economic performance and prospects : markets and trade

ARMENIA'S ECONOMY OVERVIEW

Armenia's economy is performing fairly well, and the country is enjoying sustained growth, low inflation well within target and a relatively stable currency. The conservative macroeconomic course of the past will by and large continue under the new administration.
The new government of Armenia is strongly committed to maintaining its predecessor's policy of economic reform, and on taking office the new prime minister promised not to increase the tax burden, to keep up constructive relations with the IFIs, to reach the criteria for WTO membership, and to attract foreign investment through improvements to the business climate.

Economic Performance and Prospects
GDP growth

GDP grew by 3.3 per cent in 1999, compared to a target of 5-6 per cent and following growth of 7.3 per cent in 1998. In the first nine months of 1999 GDP grew by 6.1 per cent, but the economy sharply contracted in the fourth quarter, probably due to heightened political uncertainties after the attack on parliament and a drop in public sector demand caused by the need for fiscal austerity.
Other factors also played a role, including the continuing influence of the 1998 Russian economic crisis at the beginning of the year, although the situation started to improve towards summer. Another factor was the poor performance of agriculture (1.3 per cent growth in 1999 against 12.9 per cent in 1998) and a sharp contraction in the growth of investment (15.2 per cent in 1998 but only 1. 1 per cent in 1999). Industrial production did well, recovering in the second quarter from the effects of the Russian crisis to rise by 5.2 per cent year-on-year. The main growth sectors were the precious stone and jewelry industry, tobacco, mining and metallurgy, trade, food, and chemicals. Slightly accelerated growth of 5.1 per cent is forecasted for 2000, while the government's 2000 budget is based on an annual growth target of 6 per cent.
The rate of the economic growth has made up 102.6 per cent in January-June 2000, compared to the same period of previous year (against that of 104.9 per cent in January-June 1999). The GDP deflator has made up 98.3 per cent. Such a level of economic growth is largely attributable to the growth by 2.9 per cent in industry and by 3.6 per cent in agriculture.

Real GDP growth % change

Inflation

Beginning from 1998 high inflation rates are no more the concern of the policy makers in Armenia. Price stability efforts came to success in 1996, as price liberalization process almost ended.
The Central Bank end of period inflation target for 2000 is 5% and average annual inflation target is 3%.
During the first half of 2000 the average inflation amounted to -0.7% according to data provided by the National Statistical Service. Period end inflation was 0.2 per cent. The main supply factors that affected the level of inflation were low than programmed net indirect taxes, low level of import unit value, and low than programmed labor cost. As for demand factors, the low level of budget expenditures affected the price level the most.
Actually the factors in 2000 were the same as in 1999, excluding the factor of Russian crisis, which contributed a lot to the inflation rate in 1999.
In 1999 broad money grew by 13.6% as opposed to monetary program target of 14%. And the monetary base grew by only 0.03% (program target was 9.2%) which has been the smallest registered growth rate in the last five years. During the first half of 2000 broad money grew by 9.7%, the monetary base grew by 1.02% as compared to the program indicators of 5.9% and -0. 1% respectively.

Consumer price inflation

Current account

Export performance considerably improved in 1999. After two years of contraction in exports, they increased by 5.1 per cent in 1999. In contrast, for the first time in the last five years, import growth was negative, at -10. 1 per cent. As a result, the current account deficit was lower than anticipated, equal to 21.7 per cent of GDP. However, further reductions will be needed and the high level of the deficit is still a major concern.
Diaspora transfers and worker's remittances in the first half of 1999 also dropped compared to the same period the year before. Armenia thus continues to depend on IFI loans to finance its current account deficit, increasing the external debt burden. External debt is estimated at about 47.1 per cent of GDP in 1999.

Current account

FDI and privatization

Foreign direct investment in 1999 reached a net total of about US$ 135.1 million, according to preliminary estimates from the Ministry of Statistics. This is substantially lower than the US$ 232.4 million recorded in 1998 but still above the average over recent years. Foreign direct investment over the last two years was boosted by the switch from voucher privatization to cash sales in 1998, and privatization receipts now dominate FDI. Thus, the 1998 figure was exceptionally high as a result of accelerated large-scale
* Changes are calculated on end of period indicators
privatization that year, including the sale of the national telecom company, Armentel. The government's ambitious plan is to increase FDI to US$ 350 million by 2002.
Privatization revenues in 1999 amounted to AMD 19.5 billion (US$ 37 million). This was more than projected, but only 54 of the 136 enterprises slated for privatization were sold. Entering the final phase of its privatization program, the government expects to sell some 500 enterprises for an estimated US$ 30 million in 2000. The privatization of the electricity distribution network also slated for sale to strategic investors in 2000, is not included in this estimate.

Total FDI

Government balance

Exchange rate

The dram (AMD), which is allowed to float in a independently float regime, came under pressure in early 1999, when in January the dram-dollar nominal exchange rate depreciated by 3.3 per cent. After a central bank intervention in January it remained relatively stable throughout 1999, depreciating by 1.8 per cent from January to June, but appreciating by 4.0 per cent over June to December. At AMD 523.8 per US dollar, the currency finished the year at roughly the same level as in December 1998. During 1999 average exchange rate was depreciated by 5.6 percent. During first half of 2000 average exchange rate appreciated by 1.4 percent as compared to the same period of 1999. For 2000 the government forecasts an annual average exchange rate of AMD 547 to the US dollar, compared to AMD/US$ 535 in 1999.

Exchange rate

Selected Economic Indicators