Economy of Armenia
The economy of Armenia grew by 7.5% in 2017 and reached a nominal GDP of $11.5 billion per annum, while per capita figure grew by 10.1% and reached $3880.
Until independence, Armenia’s economy was based largely on industry—chemicals, electronic products, machinery, processed food, synthetic rubber and textiles; it was highly dependent on outside resources. Agriculture accounted for only 20% of net material product and 10% of employment before the breakup of the Soviet Union in 1991. Armenian mines produce copper, zinc, gold and lead. The vast majority of energy is produced with imported fuel, including gas and nuclear fuel from Russia (for its one nuclear power plant.) The main domestic energy source is hydroelectric. Small amounts of coal, gas and petroleum have not yet been developed.
Like other former states, Armenia’s economy suffers from the legacy of a centrally planned economy and the breakdown of former Soviet trading patterns. Soviet investment in and support of Armenian industry has virtually disappeared, so that few major enterprises are still able to function. In addition, the effects of the 1988 earthquake, which killed more than 25,000 people and made 500,000 homeless, are still being felt. Although a cease-fire has held since 1994, the conflict with Azerbaijan over Nagorno-Karabakh has not been resolved. The consequent blockade along both the Azerbaijani and Turkish borders has devastated the economy, because of Armenia’s dependence on outside supplies of energy and most raw materials. Land routes through Azerbaijan and Turkey are closed; routes through Georgia and Iran are adequate and reliable. In 1992-93, the GDP had fallen nearly 60% from its 1989 level. The national currency, the dram, suffered hyperinflation for the first few years after its introduction in 1993.
Armenia has registered strong economic growth since 1995 and inflation has been negligible for the past several years. New sectors, such as precious stone processing and jewelry making and communication technology (primarily Armentel, which is left from the USSR era and is owned by external investors). This steady economic progress has earned Armenia increasing support from international institutions. The International Monetary Fund (IMF), World Bank, EBRD, as well as other international financial institutions (IFIs) and foreign countries are extending considerable grants and loans. Total loans extended to Armenia since 1993 exceed $800 million. These loans are targeted at reducing the budget deficit, stabilizing the local currency; developing private businesses; energy; the agriculture, food processing, transportation, and health and education sectors; and ongoing rehabilitation work in the earthquake zone.
Continued progress will depend on the ability of the government to strengthen its macroeconomic management, including increasing revenue collection, improving the investment climate, and accelerating privatization. A liberal foreign investment law was approved in June 1994, and a law on privatization was adopted in 1997, as well as a program on state property privatization. The government has made major strides toward joining the World Trade Organization. By 1994, however, the Armenian government had launched an ambitious IMF-sponsored economic liberalization program that resulted in positive growth rates in 1995-2005. Armenia joined the World Trade Organization (WTO) in January 2003. Armenia also has managed to slash inflation, stabilize its currency, and privatize most small- and medium-sized enterprises. Armenia’s unemployment rate, however, remains high, despite strong economic growth. The chronic energy shortages Armenia suffered in the early and mid-1990s have been offset by the energy supplied by one of its nuclear power plants at Metsamor. Armenia is now a net energy exporter, although it does not have sufficient generating capacity to replace Metsamor, which is under international pressure to close. The electricity distribution system was privatized in 2002. Armenia’s severe trade imbalance has been offset somewhat by international aid, remittances from Armenians working abroad, and foreign direct investment. Economic ties with Russia remain close, especially in the energy sector. The government has made some improvements in tax and customs administration in recent years, but anti-corruption measures have been more difficult to implement.
