ArmInfo. At the end of 2023, Armenia will register the second largest economic growth among the EAEU countries, but at the same time the lowest inflation. This is the forecast of Eurasian Development Bank (EDB) analysts, which is included in the Macroeconomic Outlook of 6 EAEU member countries published today.
According to the base scenario of the forecast, the GDP growth rate of Armenia will increase by 7.5% in 2023, 5.1% in 2024 and 5.4% in 2025. This is the highest growth rate among all member countries of the Eurasian Union. In Belarus, it will amount to 2.2%, 1.1% and 1.0%, respectively. 4.3%, 4.4% and 4.4%- in Kazakhstan; 4.2%, 4.1% and 3.6% in Kyrgyzstan. 1.0%, 1.3% and 1.3% - in Russia. Tajikistan will turn out to be the leader in terms of GDP growth: 7.9%- in 2023, 5.8% in 2024 and 6.7% -in 2025
EDB analysts raised the forecast for Armenia's GDP growth taking into account the strong economic indicators of the first quarter and a number of other factors. In particular, it is expected that the improvement of the current situation and economic prospects in the Russian Federation will have a positive impact on the volume of cross-border remittances incoming to the country and external demand. The volume of cross-border transfers from the Russian Federation, according to EDB estimates, may increase by 30% this year. The decision to resume work at the Amulsar mine, in turn, will have a positive impact on GDP dynamics. Construction work and inflow of investments in connection with the further exploitation of the field will increase the potential for economic growth. At the same time, an increase in domestic demand from residents is expected against the backdrop of a slowdown in inflation and an increase in lending. Fiscal policy is estimated this year as stimulating. Consumer demand is expected to gradually stabilize in 2024 and economic growth in 2024-2025 will develop near balanced rates - 5.1% and 5.4%, respectively At the same time, in terms of inflation, Armenia will be among the leaders in the EDB forecast. By the end of this year, it will be 2.5%, 3.2%- in 2024, and 3.5%- in 2025. It is noted that inflation will moderate due to the exhaustion of external price pressure, the devaluation of the dram and tight monetary conditions in most of the year.
<Taking into account the steady slowdown in price growth, the gradual stabilization of consumer demand, as well as the fact that inflation is within the target range of the Central Bank of the Republic of Armenia (4 + 1.5%), we assume that the refinancing rate will begin to be reduced by the end of the second quarter. (Today it is 10.75% - ed. note) However, we estimate that monetary policy will have a restraining effect on demand during the year. In 2024, the interbank rate will be formed near 6.2%, which will correspond to the stable inflation in the target range of the Central Bank of the Republic of Armenia>, the report says. In this regard, it is noted that the average interest rate of interbank loans (IBK) will be 9.7% in the current year, 6.4% in 2024, and 6.8% in 2025.
The average y-o-y exchange rate of the dram against the US dollar will be 394 drams per 1 dollar this year, 414 drams in 2024 and 422 drams per dollar in 2025. <Outstripping growth rates of exports of goods and services compared to imports, the inflow of remittances, foreign capital and the continued high level of tourist activity, as well as high rates in the financial market will support the national currency. At the same time, devaluation expectations due to the geopolitical situation, a possible decrease in rates in the money market, as well as a forecast of some devaluation of the ruble against the dollar by the end of 2023 will contribute to the gradual depreciation of the dram. As a result, in 2023, the overvaluation of the dram will be maintained, but then it will gradually begin to decrease>, the forecast says.
Speaking about the risks of the Armenian economy, EDB analysts note that the risk from the external sector is the possibility of a deeper and more protracted recession in the world's largest economies. The implementation of an unfavorable external scenario will lead to slower economic growth in Armenia in 2023, followed by an acceleration in 2024 following the recovery of the global economy. Exports and remittances will begin to decrease in the conditions of weak external demand.
The main driver of Armenia's economic growth in 2022 and the first half of 2023 may also become a risk to the economy. The likelihood of an outflow of capital and labor resources becomes a significant threat to the economy and the stability of the national currency. The net inflow of cross-border transfers through the banking system in 2022 amounted to 13.2% of GDP, which is twice the average for the past five years (5.2% of GDP). The exchange rate of the Armenian dram against a basket of currencies appreciated by almost 40% over the year. The reversal of these processes will lead, first of all, to a sharp depreciation of the national currency and a surge in prices. The refinancing rate will be forced to increase in order to consolidate inflationary expectations. Decrease in consumer and investment demand and tightening of monetary policy will lead to a downturn in the economy. Weak demand and higher rates will stop prices from rising, but at the same time there is a possibility of stagflation.
Speaking about trends in the global economy, EDB analysts note that the main factors behind the slowdown in inflation in the EAEU countries are the adaptation of the economies and the recovery from the shock of early 2022, when there was a sharp increase in devaluation and inflation expectations. The forecasted slowdown in inflation, in turn, creates prerequisites for the reduction of key rates by the central (national) banks of most countries in the region in the medium term. The Bank's analysts note that the world is on the verge of completing the cycle of raising interest rates in developed countries, post-pandemic recovery in developed countries is over. Fiscal stimulus is waning, and tightening financial conditions due to key interest rate hikes are putting more pressure on not only business, but also the banking sector. "And now we are at a point where, although inflation in developed countries has slowed, its persistent components are high, and economic activity is already weakening under the burden of tighter financial conditions. The situation in the US and the EU will affect the global economy as a whole, and the "opening" of China only increases pro-inflationary risks. As a result, there is more and more reason to believe that the trend of raising key interest rates in developed countries is close to a turning point>, the forecast says.