armenian economy
DESCRIPTION
Report on "Armenian Economy starting from sovereignty until 2013" as a part of my research within the Public Finance courseTRANSCRIPT
QAFQAZ UNIVERSITY
2013
Armenian Economy Kamran Mehdiyev
Armenian Economy
General Information:
Official Name:
Republic of Armenia (Armenia)
Hayastany Hanrapetoutyun (Hayastan)
Capital:
Yerevan
Economic Highlights1:
GDP (Purchasing Power Parity)- $19.97 billion (2012 est.)
$18.63 billion (2011 est.) $17.8 billion (2010 est.) note: data are in 2012 US dollars
GDP (official exchange rate)- $10.07 billion (2012 est.)
GDP - per capita (PPP)- $5,900 (2012 est.)
$5,600 (2011 est.) $5,400 (2010 est.) note: data are in 2012 US dollars
Unemployment rate- 7% (2012 est.)
5.9% (2011 est.)
Budget- revenues: $2.338 billion
expenditures: $2.492 billion (2012 est.)
Economics:
Armenia’s economy has undergone a notable transformation since independence in the
early 1990s. Sustained growth, reforms, and external inflows of capital and remittances have created
a market-oriented environment that is highly receptive to trade, capital, and technological innovation.
The central challenge for the government is to continue the policy and institutional reforms
essential for recovery and long-term development. Increasing the economy’s resilience to external
shocks and creating new opportunities for development are important priorities.
Armenia’s energy sector has moved from severe crisis to stability thanks to a combination
of policy, legal, regulatory and institutional reforms. Remaining challenges include an emerging
supply gap, and maintaining energy supply reliability and affordable tariffs.
“Armenia is a land-locked country with limited transport routes making the road network
essential for sustainable economic development. A key government objective has been to improve
rural roads that link villages to main highways. These roads are called “lifeline” roads and comprise
some 3,014 km of Armenia’s 7,704 km non-urban roads. With World Bank support, the government
has already improved 290 km of lifeline roads while also creating temporary employment in road
construction. By the end of 2013, 140 additional km will be rehabilitated.
In the past decade, Armenia has made progress in improving the infrastructure that
provides reliable access to safe drinking water. The use of Public Private Partnerships (PPP) in the
water and wastewater sector in Armenia has been an example of sector development.
Agriculture plays an important role in employment and rural incomes, domestic food supply,
and a source of expansion for food products exports. Weather vulnerability and marketing challenges
have caused agriculture growth rates to fluctuate over the last decade. Strengthening preparedness
for natural disasters and climate change is a critical issue as Armenia is exposed to the impact of
climate change through intensified droughts, landslides and hailstorms that affect rural communities
and agriculture.
The Government has made education reforms by establishing a fully functional
Assessment and Testing Center (ATC) that introduced a centrally administered unified examination
system, which resulted in a more equitable and transparent system for university entrance. Education
reforms also included the new National Curriculum, school-based assessment, use of Information and
Communication Technology (ICT) in schools, and effective in-service training system.
The Government is in the midst of major healthcare reforms that focus on strengthening
Primary Health Care (PHC), optimizing the extensive health services networks, enhancing health
system governance and improving provider payment methods. The ultimate goal is to improve key
health indicators of the population, in which important steps have been taken but further progress is
needed.”2
Armenia’s Economic Performance
According to the data of Armenian Development Agency “Armenia has a successful record of
transition creating a favorable macroeconomic climate based on a market economy. There has been
consistent growth since 1994. The country has successfully implemented a comprehensive
stabilization and structural reform program. In 1993, the first stock exchange was established and the
new currency, the Dram, was introduced“. Relying on information provided from the same source I
can give information on Armenian labor force, one of the main factors playing a huge role in economic
development. So Armenia has population of about 3.2 ml people with the majority of youth population,
aged between 17 and 59(64.5%). 70% out of 3.2ml people in Armenia are skilled workforce
population, 26% are semiskilled and respectively 4% are nonskilled or people out of workforce.