Overview
Under the old Soviet central planning system, Armenia had developed a modern industrial sector, supplying machine tools, textiles, and other manufactured goods to sister republics in exchange for raw materials and energy. Since the implosion of the USSR in December 1991, Armenia has switched to small-scale agriculture away from the large agroindustrial complexes of the Soviet era. The agricultural sector has long-term needs for more investment and updated technology. The privatization of industry has been at a slower pace, but has been given renewed emphasis by the current administration. Armenia is a food importer, and its mineral deposits (gold and bauxite) are small. The ongoing conflict with Azerbaijan over the ethnic Armenian-dominated region of Nagorno-Karabakh (which was part of Soviet Azerbaijan) and the breakup of the centrally directed economic system of the former Soviet Union contributed to a severe economic decline in the early 1990s. By 1994, however, the Armenian Government had launched an ambitious IMF-sponsored economic program that has resulted in positive growth rates in 1995-99. Armenia also managed to slash inflation and to privatize most small- and medium-sized enterprises. The chronic energy shortages Armenia suffered in recent years have been largely offset by the energy supplied by one of its nuclear power plants at Metsamor. Continued Russian financial difficulties have hurt the trade sector especially, but have been offset by international aid, domestic restructuring and foreign direct investment.
Global competitiveness
Armenia ranks 82nd out of 144 economies according to the 2012-2013 Global Competitiveness Index.
Armenia ranks 39th out of 179 economies according to the 2012 Index of Economic Freedom. Armenia is ranked 19th freest among the 43 countries in the Europe region, putting it above the world and regional averages.
Armenia ranks 32nd out of 185 economies according to the 2013 ease of doing business index.
History of the modern Armenian economy
At the beginning of the 20th century, the territory of present-day Armenia was a backward agricultural region with some copper mining and cognac production. From 1914 through 1921, Caucasian Armenia suffered from war, revolution, the influx of refugees from Turkish Armenia, disease, hunger and economic misery. About 200,000 people died in 1919 alone. At that point, only American relief efforts saved Armenia from total collapse.
The first Soviet Armenian government regulated economic activity stringently, nationalising all economic enterprises, requisitioning grain from peasants, and suppressing most private market activity. This first experiment of state control ended with the advent of Soviet leader Vladimir Lenin’s New Economic Policy (NEP) of 1921–27. This policy continued state control of the large enterprises and banks, but peasants could market much of their grain, and small businesses could function. In Armenia, the NEP years brought partial recovery from the economic disaster of the post-World War I period. By 1926 agricultural production in Armenia had reached nearly three-quarters of its prewar level.
By the end of the 1920s, Stalin’s regime had revoked the NEP and reestablished the state monopoly on all economic activity. Once this occurred, the main goal of the Soviet economic policy in Armenia was to turn a predominantly agrarian and rural republic into an industrial and urban one. Among other restrictions, peasants now were forced to sell nearly all of their output to state procurement agencies rather than at the market. From the 1930s through the 1960s, an industrial infrastructure has been constructed. Besides hydroelectric plants and canals, roads were built and gas pipelines were laid to bring fuel and food from Azerbaijan and Russia.
The Stalinist command economy, in which market forces were suppressed and all orders for production and distribution came from the state authorities, survived in all its essential features until the fall of the Soviet regime in 1991. In the early stages of the communist economic revolution, Armenia underwent a fundamental transformation into a “proletarian” society. Between 1929 and 1939, the percentage of Armenia’s work force categorised as industrial workers grew from 13% to 31%. By 1935 industry supplied 62% of Armenia’s economic production. Highly integrated and sheltered within artificial barter economy of the Soviet system from the 1930s until the end of the communist era, the Armenian economy showed few signs of self-sufficiency at any time during that period. In 1988 Armenia produced only 0.9% of the net material product of the Soviet Union (1.2% of industry, 0.7% of agriculture). The republic retained 1.4% of total state budget revenue, delivered 63.7% of its NMP to other republics, and exported only 1.4% of what it produced to markets outside the Soviet Union.
Armenia’s industry was especially dependent on the Soviet military-industrial complex. About 40% of all enterprises in the republic were devoted to defense, and some factories lost 60% to 80% of their business in the last years of the Soviet Union, when massive cuts were made in the national defense expenditures. As the republic’s economy faced the prospects of competing in world markets in the mid 1990s, the great liabilities of Armenia’s industry were its outdated equipment and infrastructure and the pollution emitted by many of the country’s heavy industrial plants.
