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Armenia

Armenia

Population 3.0 million
GDP 4,701 US$
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Synthesis

major macro economic indicators

  2020 2021 2022 (e) 2023 (f)
GDP growth (%) -7.4 5.7 12.6 5.0
Inflation (yearly average, %) 1.2 6.8 8.6 6.0
Budget balance (% GDP) -3.5 -4.2 -2.4 -3.4
Current account balance (% GDP) -3.9 -3.0 -0.8 -2.0
Public debt (% GDP) 62.8 63.0 46.7 49.0

(e): Estimate (f): Forecast

STRENGTHS

  • Significant mineral resources (gold, copper, molybdenum, zinc)
  • Comfortable foreign exchange reserves and relative flexibility of the dram exchange rate
  • Member of the Eurasian Economic Union (EAEU) and partnership agreement with the European Union (EU)
  • Willingness to reform in terms of corruption, justice and competition

WEAKNESSES

  • Dependence on minerals (40% of exports and 8% of GDP), despite the ongoing diversification effort
  • Strong dependence on Russia (security, trade, expatriate remittances and FDI)
  • Banking system still heavily dollarised, public debt denominated in foreign currencies (75%)
  • High and persistent levels of poverty (30% of the population) and unemployment (17%)
  • Armed conflict with Azerbaijan over the Nagorno-Karabakh enclave, which may lead to occasional clashes

RISK ASSESSMENT

Return to a moderate pace after exceptional growth in 2022

In 2022, the economy experienced exceptional growth that was unmatched for 15 years. This growth is largely explained by the massive influx of Russians and their capital into the country, which has led to an increase in household consumer demand and in the activity of certain sectors, notably the information and communication technologies, as well as construction. In 2023, growth will be weaker, albeit robust. Household consumption, the main driver of GDP (accounting for 69% of GDP) will continue to be curbed by inflation. The deteriorating economic situation in the Russian Federation is likely to generate fewer remittances, which will weigh on household consumption (in 2022, 70% of remittances came from Russia, and all remittances represented more than 18% of GDP) . The appreciation of the dram in 2022 will help contain inflation. Gross fixed capital formation (17.5% of GDP in 2022) will again contribute positively to growth; the government's objective is to increase the share of investment in GDP to 25% by 2026, and that of direct investment abroad to 6% (2.6% in 2021). Net imports will still contribute negatively to growth, but the magnitude will depend on Armenia's trade with Russia which was the country's largest trading partner in 2022. The CBA's key rate is currently set at 10.75% and the central bank does not intend to lower it in the coming months given that inflation is above its target of 4%. In March 2023, foreign exchange reserves represented 5 months of imports, mainly in the form of foreign currencies.

 

Current account balance dependent on remittances from expatriates, and a desire to reduce the budget deficit

Armenia’s current account almost reached a surplus in 2022. The trade balance, although in deficit, benefited from an increase in exports of more than 50%, part of which can be attributed to the re-export of products to Russia. The balance of services, which is structurally positive, grew by more than 400% on back of growth of nearly 50% of several of its main components (finance and insurance, information and communication and transport). Remittances from expatriates also saw record growth, with the vast majority coming from Russia. In 2023, the current account will deteriorate, with the slowdown in demand (internal and external), and less dynamic transfers from Russia. The 2023 budget forecasts a public deficit of 3.4% of GDP, with a 35% increase in spending in the defence sector. The share of public debt in GDP decreased in 2022, partly on back dram appreciation. The government wishes to increase the share of the debt expressed in drams in order to reduce its sensitivity to exchange rate fluctuations. In 2022, 62% of the public debt was denominated in foreign currency and its share would rise to 58% in 2023.

 

Conflict with Azerbaijan weighs on the political scene

27 September 2020 marked the resurgence of the 30-year armed conflict between Armenia and Azerbaijan over Nagorno-Karabakh. This clash was the deadliest since the 1994 war, having led to the proclamation of the independence of this enclave which, internationally recognised as Azerbaijani territory, was, at the end of the war, populated by Armenians and under the control forces supported by Armenia. After several unsuccessful attempts, a ceasefire was signed on 9 November 2020 under the aegis of Russia, resulting in an end to hostilities and the return to Azerbaijan control of the majority of territories adjacent to Nagorno-Karabakh and a fraction of the latter. Tensions have nevertheless been reignited since May 2021 by Armenian allegations that the Azerbaijani army is crossing the border in violation of this agreement. Clashes, resulting in casualties on both sides, were reported on several occasions during 2021 and 2022. In December 2022, Azerbaijanis set up a blockade within the Lachin Corridor, the only road connecting the Upper Karabakh and Armenia, causing supply difficulties for the inhabitants of the area. The international scene is trying to mediate this conflict. While the conflict in Ukraine weakens Russia’s position and its ability to defend Armenia's interests (in particular via the troops stationed on the border between the two states since the start of the conflict), the United States and the European Union are increasing their weight in negotiations. In this context, in February 2023, the EU sent civilians as observers to ensure stability at Armenia's border. Brussels held talks for a peace deal in May of 2023. In early May, the United States also oversaw talks between the two sides but failed to reach an agreement. Armenia remains dependent on Russia, as shown by the country's hesitation to ratify the Rome Statute. Indeed, at the end of March, the Armenian Constitutional Court paved the way for the parliamentary ratification of the treaty at the end of March, which would make Armenia a member state of the International Criminal Court (ICC) and allow it to appeal against Azerbaijan over military attacks on the country. However, Armenia, which has a three-month reflection period, has still not taken a decision on ratification due to an arrest warrant for Vladimir Putin filed by the ICC in late March. The ratification of this treaty would mark Armenia's commitment to arrest the Russian president as soon as he sets foot on the territory. However, despite worsening relations in recent months (notably because of Russian inaction regarding the conflict in Nagorno-Karabakh), the President of the Armenian National Assembly, Alen Simonyan, stated at the beginning of April that the country "is in no hurry” to ratify the treaty, which would deteriorate relations between the two countries.
Domestically, the unfavorable 2020 ceasefire led to protests organised by the opposition demanding the resignation of Prime Minister Nikol Pashinian, in power since the Velvet Revolution of 2018. After stepping down in April 2021, the latter called for snap general elections on 20 June. He and his “Civil Contract” party, with the support of his former coalition the “My Step” Alliance, comfortably won the election with 71 seats out of 107 and took power. The main opposition, united in the Armenian Alliance led by ex-president Robert Kocharian, won 29 seats. The high number of seats obtained by Pashinian's party can be explained by the criticism of Kocharian's past management of conflict. Unsurprisingly, on 3 March 2022, the Assembly elected Vahagn Khachaturian, candidate of the government party, as President of the Republic. New opposition protests erupted in April of the same year, lasting more than two months, to no avail. Pashinian stated in April 2023 that the adoption of the Madrid Principles – proposals for a peace agreement between the two countries – implies, for Armenia, that Nagorno-Karabakh would be recognised as Azerbaijan territory, a declaration strongly criticised by the enclave’s parliament.

 

Last updated: September 2023

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