Armenian Development Agency
Armenian economic performance was steadily increasing showing its results in investment
projects made by government in infrastructure within a country, but that growth rate was suddenly
stopped when Armenia faced economic recession in 2009, resulting in great amount of GDP decline.
As Forbes reports on that situation: “After several years of double-digit economic growth, Armenia
faced a severe economic recession with GDP declining more than 14% in 2009, despite large loans
from multilateral institutions. Sharp declines in the construction sector and workers' remittances,
particularly from Russia, led the downturn. The economy began to recover in 2010 with 2.1% growth,
and picked up to 4.6% growth in 2011, before slowing to 3.8% in 2012. Under the old Soviet central
planning system, Armenia developed a modern industrial sector, supplying machine tools, textiles,
and other manufactured goods to sister republics, in exchange for raw materials and energy. Armenia
has since switched to small-scale agriculture and away from the large agro-industrial complexes of
the Soviet era. Since August 2011, Armenia experienced a sharp 15 percent currency depreciation
and an increase in the unemployment rate. Armenia's geographic isolation, a narrow export base, and
pervasive monopolies in important business sectors have made it particularly vulnerable to the sharp
deterioration in the global economy and the economic downturn in Russia. Armenia has only two
open trade borders - Iran and Georgia - because its borders with Azerbaijan and Turkey have been
closed since 1991 and 1993, respectively, as a result of Armenia's ongoing conflict with Azerbaijan
over the separatist Nagorno-Karabakh region. Armenia is particularly dependent on Russian
commercial and governmental support and most key Armenian infrastructure is Russian-owned
and/or managed, especially in the energy sector. The electricity distribution system was privatized in
2002 and bought by Russia's RAO-UES in 2005. Natural gas is primarily imported from Russia but
construction of a pipeline to deliver natural gas from Iran to Armenia was completed in December
2008, and gas deliveries expanded after the April 2010 completion of the Yerevan Thermal Power
Plant. Armenia's severe trade imbalance has been offset somewhat by international aid, remittances
from Armenians working abroad, and foreign direct investment. Armenia joined the WTO in January
2003. The government made some improvements in tax and customs administration in recent years,
but anti-corruption measures have been ineffective and the economic downturn has led to a sharp
drop in tax revenue and forced the government to accept large loan packages from Russia, the IMF,
and other international financial institutions. Amendments to tax legislation, including the introduction
of the first ever "luxury tax" in 2011, aim to increase the ratio of budget revenues to GDP, which still
remains at low levels. Armenia will need to pursue additional economic reforms and to strengthen the
rule of law in order to regain economic growth and improve economic competitiveness and
employment opportunities, especially given its economic isolation from two of its nearest neighbors,
Turkey and Azerbaijan.”- (information was initially taken from http://www.forbes.com/places/armenia/#
but further research revealed the very source of information was CIA and here is the link to the initial
source https://www.cia.gov/library/publications/the-world-factbook/geos/am.html)
Armenia’s path since independence from the Soviet Union in 1991 can be broken down into
three rather distinct periods as follows: 1991-99, 2000-07, and 2008 to present day. The specific
features of these periods are highlighted in Armenia’s independent history in detail below.
Post-Transition Progress (1991-99)
Armenia’s return to growth in 1994—the first among the former Soviet republics still
recovering after the collapse of the USSR—was nothing short of remarkable and was achieved while
the economy was recovering from the impact of a devastating earthquake and a war with the
neighboring Azerbaijan.
Growth was underpinned by speedy and largely successful small- and medium-size state-
owned enterprise and land privatizations. Yet the failure to create conditions for proper functioning of
the markets and the lack of a meaningful role for the state became key constraints for progress
thereafter.
Ongoing conflict in Nagorno-Karabakh and the legacy of a highly industrialized but by now
mostly obsolete economic structure did not help.
Here is a short list of factors that proved critical and have influenced much of what had
happened next:
First signs of the nouveau riche concentrating sizable wealth and getting close to
economic decision-making have emerged.
