By end of 2023, Armenia to register 2nd largest economic growth and  lowest inflation rate among EAEU countries. But risks still remain -  EDB

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.