ArmInfo.Armenia's GDP growth by the end of 2024 will be within 5%, but not 7% according to the approved state budget and not 5.8% expected by the financial authorities in the draft budget for next year, Vardan Aramyan, an international consultant on public finance management and former RA Finance Minister, stated in an interview with ArmInfo
- Mr. Aramyan, on September 26, the government approved the draft state budget for 2025. According to the document, by the end of this year, instead of the 7% envisaged by the budget, the authorities expect growth at the level of 5.8%, and by the end of 2025 - a <modest> 5.6%. Many were alarmed by the fact that the Cabinet was forced to adjust its own forecasts, which were also included in its program of activities to ensure an annual growth of at least 7%. What's the matter?
<The root of evil>, first of all, lies in the economic policy pursued by the country's authorities. In shock situations, the number one task is always to protect the export sector, the backbone of the country's economic potential. Only a diversified export sector can ensure the stability of the economy of a country with such a small economy as ours, its ability to withstand external shocks. Meanwhile, Armenian exports had to withstand the blow alone and without preparation.
When large amounts of money flow into the country through various channels, and high-quality adjustments to changes in economic policy are not carried out, the export-oriented sector begins to lose income and suffocate. Moreover, first of all, export producers are pressured by the revaluation of the national currency due to the influx of foreign currency and the uncompromising efforts of the Central Bank to curb inflation, since in this case there are also major inflationary threats. And, if the government does not interfere in the process in order to help the Central Bank fight inflationary threats on the one hand, and support the export sector on the other, then central banksCentral banks give preference to a policy of ensuring price stabilityinflation and allow the exchange rate to rise, and sometimes even softensoften inflationary risks mainly through the exchange rate, as was the case in our case by influencing the exchange rate. In these conditions, losses in terms of priceour export sector loses price competitiveness, which leads to and and domestic products and, as a consequence, to a comparative comparative decrease in comparative external demand for our domestically produced goods.
Secondly, the threat to exporters comes from the so-called external and internal real exchange rates. First, the external real exchange rate, which characterizes the ratio of prices for goods in a given country and abroad, expressed in one currency. If the real exchange rate is high, then foreign goods are relatively cheap, and goods produced in one's own country are relatively expensive. And vice versa. And the internal real exchange rate is the ratio between prices in the non-export sector, such as construction, as well as some services, and the export sector. And if prices in the non-export sector grow faster than in the export sector, leading to an increase in the internal real exchange rate, then, all other things being equal, profitability in the non-export sector grows, and it begins to steal, pull financial and human resources from the export sector to its side. As an example, if you remember, in 2002-2003. The well-developed cutting sector in Armenia began to shrink, diamond cutters began to close their enterprises and workshops, as the revaluation of the Armenian dram made this business unprofitable. Most of them went into the construction sector, where there was a high degree of profitability. Today, a similar situation is developing - capital flows into the construction sector and into services - tourism, restaurant business.
The third problem is that when money flows into the domestic economy, the Central Bank, in order to maintain price stability, begins to raise the key interest rate in opposition to the ongoing and pressing inflation. These two factors hit the demand curve of the average total costs, due to which expenses grow both in the exported and non-exported sectors. And if for the latter the growth of expenses is not so painful, since its domestic income grows in parallel and much faster, then for the exported sector these expenses become unbearable due to the growth of the cost of manufactured products and the reduction of income due to the appreciation of the national currency, the dram.
- I think the world knows how to solve such problems. The Armenian authorities would not have to reinvent the wheel:
Absolutely. The situation could have been saved by coordinated work of the fiscal and monetary instruments. That is, first of all, the government should have strengthened coordination of actions with the Central Bank and moved to joint implementation of the sterilization policy - that is, the Central Bank would have bought up large amounts of dollar surpluses in large volumes, preventing the strengthening of the national currency (before the Russian-Ukrainian conflict, the US dollar in the Republic of Armenia cost about 4820 drams per $, but since mid-2022 and to this day, with some deviations, it has remained at the level of 380 drams per $ - Ed.). At the same time, as a result of coordinated work with the government through an unplanned issue of government bonds, pumping out dram surpluses from the market (formed in the economy through the purchase of a large volume of US dollars), it was necessary to put these financial resources at the same interest rates or even slightly lower in the Central Bank in order not to increase the fiscal burden.
Meanwhile, in addition, due to the low level of coordination of work, some of the dram surplus was pumped out of the economy, but in order to prevent an increase in interest rates, the Ministry of Finance went to reduce the maturity of the domestic debt - the issue of short-term government bonds. And this is a rather dangerous and alarming relatively problematic phenomenon, since it increases the volume of current debt.
Secondly, in terms of fiscal policy, it was necessary to focus on taxation of the non-export sector in order, on the one hand, to cool the expectation of supernatural growth in the non-export sector and, on the other hand, to withdraw from the economy the dram surplus that appeared as a result of large purchases of foreign currency by the Central Bank, and either keep the entire amount in government accounts with the Central Bank, or redirect part of this amount to support the export sector. . Meanwhile, in 2022-23, on the contrary, taxes were mainly provided by the export sector. In addition, due to the low level of coordination of work, dram surpluses were pumped out of the economy, but in order to prevent an increase in interest rates, the Ministry of Finance went to shortening the terms of repayment of the domestic debt - the issue of short-term government bonds. And this is a rather dangerous and alarming phenomenon, since it increases the volume of current debt.