The seeds of authoritarian governance were effectively sown. Generals,
returning from the front lines, were getting increasingly powerful and had a major role to play in
the hotly contested and violent 1996 election.
The promise to get the Diaspora involved meaningfully in rebuilding Armenia was
effectively reversed.
The assassination of then Prime Minister Vazgen Sargsyan—a controversial figure, who
nevertheless is widely seen as perhaps the only hope Armenia had for building a strong statehood—
and six others on October 27, 1999 in the parliament ended this period. The very high levels of public
buy-in and social cohesion, which were present during the early 1990s but almost disappeared during
the post-war reconstruction period, surfaced during V. Sargsyan’s short tenure in office, to never re-
appear again.
Qualitative Stagnation (2000-2007)
The period coincides with the rule of Robert Kocharyan, whose particular political skills
allowed him to consolidate power after the October 1999 assassinations and played a dominant role
in this handling of both political and economic affairs in the country. This period witnessed double
digit growth of GDP and macro-financial stability, but was marred by much of the same lack of regard
for good governance and properly functioning markets.
The construction sector, which was the main engine of growth during this period, absorbed
sizable amounts of credit and labor resources, driving interest rates, exchange rate, and wages up
throughout the rest of the economy. Under these conditions and without effective policy intervention,
the economy failed to diversify despite very strong signs of promise shown by some sectors (most
notably, IT and agro-processing), effectively preparing the ground for the dramatic decline of GDP in
2009.
Remittances and other transfers from abroad, which fueled this construction boom,
complicated the macroeconomic management and created adverse dependence at the
microeconomic/household level.
On the budgetary side, the period is characterized by a highly pro-cyclical fiscal policy, with
budget being in deficit even during years of double digit growth. Despite this, Armenia’s spending on
health, education, and public investment was among the lowest in the world measured as percent of
GDP. Much of this was underpinned by poor tax revenue collection, itself a function of the presence
of powerful oligarchs that were outside of the reach of the tax authorities. These oligarchs have
functioned under the direct patronage of country’s political leadership and grew more influential in
public life and economic decision making. The resulting monopolies in production and import of key
commodities curtailed competition, limited growth, and resulted in higher prices.
“In the doldrums” (2008-present)
This period is characterized by political upheaval of 2008 and the impact of the global
crisis. The poor crisis preparedness and inadequate policy mix during 2008-09 (with disproportionate
reliance on externally financed fiscal stimulus compared to exchange rate and structural policies)
resulted in a 14.2 percent decline in GDP in 2009, one of the worst performances in the world since
the beginning of the current crisis.
After 4 years, real GDP is still below its 2007 level and is projected to grow on in the
medium term, with sizable headwinds from Europe likely to undermine this outlook.
While some attempts were made to raise the level of tax-to-GDP, these efforts faced
resistance from the oligarchs and the decline in economic activity. This put most of the burden of the
stimulus on foreign borrowing. Public debt, while still largely on concessional terms, has reached
alarming levels and composition (in excess of 40 percent of GDP by end-2011 from 16 percent as of
end-2008, with close to 90 percent of it denominated in foreign currencies), with a sizable chunk of
repayments scheduled for 2012-14.
Here are some highlights that should help get a better sense of the governance and policy
landscape in the country at present:
State capture, the control of the economy by special interest groups, has gotten
worse. Economy remains highly concentrated in the hands of people directly/indirectly involved
in politics.
Migration, by now of the middle class, has intensified; inequality and poverty are
rising.
Developmental agenda is lacking and any future plans to vitalize the economy
will face an overvalued exchange rate, corruption, uneven playing field, and weak property
rights.
Overall, it is unclear as to where the potential growth could be coming from going forward,
assuming the same quality of governance, ongoing political polarization and social discontent
following the March 1-2, 2008 killing of demonstrators, and continued disengagement of the Diaspora
(that may have acted as a catalyst for foreign investment and a champion for better governance). In
the meantime, much of the same policies are being pursued and population is growing frustrated by
the day with the regime’s handling of economic and social affairs and the brave face it puts while
explaining its failure to deliver on promises.