In 1991, Armenia’s last year as a Soviet republic, national income fell 12% from the previous year, while per capita gross national product was 4,920 rubles, only 68% of the Soviet average. In large part due to the earthquake of 1988, the Azerbaijani blockade that began in 1989 and the collapse of the international trading system of the Soviet Union, the Armenian economy of the early 1990s remained far below its 1980 production levels. In the first years of independence (1992–93), inflation was extremely high, productivity and national income dropped dramatically, and the national budget ran large deficits.
Post-communist economic reform
Armenia introduced elements of the free market and privatisation into their economic system in the late 1980s, when Mikhail Gorbachov began advocating economic reform. Cooperatives were set up in the service sector, particularly in restaurants, although substantial resistance came from the Communist Party of Armenia (CPA) and other groups that had enjoyed privileged position in the old economy. In the late 1980s, much of Armenia’s economy already was opening either semi-officially or illegally, with widespread corruption and bribery. The so-called mafia, made up of interconnected groups of powerful officials and their relatives and friends, sabotaged the efforts of reformers to create a lawful market system. When the December 1988 earthquake brought millions of dollars of foreign aid to the devastated regions of Armenia, much of the money went to corrupt and criminal elements.
Beginning in 1991, the democratically elected government pushed vigorously for privatisation and market relations, although its efforts were frustrated by the old ways of doing business in Armenia, the Azerbaijani blockade, and the costs of the Nagorno-Karabakh War. In 1992, the Law on the Programme of Privatisation and Decentralisation of Incompletely Constructed Facilities established a state privatisation committee, with members from all political parties. In middle 1993, the committee announced a two-year privatisation programme, whose first stage would be privatisation of 30% of state enterprises, mostly services and light industries. The remaining 70%, including many bankrupt, nonfunctional enterprises, were to be privatised in a later stage with a minimum of government restriction, to encourage private initiative. For all enterprises, the workers would receive 20% of their firm’s property free of charge; 30% would be distributed to all citizens by means of vouchers; and the remaining 50% was to be distributed by the government, with preference given to members of the labour organisations. A major problem of this system, however, was the lack of supporting legislation covering foreign investment protection, bankruptcy, monopoly policy, and consumer protection.
In the first post-communist years, efforts to interest foreign investors in joint enterprises were only moderately successful because of the blockade and the energy shortage. Only in late 1993 was a department of foreign investment established in the Ministry of Economy, to spread information about Armenia’s investment opportunities and improve the legal infrastructure for investment activity. A specific goal of this agency was creating a market for scientific and technical intellectual property.
A few Armenians living abroad made large-scale investments. Besides a toy factory and construction projects, diaspora Armenians built a cold storage plant (which in its first years had little produce to store) and established the American University of Armenia in Yerevan to teach the techniques necessary to run a market economy.
Armenia was admitted to the International Monetary Fund in May 1992 and to the World Bank in September. A year later, the government complained that those organisations were holding back financial assistance and announced its intention to move toward fuller price liberalisation, and the removal of all tariffs, quotas, and restrictions of foreign trade. Although privatisation had slowed because of catastrophic collapse of the economy, Prime Minister Hrant Bagratyan informed the United States officials in the fall of 1993 that plans had been made to embark on a renewed privatisation programme by the end of the year.
GDP growth
The economy of Armenia grew by 7.5% in 2017 and reached a nominal GDP of $11.5 billion per annum, while per capita figure grew by 10.1% and reached $3880.
With 5.5% annual GDP growth rate in June 2017 Armenia was 4th best economy in Europe.
Main sectors of economy
Mining
In 2017 mining industry output with grew by 14.2% to 172 billion AMD at current prices and run at 3.1% of Armenia’s GDP.
