Central Bank of Armenia considers it necessary to enhance  effectiveness of government capital expenditures and refine tax  policies

ArmInfo.The Central Bank of Armenia believes that, given the heightened geopolitical and regional risks, as well  as a decrease in previous drivers of economic growth, implementing a counter-cyclical economic policy centered on enhancing the effectiveness of state capital investments and further refining tax policy is crucial for ensuring macroeconomic stability in 2025. 

Martin Galstyan, the head of the Central Bank of Armenia, expressed  this viewpoint at the parliamentary hearings focused on the 2025  draft budget, where he presented the Central Bank of Armenia's  corresponding assessment.

According to him, the draft budget considers reducing the strong  factors from previous years that directly influenced high economic  growth in the country. It focuses on strengthening the basic  potential of the economy. Consequently, the government's fiscal  policy will be designed to achieve a target of 5.6% economic growth.  To reach this goal, it is important to ensure the growth of economic  potential and implement effective structural reforms. Much will  depend on improving the investment environment, effectively utilizing  export stimulation tools, and efficiently implementing the  government's investment infrastructure programs.

Given the various risks and increased uncertainty emerging in the  world, the Central Bank considers it important to establish a reserve  fund and set strict conditions for its use, This fund should be used  exclusively in cases of financial coverage of macroeconomic risks to  ensure effective risk management.  As Galstyan noted, the budget  plans to increase the ratio of tax revenues to GDP by 0.7% compared  to the expected figure for the current year. This will result in the  share of taxes in GDP being 25%. According to him, despite some  adjustments to the government's medium-term economic program, this  factor will have a restraining effect on the formation of aggregate  demand. In this regard, the Central Bank considers it important to  improve tax administration and effectively implement tax reforms.  When discussing the government's capital expenditures, Galstyan  pointed out a slowdown in their growth compared to previous years.  The total growth will only be 0.3% of GDP. 

However, in contrast to this, the budget provides for an increase in  current expenditures by 0.8% of GDP.  In absolute terms they will  increase by 1.1%, amounting to 31.5% of the budget. As a result, the  budget deficit will be 5.5% of GDP, slightly above the neutral level.  To manage risks, a set of stabilization measures is needed to  mitigate cyclical fluctuations in the economy. In this sense, it is  necessary to focus on reducing current budget expenditures and  significantly increasing capital investments, which will help smooth  out macro risks.

As a result, the level of public debt will increase by 3.2% and  amount to 53% of GDP both due to new external loans and an increase  in the volume of domestic borrowings.  Galstyan said that the Central  Bank and the Government are currently discussing new inflation  targets.  

Let us recall that in September, the Central Bank of Armenia revised  its forecast for GDP growth in 2024.  In the "Monetary Policy for the  III quarter of 2024", the CB of Armenia adjusted the previous  estimate 6.8- 6.1% to a new range of 6.5-5.8%. This update was made  in light of the 8.3% growth in 2023 and is dependent on whether  inflation remains high or low.  The absolute value of GDP in 2024 is  projected to increase to AMD 10.2-10.1 trillion (from AMD 9.5  trillion in 2023). The GDP growth forecast for 2025 has also been  revised, with a new range of 5.9-3.7%, (previously 6.1-3.8%),  reaching up to AMD 11.2-10.9 trillion. In terms of industry  breakdown, GDP growth in 2024 will mainly come from the construction  sector - 14.5-13.7% (versus 15.7% in 2023), the service sector -  6.7-6.5% (versus 11.4% in 2023), the industrial sector - 4.7-4.5%  (versus 1.7% in 2023).  The agricultural sector is expected to  accelerate to 3.7% growth (up from 0.2% in 2023). 

Moreover, in comparison with the previous forecast, growth in the  construction sector has improved (from 12.7%), the service sector  (from 6.5-5.8%) and the agricultural sector (from 3.3-2.8%), while in  the industrial sector, on the contrary, it has worsened (from  8.3-7.5%). The dynamics of exports and imports, according to the  updated forecast of the Central Bank, show that after almost  identical growth in 2023 by 28.7-28.3%, there will be a slight  improvement in 2024 to 24.2-26.2% (for exports) and 24-23% (for  imports), with a reversal in 2025 towards a double-digit decline in  exports by 31.5-29.5% and imports by 28.4-30.4%. Compared to the  previous forecast, a slowdown in growth is now expected for both  exports and imports in 2024, with the decline being less severe in  2025. 

According to the new forecast of the Central Bank, the ratio of the  current account deficit to GDP, is expected to increase from 1.9% in  2023 to 3.5% - 3.9% in 2024.Previously a decrease to 1.3-0.6% was  expected. The Central Bank's forecast for 2024 regarding budget  revenues and expenditures remains unchanged: expenditures will grow  more noticeably - from AMD 2.5 trillion to 3.1 trillion, than  revenues - from AMD 2.4 trillion to 2.6 trillion, as a result of  which the state budget deficit will increase from AMD 191.6 billion  to 482.9 billion. As a result, in 2024 the ratio of the state budget  deficit to GDP will increase from 2% to 4.7%, with a slight increase  in the share of revenues in GDP from 24.8% to 25.9-25.7% and a more  noticeable increase in the share of expenditures in GDP from 26.8% to  30.6-30.4%. It is noteworthy that inflation is projected to be  slightly higher in 2024 at a level of 2 - 2.1%, compared to the  previously presented 0.9% and 1.3%, respectively. This is in contrast  to the deflation of 0.6% in 2023.