Armenia: Macroeconomic Performance
Taken from Armenia Micro-Fiscal Context and Health Financing Factsheet3
Taken from the same source3
Armenia’s macroeconomic performance based on charts taken from Armenia Micro-Fiscal Context
and Health Financing Factsheet provided by The World Bank. “ Following a period of steep decline in
GDP and of high inflation, Armenia had stabilized its economy. Real GDP increased by 6.9 percent in
1995, and by 4.3 percent during the first half of 1996, compared with 5.4 percent in 1994. In 1995,
end-of period inflation fell to 32 percent, from 1,885 percent in the previous year. However, at the end
of 1996, regional instability and the blockade of Armenia’s transportation routes through Azerbaijan
and Turkey continued to pose a threat to sustained growth. “3.Beside with inflation and GDP growth
rates, unemployment rate as one of the main factors of macroeconomic stability is shown on the
charts. Unemployment rate started to be measured by 2002 was very close to 40% at that date,
slightly decreasing to 19% at 2013, and is estimated to decrease of about 1-2% in next 3 years.
“The central bank’s refinance rate was constant at 52 percent between October 1995 and
August 1996, whereas lending and deposit interest rates varied substantially. The nominal exchange
rate remained stable through May 1996 before undergoing a slight depreciation, while the real
effective exchange rate depreciated by 5 percent during the first six months of 1996. As a result of
high import levels and slow export growth, the ratio of the current account deficit (excluding official
transfers) to GDP increased from 36 percent in 1994 to 38 percent in 1995. At the time of the
consultation, privatization was practically complete in the agriculture and housing sectors and on
track for small-scale enterprises. Although privatization of medium- and large-scale enterprises had
slowed in early 1996 and fallen behind schedule, it had subsequently begun to accelerate. Most
prices had been liberalized, and electricity prices were raised 40 percent between October 1995 and
April 1996.
Progress had also been made with legal reform, -states IMF, particularly in the banking
sector, with the passage in 1996 of the Central Bank Law establishing the central bank’s
independence, the Law on Banks and Banking, and the Law on Banking Insolvency. Directors
complimented the authorities on the economic growth and low inflation achieved under the ESAF-
supported program and welcomed progress in systemic reforms across all sectors. However, major
problems remained to be addressed, notably with regard to fiscal policy, financial sector reform, and
privatization. Directors supported the introduction of a treasury system and elimination of all
expenditure arrears. They expressed concern, however, over declining tax collections and the
persistence of tax arrears. They urged the authorities to strengthen the fiscal position by broadening
the tax base to include the expanding private sector and further rationalizing expenditures. Directors
welcomed the improved implementation of the monetary program and encouraged the authorities to
take measures, such as expanding the use of treasury bills, to deepen the financial sector and
enhance the central bank’s flexibility. With respect to the exchange rate, they welcomed the move
from the de facto peg to a more flexible arrangement. The fragility of the banking system and the
increase in disintermediation were of concern to Directors. They urged the authorities to take bold
steps to strengthen the banking system and build public trust, including the reorganization of the
Savings Bank and the restructuring or, if necessary, liquidation of large commercial banks deemed to
be insolvent. The Board stressed that the current account deficit was unsustainably high. While
Armenia would continue to depend on sizable concessional assistance in the foreseeable future, it
would also have to create the necessary environment for attracting foreign investment and promoting
export growth. Directors expressed concern that some structural reforms had fallen behind schedule,
notably the privatization of medium- and large-scale enterprises, and that, as in other countries,
reliance on voucher-based privatization had not yielded desired improvements in enterprise
governance. They urged the authorities to accelerate privatization, legal reform, and the restructuring
of the energy and agricultural sectors. Following the Board discussion, updated estimates showed
that real GDP increased by 5.8 percent in 1996, compared with a program projection of 6.5 percent.
