Services sector still influences economic growth dynamics in Armenia  - EDB

ArmInfo.  All sectors positively influence the dynamics of economic growth in Armenia, but the services sector still plays the main role. However, monthly data since the beginning of the year show that services growth is gradually slowing down - this is largely due to last year's strong performance and demand adjustment.  This is stated in the regular Macroeconomic Review published today, prepared by analysts of the Eurasian Development Bank (EDB).

It is noted that the Armenian economy maintains high growth rates,  trade and construction are gaining momentum. Deflation took place in  June. The Central Bank of the Republic of Armenia reduced the  refinancing rate by 0.25 percentage points up to 10.5%. Economic  activity in January-May increased by 12.5% y/y.

At the same time, as analysts note, growth in trade and construction  is increasing. This trend will continue until the end of the year,  which will somewhat slow down the pace of economic activity. The  economy is supported, among other things, by significant volumes of  remittances and net exports and continued high tourist activity. The  inflow of cross-border transfers of individuals increased 2.4-fold in  Jan-April of this year and amounted to $2.1 billion. According to  their forecasts, despite a slight slowdown, the growth rate of the  Armenian economy will remain high and will amount to 7.5% by the end  of the year.

Strong dynamics remain in almost all sectors of the Armenian economy.  The service sector showed an increase of 19.9% y/y in Jan-May, more  than 70% of the dynamics was provided by the expansion of the IT and  transport industries (by 27.7% y/y and 45.3% y/y, respectively, in  Jan-May) . The construction and manufacturing industries also showed  strong growth since the beginning of the year. Processing industries  in Jan-May grew by 7.2% y/y, while the mining industry continued to  decline (- 5.3% y/y). The volume of completed construction works  increased by 15.6% y/y in Jan-May. This was facilitated by  construction financed by organizations (+44.8% y/y). More than half  of the volume of work in the sector falls on housing construction  against the backdrop of high growth rates of mortgage lending (+30.7%  y/y in May).

At the same time, the cost volumes of exports of goods continue to  grow at a rate that outpaces imports. In Jan-May of the current year,  export deliveries increased by 93.3% y/y. Machinery and equipment,  precious stones and metals, vehicles play the main role in the  dynamics of exports of goods. Import volumes in Jan- May increased  for all commodity groups (+83.3% y/y). Maintaining a stronger growth  rate of exports compared to imports contributes, among other things,  to fixing the exchange rate of the Armenian dram at the highest level  over the past decade.

Since the beginning of 2023, the national currency has continued to  grow steadily in value. At the end of June, compared to the beginning  of the year, the Armenian dram appreciated against the basket of  currencies of trading partner countries. The dram appreciated against  the dollar by 2.3%, against the euro - by 2.1%, against the Russian  ruble - by 18.3%. At the end of May, the level of international  foreign exchange reserves amounted to 3.7 billion dollars - the  figure has been close to this level since the beginning of the year.  In the near future, the dram's appreciation will be supported by the  maintenance of a high level of remittances and the growth of exports  exceeding imports, as well as the high activity of tourism in the  summer months. By the end of the year, the Armenian currency may  depreciate somewhat compared to the current level - as the tourist  season ends, demand for mineral products imports increases and money  market rates decrease. Nevertheless, the overvaluation of the  Armenian dram will remain until the end of the year.

According to EDB experts, the appreciation of the Armenian dram may  limit the growth of some sectors of the economy and shift resources  to non-exportable sectors. As of May, the nominal exchange rate  against a basket of currencies appreciated by 51% compared to the  beginning of 2022. This adversely affects the price competitiveness  of exports and increases demand for imports. At the same time, the  inflow of additional income increases demand in the services and  trade sectors, including the demand for labor, which over time may  cause the flow of production resources into these sectors and reduce  the role of the industrial sector of the economy.