IS ARMENIA’S ECONOMIC EXPANSION SUSTAINABLE?

To the surprise of some observers, Armenia’s new “left-right” government has stayed the course on economic policy. Relations between Prime Minister Vazgen Sarkisian’s government and the IMF have remained cordial, despite Sarkisian’s criticism of the IMF during the spring parliamentary campaign. IMF support for Armenia’s economic program has therefore continued, and this could help Armenia build on the relatively strong economic performance it recorded in the first half of 1999.

Compared to other CIS countries, Armenia has survived the Russian crisis virtually unscathed. Despite dropping exports in the wake of the ruble’s August 1998 devaluation, Armenian GDP grew 4.9 percent during the first half of 1999 after surging 7.2 percent in 1998. Although declining exports boosted Armenia’s already large current account deficit in 1998, growing inflows of direct foreign investment stemming from the government’s privatization program helped finance this shortfall without running down official foreign exchange reserves. The Central Bank of Armenia has been able to use its reserves to support the dram, which has helped keep the exchange rate and prices stable. As of October 21, the exchange rate stood at US$1 = 522 dram, essentially unchanged on its October 1998 level. Year-on-year consumer price inflation was only 5.8 percent in July, compared to 126 percent in Russia.

Despite these encouraging trends, medium-term prospects for growth and stability in Armenia remain tenuous. The economic expansion is due in part to rising government spending, as the consolidated budget deficit is forecast to hit 6.1 percent of GDP this year. Likewise, the current account deficit is projected to still be above 20 percent of GDP, and both external and fiscal deficits are being financed in part by increased foreign borrowing. Armenia’s foreign debt has grown from 6 percent of GDP in 1995 to 45 percent in 1998, making these deficits almost certainly unsustainable. At some point, the government will need to tighten fiscal policy to slow the growth of this debt and remain in compliance with its IMF programs.

This policy correction, when it happens, could bring latent tensions within the governing coalition to the surface. Prime Minister Sarkisian’s Republican Party, which holds the key economic ministries, has emphasized policy continuity despite Sarkisian’s campaign rhetoric. As such, the Republicans could increasingly find themselves at odds with Parliamentary Speaker Karen Demirchian’s People’s Party. Demirchian, the former leader of the Soviet-era Armenian Communist Party, attracted support from many social groups who feel themselves to be victims of the economic transition. As such, his party may not be willing to put up with the continuation of IMF-type stabilization policies indefinitely.

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