Prepared by CRRC-Armenia International Fellow Drew Loizeaux
Policy Forum Armenia has released a new report, “Armenia: Averting Economic Catastrophe”, which describes difficulties of Armenia’s economic and political future, especially if the world economy were to experience any further shocks in the next few years. There are many important issues raised in this paper and although some of the analysis may be overcritical and pessimistic, most of the recommendations outlined are could be taken into consideration for improving political and economic future or Armenia.
The world economic crisis has left nearly every country in the world in a weaker position and Armenia is no exception. As the paper outlines in great detail, there are even a few areas where Armenia has been one of the hardest hit since 2008. Due to a confluence of vulnerabilities in the Armenian economy there was decline in GDP for 14% in 2009, forcing the government to take bold action. To avoid a total collapse of the economy, the government engaged in massive borrowing from abroad as well as the use of nearly three quarters of its foreign reserves. This borrowing has more than doubled the public debt to GDP ratio, which now stands at around 40% and leaves very little room for further borrowing. The paper concludes that when the limited borrowing capabilities, depletion of foreign reserves, a continued current account deficit and overvalued Dram are all considered together there is very high risk for a massive devaluation and default if another crisis arises in the next several years.
In addition to problems stemming from the financial crisis, the paper also highlighted several key parts of the Armenian government that it felt were corrupt and in need of immediate reform. Exchange rate policy is an area where the report makes a very strong case that there has been policies enacted that have benefitted a few well-connected importers and hurt the country as a whole. It also shows that tax collection is weak compared to other countries and that the collection process is irregular and subject to political pressures.
While it is true that Armenia was hit hard by the global financial crisis there are indications that the concerns raised in the report may be overly pessimistic. Though the 2% growth rate in 2010 was weaker than most had hoped, the IMF expects a growth rate of around 4% for 2011 and the Republic of Armenia’s National Statistical Service (NSS) has reported a growth of 6.5% through third quarter of 2011 over the same time last year. Another positive sign was seen in the indicator of economic activity, a proxy for GDP, which grew by 5.9% in 2011. In addition to the overall expansion, the make up of that growth is also very important. The construction sector, which was a main engine for bubble-fueled growth, has yet to return to its pre-crisis levels while other areas of the economy are growing a higher rate. Another aspect of this growth that will help Armenia going forward is the increase in exports that has helped drive it: according to NSS, the rate of exports growth in 2011 was much higher (27,7%, compared to 2010) than that of for imports (10.7%).
“Armenia: Averting Economic Catastrophe” raises many important issues for the political and economy future of Armenia, especially should another global economic crisis occur. And even though there is room for debate and disagreement in some of the predictions and analysis in the paper, its recommendations provide potential solutions for many of the problems facing the Armenian government and the economy today.