Country Report - WikiLeaks · Armenia 1 Country Report February 2011 ' The Economist Intelligence Unit Limited 2011 Contents Armenia 3 Summary 4 Basic data 5 Political structure 6

Country Report

Armenia

February 2011

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Armenia 1

Country Report February 2011 www.eiu.com © The Economist Intelligence Unit Limited 2011

Contents

Armenia

3 Summary

4 Basic data

5 Political structure

6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Comparative economic indicators

9 Outlook for 2011-12 9 Political outlook 11 Economic policy outlook 12 Economic forecast

15 The political scene

20 Economic policy

25 The domestic economy

27 Foreign trade and payments

List of tables 12 International assumptions summary 14 Forecast summary 21 State budget, Jan-Nov 24 Consumer prices 24 Exchange rates 26 Industrial production, 2010 27 Foreign trade by commodity 28 Top trade partners, 2010 29 Balance of payments

List of figures 14 Gross domestic product 14 Consumer price inflation 25 Agriculture

2 Armenia


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Armenia February 2011

Summary

The position of the president, Serzh Sargsyan, appears more secure now that the economic recovery is under way. The economic outlook is set to improve as the external environment becomes more favourable and domestic demand growth resumes, reducing the risk of social unrest. Attempts to improve relations with Turkey will be difficult, as little progress has been made in the unresolved dispute with Azerbaijan, an important Turkish ally, over Nagorny Karabakh. Mr Sargsyan is expected to face opposition to efforts at reconciliation with Turkey and Azerbaijan.

The influence of the prime minister, Tigran Sargsyan (no relation to the president), over the political scene has increased following a cabinet reshuffle that saw the justice, finance and economy ministers replaced in late 2010. The reshuffle should lead to a swifter implementation of reforms in the post-crisis period. No progress has been seen in recent months towards a resolution in the conflict with Azerbaijan over Nagorny Karabakh, despite several meetings and the involvement of international mediators in the negotiation process. Further delays in improving relations between the two countries can be expected.

The state budget deficit narrowed to Dram52.4bn (US$140m) in January-November 2010 from Dram114.9bn in the year-earlier period. Higher tax revenue, particularly from value-added tax (VAT), supported the contraction of the deficit. The government has reiterated its pledge to clamp down further on widespread tax evasion, which will help to improve the business environment and support the government's spending plans.

Real GDP expanded by 2.6% in 2010. Industry posted a robust recovery, recording growth of 9.7%, owing to higher global prices for base metals, one of Armenia's main exports. A sharp (13.5%) contraction in agriculture, owing to crop damage as a result of poor weather earlier in 2010, weighed on economic activity. e

The trade deficit (on a balance-of-payments basis) expanded to US$1.5bn in the first three quarters of 2010, compared with a deficit of almost US$1.4bn in the year-earlier period. An increase in the current transfers surplus to US$665m in January-September�in large part driven by higher worker remittance inflows�helped to offset the impact of the larger trade deficit. The current-account deficit widened to US$906m in January-September.

Editors: Alice Mummery (editor); Laza Kekic (consulting editor) Editorial closing date: February 14th 2011 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: To request the latest schedule, e-mail [email protected]

Outlook for 2011-12

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Armenia


Basic data

29,800 sq km, of which around 80% is mountainous

3.24m (January 1st 2009)

Yerevan (capital; population 1.1m); Gyumri; Vanadzor

Continental and dry, with cold winters and warm summers. The heaviest rainfall is in the mountains. The average temperature in July is 21°C; in January, the coldest month, it is -7°C

Armenian is the national language; Russian is widely spoken in towns

Metric system

The Armenian dram was introduced as legal tender in November 1993 to replace the rouble. Average exchange rate in 2009: Dram363.3:US$1

Four hours ahead of GMT

January 1st-2nd (New Year); January 6th (Christmas); January 28th (Army Day); March 8th (International Women's Day); April 24th (Armenian Genocide Commemoration Day); May 1st (International Workers' Day); May 9th (Victory Day); May 28th (Day of the First Republic); July 5th (Constitution Day); September 21st (Independence Day); December 31st (New Year's Eve)

Population

Main towns

Climate

Languages

Weights and measures

Currency

Time

Public holidays

Total area

Armenia 5


Political structure Republic of Armenia

The Republic of Armenia was independent between 1918 and 1921, but was incorporated into the Soviet Union in 1921. Following a referendum on September 21st 1991 Armenia became independent. A new constitution was adopted in July 1995 and revised in November 2005

National Assembly with 131 deputies, of whom 41 are elected from single-member districts and 90 by party list

May 2007 (legislative) and February 2008 (presidential); next elections due in 2012 (legislative) and 2013 (presidential)

President, Serzh Sargsyan, directly elected in February 2008

The president appoints the prime minister, who appoints the members of government. The current government, appointed in March-April 2008, is a coalition between the Republican Party of Armenia, Prosperous Armenia and Orinats Yerkir; the Armenian Revolutionary Federation withdrew from the coalition in April 2009

