WORLD ECONOMIC CRISIS DRAGS ARMENIA INTO RECESSION
Emil Danielyan

Jamestown Foundation
March 18 2009

The global economic crisis is taking an increasingly heavy toll on
Armenia, forcing its government to devalue the national currency,
cut budgetary spending, and seek hundreds of millions of dollars in
foreign assistance. With no end to the worldwide downturn in sight,
the Armenian economy looks set to contract this year for the first
time since the turbulent early 1990s.

The economy was on course to expand at a double-digit rate for the
seventh consecutive year, when stock markets in the United States,
Europe, and Russia began collapsing last September. The ensuing sharp
fall in the international prices of commodities such as non-ferrous
metals (Armenia’s largest single export) and a drop in the massive
cash remittances from Armenians working abroad (Russia in particular)
were enough to slow the 2008 growth rate to 6.8 percent. Official
statistics show the country’s Gross Domestic Product shrinking by
0.7 percent in January 2009 compared with the previous year.

The World Bank believes that Armenia will at best post zero growth
this year, while the International Monetary Fund (IMF) has forecast a
GDP drop of 1.5 percent. The authorities in Yerevan, which projected
a 2009 growth rate of at least 9 percent as recently as in November
2008, now agree with this bleak outlook. "Nobody can say how economic
developments will shape up. We must be prepared for the worst-case
scenario," Prime Minister Tigran Sarkisian said in remarks broadcast
by national television at a cabinet meeting on March 12.

Sarkisian spoke as the authorities took what appeared to be a first
step toward a major cut in the record-high government expenditures
envisaged by Armenia’s $2.6 billion state budget for 2009. Citing a
shortfall in state revenues, the Armenian Ministry of Finance proposed
that the government "delay" the planned spending of $355 million
until the fourth quarter of this year. Finance Minister Tigran Davtian
indicated during the cabinet meeting that these expenditures (mainly
earmarked for capital projects) might have to be cut altogether if
the economic situation in the country followed a "worst-case scenario"
(Kapital, March 13). Sarkisian backed the proposed austerity measure,
making its formal adoption by the government a forgone conclusion.

The successful implementation of the 2009 budget is contingent on a 21
percent rise in the government’s income from taxes and other revenues;
but proceeds from taxes dropped in January by about 13 percent year
on year. The revenue shortfall and the anticipated GDP contraction
make a downward revision of the budgetary targets all but inevitable.

The most visible and painful consequence of the crisis so far was the
March 3 devaluation of the Armenian currency, the dram. After months
of heavy monetary intervention in the local currency market, the
Central Bank of Armenia (CBA) allowed the dram to depreciate against
the dollar by nearly 18 percent within hours. The CBA is believed
to have spent at least $400 million of its hard currency reserves to
keep the dram’s exchange rate virtually unchanged since last October,
a policy strongly condemned by local economists critical of the
government. They believe that the Armenian authorities needlessly
wasted the country’s scarce assets and should instead have ensured a
smoother and more gradual weakening of the dram. The sharp devaluation
immediately pushed up the prices of fuel and imported foodstuffs and
sparked brief panic buying at Yerevan supermarkets and grocery stories.

The at least partial return to a floating exchange rate was welcomed
by the World Bank and the IMF. Both lending institutions believe
that it will make Armenian companies more competitive and thereby
make it easier for the country to cope with the recession. The dram
depreciation was apparently a key condition for the release of a
$540 million emergency loan to Armenia approved by the IMF on March
7. Much of this "stand-by arrangement," repayable in 28 months, is
expected to be used for easing the continuing market pressures on
the dram. The IMF stated that $237 million of it would be disbursed
immediately, while the remainder would come in nine installments
"subject to quarterly reviews."

The statement quoted the Washington-based fund’s deputy managing
director, Murilo Portugal, as reaffirming IMF support for the Armenian
authorities’ response to the crisis. "The Fund is confident that the
policy package put in place by the authorities is appropriate and
strong," he said.

The World Bank similarly pledged last month to more than double
its lending to the South Caucasus state to at least $525 million
over the next four years. On February 24 the bank’s governing board
disbursed three separate loans designed to mitigate the effects of
the global downturn. The largest of these loans, worth $50 million,
will be provided to several Armenian commercial banks that will in
turn lend the funds to local small and medium-sized businesses in
need of credit. Another $25 million will be spent on the construction
of rural roads and other infrastructure, which is due to start this
spring (A statement by the World Bank, February 24).

Armenia has also secured a $500 million anti-crisis loan from
Russia. Just how the government plans to use the sum remains unclear.

Speaking to journalists on March 13, Sarkisian seemed to acknowledge
that external assistance alone would not cure Armenia’s current
socioeconomic woes unless it was accompanied by a "radical" improvement
of its flawed business environment. He reaffirmed his pledge to crack
down on gross tax evasion by wealthy government-connected businessmen
who have effectively monopolized lucrative sectors of the economy
(, March 13). But whether the reformist prime minister is
powerful enough to accomplish this is an open question. President
Serzh Sarkisian (no relation to Tigran), like his predecessor
Robert Kocharyan, has relied heavily on the so-called "oligarchs"
in neutralizing opposition threats to his power. He will therefore
think twice before agreeing to risk alienating them.