Briefing Notes for the Launch in Yerevan, March 2008
Growth performance and medium-term prospects
- In 2007, Armenia was on target to expand at a double-digit rate for the sixth consecutive year and remain among the most rapidly growing economies in the world. GDP of the country expanded by 13.8 per cent in 2007.
- Construction, agriculture and services sectors were the most significant contributors to GDP growth in Armenia. Growth in construction was strong owing to new investment in industrial production and a boom in residential and office development. Economic growth became more broad-based with greater contributions of such services as trade and communications. The agricultural output grew by 9.6 per cent in 2007 with a doubling of the wheat harvest to 450,000 million tonnes.
- The main priorities for 2008-2009 will include improving governance and reducing poverty, increasing tax collection through the abolition of tax exemptions, and improving the operating environment for small and medium-sized businesses. The programme envisages 10 per cent GDP growth in 2008 and annual economic growth of at least 8 per cent in 2009.
Fiscal policy developments
- The state budget of Armenia recorded a small surplus, equivalent to 0.1 per cent of GDP in 2007 owing to the increase in tax revenue. However, the budget is expected to move back into deficit of 2.6 per cent of GDP by 2009 due to planned increase in expenditure on social programmes and infrastructure. Changes to tax legislation and improvements in the tax and customs administration could boost revenue in 2008-2009 but tax collection could remain a serious problem in Armenia.
Monetary policy and inflation
- Armenia, as other economies of North and Central Asia in 2007, had two key monetary policy targets: to curb rising inflation and to prevent excessive real exchange rate appreciation. Government tightened their monetary policy by increasing bank and government deposits and periodically raising the benchmark interest rates and refinancing rates of the central banks. During the year, the Central Bank of Armenia raised the refinancing rate to 5.75 per cent and increased the use of domestic instruments, such as repo operations (sale-and-repurchase agreements).
- Consumer price inflation in Armenia was set to rise from 2.9 per cent in 2006 to about 4.4 per cent in 2007 due to rising food prices and further growth in wages and household incomes. This rapid expansion of monetary aggregates and high import prices created considerable inflationary pressures in Armenia.
- The dram appreciated by about 10 per cent against the US dollar in nominal terms in the final quarter of 2007. The appreciation of the dram has led to concerns among those households who rely on remittances as the value of remittances was eroded when converted into the national currency.
- Despite a 9.1 per cent increase in the merchandise exports of Armenia, its trade deficit widened considerably, from US$ 826 million in 2006 to almost US$ 1.4 billion in the first nine months of 2007. Merchandise imports grew by 1.9 per cent and reached US$ 2.2 billion in the first nine months of 2007 as a result of a rise in imports of mineral products, machinery and equipment for construction projects.
- Due to the widening trade deficit the current-account deficit rose from US$78 million (equivalent to 1.9 per cent of GDP) in the first nine months of 2006 to US$327 million (5.7 per cent of GDP) in the first nine months of 2007.
- Remittances have become an important source of external finance for the economic development of Armenia. In 2007, they made a considerable socio-economic contribution to the economy. Remittances from migrant and temporary workers in foreign countries reached US$ 1.32 billion in 2007 and accounted for 14 per cent of the country’s GDP.
- FDI inflows continued to play a key role in the development and modernization of the economy of the country in 2007. FDI inflows in Armenia reached US$ 351 million in the first nine months of 2007 compared with US$202 million in the same period of 2006. a major portion of the increasing foreign investment was directed towards investing telecommunications and utilities sectors and financing the country’s current-account deficit.
Key policy issues and responses
- Making monetary policy more sound was a key policy challenge in Armenia in 2007. Other policy issues faced by the country included continued tax reforms, which played a key role in providing a solid budget performance.
- An important policy issue for Armenia in 2008-2009 is set to be implementation of social reforms. So far, the pace of implementation of social reforms has appeared to lag behind that of macroeconomic reforms. Government has taken many positive measures in managing their economic growth momentum to improve the living standard for the population. However, strategic investments are necessary to reverse trends towards increasing inequality and deteriorating education and health-care systems in the country. In 2007, the Government adopted a five-year policy programme aimed at reducing poverty from 30 per cent of the population to 12 per cent by 2012.
Agriculture and poverty reduction
- Chapter 3 of the Survey 2008 diagnoses Asia’s waning agriculture and assesses the impact of agricultural productivity growth on poverty. The chapter also analyses agriculture’s role in reducing poverty and inequality and proposes a two-pronged strategy to make agriculture economically and socially viable: first, revitalizing agriculture and second, facilitating migration out of agriculture.
- One of the conclusions of the Survey is promoting agricultural development in the region, particularly food production and generally rural development that promotes off-farm employment, can make the biggest contribution to reducing poverty in the Asia-Pacific region.
- As for Armenia, the proportion of people living below the national poverty line fell from 55 per cent in 1998 to 34 per cent in 2005. The Gini coefficient (a measure of income inequality, with higher values denoting more unequal incomes) came down from 44.42 in 1996 to 33.80 in 2003. However, income inequality remains a major challenge for the economy.