Construction sector
In 2017 construction output increased by 2.2% reaching 416 billion AMD. Armenia experienced a construction boom during the latter part of the 2000s. According to the National Statistical Service, Armenia’s booming construction sector generated about 20 percent of Armenia’s GDP during the first eight months of 2007. According to a World Bank official, 30 percent of Armenia’s economy in 2009 came from the construction sector.
Energy
In 2017 electricity generation increased by 6.1% reaching 7.8 billion KWh.
Industrial sector
In 2017 industrial output increased by 12.6% annually reaching 1661 billion AMD. Industrial output was relatively positive throughout 2010, with year-on-year average growth of 10.9 percent in the period January to September 2010, due largely to the mining sector where higher global demand for commodities led to higher prices. According to the National Statistical Service, during the January–August 2007 period, Armenia’s industrial sector was the single largest contributor to the country’s GDP, but remained largely stagnant with industrial output increasing only by 1.7 percent per year. In 2005, Armenia’s industrial output (including electricity) made up about 30 percent of GDP.
Retail trade
In 2010, retail trade turnover was largely unaltered compared to 2009. The existing monopolies throughout the retail sector have made the sector non-responsive to the crisis and resulted in near zero growth. The aftermath of the crisis has started to shift the structure in the retail sector in favor of food products.
Services sector
In the 2000s, along with the construction sector, the services sector was the driving force behind Armenia’s recent high economic growth rate.
Tourism
According to private tour operators and other individuals familiar with the country’s tourism industry, government claims that hundreds of thousands of foreign tourists visit Armenia each year are inflated. Official statistics show that as many 575,000 tourists visited Armenia from abroad in 2009; the government stated earlier in 2010 that the figure will surpass 620,000 in 2010. However, data from the National Statistical Service shows that there were only 65,000 foreigners staying in Armenian hotels in 2009. Ara Vartanian, the chairman of the Armenian Trade and Industry Chamber, thinks that this measure is a far more objective indicator of the tourist influx into the country. In 2012, as many as 843,330 tourists visited Armenia.
Agricultural sector
As of 2010, the agricultural production comprises on average 25 percent of Armenia’s GDP. In 2006, the agricultural sector accounted for about 20 percent of Armenia’s GDP.
Financial system
According to the head of the Armenian Central Bank’s (CBA) department for financial system policies and analyses (Vahe Vardanyan) Armenian banks have no large asset concentrations in foreign markets, particularly in capital markets. They nearly have no purchased securities (so-called securitized packages). For this reason, Armenia was virtually unaffected by the Liquidity crisis of September 2008.
Foreign debt
Armenia’s national debt has increased significantly since 2008 when public external debt consisted of only 13.5 percent of GDP. By the end of 2010, Armenia’s external debt is projected to form about 42 percent of GDP, and 50 percent in 2012.
Exchange rate of national currency
National Statistics Office publishes official reference exchange rates for each year.. In 2010, the value of the Armenian Dram (AMD) was artificially kept high during the height of the global economic crisis. Had the AMD been allowed to depreciate to its market level, exports would have become more competitive and the purchasing power of the majority of the population who are dependent on remittances from abroad would have increased. Instead, the value of the AMD was kept high, out of a fear of inflation and concern about alienating the powerful government-connected importers of oil, sugar, flour, cigarettes and beverages.
Cash remittances
Cash remittances sent back home from Armenians working abroad—mostly in Russia and the United States—are growing and contribute significantly to Armenia’s Gross Domestic Product (between 15 and 30 percent). They help Armenia sustain double-digit economic growth and finance its massive trade deficit.
Government revenues and taxation
Government revenues
In March 2018 Moody’s Investors Service has changed the outlook on Armenia’s rating to positive from stable and affirmed the B1 long-term issuer and senior unsecured debt ratings.
Taxation
The Armenian government collected 383.5 billion drams ($1.26 billion) in various taxes in the first nine months of 2008 (a 33.2 percent increase from the same period last year).
