THE ARMENIAN ECONOMY RECOVERS AT AN UNEXPECTEDLY RAPID PACE
The Armenian economy, which was hit strongly by the global economic crisis last year, has started to recover at a more rapid pace than expected. After a drastic drop of the GDP by 14.4 percent in 2009, which was one of the worst downturns in the world, the economy grew by 7.2 percent in January-April 2010, in comparison with the same period the previous year. This development is markedly more positive than the government’s budgetary forecasts, which predicted a growth of 1-2 percent. In the same four-month period, the foreign trade turnover grew by more than 30 percent, including a 64.3 percent jump in exports. In fact, the recovery was not only more rapid than expected; it also showed that after the crisis in 2009, Armenia’s economy underwent beneficial structural changes.
In 2001-2007, Armenia’s economy had a strong growth, at rates above ten percent a year. However, this growth was mainly due to the development of one single sector, construction, which used to grow at rates sometimes exceeding 35 percent a year. Such dependence on a single sector constituted a liability, as a possible drop in construction would have caused a downturn in the entire economy. This vulnerability was exacerbated given the fact that construction was driven mainly by monetary inflows from abroad. Armenian society has long been strongly dependent on remittances of migrant workers to their families in Armenia, and 80 percent of these transactions came from Russia. In 2007, remittances from abroad accounted for 13.5 percent of Armenia’s GDP, and was also the principal source of investments in construction, according to World Bank data. The dependence of the construction sector on continual foreign transfers constituted a further vulnerability of Armenia’s economy, which fully materialized in 2009.
The main impact of the global financial crisis on Armenia was a 30-34 percent decrease in remittances from abroad as a result of a worsening situation in the respective destinations for Armenian labor migrants. This resulted in a drastic fall in construction in Armenia (46.4 percent in 2009) and became the main cause of the economic downturn in the country. The economy would have decreased by only 3 percent (and not by the actual 14.6 percent) without the fall in construction.
The growth in 2010 differed qualitatively from that in the years prior the crisis. The 7.2 percent growth of the Armenian economy was mainly due to a 12.9 percent growth in industry, although trade and other services also continued to grow moderately. Thus, for the first time in several years, the Armenian industry grew faster than construction, which grew by only 8.8 percent in January-April 2010. This growth in industry took place primarily in the processing sectors, although the mining sector also showed a jump of 46.7 percent caused by the price rise for exported metals, primarily copper. Production of food and beverages, the two biggest sectors of the processing industry, grew by 4.5 percent and 28.4 percent respectively. All of this indicates that the economy has undergone structural changes and that the processing industry is replacing construction as a leading sector, potentially making Armenia’s economy more stable. In turn, this demonstrated the success of the government’s efforts to diversify the economy and stimulate business activity. To that end, the government provided loans and subsidies in 2009 to perspective enterprises. The government has also performed a set of tax and administrative reforms to improve the business environment and improve the conditions for small and medium businesses.
Economic successes have evidently consolidated the position of the cabinet led by Prime Minister Tigran Sargsyan, and in extension, that of President Serzh Sargsyan. In the previous months, the economic policy of the cabinet during and after the crisis year was criticized not only by the opposition parties, but also by the leaders of the Bargavach Hayastan (Prosperous Armenia) party, which is a member of the ruling coalition. The strengthening of the positions of the Prime Minister and the President are important, since the attacks of the Bargavach Hayastan leaders are allegedly linked with former President Robert Kocharian’s efforts to return to the political arena, along what is in Armenia frequently termed “the Russian path”. This means that Kocharian hopes to first occupy the office of the Prime Minister and later that of the President. In this perspective, the rapid recovery of Armenia’s economy has the potential of also stabilizing the political situation in the country.