Armenian National Congress (ANC); Armenian National Movement; Armenian Revolutionary Federation (ARF; also known as Dashnaktsutiun); Christian Democratic Union of Armenia; Communist Party of Armenia; Hanrapetutiun (Republic); Heritage; Liberal Democratic Party; National Unity Party; National Democratic Union; National Party of Armenia; Orinats Yerkir (Rule of Law); People's Democratic Party; People's Party of Armenia; Prosperous Armenia; Republican Party of Armenia (RPA); United Labour Party

Prime minister Tigran Sargsyan

Agriculture Sergo Karapetian Culture Hasmik Poghosian Defence Seyran Ohanian Diaspora affairs Hranush Hakobian Economy Tigran Davtian Education & science Armen Ashotian Emergency situations Armen Yeritisian Energy & natural resources Armen Movsisian Environmental protection Aram Harutiunian Finance Vache Gabrielian Foreign affairs Eduard Nalbandian Health Harutiun Kushkian Justice Hrayr Tovmasian Labour & social affairs Artur Grigorian Sport & youth affairs Armen Grigorian Transport & communications Manuk Vardanian Territorial administration Armen Gevorgian Urban development Vartan Vartanian

Hovik Abrahamian

Artur Javadian

Main political parties

National government

Form of state

National legislature

National elections

Head of state

Official name

Speaker of the National Assembly

Central Bank chairman

Key ministers

6 Armenia


Economic structure

Annual indicators

2006a 2007a 2008 a 2009 a 2010a

GDP at market prices (Dram bn) 2,656.2 3,149.3 3,568.2 3,102.8 3,509.6

GDP (US$ bn) 6.4 9.2 11.7 8.5 9.4

Real GDP growth (%) 13.2 13.8 6.8 -14.4 2.6

Consumer price inflation (av; %) 2.9 4.4 9.0 3.4 8.2

Population (m) 3.1 3.1 3.1 3.1 3.1b

Exports of goods fob (US$ m) 1,025.5 1,196.7 1,124.0 722.3 947.7b

Imports of goods fob (US$ m) 1,921.3 2,796.9 3,763.4 2,817.2 3,036.4b

Current-account balance (US$ m) -117.1 -589.6 -1,355.3 -1,326.3 -1,284.9b

Foreign-exchange reserves excl gold (US$ m) 1,071.9 1,659.1 1,406.8 2,003.6 1,859.0

Exchange rate Dram:US$ (av) 416.0 342.1 306.0 363.3 373.7

a Actual. b Economist Intelligence Unit estimates.

Main origins of gross domestic product 2009 % of total Main components of gross domestic product 2009 % of total

Agriculture 16.4 Private consumption 81.2

Industry 13.8 Government consumption 12.6

Trade & catering 12.8 Gross fixed investment 32.7

Construction 17.7 Change in stocks 1.1

Financial services & real estate 4.1 Net exports of goods & services -27.9

Statistical discrepancy 0.2

Principal exports fob 2010 % of total Principal imports cif 2010 % of total

Base metals 32.9 Mineral products 18.0

Mineral products 27.3 Machinery & equipment 17.3

Precious or semi-precious stones & metals 13.3 Base metals 9.7

Prepared foodstuffs 13.0 Transport equipment 8.2

Main destinations of exports 2010 % of total Main origins of imports 2010 % of total

Russia 15.9 Russia 22.1

Bulgaria 15.5 China 10.7

Germany 13.1 Ukraine 6.1

US 8.2 Turkey 5.6

Armenia 7


Quarterly indicators 2009 2010

1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

State government finance (Dram bn)

Revenue & grants 144.5 166.5 183.0 182.4 164.1 202.2 200.3 n/a

Expenditure & net lending 165.3 220.2 256.3 182.9 170.1 213.1 211.7 n/a

Balance -20.8 -53.7 -73.3 -0.5 -6.0 -10.9 -11.4 n/a

Employment, wages & prices

Unemployment ('000; end-period) 76.1 79.1 80.8 81.4 84.3 84.6 84.2 83.3

Unemployment (% of the labour force) 6.6 6.7 6.8 6.9 7.2 7.1 7.1 7.0

Nominal wages (Dram per month; av from start of year) 95,928 98,138 98,369 102,054 102,712 104,462 105,910 108,852

Consumer prices (av; 2005=100) 117.9 123.1 120.2 123.0 127.8 130.9 130.6 134.5

Consumer prices (% change, year on year) 2.0 3.3 3.4 4.9 8.4 6.3 8.7 9.4

Producer prices (2005=100) 94.1 106.7 118.7 124.9 129.6 136.7 135.9 n/a

Producer prices (% change, year on year) -7.4 1.1 8.1 27.3 37.7 28.2 14.4 n/a

Financial indicators

Exchange rate Dram:US$ (av) 325.6 370.5 372.6 384.4 384.1 384.3 365.5 360.7

Exchange rate Dram:US$ (end-period) 367.8 360.1 384.3 377.9 400.5 367.5 361.3 363.4

