Eurasia Daily Monitor, DC
Jan 15 2008
YEREVAN REPORTS DOUBLE-DIGIT GDP FOR 2007
By Emil Danielyan
Tuesday, January 15, 2008
Armenia’s economy appears to have expanded at a double-digit rate for
the sixth consecutive year in 2007 despite the unresolved conflict
over Karabakh and the resulting high cost of the country’s transport
communication with the outside world. Official statistics show its
gross domestic product increasing by 13.6% to about $9 billion in the
first eleven months of last year.
Economic growth continued to be primarily driven by the booming
construction and services sectors, where output was up by
approximately 20% from the same period in 2006. Other sectors such as
agriculture and energy also posted major gains. The Armenian economy
has also been greatly helped by rising large-scale remittances from
Armenians working abroad. The money they send to their relatives not
only boosts consumption but also allows Armenia to finance its huge
trade deficit. The deficit jumped by as much as 70% to a new record
high of $1.8 billion in January-November 2007, due to a surge in
imports.
While admitting the uneven distribution of the benefits of the
double-digit growth, the Armenian government maintains that
widespread poverty in the country has decreased significantly in
recent years. According to government data, the proportion of
Armenians living below the official poverty line dropped from 50% in
2001 to 27% in 2006. The government has pledged to help reduce the
poverty rate to 12% by 2012. Its critics question these figures,
saying that the poverty line is set too low and does not take account
of in the increased cost of living in Armenia.
However, Western lending institutions find the figures credible.
`Over this 12-year period, Armenia has achieved spectacular income
growth … and poverty reduction,’ the World Bank said in a November
2007 report that reviewed the results of its lending programs for the
South Caucasus state. The International Monetary Fund also noted
`good progress’ in poverty reduction in Armenia as it disbursed a
fresh $5.2 million loan to Yerevan later in November. `The
medium-term [economic] outlook is positive, with a favorable outlook
for investment,’ the IMF’s deputy managing director, Murilo Portugal,
said in a statement posted on the fund’s website ().
Meeting with Armenia’s leading businessmen on December 28, President
Robert Kocharian said the double-digit growth rate can be sustained
in the next few years. (Statement by the presidential press service,
December 28). His government, though, set more modest growth targets
of between 8% and 10% in its five-year program approved by parliament
in June. The program commits the government to implementing
`second-generation reforms’ that Western donors say are essential for
ensuring continued growth. Prime Minister Serge Sarkisian and other
government officials have said those reforms will result in better
governance, `unconditional rule of law,’ less government corruption,
and fair business competition.
There is widespread skepticism about the seriousness of those
pledges, which was only reinforced by the Kocharian administration in
the past year. In October 2007 Kocharian, for example,
controversially dismissed Pargev Ohanian, a judge who had
sensationally acquitted two businessmen in a rare court ruling that
went against the government’s wishes. The businessmen, who ran a
leading Armenian coffee packaging company, had been arrested and
charged with fraud in 2005 after publicly accusing senior customs
officials of corruption. Armenia’s Court of Appeals overturned their
acquittal and sentenced them to six and two years in prison in
November. The developments made a mockery of the government’s stated
efforts to combat corruption and boost judicial independence in the
country.
The ruling regime also made it clear that it will not tolerate
expressions of political dissent by wealthy entrepreneurs dependent
on government connections. One of those tycoons, Khachatur Sukiasian,
has been facing a government crackdown on his businesses since
September 2007, when he voiced support for former President Levon
Ter-Petrosian, a leading opposition candidate in Armenia’s upcoming
presidential election. There were also no visible government efforts
to liberalize lucrative forms of economic activity, notably imports
of fuel and basic foodstuffs, that have been effectively monopolized
by `oligarchs’ close to Kocharian and Sarkisian. In fact, Kocharian
denied the existence of such monopolies at the December 28 meeting,
saying that other businesspeople are not venturing into the imports
business for purely `psychological’ reasons.
The obvious lack of fair competition might explain why the prices of
imported products such as wheat and cooking oil went up considerably
in the fourth quarter of 2007 despite the continuing strong
appreciation of the national currency, the dram. The price hikes
pushed up inflationary pressures on the economy, forcing the Central
Bank of Armenia (CBA) to raise its refinancing rate twice. Even after
that the CBA forecast that consumer price inflation will hit 7% in
2007, well above the Armenian authorities’ target rate of 4%.
The tightening of the CBA’s monetary policy was in line with the
IMF’s recommendations. The fund also continued to press for further
improvement in Armenian tax collection. The government’s tax revenues
soared by 35% in January-November, allowing it to meet record-high
spending targets set by the state budget for 2007. (Budgetary report
by the Armenian Ministry of Finance and Economy, December 28). Still,
those revenues made up only 16% of GDP. The proportion is very modest
even by ex-Soviet standards and highlights the scale of widespread
tax evasion in Armenia. The government has for years been promising
to tackle the problem in earnest. But its declared crackdowns on tax
fraud have so far mainly targeted small and medium-sized enterprises,
with many large and far more profitable companies owned by
government-linked individuals continuing to underreport their
earnings.