused an increase both in the number of relocated employees and in the amount of money transfers, with the largest amount, $615mln, recorded last October, which, in turn, compensated for possible economic losses. The premier did not mention that fact. So the Pashinyan-led government should not claim the credit for ensuring the economic growth - they have nothing in common with that," Mr Parsyan said.