YEREVAN, OCTOBER 27, ARMENPRESS. Prudent macroeconomic policies, low inflation, and favorable terms of trade will continue to support economic expansion. Real GDP growth is expected to moderate to 5.3 percent in 2018, reflecting strengthening headwinds in Armenia’s main trading partners, the World Bank said in the October report on Armenia’s Macroeconomic Development.

“Armenia’s economy continued to grow strongly in 2018, reflecting robust external demand, favorable metal prices, higher investment, and strengthened private consumption. Improvements in labor markets and remittance inflows are estimated to have lowered poverty to prefinancial crisis levels. Subject to robust structural reforms, real GDP growth in the medium term is projected to average 4.5 percent, helping to improve living conditions further. Still, a number of political and economic risks, both external and domestic, could undermine prospects.

The peaceful revolution of April-May 2018 did not disrupt the positive trends in Armenia’s macroeconomic indicators. GDP expanded by 8.3 percent in the first half of 2018, benefiting from robust external and domestic demand and elevated copper prices. Growth is being driven by rising investment, although this largely reflects a build-up of inventories rather than a more broad-based acceleration of investment. Rising real wages (up 4 percent year on year (y/y) in June 2018), falling unemployment (down 1.4 percentage points y/y in the first quarter), and rising remittances (up 9 percent y/y in January-March) are fueling private consumption and contributing to poverty reduction. On the production side, the main drivers of growth were services (up 10 percent y/ y) and industry (up 8 percent). Output from the construction sector continued to rise, extending the recovery that began in 2017 when the sector posted its first positive contribution since the 2008–09 financial crisis. After stagnating in 2017 and early 2018, agricultural output has rebounded more recently. Despite robust GDP growth, output remains below potential, keeping inflationary pressures low. Annual inflation stood at 2.4 percent in July 2018, below the Central Bank of Armenia (CBA) inflation target range (4 percent +/- 1.5 percent). Rising prices for food (up 2 percent y/y) and transport (up 9 percent y/y) were the main drivers of inflation.

The new government has shown commitment to fiscal prudence. Revenues overperformed in the first half of 2018, in part due to stepped-up efforts to fight tax evasion. Both capital and current spending underperformed, resulting in a small fiscal deficit of 0.2 percent of GDP in the first half of 2018. The current account deficit widened as strong exports and remittances inflows were more than offset by increased imports. Goods exports rose by 20 percent y/y, reflecting stronger external demand and higher metal prices. Tourism proceeds also grew, as the number of arrivals increased by 10 percent. However, the import bill increased by 33 percent, one-third of which was for capital goods, mostly in the mining sector. International reserves stood at more than $2 billion at end-July (similar to a year-earlier), providing around 3.5 months of imports cover. Although political developments in 2018 put some pressure on the exchange rate, a quick resolution and prompt central bank reaction maintained stability. So far, spillovers from the turmoil in the Russian Federation and Turkey have been contained. The banking sector indicators point to a high system-wide Capital Adequacy Ratio (18.2 percent at end-June 2018), manageable levels of non-performing loans (6.3 percent in June, unchanged from a year earlier) and recovering profitability, but also vulnerability to external shocks. Driven by dram-denominated lending and supported by falling bank lending rates, credit growth accelerated to 18 percent y/y at end-July. Deposit growth expanded by 7 percent y/y, also driven by dramdenominated deposits. Dollarization ratios remain high at around 60 percent.

In 2017 solid economic growth and positive labor market trends—together with low inflation and rising remittances inflows—contributed to declining poverty rates. Continuation of these trends in 2018 should contribute to income generation opportunities among those at the bottom of the distribution. The absolute poverty rate (measured at the lower-middleincome country, LMIC, poverty line of $3.2/day PPP 2011) is estimated to have declined to 11.6 percent in 2017, surpassing the lowest value previously recorded just before the global financial crisis (13.6 percent in 2008).

Armenia’s economic outlook remains generally positive. Prudent macroeconomic policies, low inflation, and favorable terms of trade will continue to support economic expansion. Real GDP growth is expected to moderate to 5.3 percent in 2018, reflecting strengthening headwinds in Armenia’s main trading partners. Inflation will edge up but remain within the CBA target range, while the current account deficit will widen on account of a higher import bill. Subject to robust structural reforms— which the new government has committed to undertake to create a fair and competitive business environment— growth in the medium term is projected to average 4.5 percent, with investment providing a major contribution. Commitment to the fiscal rule, which puts a cap on debt at 60 percent of GDP but also introduces operational rules at lower public debt levels, will result in a smaller fiscal deficit. Consequently, public debt (including CBA debt) is projected to fall from 58.9 percent of GDP at end-2017 to 55 percent by 2020. As the economy continues to expand and create income generation opportunities, especially in sectors that employ low-skilled workers (such as agriculture), poverty will continue to recede. The expected growth of the Russian economy in the coming years, albeit modest, should help sustain the flow of remittances to Armenia, pushing poverty rates down further. Current projections have the absolute LMIC poverty rate reaching 7.6 percent in 2020; when the international poverty rate (IPL) is forecast to fall below 1 percent”, the report says.