Value-added tax
Over half of the tax revenues in the January–August 2008 time period were generated from value-added taxes (VAT) of 20%. By comparison, corporate profit tax generated less than 16 percent of the revenues. This suggests that tax collection in Armenia is improving at the expense of ordinary citizens, rather than wealthy citizens (who have been the main beneficiaries of Armenia’s double-digit economic growth in recent years).
Tax evasion
Many Armenian companies, especially those owned by government-connected tycoons, have long reported suspiciously low earnings, thereby avoiding paying larger taxes.
Foreign trade, direct investments and aid
Foreign trade
Exports
Armenia exported US$2.24 billion worth of goods in 2017, up 25.2% from 2016. Exports grew in all reported groups except for non-livestock food products, oils and fats, paper, vehicles and works of art.
Imports
Imports in 2017 amounted to $4.183 billion, up 27.8% from 2016.
Deficit
According to the National Statistical Service foreign trade deficit amounted to 1.94 billion USD in 2017.
Imports
Imports in 2017 amounted to $4.183 billion, up 27.8% from 2016.
Deficit
According to the National Statistical Service foreign trade deficit amounted to 1.94 billion USD in 2017.
Partners
European Union
In 2017 EU countries accounted for 24.3 percent of Armenia’s foreign trade. Whereby exports to EU countries grew by 32,2% to $633 million.
Russia and former Soviet republics
In 2017 CIS countries accounted for 30 percent of Armenia’s foreign trade. Exports to CIS countries rose by 40,3% to $579,5 million.
China
In 2017 trade with China grew by 33.3 percent.
Iran
In 2010, the volume of bilateral trade with Iran was $200 million – which is approximately equal to the trade between Armenia and Turkey. The number of Iranian tourists has risen in recent years, with an estimated 80,000 Iranian tourists in 2010.
United States
From January–September 2010, bilateral trade with the United States measured approximately $150 million, on track for about a 30 percent increase over 2009. An increase in Armenia’s exports to the US in 2009 and 2010 has been due to shipments of aluminum foil.
Georgia
The volume of Georgian-Armenian trade remains modest in both relative and absolute terms. According to official Armenian statistics, it rose by 11 percent to $91.6 million in January–November 2010. The figure was equivalent to just over 2 percent of Armenia’s overall foreign trade.
Turkey
In 2010, the volume of bilateral trade with Turkey was about $200 million, with trade taking place without open borders, across Georgian territory. This figure is not expected to increase significantly so long as the land border between the Armenia and Turkey remains closed.
Foreign direct investments
Yearly FDI figures
Despite robust economic growth foreign direct investment (FDI) in Armenia fell by 27% in 2017. According to the National Statistical Service, FDI inflows totaled nearly $246 million in 2017, down from $338 million in 2016. They stood at $178.5 million in 2015.
Stock FDI
FDI stock to GDP ratio grew continuously during 2014-2016 and reached 44.1% in 2016, surpassing average figures for CIS countries, transition economies and the world.
Foreign aid
United States
The Armenian government receives foreign aid from the government of the United States through the United States Agency for International Development and the Millennium Challenge Corporation.
European Union
With curtailment of the MCC funding, the European Union may replace the US as Armenia’s chief source of foreign aid for the first time since independence. From 2011 to 2013, the European Union is expected to advance at least €157.3 million ($208 million) in aid to Armenia.
Domestic business environment
Armenia’s economy is competitive to a few extent with government-connected individuals enjoying de facto monopolies over the import and distribution of basic commodities and foodstuffs, and under-reporting revenue to avoid paying taxes.
Foreign trade facilitation
In June 2011, Armenia adopted a Law on Free Economic Zones (FEZ), and developed several key regulations at the end of 2011 to attract foreign investments into FEZs: exemptions from VAT (value added tax), profit tax, customs duties, and property tax.
