ARMENIAN ECONOMY ACHIEVES DOUBLE-DIGIT GROWTH RATE YET AGAIN IN 2007
by Venla Sipila

Global Insight
January 23, 2008

The Armenian economy powered on in 2007 as output in the construction
and service sectors surged.

Economy Powers On

According to latest, preliminary data published by the Armenian
National Statistics Service, the GDP of the country surged by 13.8%
over 2007, BBC Monitoring Caucasus reports. Thus, last year proved
the sixth consecutive one to see the Armenian economy expand at
double-digit rates. In 2006, GDP increased by 13.4%, after soaring
by 14.0% in 2005. Monthly data show that growth rocketed by over
36% in December compared with November, after contracting by 17%
month-on-month (m/m) in November.

Global Insight Perspective Significance The annual growth rate of 13.8%
seen in Armenia in 2007 presents the sixth double-digit expansion
for the economy rate in a row.

Implications The reported growth rate exceeds the economic expansion
rate of 11% specified in 2007 Armenian budget targets.

Outlook Growth is set to moderate in the coming years. Further reform
progress and policies aimed at supporting competition and productivity
are necessary in order to support potential for broad-based growth
of the Armenian economy.

Industrial Output Recovers

Further, Black Sea Press reports on additional National Statistics
Service figures which show what industrial output over last year
increased by 2.6%. This result is welcome news after the industrial
sector suffered a contraction of 1.1% in 2006. Nevertheless, the
industrial sector still only provides a relatively modest share of
value added; annual industrial production was valued at $2US.1 billion
whereas the total GDP was reported to amount to $9US.2 billion or
3.1 trillion dram.

Construction, Services Surge

Meanwhile, electricity generation decreased by 0.7% over the whole
of 2007, while surging by over 35% m/m in December. Further, it was
reported that supply of services (excluding domestic trade) surged
by 21% over the year and by some 30% m/m during the last month of
the year. The construction sector expanded by 19.5% over the year as
a whole and by some 42% m/m in December alone. Data on agricultural
production was not reported, but performance in this important sector
is likely to have picked up clearly in annual terms compared with the
disappointing annual performance of 2006, when a growth rate of 0.4%
was registered. Indeed, agricultural output growth had earlier been
reported at 9.6% year-on-year (y/y) for the January-November period.

While detailed demand-side data is not available, domestic household
consumption is likely to have featured as an important growth driver
in 2007. Indeed, the impressive annual overall growth result was
supported by a surge of 25.4% in income. Reflecting this, consumer
spending surged by 23.3% over the year. Also investment is likely to
have fared well, whereas not much contribution to growth is likely
to have come from net exports.

Outlook and Implications

The growth result for 2007 somewhat exceeds our latest projections,
while also coming in higher than the growth target of 11% specified
in last year’s budget. The 2008 budget is based on an annual growth
expectation of 10%. Looking further, growth at such extremely high
rates is not sustainable. Even if the extremely high growth rates
seen in recent years have been combined with reasonably moderate
inflation rates, extremely rapid economic expansion also brings with
it concerns over overheating, Indeed, the International Monetary Fund
(IMF) has cautioned that it is imperative for Armenia to ensure that
macroeconomic policy is consistent with keeping inflation under control
(see Armenia: 5 October 2007: ). In addition, also the Armenian trade
deficit is wide, as strong income growth has fuelled imports at the
same time as export potential remains limited. This has resulted
in a deep current-account deficit. On the other hand, sharp dram
appreciation connected to strong foreign currency inflows has mitigated
the effect of increased oil prices on the domestic economy.

We expect Armenia’s economic growth to moderate in the medium term,
as growth at such an extremely strong level is not sustainable. While
strong foreign currency inflows naturally have several positive
effects, the expected continued strength of these underlines the need
to support external competitiveness. As urged by the International
Monetary Fund (IMF), this calls for adhering to suitably tight
monetary and fiscal policies. In addition, while Armenia has
already demonstrated several forward steps on its reform path,
further progress with structural reform is needed in order to
enhance growth potential. In addition to keeping to responsible
macroeconomic policies, further improvement in tax administration
would be important in order to strengthen the business environment. A
more transparent tax administration would also help in supporting
productivity and competitiveness. Increasing general competitiveness
of the industrial sector also has a connection to the tax policy in
that reforms in the system of tax rebates and fixed payments would
be needed in order to create an even playing field for producers,
and to support efficient allocation of resources. This, further, is
necessary in order to increase Armenia’s long-term growth potential
and export earnings capacity.

From: Emil Lazarian | Ararat NewsPress