Deposit rate (av; %) 8.7 8.9 8.7 8.3 8.3 9.3 9.3 8.9

Lending rate (av; %) 19.2 18.7 18.5 18.7 19.4 19.5 18.8 19.1

Money market rate (av; %) 8.3 6.4 5.0 5.4 8.2 8.0 5.0 5.1

Refinancing rate (end-period; %) 7.8 6.0 5.0 5.0 6.5 7.3 7.25 7.30

Treasury-bill rate (av; %) 10.0 11.2 7.9 8.6 9.4 11.4 10.7 10.9

M1 (end-period; Dram bn) 300.0 324.6 361.9 388.9 344.8 369.6 388.6 n/a

M1 (% change, year on year) -28.9 -25.2 -21.9 -6.7 14.9 13.9 7.4 n/a

M2 (end-period; Dram bn) 941.5 991.7 1,117.3 1,212.9 1,169.7 1,165.1 1,206.7 n/a

M2 (% change, year on year) -14.5 -13.5 -8.1 7.8 24.2 17.5 8.0 n/a

Foreign trade (US$ m)

Exports fob 123.4 158.0 199.4 217.0 198.5 244.3 262.5 306.2

CISa 36.1 50.6 7.9 44.5 35.3 40.0 b 48.0b 76.0

Imports cif -661.7 -717.5 -872.7 -1,052.3 -814.2 -906.7 -954.4 -1,107.5

CISa -236.0 -231.2 -257.8 -319.5 -252.3 -281.2 b -286.1b -322.4

Trade balance -538.3 -559.5 -673.3 -835.3 -615.7 -662.4 -692.0 -801.4

Foreign payments (US$ m)

Balance in trade in goods fob-fob -433.9 -437.2 -521.0 -689.2 -492.3 -514.3 -534.0 n/a

Services balance -46.5 -55.3 -72.0 -94.4 -52.9 -62.4 -65.3 n/a

Income balance 68.3 43.1 71.2 -16.6 24.2 24.9 74.9 n/a

Net transfer payments 144.5 180.7 237.6 251.2 171.8 205.5 285.9 n/a

Current-account balance -267.6 -268.7 -284.2 -548.9 -349.2 -346.3 -238.6 n/a

Reserves excl gold (end-period) 1,343.3 1,963.1 2,029.7 2,003.6 1,837.8 1,786.9 1,852.6 1,859.0

a Commonwealth of Independent States. b Excluding Georgia.

Sources: National Statistical Service; IMF, International Financial Statistics.

8 Armenia


Comparative economic indicators Pl ea se se e g ra p hi c b el ow

Comparative economic indicators, 2009

Gross domestic product(US$ bn; market exchange rates)

Gross domestic product(% change, year on year)

Consumer prices(% change, year on year)

Sources: Economist Intelligence Unit estimates; national sources.

Sources: Economist Intelligence Unit estimates; national sources.Sources: Economist Intelligence Unit estimates; national sources.

Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product per head(US$ '000; market exchange rates)

0 40 80 120 160 200

1,231.8

430.5

Kyrgyz RepublicTajikistan

MoldovaTurkmenistan

ArmeniaMacedonia

GeorgiaAlbania

Bosnia and HercegovinaEstonia

LatviaUzbekistan

LithuaniaAzerbaijan

SerbiaBulgariaBelarus

SloveniaCroatia

SlovakiaKazakhstan

UkraineHungaryRomania

Czech RepublicPolandRussia

0.0 5.0 10.0 15.0 20.0 25.0

TajikistanKyrgyz Republic

UzbekistanMoldova

TurkmenistanGeorgiaUkraine

ArmeniaAlbania

MacedoniaBosnia and Hercegovina

AzerbaijanBelarus

SerbiaBulgaria

KazakhstanRomania

RussiaLithuania

PolandLatvia

HungaryCroatiaEstonia

SlovakiaCzech Republic

Slovenia

-2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

MacedoniaBosnia and Hercegovina

EstoniaMoldovaSlovenia

Czech RepublicAzerbaijan

SlovakiaGeorgiaAlbaniaCroatia

BulgariaArmenia

PolandLatvia

HungaryLithuaniaRomania

TajikistanKyrgyz Republic

KazakhstanSerbia

TurkmenistanRussia

BelarusUzbekistan

Ukraine

-20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0

LatviaUkraine

LithuaniaArmenia

EstoniaSlovenia

RussiaRomaniaHungaryMoldova

TurkmenistanCroatia

BulgariaSlovakia

Czech RepublicGeorgia

SerbiaBosnia and Hercegovina

MacedoniaBelarus

KazakhstanPoland

Kyrgyz RepublicAlbania

TajikistanUzbekistanAzerbaijan

Armenia 9


Outlook for 2011-12

Political outlook

The president, Serzh Sargsyan, now appears to be in a more secure position. Popular support for the main opposition alliance�the Armenian National Congress (ANC), led by Levon Ter-Petrosian�has diminished. Calls from the ANC for a fresh election to be held after the controversial presidential election in February 2008, which led to clashes between the opposition and the authorities in which ten people died, have proved fruitless. The appointment of Tigran Sargsyan, an unaffiliated former Central Bank of Armenia chair and no relation to the president, as head of the three-party coalition government in the aftermath of the conflict appears to have reduced political polarisation.

