Armenia

EDB investment portfolio

01/02/2018

9 projects

$150 million

2.38% of the total

EFSD investment portfolio

06/30/2017

4 projects

$512.2 million

9.3% of the total


Armenia became a full member of Eurasian Development Bank in April 2009. Its contribution to the Bank’s capital is US $100,000.

Trends

GDP

2Q 2017 GDP growth was 5.5% y-o-y (vs. 6.5% growth in 1Q 2017), according to preliminary estimates. GDP growth was driven by household consumption (up 9.3% from 2Q 2016) and additionally supported by a gradual easing of lending terms, higher real incomes, and a growing influx of remittances from migrant workers. Higher consumer demand combined with gradually increasing volumes of bank lending to private sector businesses contributed to a slowdown in the decline of gross fixed capital formation. Improved terms of trade against the background of accelerating growth in the primary trade partner nations contributed to further growth in physical export volumes (up 22.5% in 2Q 2017 from 2Q 2016). Still, net exports continued to drag down GDP growth due to the even higher growth in physical import volumes (up 29.7% in 2Q 2017 from 2Q 2016) against the background of recovering domestic consumer activity.

Growth in economic activity slowed in August 2017, up by 2.4% y-o-y, or 4.6 percentage points less than in July 2017. The indicator rose 5.5% in January-August 2017 from the comparable period in 2016 (6.2% in January-July). The chief factor behind this economic activity slowdown was the shrinking agricultural output (down 25% in August 2017 from August 2016) due to adverse weather conditions. The construction industry continued to make a negative contribution to the economic activity trend (down 5.1% in August 2017 from August 2016). The manufacturing industry, commerce, and services continue to exert a positive effect on economic activity against the backdrop of the ongoing recovery in both external and domestic demand (up 10.9%, 12.4%, and 15.5% in August 2017 y-o-y, respectively).

In terms of income spending, strong consumer demand persists: retail sales rose 5.9% in August 2017 from August 2016. Decreasing interest rates for consumer loans denominated in drams continue to exert a stimulative effect on consumer activity, which is manifested in growing household lending (up 14.2% in August 2017 from August 2016) and remittances from migrant workers. Export volumes in money terms continued to grow at a high rate in July-August 2017 (up 21.8% in August 2017 from August 2016), supported by a weakening of the real effective exchange rate of the dram and acceleration of economic activity in trade partner countries.

Inflation

After the 2Q 2017 uptick in annual inflation, consumer price index growth slowed in July-August 2017. August inflation was 0.9% vs. August 2016 (June inflation was 1.1% vs. June 2016). Slower growth in prices for agricultural products was the primary factor behind this inflation trend in the summer months.

Core inflation (net of changes in prices for seasonally volatile goods and regulated services) accelerated in July-August 2017 (up 1.5% in August 2017 from August 2016 vs. a 0.3% increase in June), which was aided by the continuing dampening of the disinflationary effect of domestic demand. The steady growth in core inflation since the beginning of 2017 is indicative of a favorable recovery trend in inflationary processes. This will gradually bring the inflation rate to the lower limit of the target range in 2018.

Exchange Rate

The real effective exchange rate of the dram weakened by 3.1% in July 2017 vs. July 2016. The real exchange rate devalued by 3.5% in January-July 2017 from the comparable period in 2016. The nominal effective exchange rate of the dram weakened by 0.9% in July 2017 from July 2016 (or by 0.1% in January-July 2017 from the comparable period in 2016).

The devaluation of the real effective exchange rate of the dram, together with rising external demand and export prices, continue to stimulate exports from Armenia. Export volumes in money terms grew by 21.7% in January-August 2017 from the comparable period in 2016. Against the background of rapidly growing consumer activity in Armenia, imports have been rising at a faster rate that exports (up 26% in January-August 2017 y-o-y), contributing to a widening negative balance of trade (USD 1,114.2 million in January-August 2017 vs. USD 855.3 million in January-August 2016).

The devaluation of the Armenian dram against the Russian rouble (18.1% in January-August 2017 y-o-y) along with growing domestic demand in Russia have driven growth in Armenian exports to the Russian market, which increased by 36.6% in money terms in January-August 2017 from the comparable period in 2016. Imports from Russia also increased, fueled by rapidly growing economic activity in Armenia (up 22.8% in January-August 2017 y-o-y).

The current account showed a surplus of USD 20.9 million in 2Q 2017 (vs. a deficit of USD 42.2 million in 2Q 2016). The improvement in the 2Q 2017 current account from the comparable period in 2016 is attributable to the growing influx of primary income (mainly reinvested earnings) and secondary income. The widening trade balance deficit continued to exert a negative effect on the current account due to a steady increase in imports against the background of rising household consumption.

