Armenia Scrambling To Cushion the Effects of the Global Economic Crisis

Armenia’s decade-long economic recovery seems to be slowing down due to the increasingly visible effects of the global financial and economic crisis. The authorities in Yerevan are scrambling to minimize them by boosting government involvement in business activity and seeking hundreds of millions of dollars in emergency funding from Western lending institutions.

None of the country’s two dozen commercial banks, tightly regulated by the Armenian Central Bank, has so far faced the kinds of problems that hit many financial corporations in the United States and Europe in autumn. This has led President Serzh Sarkisian and other senior officials to declare that the Armenian banking sector has weathered the storm, but they also admit that the economy as a whole will not go unaffected by the worldwide downturn.

“We can not claim that the global economic crisis will not affect Armenia’s economy, but there are many factors enabling to us to keep the consequences of the crisis to a minimum,” Sarkisian said at a December 5 meeting with local commercial bank governors. Armenia, he said, had already gone through much harder times (statement by the president’s press service, December 5).

Sarkisian referred to the first years of the country’s transition to a market-based economy, which coincided with the collapse of the Soviet Union and the outbreak of the wars in Karabakh and elsewhere in the South Caucasus. Armenia’s gross domestic product (GDP) shrank by more than half in 1992 and 1993, but the economic situation stabilized and slowly began to improve shortly after a Russian-mediated truce halted the bitter war between Armenia and Azerbaijan in May 1994. Armenia’s economic growth has accelerated dramatically since the late 1990s, averaging 12 percent a year from 2001 through 2007.

According to government statistics, the proportion of Armenians living below the official poverty line dropped from around 50 percent to 25 percent during this period. Earlier this year, the Organization of Economic Cooperation and Development (OECD) upgraded Armenia’s status from a poor to a medium-income country. The British government’s Department for International Development cited this as the main reason for its decision to end its aid programs in Armenia late last month (Mediamax news agency, November 25).

Still, Armenian growth has slowed since the stock markets in the United States and around the world began collapsing in September. Official macroeconomic data for the first 10 months of 2008 put growth at 9.2 percent per annum, indicating that the Armenian economy might not expand at a double-digit rate for the seventh consecutive year. The construction sector, a key driving force behind the double-digit growth, grew by less than 7 percent from January to October, down from about 17 percent in the first half of the year.

Another negative effect of the global crisis has been a sharp fall in international prices for non-ferrous metals such as copper and molybdenum, Armenia’s largest export item. Hundreds of employees of local mining companies have been laid off or sent on indefinite leave as a result. Many others risk losing their jobs in the coming months.

The crisis could also reduce vital cash remittances sent home by hundreds of thousands of Armenians working abroad, particularly in Russia. These remittances have also been a major factor behind Armenia’s strong economic performance, enabling the country to finance its huge trade and current account deficits. According to the Armenian Central Bank, the total amount of individual cash transfers processed by local banks jumped by 45 percent to $1.21 billion, equivalent to 14 percent of the GDP, from January through September. The Armenian government recognizes that with the United States and Europe entering into recession and the Russian economy increasingly hard hit by falling oil prices, a reduction in the remittances in 2009 is now a real possibility.

Prime Minister Tigran Sarkisian (no relation to the president) believes that the government should grapple with this and other negative effects by significantly boosting its role in the overwhelmingly privately-owned economy. Addressing parliament on November 12, Sarkisian said that the government wanted to offer credit guarantees to, and even buy shares in, private firms that needed investments to expand their operations (168 Zham, November 13). He said that Yerevan was now negotiating with the World Bank, the European Bank for Reconstruction and Development, and the Asian Development Bank for $350 million in loans that would be used to aid Armenian companies that presented realistic business plans.

The prime minister claimed that the World Bank was ready to disburse as much as $800 million not only to assist the Armenian private sector but also to finance a “drastic increase in public works” planned by the government. President Sarkisian likewise stressed at the December 5 meeting the importance of increased commercial bank loans to small and medium-sized enterprises. He said that this had to become a top priority for Armenian banks.

The government also hopes to cushion the negative effects of the economic crisis with large-scale and extremely ambitious projects, such as construction of a new nuclear plant and a railway linking Armenia to neighboring Iran. Yerevan, however, has yet to find foreign investors interested in spending billions of dollars on these projects, so their implementation may still be a long way off.

So far, the Armenian authorities have succeeded only in obtaining a $13.6 million loan from the International Monetary Fund (IMF) last month. “The worsened global macroeconomic outlook has increased uncertainty, but Armenia is in a strong position to withstand the impact of the global economic downturn,” the IMF’s deputy managing director, Murilo Portugal, said during a visit to Yerevan on November 19. While predicting a slowdown in Armenian growth, Portugal said the country’s medium-term economic outlook “remains benign in view of favorable investment opportunities” (RFE/RL Armenia Report, November 19).