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.