The rapid recovery in the Russian economy contributed to continued growth in remittances from migrant workers. Remittances in dollar terms rose by 19.8% in July-August 2017 (including an 18.8% increase in money transfers from Russia) from the comparable period in 2016, according to the Central Bank of Armenia. In the first eight months of 2017, money transfers grew by 17.5% y-o-y overall (including a 16.6% increase in money transfers from Russia). The growing volume of remittances from migrant workers in 2017 is one of the factors behind the rapid recovery in economic activity, above all consumer demand, and also has a favorable effect in terms of reducing the current account deficit.

International reserves amounted to USD 2,176.4 million at the end of August 2017, up by USD 160 million from June 2017. Foreign-currency loans mobilized by the government contributed to the growth in gold and foreign currency reserves.

Fiscal Policy

The state budget posted a deficit of 71.7 billion drams in January-August 2017, or 54.5 billion drams less than in the comparable period of 2016 (a deficit of 126.2 billion drams). The budget deficit has been declining owing to both growing budget revenue (5.1% up in January-August 2017 y-o-y) and lower spending (down 2% in January-August 2017 y-o-y). Rising consumer demand in January-August 2017 contributed to growing VAT and excise revenue (up 5.1% and 33% from January-August 2016, respectively), while the growing output of the mining industry translated into higher mineral tax revenue (up 64.7% from January-August 2016). Lower budget spending is due to a scale-back of subsidies and transfers to the economy, as well as lower spending on goods and services (down 9.5%, 11.5%, and 11.5%, respectively, in January-August 2017 y-o-y).

Armenia’s sovereign debt rose by USD 118.7 million (or 1.9%) in July-August 2017 to USD 6,259.5 million (or around 56.5% of GDP). The country’s growing debt obligations are mainly due to an increase in both foreign and domestic public debt (by USD 64.6 million and USD 40 million, respectively). Public debt has grown by USD 317.4 million since the beginning of 2017.

The Armenian Ministry of Finance estimates1 that public debt may reach USD 6.7 billion, or 58.8% of GDP, by the end of 2017, and USD 7 billion (60% of GDP) in 2018.

Monetary Policy

The Central Bank of Armenia kept the refinancing rate at 6% in 3Q 2017 against the background of growing core inflation and continuing strong consumer demand. The Central Bank estimates that this refinancing rate will help achieve the target inflation rate in the medium term.

A reduction in bank lending interest rates in January-August 2017 translated into more lending to private sector businesses and households. Loans denominated in drams rose by 24.1% in August y-o-y, with loans to the private sector up 34.6% and households up 14.2% (up 15%, 19.8%, and 8.4%, respectively, in January-August 2017 y-o-y).

Dollarization of residents’ bank deposits stood at 57.2% in August 2017, down 4.9% y-o-y or 3.1% since the beginning of 2017. Term deposits of households showed the fastest reduction in the rate of dollarization (down 5.6% in August y-o-y) due to attractive interest rates for deposits denominated in the national currency against the backdrop of a steady dram to US dollar exchange rate (the difference between interest rates for deposits in drams and foreign currencies is over 5 percentage points). Dollarization of loans to residents is also declining. It was 62.3% in August 2017, down 4.2% y-o-y or 2.4% since the beginning of 2017. Despite the reduction in financial dollarization, its level remains fairly high compared to that in other Eurasian Economic Union member states, which hinders the effective operation of the transmission mechanism of monetary policy.


1 https://news.am/rus/news/411717.html

EDB’s priority areas of operation in Armenia in 2013-2017 are as follows:

  • Infrastructure projects to reduce transport dependency and ensure energy security.
  • Export enhancement by providing project and investment finance for mining, metallurgical and processing projects as well as other sectors of priority for Armenia listed in Armenia’s export-oriented industrial strategy.
  • To ensure food security and improve the country’s external competitiveness, the Bank will support agricultural projects envisioning modernisation and the introduction of new technologies, as well as the creation of vertically integrated agricultural enterprises with export potential. The Bank will also support food imports, primarily from the Bank’s member states, on conditions acceptable to the country.
  • Further financing of the banking sector by means of targeted programmes supporting SMEs and export and import transactions with the Bank’s member states.

Yerevan Representative Office

Address:
Erebuni Plaza Business Centre, office 811, 26/1 Sargsyan St., Yerevan, 0010, Republic of Armenia