The ANC's chances of posing a serious threat to government, or ushering in a significant change in policy direction, are limited. Further protests are possible in 2011-12, particularly in the run-up to the parliamentary election in 2012, although the potential for these to lead to a change to the status quo is limited. The ANC lacks a cohesive political programme, and criticises the government without presenting policy alternatives�actions unlikely to convince the public about the ANC's ability to form a cohesive opposition force. In addition, attempts by Mr Ter-Petrosian to form a wider umbrella group comprising the three main opposition forces�the ANC, the Armenian Revolutionary Federation (ARF; also known as Dashnaktsutiun) and Heritage�have been unsuccessful. In contrast, Serzh Sargsyan has consolidated his authority among the political and business elite as support for opposition groups has weakened.

Mr Sargsyan's presidency appears not to have been greatly damaged by the negative impact of the global recession in 2009, which contributed to a contraction of 14.4% in Armenian real GDP in that year. An improvement in external demand and a modest pick-up in domestic demand (in part because of rising remittance inflows) contributed to a 2.6% expansion in real GDP in 2010. As a result, the risk of a surge in popular dissatisfaction and public unrest appears to be subsiding. Tensions will nonetheless remain between the coalition partners�for example, over the direction of economic policy.

The next legislative election is scheduled for 2012 and the presidential election for 2013. Politics will become more fractious in the run-up to the election, given the sharp divide between the opposition and the administration. The Economist Intelligence Unit expects that the performance of Mr Sargsyan's Republican Party of Armenia (RPA) will be enhanced by its access to administrative resources, so it seems likely to remain the dominant party in parliament. The opposition will remain hindered by its inability to contest the election as a single bloc. Although Armenia has taken some steps towards improving electoral procedures and processes since the presidential election in 2008, the opposition is expected to contest the outcome of the election, given its distrust of the administration. The possibility of street protests after the election cannot be excluded. However, the authorities will be more reluctant to disband the protests through the use of force, as the international community

Political stability

Election watch

10 Armenia


criticised such actions following the election in 2008. It is also likely that the West will become less tolerant of electoral abuses in the light of recent extraordinary developments in the Middle East.

The Russia-Georgia war in August 2008 brought home the negative implications that instability in the Caucasus has for political and economic developments in Turkey and Armenia. Since then, Turkey and Armenia have increasingly attempted to restore ties, although they have so far been unsuccessful. Many obstacles must be removed before decades of mutual hostility can be overcome. In October 2009 Armenia and Turkey signed two protocols aimed at establishing diplomatic relations and reopening the border, which Turkey closed in 1993 in support of Azerbaijan's position in its frozen conflict with Armenia over Nagorny Karabakh. The signing of the protocols represented significant progress in Armenian-Turkish relations.

However, the conflict with Azerbaijan over Nagorny Karabakh has limited the potential for further improvement in relations with Turkey. Although the conflict was not mentioned in the protocols, the Turkish prime minister, Recep Tayyip Erdogan, has stated that Turkish ratification of the protocols is not possible until a breakthrough occurs over Nagorny Karabakh.

Serzh Sargsyan strongly objected to Turkey's decision to link improvements in the Nagorny Karabakh conflict to the bilateral protocols. In April 2010 he announced that the parliamentary ratification process would be suspended indefinitely. The US and other foreign powers have expressed limited optimism at Mr Sargsyan's decision not to withdraw his signature from the document, claiming that time is needed to create new momentum in the normalisation process. Further progress nonetheless seems unlikely for the time being.

Progress in the normalisation of ties between Armenia and Azerbaijan will remain slow. There was a modest breakthrough at the start of 2010, with the two sides agreeing on a preamble to the Madrid Principles, which set out the steps for a resolution of the Nagorny Karabakh conflict. Indicating that both sides remain open to improving links, Armenia and Azerbaijan agreed in late October to swap prisoners of war and return the bodies of those killed in the conflict. The deal indicates that both are willing to take small steps towards conflict resolution, particularly if these are of a humanitarian nature. Nonetheless, tensions will remain high and border skirmishes will continue. The worst violations of the ceasefire agreements between Azerbaijan and Armenia since 2008 occurred in June 2010, when fighting lasted for several days. Both sides blame each other for the violence, in which four Armenians and two Azerbaijani soldiers were killed. Despite third-party-mediated meetings between Armenian and Azerbaijani officials in 2010, no tangible progress towards a resolution has been seen in recent months.

Even if international mediators are successful in encouraging renewed momentum for a rapprochement between Armenia and Turkey, the side-stepping of two of the most divisive issues in the protocols will hinder future progress. Turkey expects Armenia to make a breakthrough in its relations with Azerbaijan before it will ratify the protocols. Armenia and Turkey have agreed to set up a commission to investigate the mass killings and deportations of

International relations

Armenia 11


Armenians during the first world war, but the protocols avoided describing the massacres as genocide. Such recognition has been a requirement of the Armenian diaspora for any improvement in relations with Turkey. The government has done little to prepare the population for improved relations with Turkey, or for the compromises that would be necessary to end the Nagorny Karabakh conflict�in particular, the possible withdrawal of Armenian troops from the disputed territory and surrounding regions.

