Tuesday, August 27 2024 11:55

ArmInfo.The Armenian economy is going through a turning point.  The latest statistics on GDP growth  revealed an alarming reality: the country's economic recovery, which has been so celebrated lately, was mainly built on unstable, exogenous factors, and economic growth was just an illusion. This assessment was made by Aghasi Tavadyan, associate professor at the Armenian State University of Economics, founder of the analytical  portal tvyal.com. 

It should be noted that according to preliminary data from the RA  Statistical Committee, economic activity growth in Armenia in  January-July 2024 slowed to 9.6% per annum (from 10.4% in the same  period of 2023). But unlike last year, the industrial sector has  become one of the growth drivers, which is accompanied by continued  high growth rates of exports and imports. Despite the fact that the  preliminary statistical report does not provide for the disclosure of  more detailed information, nevertheless, judging by the data of  previous months, the high growth of industrial production no longer  comes from the jewelry industry, which previously demonstrated growth  several times, now showing too moderate growth. In particular, the  high growth of the industrial sector is now supported to a greater  extent by the production of basic metals, electrical equipment, and  to a slightly lesser extent by the production of finished metal  products, furniture, woodworking industry, metallurgy industry.

Exposing growth myth

Tavadyan reminds that the growth in the first quarter of 2024 was  revised by the Statistics Committee to 6.6% from the earlier 9.2%,  which means a significant decrease. The indicator for the 4th quarter  of 2023 was adjusted by 1.3 percentage points - decreasing from 7.7%  to 6.4%. At the same time, the contribution of industry to GDP  sharply decreased - from 4 percentage points to 1.2. 

The reason, according to the economist, is the revision of the  indicators of the gold re-export .  , - the expert notes. At the center of this , he notes, is the phenomenon of gold re-export, which has  gained momentum since November 2023 and will continue until May 2024.  This sector seemed to make Armenia's growth indicators viable.  However, recent amendments have effectively negated its contribution  to GDP growth. In this vein, Tavadyan believes that GDP growth for  2023 at 8.7% may also be revised to 7.5%, since the indicator was  unjustifiably influenced by the "gold effect".

External factors and economic growth

Thus, in 2022, there was a significant capital inflow from Russia. In  addition, the growth of indicators was facilitated by large-scale  re-export of gold since November 2023. The current growth is mainly  provided by trade, real estate and financial services, which also  depend on external factors. , - the expert explains.

The IT sector, which has been one of the growth drivers since the  beginning of 2022, in the second quarter of 2023, having recorded an  annual growth of 62.6%, is now experiencing a significant decline. In  the second quarter of 2024, the sector showed a decline of 14.1%  year-on-year. Other industries, including catering and transport, are  also in decline. The growth of the main drivers of the economy -  construction and trade - is slowing down. Here are the main  observations that make the picture more alarming," he notes.

Risks and consequences

The decline of the IT sector and its consequences: The decline of the  IT sector is particularly alarming, notes Tavadyan. After three  consecutive quarters of decline, this strategic sector no longer  makes a positive contribution to GDP growth. This trend calls into  question the sustainability of Armenia's technological growth  strategy and the reasons for such a reversal. This indicates a crisis  in this sector.

Fiscal consequences: Problems related to the stability of economic  growth have a direct impact on Armenia's fiscal position.

There is currently a significant shortfall in tax revenues (9%), he  reminds. This deficit leads to discussions about possible reductions  in budget expenditures.

 

This situation increases the likelihood of an increase in public  debt>, the expert notes.

He identifies a number of factors that contribute to the risk of  public debt growth.

Economy at crossroads

 

The decline in the IT sector, the unstable nature of the real estate  sector's contribution to GDP, and potential financial problems all  point to the economy being at a crossroads. We cannot ignore the risk  of rising public debt and possible financial instability in the  coming years.

Our long-term GDP growth forecasts are not positive at this point.  Without a solid foundation for sustainable, long-term value-added  growth, Armenia may find itself chasing economic illusions instead of  building sustainable prosperity. The coming months and years will be  critical in determining whether the country can move toward more  sustainable economic strategies or whether it will continue to rely  on unstable and temporary growth factors>, - concludes Aghasi  Tavadyan.