The current account deficit, at 26.6 percent, was lower than projected. Despite a sharp
increase in broad money during the second half of 1996, inflation was lower than projected owing to a
strong increase in the demand for money.“4
Obviously from the chart, Armenian Real GDP increased from 1994 to 1996 respectively
with 5.5%, 7.2% and 6% each year, showing the shrank increase in 1997 of 2.3%. In 1998 the economy growth rate achieved the 7.7% further decreasing to 2.2% of GDP increase, mainly because
of Russian financial crisis in 1998. After 1999 economy was steadily increasing by adding 2-3% each year.
The Gross Domestic Product (GDP) in Armenia was worth 9.91 billion US dollars in 2012.
The GDP value of Armenia represents 0.02 percent of the world economy. GDP in Armenia is
reported by the The World Bank Group. From 1990 until 2012, Armenia GDP averaged 4.3 USD
Billion reaching an all time high of 11.7 USD Billion in December of 2008 and a record low of 1.2 USD
Billion in December of 1993. The gross domestic product (GDP) measures of national income and
output for a given country's economy. The gross domestic product (GDP) is equal to the total
expenditures for all final goods and services produced within the country in a stipulated period of
time. This page contains - Armenia GDP - actual values, historical data, forecast, chart, statistics,
economic calendar and news. 2013-12-11
Central Bank of Armenia5
Central Bank of Armenia5
Inflation rate, shown above sourced from Central Bank of Armenia4, for 2009 was about
3.5%, further increasing to 7.3 in 2010, and kept above 7% rate in 2011. Estimated inflation rate for
2012 was about 4%, actually resulting in 4.3% in 2012
“Armenia’s economic freedom score is 69.4, making its economy the 38th freest in the
2013 Index. Its overall score has increased by 0.6 point from last year, mainly reflecting the better
management of public spending. Armenia is ranked 17th among the 43 countries in the Europe
region, and its score puts it above the world and regional averages. Considerable diversification of
the economic base has increased economic dynamism in Armenia, and a decade of strong economic
growth has reduced poverty and unemployment rates. Regulatory efficiency has been facilitated by a
broad simplification of business procedures. Following expansionary fiscal policies in recent years,
steps have been taken to limit the cost of government through more prudent public finance
management. Although Armenia performs relatively well in many categories of economic freedom,
stronger foundations are needed in areas like judicial independence and government transparency.
Despite progress in tackling corruption, particularly within the tax and customs administrations, the
close relationships within political and business circles raise concerns about cronyism and undue
influence by vested interests.”6
Government Budget and Debt
Government Budget
Armenian Government Budget is reported by Central Bank of Armenia since 1995. Armenia
Government Budget averaged -3.2 Percent of GDP reaching an all time high of -0.7 Percent of GDP in December of 2008 and a record low of -7.5 Percent of GDP in December of 2009. Government
Budget is an itemized accounting of the payments received by government (taxes and other fees) and the payments made by government (purchases and transfer payments).
Central Bank of Armenia5
Armenian government budget in 1991 was 4.6bl Armenian dram. In 1995 this figure reached
the 94.5bl AMD. 1995 was first year when Armenian Central Bank started to report Government Budget, and in which year budget showed deficit of 31% of decline based on 1994 year’s figures. Armenian Central Bank started to report information on Consolidated Budget since 2000. So
beginning from 2000 Armenian Consolidated budget amount was 205bl ADM, with budget deficit of 26.6%. After 2008 when Armenia faced recession in 2009, its consolidated budget shrank, but in
2010 consolidated budget showed a small amount of increase returning Budget into before recession situation. Unlikely from consolidated budget government budget showed decrease in both 2009 and 2010, resulting in small positive amount increase only in 2011 making government budget 881bl
ADM. Last report by Armenian Central Bank consisted of budget highlights for 2012 with consolidated budget of 968.3bl ADM.