Economic policy outlook

The challenges posed by the repercussions of the global recession of 2009 will continue to ease gradually throughout the forecast period. Although the financial services sector is not greatly exposed to international capital markets, Armenia relies heavily on inflows of remittances and official transfers, and much of its export revenue is generated by commodities�in particular, metals. Although remittance inflows and commodity exports picked up in 2010, they will remain below 2008 levels in 2011-12.

Financial support from multilateral organisations, including the IMF and the World Bank, should lead to improvements in the business environment and stimulate economic activity. The authorities have reiterated their commitment to support small and medium-sized enterprises (SMEs). With a respected former Central Bank governor heading the cabinet, the government is likely to make further progress in tackling corruption within the tax and customs admin-istrations, strengthening the rule of law, and ensuring fair business competition. However, given the close links between political and business circles, and the fact that the president relies on these circles for support, vested interests will still present a significant obstacle to more open and transparent policies.

The consolidated budget deficit narrowed to 4.9% of GDP in 2010, from 7.9% in 2009. Government expenditure rose by 2%, and the economic recovery contributed to a 5% increase in revenue. We forecast that the deficit will narrow to 3.8% of GDP in 2011 and 2.8% in 2012. Future deficits will be larger than the 1.9% average in 2001-08, mainly because revenue inflows will take time to recover. As economic activity continues to strengthen, we expect revenue from value-added tax (VAT), customs duties and corporate profit tax to continue rising. The government will also benefit from continuing improvements to the tax and customs administration, including a clampdown on tax evasion. In 2010 the government maintained spending on social programmes, but it was forced to cut spending on capital projects. However, as the economic outlook improves, capital spending is expected to rise.

After raising the refinancing rate to 7.75% in March 2009, when it devalued the currency, the Central Bank adopted a policy of monetary loosening, lowering the rate by a cumulative 275 basis points, to 5% in September, where it stood for the remainder of the year. The policy was designed to stimulate economic activity and protect domestic businesses, which faced wide interest-rate spreads, owing to perceptions of high business risk. In 2010 the Central Bank raised the rate by a cumulative 225 basis points, to 7.25%. At its latest monetary

Monetary policy

Fiscal policy

Policy trends

12 Armenia


policy meeting, in February 2011, the Central Bank increased the refinancing rate by 0.5 percentage points, to 7.75%, citing concerns over inflationary pressures. Further monetary policy tightening is likely as the economic recovery continues and as a result of inflationary pressures, particularly in the first half of 2011. However, movements in the refinancing rate have only a limited impact on inflation, as the domestic debt market is underdeveloped. The Central Bank will attempt to broaden its policy tools gradually over the forecast period by increasing the use of instruments such as repo operations. It will also work with the fiscal authorities to deepen the domestic debt market. Nevertheless, the development of the banking sector is likely to be much slower than previously expected.

Economic forecast

International assumptions summary (% unless otherwise indicated)

2009 2010 2011 2012

Real GDP growth World -0.8 4.8 4.1 4.1

Russia -7.9 4.0 4.3 4.5

EU27 -4.2 1.8 1.6 1.7

Exchange rates Rb:US$ 31.7 30.4 30.3 30.2

US$:� 1.393 1.326 1.265 1.200

SDR:US$ 0.646 0.652 0.656 0.668

Financial indicators � 3-month interbank rate 1.23 0.84 1.03 1.88

US$ 3-month commercial paper rate 0.26 0.26 0.34 0.70

Commodity prices Oil (Brent; US$/b) 61.9 79.6 90.0 82.3

Gold (US$/troy oz) 973.0 1,224.7 1,331.3 1,232.5

Food, feedstuffs & beverages (% change in US$ terms) -20.4 11.7 27.0 -9.9

Industrial raw materials (% change in US$ terms) -25.6 44.9 22.3 -8.8

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

Real GDP expanded by 2.6% in 2010, following a 14.4% contraction in 2009�the first recession since 1993. It grew by a robust 6.7% year on year in the first half of 2010, although it contracted in the second half. The slowdown was primarily driven by agriculture, which contracted by 13.5% in 2010 as a result of poor weather that destroyed large areas of crops. Construction contracted by 3.3%, an improvement on the 36.4% contraction in 2009.

Other sectors fared better, with services and industry expanding by 3.8% and 9.7%, respectively. Industry has benefited from an improvement in external demand, and higher global prices for mining and metallurgy products. This contributed to a rise in export volume and revenue. We expect this trend to continue in 2011-12, albeit more slowly in 2011, as slower global demand will affect the sector. Furthermore, economic activity has been boosted by a return to growth of leading partners, particularly Russia. Russian real GDP grew by 4% in 2010, according to preliminary data, following a 7.9% contraction in 2009. This has provided support to remittance and capital inflows. We forecast that

International assumptions

Economic growth

Armenia 13


Armenian real GDP will expand by 3.8% in 2011. The outlook will benefit from a recovery of conditions in agriculture and construction, and the ongoing recovery in countries that host migrant workers or are important export markets and sources of investment. An increase in global demand for Armenia's main export products�base metals and mineral products�and the ongoing recovery in domestic demand will lead to a 4.6% expansion in real GDP in 2012.

