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