Publication: Eurasia Daily Monitor Volume: 3 Issue: 153

Armenia’s economy is on track to expand at a double-digit rate for a sixth consecutive year, earning the government in Yerevan more praise from Western lending institutions. The Armenian authorities say that growth may slow down in the coming years but will still be strong enough to bring about a further drop in poverty and a sizable increase in the still modest public spending.

Official macroeconomic data for the first half of this year show the country’s gross domestic product increasing by almost 12% despite a slight decrease in industrial output. Trade and Economic Development Minister Karen Chshmaritian blamed the drop on July 26 on a continuing downturn in the local diamond-cutting industry, which produces one of Armenia’s key export items. He assured reporters that the impending reactivation of two large industrial enterprises in Yerevan will significantly boost the manufacturing sector in the second half.

The continuing robust growth has created additional inflationary pressures on the economy, leading the Armenian Central Bank (CBA) to twice raise its refinancing rate in recent months. The benchmark rate is currently set at 4.25%, up from last January’s level of 3.5%. The bank hopes that the new rate will help to keep inflation within a 3% limit in 2006. The Armenian authorities say this growth is one of the reasons for a renewed appreciation of the national currency, the dram. It has gained more than 10% in value against the U.S. dollar since January and is now worth 30% more, in dollar terms, than it was in late 2004.

Western donors, notably the International Monetary Fund, have been quick to heap more praise on Armenia. “Armenia’s economic performance has been impressive in recent years: double-digit growth since 2001 in an environment of low inflation; a strengthening external position; a reduction in poverty; and, more recently, a notable improvement in tax performance,” the IMF’s managing director, Rodrigo de Rato, said during a late June visit to Yerevan. “The authorities have done a commendable job in maintaining sound macroeconomic policies,” he added, promising to reward them with $34 million in additional IMF loans.

“Even China is not achieving that sort of growth,” observed Jeroen Kremers, another senior IMF official. The macroeconomic performance also earned Armenia this summer its first-ever credit ratings by two of the world’s leading risk-assessment companies. The BA2 and BB- grades assigned to it by Moody’s Investors Service and Fitch, respectively, indicate a medium-level of creditworthiness and a relatively high risk of doing business. Armenian Finance Minister Vartan Khachatrian and Tigran Sarkisian, chairman of the Central Bank of Armenia, insisted at a July 25 news conference that the ratings are quite high for an ex-Soviet state and will facilitate foreign investment.

The Armenian economy shrank by half in 1992 and 1993 following the Soviet collapse and the outbreak of the wars in Karabakh and elsewhere in the South Caucasus. Its slow recovery began in 1994 and accelerated several years later, despite Azerbaijan and Turkey’s continuing economic blockades of Armenia resulting from the unresolved Karabakh conflict. Armenian growth has averaged nearly 12% since 2001, according to official statistics endorsed by the IMF and the World Bank. The real impact on living standards on the country has been a matter of contention, however.

The Armenian government says the proportion of Armenians living below the official poverty line fell from 56% to 34.6% between 1999 and 2005. But the picture is rather mixed on closer inspection. While increased prosperity is visible in Yerevan (e.g., skyrocketing real estate prices, proliferating cars, shops, and other small businesses), many regions outside the Armenian capital have seen little development over the past decade. The economic upswing has clearly not been accompanied by the creation of a sufficient number of new jobs, with some independent studies suggesting that unemployment may still be as high as 30%. The uneven distribution of the benefits of growth also manifests itself through massive tax evasion by Armenia’s wealthiest citizens, many of them having close ties with the government.

Although the Armenian government’s tax revenues have been growingly steadily and considerably, they still made up only 14.5% of GDP last year, one of the lowest ratios in the former Soviet Union. President Robert Kocharian’s top economic adviser, Vahram Nercissiantz, admitted recently that the Armenian state budget, projected at just over $1 billion in 2006, should have been much bigger given the real volume of economic activity in the country.

The Kocharian administration claims to be tackling the problem in earnest. It has promised in particular to raise by 40% the salaries of civil servants and schoolteachers as well as pensions in the next three years. The pledge is part of the Armenian government’s short-term economic outlook that predicts a GDP growth of at least 6% a year from 2007 through 2009. Officials say Armenia’s GDP per capita will rise from the current $1,600 to $2,300 as a result.

Fitch also offered a “stable outlook” for the Armenian economy in a report released last June. But the Western credit rating firm cautioned that the economy remains “vulnerable to shocks” due to a low level of monetization and underdeveloped financial services. It also said the authorities in Yerevan should do more to “strengthen governance and the still relatively immature political system, as well as reduce the high level of corruption.”

(Noyan Tapan, August 1; Azg, July 26-27; RFE/RL Armenia Report, June 28, June 8; Hayots Ashkhar, June 20)