YEREVAN, MAY 2, ARMENPRESS. Minister of Finance of Armenia says 3.2% GDP growth is predicted for Armenia in 2017, “Armenpress” reports the Minister said in an interview with Emerging Europe. He spoke about the country’s growing macroeconomic stability and predictability, as well as the reforms that are improving the business climate.

Referring to the high economic growth of Armenia in 2013-2015, the Minister reminded of three main factors that had an impact on the economic activity of Armenia. “ In mid-2011, copper prices reached a peak. They got as high as $9,300 per ton of copper, and then gradually began to decline. The price reached its lowest level at the beginning of 2016. This hit Armenia hard because we are an exporter of copper and molybdenum. In parallel with this, during this period major capital flows were turned away from the developing world towards the developed world.

The economic sanctions imposed on Russia in the middle of 2014 have also had a great impact as we have various economic links with Russia. There are two important transmission channels. The first is remittances and the second is export. Around 60 per cent of our processed food goes to Russia”, he said.

To the question how the Government of Armenia acts to mitigate the consequences, Minister Aramyan answered, “or a long time, there was pressure on the exchange rates firstly because of the negative terms of trade effect that comes from world commodity prices, secondly because of the weaker Russian economy, which caused cutting down remittances and dramatic decline in export proceeds from Russia. If we only take the behaviour of remittances in 2014 and 2015 together, our remittances declined by around 45 per cent. We are anticipating it will decline by a further 11 per cent for 2016. In nominal terms, that’s more than $900 million loss just declining from $2 billion.

Of course, we need to compensate this somehow. There are two major microeconomic tools that can be used to absorb the external shocks and stabilise markets: through fiscal policy or monetary policy, or the right balance of both”, Aramyan said, quoting two famous economists Calvo and Reinhart, who wrote articles and research papers about the fear of floating, and why dollarised economies are afraid of allowing the exchange rate to float freely, in the developing world.   The economists argue that managed exchange rate regime is justified in some instances and anchoring negative expectations in foreign exchange markets that are a result of information asymmetry is the right thing to do. “We have tightened our monetary policy and tried to anchor the negative expectation towards the unjustified depreciation. From the other hand, to compensate for the contractionary impact of monetary tightening, we have eased fiscal conditions and allowed higher deficit for two consecutive years.

In December 2014, monetary bodies dramatically increased the reserve requirement from 12 per cent to 24 per cent, and the repo rate — from 8.5 per cent to 10.5 per cent by February 2015. This action diminished the appetite of financial market players for borrowing in local currency and buying dollars as local currency became too expensive for playing such a game.

We did understand that each action was going to have its costs, but it’s always the case that you need to sacrifice something to gain something else. We sacrificed low interest rates for local currency borrowings and, as a consequence, growth of credits to economy, but we gained market stability and avoided an overshoot of exchange rate. We did not suffer from turmoil in our forex markets, unlike other countries such as Azerbaijan, Kazakhstan, or Belorussia, Russia. Instead, as I said, we kept our fiscal policy quite flexible.

In turn, fiscal easing cost us an increase in the level of debt, as we were obliged to borrow overseas and finance fiscal deficit. That turned to be slightly higher than was planned for the years 2015 and 2016. That’s why we moved from planned three per cent, in 2015, to around 4.8 per cent of deficit/GDP. For 2016, we feel that we have still not overcome the external negative effect. We had planned for around four per cent, but we ended up at around 5.5 per cent deficit to GDP. This was just a fiscal push that we gave our economy in order to ensure that we had a basis for the future strong recovery, but also for ensuring positive growth rates for 2015 and 2016. As the Americans used to say, there is no such thing as a free lunch. We had costs here as well; I would say the cost was that our debt, in terms of GDP, increased around ten percentage points”, Aramyan continued.

According to Vardan Aramyan, macroeconomic stability is important for foreign investors. It’s the first precondition for attracting foreign investment. “This is because everybody, including the local investors, needs stability. They need to see some predictability and to have a clear understanding about what the government is doing and why, and if we cannot provide them with that we will not be able to convince them to come to our market”, he said.

Referring to Armenia cooperation with the two economic blocks, the EU and the EEU, the Fianance Minister said, Yes, many politicians say that being part of the EU could foster reforms, as the EU is more advanced, but we are working closely with both the EU and the EEU. Actually, the EEU is a custom union at this stage. However, we have a much broader aspect of cooperation with the EU. We are seeing reforms in good governance, reforms in our human rights; judiciary and business environment and we are going to continue that”.

According to the Finance Minister of Armenia, 2017 is the year of stabilization and rehabilitation of Armenia’s economy, while higher growth is expected in 2018 and 2019.