Controversial issues
Monopolies
According to one analyst, Armenia’s economic system is anticompetitive due to the structure of the economy being a type of “monopoly or oligopoly”. “The result is the prices with us do not drop even if they do on international market, or they do quite belated and not to the size of the international market.”
Major monopolies in Armenia include:
Natural gas import and distribution, held by ArmRosGazprom (ARG) (controlled by Russian monopoly Gazprom)
Armenia’s railway, held by the Russian-owned South Caucasus Railway (SCR) (formerly Russia’s state-run rail company, RZD)
Oilimport and distribution (claimed by Armenian opposition parties to belonging to a handful of government-linked individuals, one of which – “Mika Limited” – is owned by Mikhail Baghdasarian, while the other – “Flash” – is owned by Barsegh Beglarian, a “prominent representative of the Karabakh clan”)
Aviation kerosene (supplying to Zvartnots airport), held by Mika Limited
Various basic foodstuffs such as rice, sugar, wheat, cooking oil and butter (the Salex Group enjoys a de facto monopoly on imports of wheat, sugar, flour, butter and cooking oil. Its owner is parliament deputy Samvel Aleksanian (a.k.a. “Lfik Samo”) a figure close to the country’s leadership.)
Newspaper distribution, held by Haymamul (some newspaper editors believe that Haymamul deliberately refuses to print more newspaper copies in order to minimize the impact of unfavorable press coverage of the government)
Former major monopolies in Armenia include:
Non-transparent deals
Critics of the Kocharian government say that the Armenian administration never considered alternative ways of settling the Russian debts. According to economist Eduard Aghajanov, Armenia could have repaid them with low-interest loans from other, presumably Western sources, or with some of its hard currency reserves which then totaled about $450 million. Furthermore, Aghajanov points to the Armenian government’s failure to eliminate widespread corruption and mismanagement in the energy sector – abuses that cost Armenia at least $50 million in losses each year, according to one estimate.
Transportation routes and energy lines
Internal
Since early 2008, Armenia’s entire rail network is managed by the Russian state railway under brand South Caucasus Railways.
Through Georgia
Russian natural gas reaches Armenia via a pipeline through Georgia.
The only operational rail link into Armenia is from Georgia. During Soviet times, Armenia’s rail network connected to Russia’s via Georgia through Abkhazia along the Black Sea. However, the rail link between Abkhazia and other Georgian regions has been closed for a number of years, forcing Armenia to receive rail cars laden with cargo only through the relatively expensive rail-ferry services operating between Georgian and other Black Sea ports.
Through Turkey and Azerbaijan
The closing of the border by Turkey has cut Armenia’s rail link between Gyumri and Kars to Turkey; the rail link with Iran through the Azeri exclave of Nakhichevan; and a natural gas and oil pipeline line with Azerbaijan. Also non-functioning are roads with Turkey and Azerbaijan. Despite the economic blockade of Turkey on Armenia, every day dozens of Turkish trucks laden with goods enter Armenia through Georgia.
Through Iran
A new gas pipeline to Iran has been completed, and a road to Iran through the southern city of Meghri allows trade with that country. An oil pipeline to pump Iranian oil products is also in the planning stages.
Labor
Monthly wages
According to official figures from ArmStat average monthly wage in 2017 stood at 194 thousand AMD (about $404 at Feb 2018 exchange rate).
Unemployment
According to World Bank data unemployment ratio in 2016 stood at 16.76%.
Migrant workers
Since gaining independence in 1991, hundreds of thousands of Armenia’s residents have gone abroad, mainly to Russia, in search of work. Unemployment has been the major cause of this massive labor emigration. OSCE experts estimate that between 116,000 and 147,000 people left Armenia for economic reasons between 2002 and 2004, with two-thirds of them returning home by February 2005. According to estimates by the National Statistical Survey, the rate of labor emigration was twice as higher in 2001 and 2002.
Source from Wikipedia