ArmInfo. According to the EBRD-prepared report "Regional Economic Prospects in the EBRD Regions", in 2023, economies in Eastern Europe and the Caucasus have been adjusting to the extreme shock to their economies caused by the war on Ukraine.
The Ukrainian economy is likely to show modest growth in 2023, subject to high uncertainty related to the war's intensity. Moldova is struggling to leave recession behind in the face of multiple structural challenges.
In the Caucasus, growth decelerated in 2023, from the extraordinary levels observed in 2022, to rates closer to long-term potential. Inflation has slowed down considerably throughout the region, though at a different pace in different countries.
In Armenia and Georgia, inflation is already below the target level, but it remains in high single-digits in Ukraine, Moldova and Azerbaijan. In all economies, the war on Ukraine remains a major risk to the economic outlook.
Specifically, Armenia's economy continued its exceptionally strong performance in 2023, but the first signs of a slowdown are already visible. GDP growth reached 10.4 per cent year on year in the period from 27 January to July 2023, driven by the strong performance of service industries in particular.
Net inflows of money transfers, which have been driving demand for services, declined by 10 per cent year on year in the first half of 2023, but the growth rates of exports and imports of goods remained robust. The exchange rate and foreign reserves have been broadly stable since the beginning of 2023. At the same time, the inflation rate fell below zero in July 2023, contributing to the reversal of the real effective exchange rate appreciation seen in the past two and a half years. The Central Bank of Armenia has started a gradual reduction in the policy rate, with two 25-basis point cuts in June and August 2023, bringing the policy rate to 10.25 per cent. Growth is likely to moderate in the second half of the year, as the temporary factors that contributed to Armenia's double-digit growth are dissipating. Therefore, GDP is expected to grow by 6.5 per cent in 2023 and 4.5 per cent in 2024. Geopolitical developments remain an important source of downside risks. The isolation of Russia, a major trading partner for Armenia, from western markets could have negative long-term consequences for the Armenian economy. Further escalation of the conflict with Azerbaijan is another major risk to economic prospects. On the upside, progress in re-opening the land border with Turkiye could yield economic benefits in the medium term.
After two strong years, Azerbaijan's GDP growth decelerated to 0.7 per cent year on year between January and July 2023. Growth in the non-oil sector slowed to 3.4 per cent from 9.0 per cent in 2022, mainly due to weaker growth of disposable incomes. The oil and gas sector continued to decline, by 2.2 per cent year on year over the same period.
Nevertheless, export and fiscal revenues remained robust amid an oil price above the prewar level and rising demand for Azerbaijan's gas.
In mid-2023, the government amended the budget to increase public sector wages and public investment, providing fiscal stimulus to the sluggish economy. Domestic demand also benefited from the strong increase in loans to households by 25.8 per cent (year on year) between January and July 2023. However, demand pressures have kept inflation relatively high at 9.4 per cent in July 2023 and the Central Bank responded by increasing its policy rate to 9.0 per cent in May 2023. High energy export revenues are likely to support GDP growth in the short term. Therefore, GDP is forecast to increase by 1.5 per cent in 2023, with growth strengthening to 2.5 per cent in 2024. The forecast is highly dependent on developments in the oil and gas markets.
Georgia's economy grew at a robust rate of 7.6 per cent year on year in the period from January to July 2023. Financial services, tourism, construction, and trade were the main drivers of growth, while the manufacturing and mining sectors registered declines. Income generated by foreign travelers increased by 57.9 per cent year on year in the first half of 2023 and tourism revenues are now well above pre-pandemic levels. Net money inflows continued growing at 29.4 per cent year on year in the first half of 2023, playing a crucial role in covering a significant part of the trade deficit and helping to bring down the current account deficit. Annual inflation fell to 0.9 per cent in August 2023, well below the National Bank of Georgia's (NBG) 3 per cent target. However, as domestic demand and cash inflows from migrants remain strong, the NBG has been cautious about rate cuts. It reduced its policy rate by 50 basis points in May 2023 and by a further 25 basis points in August, to 10.25 per cent. Given the continued strength of the economy in the first half of 2023 and the expected slowdown in the second half of the year, GDP is projected to grow by 6.0 per cent in 2023 and 4.5 per cent in 2024. The main downside risks stem from geopolitical developments. On the upside, the possibility of gaining EU candidate status could give a new impetus to structural reforms enabling growth and promoting economic stability.
The full report is available here: file:///D:/txt/EBRD_RegionalEconomicProspects_Sept2023_report.pdf