Annual average inflation rose to 8.2% in 2010 from 3.4% in 2009, significantly above the authorities' target of 4% (±1.5 percentage points). Higher food price inflation in the second half of 2010 (particularly in the final months of the year) led to a surge in consumer prices. The primary drivers behind the rise in food prices were a violent storm that destroyed a significant portion of crops and Russia's decision to ban wheat exports owing to the negative impact of a drought and peat fires on the Russian harvest. Concern over the threat posed by a resurgence in food price inflation lay behind the Central Bank's decision to raise the key refinancing rate to 7.75% in February 2011�the first rise since May 2010.

The authorities continue to target annual average inflation of 2.5-5.5% in 2011. We expect inflationary pressures to remain significant in 2011, and forecast average inflation of 7.9%. The Central Bank remains committed to tightening monetary policy further if inflationary pressure becomes too persistent. It believes that inflationary pressures will remain high in the first half of the year, before falling within the target range in the second half�although the risks to its forecast are considerable. We believe that slower money supply growth and weaker domestic demand over the forecast period will help to temper inflationary pressure. Conversely, higher import prices will encourage inflation, although a tight fiscal policy should help to keep it in check. We forecast annual average inflation to fall to 6.6% in 2012.

In March 2009 the Central Bank stopped supporting the dram, which then weakened by around 18%, to Dram370:US$1, from Dram305:US$1, where it had traded since late 2007. The authorities were forced to allow the currency to weaken when reserves came under pressure, following a decline in foreign-exchange inflows from exports and remittances. In June 2009 the authorities adopted a strategy designed to enable the dram to move towards a free-floating exchange rate by reducing Central Bank intervention in the foreign-exchange market. The authorities do not appear to have made any substantial interventions in recent months. Although the dram depreciated against the US dollar in January-May 2010, it has since adopted an appreciating trend, boosted by an improvement in export earnings and remittance inflows. We estimate that an improvement in domestic and external economic conditions allowed the dram to average Dram373.7:US$1 in 2010, and forecast an appreciation to Dram351.9:US$1 in 2012.

After contracting by 35.7% in 2009, export revenue (on a balance-of-payments basis) increased in January-September 2010, by around 47% year on year, to US$762m. Higher global prices and increased demand for the country's main exports (metals and mineral products) were the primary drivers behind export

Inflation

Exchange rates

External sector

14 Armenia


revenue growth. The weaker global economic outlook in 2011 will slow export revenue growth in that year. However, an improvement in global conditions in 2012 will result in higher demand for Armenian exports. In the first three quarters of 2010 import expenditure totalled almost US$2.3bn, a year-on-year expansion of 20.4%. An ongoing increase in domestic demand and the improved outlook for capital-intensive sectors will boost import demand over the forecast period, and it will pick up more rapidly in 2012 as the economic recovery strengthens. Nonetheless, we expect growth in imports to remain slower than before 2009.

The surplus on current transfers will be boosted by increased remittance inflows, as the outlook for Russia (the main destination for Armenian migrant workers) improves from 2009. We estimate that the current-account deficit narrowed as a percentage of GDP, to 13.7% in 2010, after expanding to 15.5% in 2009. It is forecast to shrink to 9.1% of GDP in 2012.

Forecast summary (% unless otherwise indicated)

2009 a 2010 a 2011b 2012b

Real GDP growth -14.4 2.6 3.8 4.6

Gross agricultural production growth 1.0 -13.5 4.0 3.8

Consumer price inflation (av) 3.4 8.2 7.9 6.6

Short-term interbank rate 18.8 19.2 18.5 18.5

Consolidated budget balance (% of GDP) -7.9 -4.9 -3.8 -2.8

Exports of goods fob (US$ m) 722.3 947.7 c 1,029.1 1,141.7

Imports of goods fob (US$ m) 2,817.2 3,036.4 c 3,267.3 3,557.8

Current-account balance (US$ m) -1,326.3 -1,284.9 c -1,215.4 -1,192.0

Current-account balance (% of GDP) -15.5 -13.7 c -10.8 -9.1

Exchange rate Dram:US$ (av) 363.3 373.7 356.6 351.9

Exchange rate Dram:� (av) 506.1 495.4 451.1 422.3

Exchange rate Dram:Rb (av) 11.4 12.3 11.8 11.7

a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.

Gross domestic product

(% change, year on year)

(a) Commonwealth of Independent States.

Consumer price inflation

(av; %)

-16.0

-12.0

-8.0

-4.0

0.0

4.0

8.0

12.0

16.0

CIS (a) Armenia

12111009080720060.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

CIS (a) Armenia

1211100908072006

Armenia 15


The political scene

The political situation remains generally stable. The president, Serzh Sargsyan, has denied that a rift has developed between his party, the Republican Party of Armenia (RPA), and Prosperous Armenia, which is led by a millionaire businessman, Gagik Tsarukian. Both governing parties have announced that they want to win the parliamentary election scheduled for 2012. Prosperous Armenia, which is represented in the three-party coalition government by four ministers, has yet to endorse the president's expected re-election bid in the presidential election in 2013. Addressing hundreds of senior RPA members on December 18th, Mr Sargsyan dismissed media speculation about a rift between his party and Prosperous Armenia. He insisted that Prosperous Armenia was not under pressure to pledge to support him in the presidential election or to quit the government. He said that he only expected it and the other junior coalition partner, Orinats Yerkir (Rule of Law), to honour the terms of a power-sharing agreement that they had signed with him in April 2008. Mr Tsarukian's aides similarly continued to deny, in public, any friction with Mr Sargsyan. They also brushed aside pro-opposition newspaper claims that Prosperous Armenia could pull out of the government in the hope of boosting its electoral chances.

