EDB: Service sector remains main driver of economic growth in Armenia

ArmInfo. The Armenian economy maintains high growth rates, but the service sector remains its main driver. This is stated in the February "Macroeconomic review", prepared by analysts of the Eurasian Development Bank.

The review notes that at the end of the year 2022, the unprecedented  growth in the service sector was due to an expansion in demand for  goods and services against the backdrop of an influx of Russian  citizens and a significant increase in remittances. The service  sector showed an increase of 28.2% y/y. More than half of the growth  dynamics of the sector was provided by the expansion of banking  activities and software development (+67.7% y/y and 2.4-fold y/y,  respectively. This, in turn, is associated with an increase in the  number of non-residents, inflow of foreign capital and labor  resources.

In 2022, investment in fixed assets also increased in the context of  a steady growth in construction.  Meanwhile, by the end of 2022, the  growth rate of economic activity showed a weakening trend - to 12.8%  y/y in December (after 17.5% y/y in October and 13.8% y/y in  November) due to slowdown in the dynamics of the services and  industry sectors (+27.9% y/y and +2.7% y/y, respectively, in  December). This indicates that the peak of last year's strong  activity has been passed. This year, demand is expected to gradually  stabilize, economic growth will slow down and amount to about 4.2%.

Activity in the transport, restaurant and hospitality sectors also  expanded thanks to the strong external demand, as well as domestic  demand supported by remittances.

Industry and construction showed strong dynamics throughout the year.  Industrial production increased by 7.9% y/y in January-December  mainly due to the growth of manufacturing industries (+13.5% y/y):   production of building materials, foodstuffs, as well as basic  metals. The volume of completed construction works in  January-December increased by 12.5% y/y, this was facilitated by  construction financed by organizations. More than half of the volume  of construction work was carried out in housing construction against  the backdrop of high growth rates of mortgage lending (+29.7% y/y as  of the end of December 2022).

The foreign trade deficit in January-December increased compared to  the same period of the previous year.  The negative balance of trade  in goods has increased to $3.4 billion in 2022 ($2.3 billion in  2021). Exports outpaced imports in terms of value growth, with  deliveries almost doubling year-on-year over the past five months. In  the dynamics of exports of goods (+77.7% y/y in 2022), precious  stones and metals, machinery and equipment, and food products played  the main role. Import volumes increased (+63.5% y/y) across all  commodity groups, equipment, mineral products and vehicles made the  largest contribution. The export of from Armenia to the Russian  Federation increased 2.9-fold over the past year, due to the  limitation of supplies from other countries to the Russian  Federation, and the negative balance of trade with Russia decreased  to $211 million ($945 million in 2021) . Inflation in Armenia  continued to slow down in December, amounting to 8.3% y/y after 8.8%  y/y a month earlier. Such dynamics was facilitated by a slowdown in  the growth of prices for food and non-food products.

The revaluation of the Armenian dram also had a disinflationary  effect on prices. Prices for services continued to rise in December  mainly due to the strong consumer demand. Core inflation slowed to  9.5% y/y in December from 9.9% y/y a month earlier. The Central Bank  of the Republic of Armenia kept the refinancing rate at 10.75% at its  January 31 meeting. Bank experts believe that the refinancing rate  can be maintained at the current level in the first quarter of 2023  amid still strong demand.