Armenia`s economy to stabilize on 5.5% growth trajectory - EDB

ArmInfo.  According to EDB forecasts, the Armenian  economy will stabilize on a 5.5% growth trajectory with domestic demand maintaining its role as the main driver of development. This is stated in the Macroeconomic Forecast of the EDB Countries for 2025-2027.

Inflation in Armenia is forecast to be close to the target throughout the forecast horizon and will amount to 3.1% by the end of 2025. The average exchange rate of the dram this year is expected to be at the level of the previous year - 392 drams per dollar. The exchange rate will be supported by the growth of revenues from the export of tourism services and the inflow of remittances.

According to EDB analysts, economic growth in the country will  approach sustainable rates after the high indicators of the past  three years. The stimulating effect of fiscal policy, high rates of  lending to the population and the restoration of remittances will  support demand in 2025. In 2026 and 2027. economic growth will be close to long-term rates - 5.3% and 5.0%, respectively. In 2025, some cooling of economic growth of Armenia's main trading partners is expected. In Russia, the United States and China, economic dynamics will become more moderate, but will still be quite high. Relatively stable external demand for exported goods, as well as the restoration of positive dynamics of net remittances after a decrease in 2024, will support the Armenian economy throughout the forecast horizon.

Inflation is forecast at 3.1% y/y by the end of 2025. Inflation will  be close to the target range (3+1%) throughout the year. This will be facilitated by the recovery in global food prices, the effect of the reduction in the refinancing rate over the past year and a half, a stimulating budget policy and a moderate weakening of the dram by the end of the year. In 2026-2027, inflation will slow down somewhat after recovering in 2025 and will be close to the lower limit of the Central Bank of the Republic of Armenia's target range, averaging 2.8% per year. Such dynamics will be due to the stabilization of global food prices, the return of the economy to long-term growth rates and a slight weakening of the dram. The refinancing rate of the Central Bank of the Republic of Armenia will amount to 6.8% on average for 2025. In the conditions of inflation being within the target range of the Central Bank of the Republic of Armenia and balanced growth of domestic demand, the refinancing rate will remain  at the current level (6.75%) until the end of 2025. At the same time, according to our estimates, monetary policy will have a weakly positive effect on demand this year and a neutral effect in the medium term. In 2026-2027, the rate will be formed near 6.5%, which will correspond to inflation being stable within the target range of the Central Bank of the Republic of Armenia, and GDP growth rates at a long-term sustainable level, which is estimated at about 5% per year.

The average annual exchange rate of the dram to the dollar is  projected at 392 in 2025. The dram will be stable throughout most of 2025. The recovery of the dynamics of the net inflow of remittances after the decline in 2024 and the high level of international reserves will support the national currency. In 2026- 2027, the average annual exchange rate will be about 402 drams per dollar. A gradual moderate weakening of the Armenian dram compared to the current year will occur against the backdrop of a decrease in rates on the money market and a slowdown in economic growth. In addition, the dynamics of the dram exchange rate will be affected by the growth of imports in the context of stable domestic consumer and investment  demand. The impact of budget policy on demand in 2025, according to our estimates, will be stimulating, given the government's plans to achieve a budget deficit of 5.5% of GDP after 3.7% in 2024. 

The expansion of the deficit will be associated with an increase in the level of expenditure by 1.8 percentage points. up to 30.8% of GDP, while revenues in 2025 will be stable - 25.3% of GDP. The government plans to increase the level of capital expenditures to 6.3% of GDP in 2025 and stabilize them at 5.9% of GDP in 2026-2027. Successful implementation of these plans will contribute to an increase in overall productivity, which will have a positive impact on the rate of potential economic growth in the medium term. In 2026-2027, we predict a neutral impact of budget policy on demand, taking into account a gradual decrease in expenditures to 29% of GDP  and an increase in tax revenues to 25% of GDP by 2027.

The likelihood of a sharp outflow of capital and labor resources and the associated economic losses is becoming an unlikely risk for the Armenian economy. The outflow process will most likely be extended over time, and its impact will be gradual, so the economy will have time to adapt to the new conditions and compensate for the losses in other ways. The worsening geopolitical situation in the region increases the uncertainty of forecasts regarding key macroeconomic indicators. If unfavorable scenarios materialize, inflationary risks and risks of weakening external demand will increase, and the country  risk premium will increase.