YEREVAN ANNOUNCES CONTINUED ECONOMIC GROWTH, BUT TAX REVENUE STILL LAGS
Eurasia Daily Monitor, DC
Aug. 8, 2006
By Emil Danielyan
Armenia’s economy is on track to expand at a double-digit rate for
a sixth consecutive year, earning the government in Yerevan more
praise from Western lending institutions. The Armenian authorities
say that growth may slow down in the coming years but will still be
strong enough to bring about a further drop in poverty and a sizable
increase in the still modest public spending.
Official macroeconomic data for the first half of this year show the
country’s gross domestic product increasing by almost 12% despite a
slight decrease in industrial output. Trade and Economic Development
Minister Karen Chshmaritian blamed the drop on July 26 on a continuing
downturn in the local diamond-cutting industry, which produces one of
Armenia’s key export items. He assured reporters that the impending
reactivation of two large industrial enterprises in Yerevan will
significantly boost the manufacturing sector in the second half.
The continuing robust growth has created additional inflationary
pressures on the economy, leading the Armenian Central Bank (CBA) to
twice raise its refinancing rate in recent months. The benchmark rate
is currently set at 4.25%, up from last January’s level of 3.5%. The
bank hopes that the new rate will help to keep inflation within a 3%
limit in 2006. The Armenian authorities say this growth is one of
the reasons for a renewed appreciation of the national currency, the
dram. It has gained more than 10% in value against the U.S. dollar
since January and is now worth 30% more, in dollar terms, than it
was in late 2004.
Western donors, notably the International Monetary Fund, have been
quick to heap more praise on Armenia. "Armenia’s economic performance
has been impressive in recent years: double-digit growth since 2001 in
an environment of low inflation; a strengthening external position;
a reduction in poverty; and, more recently, a notable improvement
in tax performance," the IMF’s managing director, Rodrigo de Rato,
said during a late June visit to Yerevan. "The authorities have done a
commendable job in maintaining sound macroeconomic policies," he added,
promising to reward them with $34 million in additional IMF loans.
"Even China is not achieving that sort of growth," observed Jeroen
Kremers, another senior IMF official. The macroeconomic performance
also earned Armenia this summer its first-ever credit ratings by two of
the world’s leading risk-assessment companies. The BA2 and BB- grades
assigned to it by Moody’s Investors Service and Fitch, respectively,
indicate a medium-level of creditworthiness and a relatively high risk
of doing business. Armenian Finance Minister Vartan Khachatrian and
Tigran Sarkisian, chairman of the Central Bank of Armenia, insisted
at a July 25 news conference that the ratings are quite high for an
ex-Soviet state and will facilitate foreign investment.
The Armenian economy shrank by half in 1992 and 1993 following
the Soviet collapse and the outbreak of the wars in Karabakh and
elsewhere in the South Caucasus. Its slow recovery began in 1994
and accelerated several years later, despite Azerbaijan and Turkey’s
continuing economic blockades of Armenia resulting from the unresolved
Karabakh conflict. Armenian growth has averaged nearly 12% since 2001,
according to official statistics endorsed by the IMF and the World
Bank. The real impact on living standards on the country has been a
matter of contention, however.
The Armenian government says the proportion of Armenians living below
the official poverty line fell from 56% to 34.6% between 1999 and
2005. But the picture is rather mixed on closer inspection. While
increased prosperity is visible in Yerevan (e.g., skyrocketing real
estate prices, proliferating cars, shops, and other small businesses),
many regions outside the Armenian capital have seen little development
over the past decade. The economic upswing has clearly not been
accompanied by the creation of a sufficient number of new jobs, with
some independent studies suggesting that unemployment may still be as
high as 30%. The uneven distribution of the benefits of growth also
manifests itself through massive tax evasion by Armenia’s wealthiest
citizens, many of them having close ties with the government.
Although the Armenian government’s tax revenues have been growingly
steadily and considerably, they still made up only 14.5% of GDP last
year, one of the lowest ratios in the former Soviet Union. President
Robert Kocharian’s top economic adviser, Vahram Nercissiantz, admitted
recently that the Armenian state budget, projected at just over $1
billion in 2006, should have been much bigger given the real volume
of economic activity in the country.
The Kocharian administration claims to be tackling the problem in
earnest. It has promised in particular to raise by 40% the salaries
of civil servants and schoolteachers as well as pensions in the
next three years. The pledge is part of the Armenian government’s
short-term economic outlook that predicts a GDP growth of at least 6%
a year from 2007 through 2009. Officials say Armenia’s GDP per capita
will rise from the current $1,600 to $2,300 as a result.
Fitch also offered a "stable outlook" for the Armenian economy in
a report released last June. But the Western credit rating firm
cautioned that the economy remains "vulnerable to shocks" due to a
low level of monetization and underdeveloped financial services. It
also said the authorities in Yerevan should do more to "strengthen
governance and the still relatively immature political system, as
well as reduce the high level of corruption."
(Noyan Tapan, August 1; Azg, July 26-27; RFE/RL Armenia Report,
June 28, June 8; Hayots Ashkhar, June 20)
From: Emil Lazarian | Ararat NewsPress
