ARMENIA SHOWS SIGNS OF RECOVERY FOLLOWING FOURTH-QUARTER ECONOMIC COLLAPSE.

The Armenian economy collapsed in late 1999, following the October 27 assassination of Prime Minister Vazgen Sarkisian and seven leading parliamentary and government officials. According to the latest data from the CIS Statistical Committee, Armenia’s GDP dropped by 6.3 percent in the fourth quarter, due to sharp declines in investment, construction and retail sales. Fortunately, the Armenian economy is now showing signs of recovery; preliminary data show that GDP grew by 2.8 percent in February. This was Armenia’s first month of GDP growth since September 1999. Because imports in Russia–Armenia’s largest trading partner–are expected to grow in 2000, Armenia’s growth prospects could well improve this year. Whether the economy can return to the rapid rates of growth seen prior to the fourth quarter of 1999, however, remains to be seen.

Prior to October 1999, the Armenian economy had been one of the CIS’s top performers. After growing by 7.2 percent in 1998, GDP was up by 6.2 percent through the first three quarters of 1999, second only to Azerbaijan. However, in contrast to most other CIS economies–which were beginning to recover from the effects of Russia’s August 1998 financial crisis by the fourth quarter of 1999–Armenia’s economic expansion ended abruptly in October. GDP fell by 0.6 percent that month, due in large part to the government’s deteriorating fiscal position. Retail sales dropped by 48 percent this month due in large part to the government’s accumulation of US$32.3 million in arrears, of which the bulk were accumulated in the third quarter. A sharp slowdown in construction and public-sector investment, both of which had been growing by over 25 percent in the first three quarters, exacerbated the decline in retail trade in October. To secure the release of multilateral credits, the government cut its investment spending by 26 percent in late August.

The economy fell further in November in the wake of the assassinations. The political turmoil surrounding the formation of the new government slowed infrastructure spending and led to a collapse in construction activity in November, so that GDP fell by a staggering 14 percent in that month alone. The sharp declines in investment and construction continued into December and, due to the drop in demand for construction materials, caused industrial output to drop by 12 percent in December. GDP thus fell by 4.5 percent in December, reducing growth in GDP for the year to 3.0 percent.

Armenia’s GDP growth in February 2000 stemmed from solid industrial growth, which was due largely to a surge in exports of manufactures to Russia. But despite projections for continued growth in exports to Russia, Armenia’s economic prospects remain clouded by the government’s weak fiscal position, as the IMF and World Bank are pressuring the government to reduce Armenia’s budget deficit and large current account deficit. Due to the government’s inability to finance major construction projects as occurred during the first half of 1999, Armenia’s GDP growth could slow further this year.

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