Central Bank of Armenia5
Central Bank of Armenia5
In the upper tables I gave information about revenue and expenditure side of Armenian State Budget. Budget in this specific case gets revenues from taxes, duties and compulsory social
insurance contributions, which are also divided into tax revenues, duties, other incomes, official transfers and compulsory social insurance contributions. Government expenditures are classified
mainly according to functional classification method, so that there are 11 groups within a government demanding for capital to support government maintenance. If to look at expenditures side more deeply first of all it is noticeable that for every and each year government expenditures are more than
its revenues, resulting in government budget deficit, making government to look for other sources of capital. As within the country there is no any large financial institutions and other financial
organizations, which can afford to be a sponsor for government, Armenian Republic is made to look for financial aid and debt in foreign markets, also increasing government debt.
Government Debt
Continuing the topic about government debt stated in Government Budget, as Armenia had
Budget Deficit, since first day of independency, government looked for sources of capital in foreign countries, increasing government external debt. Increasing rate of external debt can be explained by various factors such as increasing population and demand for government services, making
government budget to enlarge. The need for forming new government budget+returning back
interests of debts from previous years. But main factor is war between Armenia and Azerbaijan
putting pressure to Armenian budget to spend more capital to defense and other military systems without having any other stable source of money transfer except Armenian Diaspora. After recession
in 2009 there was a great need to fulfill budget and because of that factor Armenian external debt boomed, increasing external debt amount by nearly 2 times.
Summary
As with other countries making the change from a command economy to capitalism, the
changes have been difficult, the bulk of the population has not seen real gain in the quality of their
lives. Although Armenian economy was deeply suffered from economic recession in 2008-2010,
mostly because of majority of economy is managed by Russian investors, and its heavily dependency
on Russian economy and its effects, Armenia nowadays tries to decrease the unemployment rate and
curb the inflation rate. Armenia’s central policy objective affecting industry is privatization. Pending
completion of the privatization program, the government is forcing state-owned enterprises to operate
according to market principles. Since the beginning of 1995, no direct subsidies have been granted to
the industry. This is in sharp contrast to previous years, when direct subsidies were provided on a
fairly large scale via concessionary credits to firms. The countries of the European Union account for
one-third of Armenia’s trade; trade with the United States, Russia, Israel and Iran is also
considerable, followed by Turkmenistan and Georgia. Israel, now Armenia’s third-largest trading
partner, is primarily involved in joint diamond-cutting ventures. A proposed project to build a pipeline
to carry Iranian natural gas to Armenia has been on hold for several years due to lack of funding; for
now Turkmenistan supplies Armenia with gas for most of its needs. Besides of this pipeline, there are
many of other pipelines longed through the region, and of course if Armenia accepts to return
Azerbaijan territories back, it will benefit from them, as main source of these pipelines is Azerbaijan,
and without its goodwill Armenian development would be much more slowed. Other factor preventing
Armenia to develop is closed borders with Turkey, building barriers to trade within the region.
Armenia was also acceded to membership in the World Trade Organization in February 2003, which
is another mainstream in Armenian central government economic policy. However Armenian central
government plans are building strong relationship with European Union in future, but after a long
fluctuation its preference was on the side of Custom Union, organized mostly by Russia, and seemed
as restructuring of old Sovet Union. This option mostly promises to Armenia more dependency on
foreign sources, mainly Russian ones that in my opinion will furthermore result in increasing rate of
external debt and budget deficit. Let’s wait and see its economic results for Armenia.
1http://www.indexmundi.com/armenia/economy_profile.html- Index Mundi official site
2http://gov.am/en/official/ - Official site of Government of Armenian Republic
3 http://www-
wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2013/08/14/000333037_20130814150227/Rendere
d/PDF/802610BRI0Micr0Box0379803B00PUBLIC0.pdf
4 http://www.imf.org/external/pubs/ft/ar/97/pdf/file07.pdf - Annual Report of IMF in the April of 1997
5 http://www.cba.am- Central Bank of Armenia
6http://www.heritage.org/index/pdf/2013/countries/armenia.pdf - downloaded from official
http://www.heritage.org – Index of Economic Freedom
7 http://www.ev.am/media/documents/ACR/2011-2012/ACR%202011-2012_eng.pdf