In 20 years, Armenia can reach the level of Emerging Europe

by Anna Ryzhova
CRRC-Armenia International Fellow

On the 20th of November, the International Monetary Fund (IMF) Resident Representative for Armenia Yulia Ustyugova gave a presentation of the recent “Caucasus and Central Asia Regional Economic Outlook” in Yerevan. This presentation was dedicated to both global and local challenges and opportunities that the current economic situation brings. The presentation has started with a brief overview of the economic situation in the world.

Chart 1

The global economic environment undergoes through certain changes, and these changes are not always positive. This is due to the number of factors, that include trade tensions (e.g. the tariffs that the United States put on China), financial tensions and other factors such as geopolitical tensions (e.g. sanctions against Russia, Iran). As a result, according to the IMF, the global growth for 2018 is predicted to be 3,7%, which is relatively good but still 0,2% lower than it was previously expected. In general, it can serve as a sign that global growth prospects have a tendency to weaken.

Chart 2

According to the IMF, GDP growth has decelerated in Armenia as well. On Chart 1, it is visible that investment and consumption have experienced a major decrease in the second and the third quarter of 2018. Chart 2 shows this tendency in terms of composition – likewise, in the third quarter, the agriculture had been on the downside, while trade and services remain strong and served as a pillar of economic growth in the third quarter of 2018.

Still, Armenia’s GDP growth is estimated 6% for this year. Even though Ms Ustyugova noted that this prognosis is a bit on the upside as earlier the growth of Armenian economy was estimated 3,4%, the speaker reassured that achieving 6% GDP growth for Armenia is possible this year.

Chart 3

Like in the other oil-importing countries of the Caucasus and Central Asia region (Georgia, Kyrgyzstan, Tajikistan), investment ratios to GDP in Armenia have declined since the global economic crisis (International Monetary Fund 2018, 55). In Armenia, the level of foreign direct investment (FDI) remains low (see Chart 3 below). Why FDI is important for Armenian economy? As the speaker explained, medium-term growth will depend on what are the drivers of this growth, and this should rather be an investment than consumption. 

Still, as the IMF representative pointed out if you look at Chart 4 then it is visible that accumulatively the rates of FDI have increased. This tendency might be promising, but when it comes to the future developments of FDI in Armenia there’s not much certainty at the moment. As the speaker underlined, Armenia has a great potential to make progress, and it can do at least 5 times better.

Chart 4

In conclusion, the speaker noted that the tone of the presentation could seem rather dark as lower growth prospects and tighter economic conditions are predicted to occur globally. But this is also an indicator that it is time to take action now as these factors might in future limit the possible policy maneuver for the region in general and for Armenia in particular. It is estimated, that it will take 20 years for Armenia to reach the level of Emerging Europe as the economic change requires time. During this period of time, it is crucial for Armenia to conduct structural reforms that would boost private investment.

Even though some of the questions asked after the presentation reflected worries and doubt about the pace and scope of economic change in Armenia, the IMF representative reassured that Armenia has already made significant progress – e.g. this year its classification was changed from the country of lower-middle income to the country of upper-middle income. The IMF works closely with the government on the coming reforms that are meant to further boost the Armenian economy.