On December 8th the mayor of the capital, Yerevan, Gagik Beglarian, resigned. Mr Beglarian, who had previously been an important presidential ally, was forced to step down after allegedly assaulting an official from the presidential protocol service in a dispute over seating at a classical concert attended by Mr Sargsyan and other high-ranking state officials. Mr Sargsyan's office described Mr Beglarian's allegedly violent conduct as "unacceptable and intolerable". The mayor has not been prosecuted. The Yerevan municipal Council of Elders, an group of elected representatives in which the RPA has a comfortable majority, promptly replaced Mr Beglarian with Karen Karapetian, the executive director of the state-owned energy company, ArmRosGazprom. Mr Sargsyan is likely to have had a decisive say in the appointment.

On December 9th Mr Sargsyan dismissed the justice minister, Gevorg Danielian, who has close ties to the influential and politically ambitious prosecutor-general, Aghvan Hovsepian. Mr Sargsyan's reformist prime minister, Tigran Sargsyan (no relation), is believed to have been instrumental in the move. Tigran Sargsyan publicly faulted Mr Danielian for failing to take disciplinary action against Mihran Poghosian, the head of a Ministry of Justice division that has the task of enforcing court decisions, who allegedly assaulted one of his subordinates. Mr Poghosian himself was not fired, however, raising more questions about Mr Danielian's ouster. Mr Danielian was replaced by Hrayr Tovmasian, a 40-year-old lawyer who used to be affiliated with a large opposition party.

In mid-December Tigran Sargsyan reshuffled a further three high-level ministerial posts. The finance minister, Tigran Davtian, was replaced by the respected deputy governor of the Central Bank of Armenia, Vache Gabrielian. Mr Davitan was appointed as economy minister, a position previously held by Nerses Yeritsian. The agriculture minister, Gerasim Alaverdyan, decided to

The prime minister reshuffles the cabinet

The RPA denies that there is a rift in the coalition

16 Armenia


resign in late December 2010, and stated that the poor performance of the agricultural sector was the primary reason. His successor, Sergo Karapetian, previously managed and has a large stake in one of the country's largest food-processing companies, Artfood. The authorities have stressed that this will not lead to a change in the direction of policymaking. However, Tigran Sargsyan stated that he expected the ministers to draw on their expertise to "improve the rate of reforms during the post-crisis period". The ministerial changes should also mark an increase in Tigran Sargsyan's political power. He is widely expected to top the party list of RPA candidates in the election in 2012.

The prime minister also sought to reassert his political power by harshly criticising the ministers of agriculture, finance, education and health in November over what he termed widespread corruption in their areas of responsibility. At least four senior officials, including two deputy health ministers, were forced to resign as a result. All four ministers submitted anti-corruption proposals that Tigran Sargsyan praised as "radical".

In a speech on December 18th Serzh Sargsyan called for a tougher crackdown on corruption, which he described as the main challenge facing Armenia. He also stressed the importance of political reforms that would "deepen democracy" in the country and introduce "European standards" into all spheres of state, public and economic life. He did not elaborate on those reforms, and stopped short of promising that the next national election will be more democratic than previous elections, considered fraudulent by the opposition. The president has made similar remarks before, and it seems unlikely that he will implement the reforms necessary to bring about the changes necessary to lead to improvements in democracy and towards eradicating corruption.

After a hiatus of more than two years, in October the National Commission on Television and Radio (NCTR), a regulatory body believed to be controlled by the presidential administration, resumed nationwide tenders for broad-casting licences. However, Serzh Sargsyan and the authorities did not use this opportunity to reduce their control over the coverage of political news across virtually all Armenian television and radio stations. Media associations claim that the authorities have initiated the process to tighten their grip on electronic media, the main source of information for most Armenians.

As has been the case in previous years, the NCTR refused to grant an airwave frequency to A1+, the country's leading independent broadcaster, which was taken off air in 2002. In late December 2010 the NCTR announced that it had decided not to renew the licence of a small, independent channel, GALA, which will expire in 2015. GALA is based in the country's second-largest city, Gyumri. It is one of the few remaining broadcast stations in Armenia, and regularly provides a voice to the opposition and airs reports critical of the president.

