ARMENIA SEEKS INTERNATIONAL LOANS TO ALLEVIATE CRISIS

Business new europe
ia_seeks_international_loans_to_alleviate_crisis
F eb 17 2009
Germany

Armenia is close to signing a $500m stabilisation loan agreement
with Russia. The government needs to raise more money if it is to
carry out its 2009 budget plans, which were based on an optimistic
forecast of 9.2% growth.

Since the budget was approved in November, the impact of the
international crisis on Armenia has continued to deepen. Falling prices
for its main exports – copper and molybdenum – and the collapse of
a speculative bubble in the construction sector have caused a sharp
increase in unemployment. The number of people seeking work rose
from 90,500 in December to 95,000 on January 23. The situation is
worst in the mining regions of Lori and Lyunik, according to the
State Statistical Service. Job losses in the construction industry
are also expected, as virtually no new projects are being commissioned.

Analysts argue that opportunities to diversify the economy and tackle
corruption have been missed, and low levels of tax collection are
contributing to the current plight of the country. As a result,
Yerevan has no choice but to try to tap international lenders.

International lenders

A $500m stabilisation loan, already agreed with Moscow, is expected
to be signed off on by early March, Finance Minister Tigran Davtian
has said. Terms for the 15-year loan haven’t been disclosed, but are
expected to be granted on relatively soft conditions, and there is
likely to be an initial grace period of four years to allow Armenia
time to deal with the crisis.

Yerevan is hoping to raise additional funds from other international
sources. The World Bank said in January it would more than double
its lending to Armenia over the next four years. Armenia is due
to receive at least $525m in low-interest loans from 2009 to 2012,
as well as funding from the International Finance Corporation and
the Multilateral Investment Guarantee Agency, which could increase
the total to as much as $800m, the World Bank’s vice-president for
Europe and Central Asia, Shigeo Katsu, has said.

Armenia has only started to feel the full force of the crisis in
recent months due to its being out of the mainstream of the world
economy. It has, for example, been spared the banking sector problems
that have affected Kazakhstan in particular. No significant losses
have been recorded in the sector to date. However, its economic
prosperity will depend to a large extent on international metals
prices, and the flow of remittances from Armenians working abroad –
many of whom are in countries that are now suffering.

"It has become clear by now that the ongoing financial crisis will
have a deep and prolonged impact on a wide range of economies," says
a recent report from Policy Forum Armenia. "This is also likely to
be true for a peripheral economy like Armenia’s, regardless of how
isolated its relevant sectors are from the rest of the world."

Hovsep Khurshudyan, senior analyst at the Armenian Center for National
and International Studies (ACNIS), considers that the impact of
the crisis is not yet fully felt in Armenia. "It is on account of
the government’s gold and money reserves that it has so far been
possible to secure stability in the country’s financial market,"
he says. "In particular the dollar-dram ratio is the same as it
was prior to the outset of the crisis in August 2008. This also is
having a positive effect on the societal mood, as the increase of
panic still is restrained."

However, further job losses in mining and construction could lead
to social unrest, which has spurred on government efforts to raise
cash. But critics of the government say that the Russian loan is
unlikely to be used wisely, and hark back to the last time Russia
forgave an Armenian debt of around $100m; soon after, Russian companies
acquired strategic assets in the country.

Armenian officials are being open about their expectation of increased
Russian influence once the deal is signed. Just before the loan was
announced, the parliament’s permanent economic commission chairman
Vardan Aivazian was quoted by Interfax as saying that, "Russia and
Armenia are strategic partners. The loan will help increase Russia’s
political influence in Armenia. Most likely, Russia will agree to
grant us a loan."

Khurshudyan doubts the funds will benefit Armenia in the long term,
forecasting that the money will merely be spent on maintaining the
Armenian dram’s high exchange rate, but without helping the economy
to recover. "That is, they will serve Armenia’s high negative foreign
trade balance, in which the volume of import nearly quadruples that
of export. The government will leave the burden of foreign debts
on the shoulders of future generations, and momentarily put off the
social distress that ultimately could destroy the foundations of the
authority of the oligarchic elite."

Armenia’s growth in the last decade was mainly driven by the metals
and mining sector, which benefited from high copper and molybdenium
prices. Real estate prices also soared, but the focus was on
elite apartments, and – as the recent slump in prices has shown –
wasn’t sustainable. The government is currently trying to encourage
development of small and medium-sized businesses with the aim of
creating new jobs, but it failed to act during the years of rapid
growth. Widespread corruption has made it difficult for legitimate
businesses to compete, especially when they are burdened with high
tax rates.

In recent years, Armenia has made efforts to move closer to Europe,
but achieving financial stability has become a more immediate goal
and – as the recent example of Kyrgyzstan demonstrates – could lead
to a fundamental change of direction. "Should Armenia receive those
loans from the West, and not from Russia or China, this means there
still is hope that we ultimately won’t deviate from the course of
European integration and once again find ourselves in the East,"
says Khurshudyan.

From: Emil Lazarian | Ararat NewsPress