CONSTRUCTION SECTOR’S BOOMERANG EFFECT

Information-Analytic Agency NEWS.am
Sept 7 2009
Armenia

The Armenian housing construction sector, which had ensured two-digit
GDP growth rates until early 2009, has had quite the opposite effect
on the macroeconomic index this year. This January-July, the GDP
registered a decrease of up to 18.5% — the same two-digit figure
we were proud of before. True, some experts point out a seemingly
hope-inspiring 6.3% increase in GDP this July as compared with this
June. This increase is often regarded as crucial for in Armenia’s
economic development and even as a starting point of the country’s
recovery from the economic crisis. However, it is only at first sight.

In a number of sectors, especially the agricultural sector, the monthly
production output demonstrates obvious seasonality. Specifically,
the agricultural sector registered a 58.7% increase in the output
this June, which is quite understandable: July marks the beginning of
harvest campaign. To make sure, one can only look at the same index for
the previous years. Specifically, last July gross agricultural output
registered an increase of up to 63.7% as compared with last June. Thus,
last year’s increase is 5% as high as this year’s, and there is
no special occasion for rejoicing over the July "achievements." It
would be absurd to account for all the "insignificant events" in our
agricultural sector by the global crisis. However, it is as clear
as noonday that such a slowdown in the rates of increase in the
agricultural sector is undesirable now.

Back to the GDP – the poor index is the result of influence by almost
all the economic sectors of Armenia, first of all the construction
sector.

The situation in the sector can be considered a most grave one:
a 2.2-fold decrease. On the other hand we should not exaggerate
the influence on the construction sector on our economy. Except
for a decline in job registered in the sector, as well as in the
demand for home-made building materials, the fact itself can even
be welcomed. Spending hundreds of billions of drams on housing
construction is not only unpractical, but also absurd for a country
in dire need for investments. For example, last year 600 billion AMD
construction work was carried out on the population’s funds. It is no
secret that the large-scale construction in Armenia over recent years
has not been a necessity, as, for the most part, the construction
projects have been designed to spur the local nouveaux riches’
ambitions. By the way, this phenomenon, as well as the inflation of
housing prices, is far from being a local one, which deserves a more
detailed study.

Although, with respect to construction, many of the CIS
member-countries have "traveled the same road", Armenia has "reached
the bottom" in terms of GDP. Unlike the other former "fraternal"
republics, it is the construction sector that has, to a considerable
extent, contributed to our economic "achievements." Last year, the
construction sector’s share in the GDP was 27.1% against the 13%
share of the industrial sector (with energy generation). So it is
clear why the "boomerang effect" produced by the construction sector
proved to be more harmful.

Here is another surprising fact. While all the economic sectors
are registering a significant decline, the average nominal monthly
wages showed a 12.1% rise (!) this January-July. It turns out that,
in the first half of this year, all the economic sectors, except for
the mining industry, registered a wage increase. The highest wage
increase was registered in the trade sector and household appliance
repair services (137.3%). True, the wages of salespeople and "fixers"
are still low, 81,800 AMD (about $225) as compared with the average
monthly wages in Armenia (about 97,000 AMD). The financial sector
remains leader, with monthly salaries there exceeding the average
level more than 2.6 times. With the banking system’s insignificant
contribution to the development of Armenian economy, one can only be
surprised at the "wage progress" in the system.

Commodity turnover is another paradox. Retail trade registered a
symbolic increase of 0.1%. It is surprising that the increase was
registered against the crisis in Armenia’s industrial sector, a sharp
decrease in exports and in private money transfers from abroad.

This January-July, the industrial production index reached 88%,
with the processing industry index being 87%. The same period saw a
6.4% decrease in food output (inclusive of beverages). The output of
meat products (inclusive of sausages) registered a 41.5% increase,
and that of tobacco products a 20.9% increase. The output of cheese,
confectionery, noodles, etc.. increased as well. On the whole, the
Armenian food industry does not provide a clear picture in terms of
specific products. On the other hand, the output of milk, canned food,
soft and hard drinks (vodka and brandy) registered a decrease.

A downward tend in imports has for the first time been observed over
recent years. This January-July, imports decreased by 29.5%, with a 24%
decrease in the imports of finished food products and 7.8% decrease
in that of vegetables. So the retail trade stability was supposedly
ensured by an increase in the output of a number of product items
in Armenia, as well as due to the retail and wholesale of reserved
imported products. But how can it be harmonized with the considerable
decrease in private money transfers from abroad (mostly from Russia)?

The aforementioned economic collisions affected the Armenian state
budget. The budget tax revenues registered a decrease of 18.1%,
with a decrease of up to 25.1% in VAT revenues. As a result, this
January-July the state budget deficit "set a new record", reaching
67.5 billion AMD. External financing was widely used to cover the
budget deficit. As a result, the external financing of the Armenian
state budget jumped from 9 billion AMD last January-July up to 261
billion AMD this January-July.