Economic Analysis
Armenia

Armenia

Population 2.9 million
GDP per capita 3 520 US$
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Synthesis

major macro economic indicators

  2014 2015  2016 2017 (f)
GDP growth (%) 3.6 3.0 0.2 3.0
Inflation (yearly average) (%) 3.0 3.7 -0.5 2.0
Budget balance (% GDP) -1.9 -4.8 -5.6 -3.0
Current account balance (% GDP) -7.6 -2.7 -2.5 -3.0
Public debt (% GDP) 41.4 46.9 50.6 51.6

 

(e) Estimate (f) Forecast

STRENGTHS

  • Significant mining resources (molybdenum, copper, gold)
  • Significant support from international organisations and the diaspora
  • Member of the Eurasian Economic Union (EAEU)

WEAKNESSES

  • Geographically and politically isolated, aggravated by a lack of infrastructure
  • Strong dependence on Russia (trade: 20% of exports, 30% of imports, FDI, loans, remittances)
  • Persistently high level of unemployment
  • High level of corruption
  • Conflict with Azerbaijan regarding Nagorno-Karabakh

RISK ASSESSMENT

The Armenian economy has stood up to the regional environment

Unlike in Russia and Azerbaijan, growth in Armenia did not contract in 2016. In 2017, growth is expected to be driven by activity in the industrial sector. Increased mining production, particularly of copper, is expected to continue in 2017, driven by a slight uptick in global commodity prices, which had been down since 2011. A recovery, even a moderate one, in Russian economic growth should also encourage household demand thanks to remittances from expatriates. These remittances make up about 15% of the country's GDP and mainly come from Russia (more than 60% of the total). However, the Armenian economy will still suffer from major structural problems. The lack of infrastructure and competition in the domestic market, the fragility of institutions, the persistently high unemployment rate (around 18%), as well as the deteriorated business environment are some of the most significant sources of vulnerability.

In 2017, inflation is expected to return in spite of the decrease in natural gas prices seen since January. Improved domestic demand, particularly spurred by the gradual loosening of monetary policy by the central bank (key interest rate decreased from 8.75% to 6.0% between January 2016 and February 2017), as well as increased food and commodity prices are expected to put upward pressure on prices.

 

Budget consolidation and relative stabilisation of the current account deficit expected in 2017

The budget deficit is expected to be reduced in 2017 thanks to consolidation efforts undertaken by the government with support from the IMF. Started in 2016, these efforts are focused in particular on efficiency in the tax system. The adoption of a new Tax Code by the Parliament in 2016, including a number of measures that aim to improve tax collection, may help increase revenue in 2017.

The government also intends to limit non-priority expenditures, particularly social and infrastructure spending. The government is expected to not increase wages or retirement benefits in 2017 in order to ensure the sustainability of public debt, which is expected nonetheless to continue to increase in proportion to GDP, but at a slower pace than in the last few years.

The current account balance is likely to remain in deficit. Indeed, the rise in imports tied to the expected increase in domestic demand is likely to be only partially offset by higher export revenues, coming notably from improved copper prices (20% of total exports). Increased transfers should prevent an overly strong deepening of the deficit.

 

Fragile political, social, and geopolitical stability

After 2016, a year marked by various social movements, a hostage situation at a police station in which two officers were killed, and the replacement of the Prime Minister in September, the results of the parliamentary elections in April 2017 are expected to allow President Serzh Sargsyan to continue with his second term in a more favourable situation. His party (the Republican Party of Armenia, RPA) garnered 58 of 105 seats in the National Assembly. While the relative popularity of the RPA is not in question, acts of vote buying and voter intimidation were reported by international observers during this election.

Mr Sargsyan will not be able to seek a third term in the 2018 presidential election. However, he could become Prime Minister at the same time that Armenia becomes a parliamentary republic in accordance with the constitutional amendments that Mr Sargsyan had approved at the end of 2015 after a referendum.

Widespread corruption, persistent unemployment, and growing inequality and poverty are contributing to popular discontent, which could translate to new protests, particularly as the presidential election approaches.  

In the region, the dispute with Azerbaijan over the territory of Nagorno-Karabakh saw an escalation of violence in April 2016, ending in a four-day confrontation. Tensions then calmed down, particularly after intervention by Turkey, which maintains strong diplomatic relations with Azerbaijan, as well as by Russia, a partner to Armenia. As there seems to be no long-term solution to resolve this conflict, the status quo is expected to continue in the coming months, with the possibility of occasional confrontations.

 

Last update : March 2017

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