Armenia

EDB investment portfolio

01/05/2018

10 projects

$180 million

2.71% 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

After a slowdown in 3Q 2017, economic activity in Armenia in 4Q 2017 demonstrated significant acceleration. According to the Armenian Ministry of Finance’s estimates, by the end of 2017 the country’s GDP increased by 6.7%, and economic activity index growth, calculated by the National Statistical Service, was 7.7% for the year. The main factors leading to the acceleration in economic growth for 4Q 2017 were:

  • An expansion in lending in drams (an increase of 28.8% YoY in December 2017 with 25.1% growth in September 2017) and a slight increase in remittances led to a further increase in consumer demand. Retail trade turnover increased in October and November 2017 by 7.1% and 7.6% YoY respectively, after 5.8% growth in January-September 2017. The increase in the annual growth rate of goods imports from 25.4% in September 2017 to 40% in December 2017 also points to continued high consumer activity.
  • Increasing world prices for Armenian exports, along with the high external demand and the weakening of the real effective exchange rate, continued to support the export of goods, the value of which showed a 44.4% increase YoY in December 2017.
  • Construction contributed a positive impact on economic activity in OctoberDecember 2017 (an increase of 10.4% YoY in December 2017). According to revised data, annual construction growth rates have been rising since July 2017. Strong consumer demand has led to significant growth in trade and services turnover (by 12.7% and 15.6% YoY in December 2017, respectively). After a slowdown in 3Q 2017, in October-December 2017 growth in industrial production accelerated, amounting to 15.6% YoY in December 2017. Industrial growth was aided by a softening in lending conditions, a favorable external environment (improved trade conditions and continued strong external demand), as well as domestic consumer demand. Overall by the end of 2017, all sectors included in economic activity indicators (excluding agriculture, which declined in the year by 3%, largely due to unfavorable weather conditions in 3Q 2017) showed positive growth.

Inflation

At the end of 2017, annual inflation reached the lower boundary of the Armenian Central Bank’s target range (4% ±1.5%), an increase of 2.6% (versus deflation of 1.1% in 2016). Factors leading to a gradual recovery of inflationary processes in 2017 were a significant acceleration of economic activity in general and consumer demand in particular, as well as an increase in global commodity market  prices.

The underlying inflation index, taken into account by the Armenian Central Bank when making decisions in the field of monetary policy, significantly accelerated in 4Q 2017 (an increase of 3.6% in December 2017 YoY). The rapid growth of underlying inflation, caused by the expansion of domestic demand, creates certain risks of exceeding the 2018 inflation target, which may, in all likelihood, require the Central Bank to gradually reduce monetary policy stimulus measures.

Exchange Rate

In October-November 2017, the real effective dram rate strengthened slightly (by 3.4% in November 2017 compared with September 2017) after a significant decline in 3Q (by 4.3% for the quarter), which is due to both some strengthening of the nominal effective rate (by 1.1% over the two months) and an acceleration of inflation in Armenia in 4Q 2017. Overall in January-November 2017, the weakening of the real effective exchange rate was 4.4% YoY, with a weakening of the nominal rate by 1.3% for the same period.

The current account surplus remained in 3Q 2017 (USD 3.5 million), which was nevertheless USD 56.1 million less than in the same quarter of the previous year. The decrease in the positive balance is primarily due to an increase in the trade deficit (by USD 115.1 million in 3Q 2017 YoY) against a background of faster growth in the imports of goods compared with exports. An increase in compensation of employees, investment income and remittances had a positive impact on the current account against the backdrop of a recovery in economic activity in trading partners.

In October-December 2017, the negative balance of trade in goods increased and reached USD 225.4 million in December. The negative trends are driven by the continued high growth in imported goods against a backdrop of an increase in domestic demand.

International reserves for October-November 2017 increased by USD 80 million, reaching a level of USD 2.1744 billion, which contributed to an increase in the country’s debt obligations.

The high growth of remittances from labor migrants was maintained in October-November 2017 (an increase of 25.6% in dollar terms YoY, including from Russia by 22.4%). As a result, in January-November 2017, cash receipts increased by 18.2% YoY, including from Russia by 17.7%. The growth of remittances is due to economic growth in the countries with labor migrants from Armenia and is a significant factor in the rapid recovery of consumption and investment in fixed assets.

Fiscal Policy

According to the Armenian Ministry of Finance, the Republic of Armenia’s state budget in 2017 had a deficit of AMD 180.1 billion, meaning that the budget deficit contracted from 5.5% of GDP in 2016 to 3.3% of GDP in 2017. An acceleration in the country’s economic activity led to 5.6% growth in budget revenues. State expenditures decreased by 2.2%.

In 4Q 2017, Armenia’s public debt continued to grow and amounted to USD 6.8 billion by the year’s end. The increase in debt of USD 466.6 million for October-December 2017 is due to new foreign borrowings by the government. The high level of public debt and the significant increase in the cost of servicing it (an increase of 25.5% in January-November 2017 YoY) necessitates further fiscal strengthening measures.

Monetary Policy

The Central Bank of Armenia kept the refinancing rate unchanged at 6% in Q4 2017. In 2017, the refinancing rate was reduced hence only once, by 0.25 pp. at the February meeting of the Central Bank of Armenia. The nature of monetary conditions facilitated the rapid recovery of economic activity and inflation growth in 2017.

Gradually, interest rates on the credit market also declined, but mainly in the private individuals segment. As a result, in January-December 2017, the growth of loans to residents in drams amounted to 33.5%, including 27.1% for organizations, and 22.1% for households (for 2016 – 9.6%, 10.2% and 4.1%, respectively).

The degree of dollarization of residents’ bank deposits continued to decline and amounted to 55.7% at the end of December 2017 (compared with 60.3% in December 2016), which was supported by the continued significant spread between interest rates for deposits in drams vs. US dollars and the stable nominal exchange rate of the dram to the US dollar.

In 2017, the degree of dollarization of loans to residents decreased, standing at 61.2% at the end of the year compared with 64.7% a year earlier. The decrease in dollarization of bank loans is facilitated by measures taken by the Central Bank of Armenia to dedollarize the economy, such as an increased weighting of foreign currency assets in credit risk calculations.


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