Thus, it can be stated that adequate measures were not taken, and economic growth at the end of 2023 and the beginning of 2024 was ensured mainly by re-exporting gold for about $5-6 billion. As a result, we have what we have, and today only the non-export-oriented sector is in the black. Therefore, when one not very fine day, as suddenly as they arose, external factors that promote growth are neutralized, we risk finding ourselves in the situation of 2009. In this regard, I consider the 5.8% GDP growth for 2024, expected by the draft state budget for 2025, to be quite ambitious and optimistic. I think that in the current conditions, growth within 5% growth in the current conditions is more realistic. The 5.6% growth for the coming years is also optimistic, unless another wave of positive shock occurs, as was the case with the re-export of gold. By the way, in the explanation attached to the draft budget for 2025, the Ministry of Finance also talks about the risks of economic growth, and it should be noted that the distribution chart of these risks of economic growth, the so-called fan table, also shows that a decline in growth rates in 2025 is much more likely than the opposite...
At the same time, due to geopolitical turbulence, at this stage it is extremely difficult to assert anything with a very high degree of probability, one hundred percent impossible. After all, just over a year ago no one could have known about <manna from heaven> in the form of a <transit channel> for the export and subsequent re-export of Russian gold and diamonds. Without this factor, we could not even dream of 5%, at best we would pray for 2-3% at best <pray> for 2-3%. Therefore, given that the RA economy is still quite dependent on the Russian Federation, even in the conditions of the collapse of the difficulties of the local economy, the smallest window opened by the $1.8 trillion Russian economy, in the amount of all the same $5 billion, can play the role of a lifeboat for the Armenian economy.
- In May of this year, Armenian Finance Minister Vahe Hovhannisyan assured ArmInfo that the potential for growth in Armenia's GDP generation has increased to 5.5-6% from the earlier 4-4.5%, thanks to structural reforms, investments, and programs to support the development of various spheres as a result of the government's work over the past 2 years. Do you share the minister's optimism in this regard?
No. I would very much like it to be so, but no, unfortunately, I do not share it. Look, if, for example, we were to analyze statistical data for the pre-crisis years 2002-2006, it might seem that we had formed a certain potential for economic growth. Econometric estimates for these years for this period showed an increase in the overall productivity of production factors, or, in simple terms, showed that overall productivity in the economy is growing. growing. But these indicators also included the so-called <noise> factor (the rationality factor from the 2002 Nobel Prize laureate in economics, psychologist Daniel Kahneman - Noise - Ed.). Today I can say that the GDP growth potential today is even lower than the previously announced 4-4.5%. This will become obvious when the economic crisis hits. All external temporary factors that had a positive effect on our growth will disappear, as happened to us in 2001-2008. Then there was a similar growth situation, and if in 2001 Armenia registered economic growth of 9.6%, then already in the pre-crisis years of 2002-2008 our economy of the RA grew by leaps and bounds, showing double-digit values. In particular, in 2002 the indicator reached 12.9%, in 2003 - 14%, in 2004 - 10.5%, in 2005 - 13.9%, in 2006 - 13.2%, in 2007 - 13.7%. Then we boasted that our potential had reached at least 7%. But already in 2008 the rates dropped to a single-digit 6.8%, and in 2009 the economy crashed to 14.2%. Then, for several years, we were quite <content> with an average growth of around 3.5%.
Today, the most dangerous thing for us is incorrect targeting in the state budget - that is, fixing over- ambitious and unrealistic goals. Including because of this, I did not believe, and, as it turned out, quite justifiably, in the ability of the economy in 2024 to ensure an improvement in the tax/GDP indicator by 0.7 p.p. in addition to the already improved indicator by 0.8 p.p. for 2023 (according to the results of the first half of this year, the tax shortfall amounted to about 8-9% - Ed.). Similarly, I do not confidently believe that in 2025 the tax-to-GDP ratio, compared to the expected indicator for 2024, will be increased by 0.7% (0.1% compared to the approved budget) and brought to the target indicator of 25%.
Thus, it is safe to say that the financial authorities are in a difficult situation and will most likely not be able to collect 304.1 billion drams more next year than expected by the end of 2024. Firstly, the RA GDP is not so taxable and, secondly, the country has not made any significant and rational despite some positive shifts in tax policy - the transition to the income tax declaration system, revision of the preferential turnover tax system, etc. - all this will not be enough to ensure such a significant improvement in the tax/GDP ratio; tax reforms. And, what is most dangerous - you cannot set the inspection body, in this case the State Revenue Committee, the task of plugging the budget hole by any means. They will do it as best they can - in our case - by trying to completely criminalize arrears. The consequence of this policy will not be to ensure the desired indicator, but to migrate businesses and flee capital. I see that many entrepreneurs are already close to the "suitcase mood".