World Economic Crisis Drags Armenia into Recession

Publication: Eurasia Daily Monitor Volume: 6 Issue: 52

IMF Deputy Managing Director Murilo Portugal

The global economic crisis is taking an increasingly heavy toll on Armenia, forcing its government to devalue the national currency, cut budgetary spending, and seek hundreds of millions of dollars in foreign assistance. With no end to the worldwide downturn in sight, the Armenian economy looks set to contract this year for the first time since the turbulent early 1990s.

The economy was on course to expand at a double-digit rate for the seventh consecutive year, when stock markets in the United States, Europe, and Russia began collapsing last September. The ensuing sharp fall in the international prices of commodities such as non-ferrous metals (Armenia’s largest single export) and a drop in the massive cash remittances from Armenians working abroad (Russia in particular) were enough to slow the 2008 growth rate to 6.8 percent. Official statistics show the country’s Gross Domestic Product shrinking by 0.7 percent in January 2009 compared with the previous year.

The World Bank believes that Armenia will at best post zero growth this year, while the International Monetary Fund (IMF) has forecast a GDP drop of 1.5 percent. The authorities in Yerevan, which projected a 2009 growth rate of at least 9 percent as recently as in November 2008, now agree with this bleak outlook. "Nobody can say how economic developments will shape up. We must be prepared for the worst-case scenario," Prime Minister Tigran Sarkisian said in remarks broadcast by national television at a cabinet meeting on March 12.

Sarkisian spoke as the authorities took what appeared to be a first step toward a major cut in the record-high government expenditures envisaged by Armenia’s $2.6 billion state budget for 2009. Citing a shortfall in state revenues, the Armenian Ministry of Finance proposed that the government "delay" the planned spending of $355 million until the fourth quarter of this year. Finance Minister Tigran Davtian indicated during the cabinet meeting that these expenditures (mainly earmarked for capital projects) might have to be cut altogether if the economic situation in the country followed a "worst-case scenario" (Kapital, March 13). Sarkisian backed the proposed austerity measure, making its formal adoption by the government a forgone conclusion.

The successful implementation of the 2009 budget is contingent on a 21 percent rise in the government’s income from taxes and other revenues; but proceeds from taxes dropped in January by about 13 percent year on year. The revenue shortfall and the anticipated GDP contraction make a downward revision of the budgetary targets all but inevitable.

The most visible and painful consequence of the crisis so far was the March 3 devaluation of the Armenian currency, the dram. After months of heavy monetary intervention in the local currency market, the Central Bank of Armenia (CBA) allowed the dram to depreciate against the dollar by nearly 18 percent within hours. The CBA is believed to have spent at least $400 million of its hard currency reserves to keep the dram’s exchange rate virtually unchanged since last October, a policy strongly condemned by local economists critical of the government. They believe that the Armenian authorities needlessly wasted the country’s scarce assets and should instead have ensured a smoother and more gradual weakening of the dram. The sharp devaluation immediately pushed up the prices of fuel and imported foodstuffs and sparked brief panic buying at Yerevan supermarkets and grocery stories.

The at least partial return to a floating exchange rate was welcomed by the World Bank and the IMF. Both lending institutions believe that it will make Armenian companies more competitive and thereby make it easier for the country to cope with the recession. The dram depreciation was apparently a key condition for the release of a $540 million emergency loan to Armenia approved by the IMF on March 7. Much of this "stand-by arrangement," repayable in 28 months, is expected to be used for easing the continuing market pressures on the dram. The IMF stated that $237 million of it would be disbursed immediately, while the remainder would come in nine installments "subject to quarterly reviews."

The statement quoted the Washington-based fund’s deputy managing director, Murilo Portugal, as reaffirming IMF support for the Armenian authorities’ response to the crisis. "The Fund is confident that the policy package put in place by the authorities is appropriate and strong," he said.

The World Bank similarly pledged last month to more than double its lending to the South Caucasus state to at least $525 million over the next four years. On February 24 the bank’s governing board disbursed three separate loans designed to mitigate the effects of the global downturn. The largest of these loans, worth $50 million, will be provided to several Armenian commercial banks that will in turn lend the funds to local small and medium-sized businesses in need of credit. Another $25 million will be spent on the construction of rural roads and other infrastructure, which is due to start this spring (A statement by the World Bank, February 24).

Armenia has also secured a $500 million anti-crisis loan from Russia. Just how the government plans to use the sum remains unclear.

Speaking to journalists on March 13, Sarkisian seemed to acknowledge that external assistance alone would not cure Armenia’s current socioeconomic woes unless it was accompanied by a "radical" improvement of its flawed business environment. He reaffirmed his pledge to crack down on gross tax evasion by wealthy government-connected businessmen who have effectively monopolized lucrative sectors of the economy (, March 13). But whether the reformist prime minister is powerful enough to accomplish this is an open question. President Serzh Sarkisian (no relation to Tigran), like his predecessor Robert Kocharyan, has relied heavily on the so-called "oligarchs" in neutralizing opposition threats to his power. He will therefore think twice before agreeing to risk alienating them.