Armenia`s economy vulnerable to external shocks - EFSD

ArmInfo.In 2024, the growth of the Armenian economy will slow down slightly, but will remain at a  high level of 6.3%. This is stated in the regional economic review of the Eurasian Fund for Stabilization and Development (EFSD) for the summer of 2024.

According to the source, despite the high economic growth recorded in  the first quarter of 2024, the GDP forecast for 2024 remained  unchanged due to the significant structural changes currently  observed. The pace of the main growth drivers has slowed  significantly, with the exception of net exports (gold re- exports).

The budget deficit for 2026 increased by 0.6 percentage points. due  to the planned increase in budget expenditures. Prices are returning  from the deflationary zone more slowly than expected, which led to a  decrease of 0.2 percentage points. 12-month inflation forecast for  2024.

As EFSD analysts note, from the second half of 2024, the growth of  exports of goods and services will slow down against the backdrop of  a slowdown in gold re-exports. Despite the fact that the largest  contribution to GDP growth in the first quarter of 2024 was made by  net exports, it is expected that from the second half of 2024 the  growth of exports of goods and services will slow down against the  backdrop of a slowdown in gold re-exports and the continued  overvaluation of the Armenian dram.

Consumer and investment demand will remain the main drivers of growth  in the Armenian economy.  Consumer demand will be supported by  continued growth in consumer lending and wages. At the same time, the  growth rate of real wages will slow down somewhat. Increased  investment demand will be driven by further growth in government  investment and housing construction.

In the medium term, economic growth rates will be around 5.6% in  2025-2026. Monetary policy will be aimed at returning inflation  within the target corridor (4+1.5%).

According to EFSD analysts, 12-month inflation in December 2024 will  be 3.0% (y/y) against the backdrop of a gradual normalization of  monetary conditions - a reduction in the refinancing rate and a  weakening of the Armenian dram. In the medium term, inflation will  remain close to its target values. The increase in budget  expenditures is expected to reach 30.3% of GDP, driven by an increase  in current and capital expenditures. Against the backdrop of growing  social spending, current spending will increase from 21.8% of GDP  (2023) to 23.5% of GDP. A significant increase in capital spending is  also expected, as provided for in the medium-term government spending  program for 2024-2026.

As Sergei Ulatov, Deputy Executive Director and Chief Economist of  the EFSD, said at an online conference on the occasion of the release  of the report, there are quite serious budget risks in Armenia,  including those associated with high government spending, including  those associated with political factors.  <The budget deficit,  according to our forecasts, will be about 5% in 2024 and 4.1% in  2026. That is, the budget deficit will remain at a fairly high level  and our estimates indicate that expenses will increase, which means  budget risks will persist," he noted.

Another imbalance that has formed, Ulatov believes, is a serious  strengthening of the dram in 2022. Now there is a gradual  normalization of the exchange rate, but we still believe that the  exchange rate is overvalued and the risks of devaluation remain if  foreign economic conditions change sharply.

According to him, if we talk about our research, and this is typical  not only for Armenia, then there is an increase in political tension,  and when assessing it is necessary to take into account the influence  of the Russian factor and Russian impact on economic growth in  countries, including Armenia. According to the Fund's experts, the  influence of Russian capital on Armenia amounted to about 4% of  economic growth, and there are risks that this influence, the  influence of this factor, will decrease.

The expert called it "unusual" that deflation occurred within the  framework of very high consumption and consumer activity in Armenia,  which rather indicates the influence of non-monetary external factors  affecting food prices in Armenia. This in turn suggests that  macroeconomic management in these countries, including Armenia, is  very vulnerable to the influence of external shocks. <There was a  positive shock here, but it could also be a negative one. It can be  seen that external shocks are very quickly transmitted to Armenia  both through economic growth and inflation, so we are keeping our  finger on the pulse, taking care of how to timely support Armenia  from the possible negative impacts of external shocks," Ulatov  concluded.