The NCTR also refused to renew the licence of ALM TV in December 2010. The station's owner, Tigran Karapetian, is a politician and a television commentator on business developments. He has occasionally (and cautiously)

The authorities try to restrict media freedoms

Tigran Sargsyan urges a clampdown on corruption

Armenia 17


criticised some government policies. ALM TV stopped broadcasting on January 20th, despite two anti-government rallies staged in central Yerevan led by Mr Karapetian. Speaking at the second rally, on January 19th, Mr Karapetian threatened to campaign for government change and snap elections if the authorities failed to meet a long list of his demands by February 28th. Among other things, he demanded the release of all political prisoners; the doubling of the national minimum wage, pensions and poverty benefits; and sharp tax cuts. It is highly unlikely that the government will meet Mr Karapetian's demands. However, the potential for further rallies to pose a risk to stability would rise if concerns over socio-economic developments increase. So far, Mr Karapetian has refrained from personally attacking Serzh Sargsyan.

The only visible concession that the authorities have made to the opposition in recent months was the decision to release four more members of the Armenian National Congress (ANC) in November and December 2010. The ANC members were arrested following violent unrest in Yerevan following the presidential election in 2008. The release of a further eight ANC loyalists who remain in prison�including a prominent newspaper editor, Nikol Pashinian�remains the main stated objective of the ANC opposition alliance, which is led by the country's first president, Levon Ter-Petrosian. In recent months the ANC has held a series of rallies across Armenia in support of the political prisoners.

The release of opposition activists was the main focus of a visit to Yerevan in January 2011 by the Council of Europe's commissioner for human rights, Thomas Hammarberg. At the end of his four-day visit, Mr Hammarberg urged the authorities to free all imprisoned members of the opposition and claimed that Serzh Sargsyan was now considering taking such action. However, Mr Hammarberg made it clear that the Council of Europe was unlikely to impose any political sanctions on Armenia, despite the authorities' decision to continue to imprison members of the opposition.

The ANC has implicitly sought the introduction of such sanctions. In December Mr Ter-Petrosian urged the EU to press harder for the release of ANC loyalists in a letter to the head of the EU's European Council, Herman Van Rompuy. Mr Ter-Petrosian said that failure to so would reinforce what he claimed was a widespread suspicion that the EU and the US are ignoring to human rights abuses in Armenia for geopolitical reasons, such as trying to encourage an improvement in relations between Armenia and its neighbours.

The ANC's relationship with other large opposition groups, notably Heritage, appears to have deteriorated further, making the formation of electoral alliances between them even less likely. In late December two senior members of Heritage accused the ANC of seeking to impose its will on all other political forces challenging the government. The deputy chair, Ruben Hakobian, and the party's parliamentary leader, Stepan Safarian, claimed that the ANC was presenting Mr Ter-Petrosian as the only viable alternative to the current leadership and slandering those who disagreed with the ANC's viewpoint. Another Heritage representative, Armen Martirosian, had earlier

The government releases some political prisoners

Relations between the opposition remain weak

18 Armenia


confirmed that the party's US-born leader, Raffi Hovannisian, would contest the presidential election in 2013.

In November the ANC's central office co-ordinator, Levon Zurabian�who is close to Mr Ter-Petrosian�confirmed that the former president plans to contest the presidential election in 2013. Mr Zurabian also stated that the ANC would take up seats in the next parliament, which will be formed after the parliamentary election in 2012. Even the ANC refuses to recognise the legitimacy of parliament. It refused to take its 13 seats in the 65-member municipal council of Yerevan following the election in May 2009, as it claimed that the electoral process and procedures were fraudulent. Some opposition supporters now believe that the decision to boycott the institution was a mistake.

The Armenian Revolutionary Federation (ARF; also known as Dashnaktsutiun)�another large opposition party, which holds seats in the national parliament�has increased its anti-government rhetoric. Addressing a press conference on December 8th, the chair of the party's supreme council, Armen Rustamian, criticised "the rule of wealth" and "widespread corruption and inept governance" that he believes taint Armenia. The ARF insisted that it remains committed to ousting the government, but the party failed to launch a nationwide campaign of anti-government rallies that it had pledged to hold at a rally in September in Ashtarak. Poor attendance at the rally may be the reason why the ARF has decided to stage no further protests.

No further progress has been seen towards a resolution of the conflict with Azerbaijan over Nagorny Karabakh, despite active mediating efforts by the US, Russia and France, which are co-chairs of the Minsk Group of the Organisation for Security and Co-operation in Europe (OSCE). Russia played the most prominent role in the negotiating process, which aims to facilitate a breakthrough between Armenia and Azerbaijan. The Russian president, Dmitry Medvedev, has hosted three sets of tripartite talks in the hope of moving the peace process along. No progress was made at the most recent meeting between Serzh Sargsyan, Mr Medvedev and the president of Azerbaijan, Ilham Aliyev. However, Mr Medvedev stated that the two leaders would be able to bridge their remaining differences over the basic principles of a settlement by the OSCE summit held in Astana, the Kazakh capital, on December 1st-2nd.

However, Mr Sargsyan and Mr Aliyev failed to reach a tangible agreement at the summit. They only signed a joint statement with Mr Medvedev; the French prime minister, François Fillon; and the US secretary of state, Hillary Clinton. The statement stressed the need for more decisive efforts to bring about a peaceful, negotiated settlement. The Armenian and Azerbaijani presidents highlighted the difficult task ahead for the mediating powers. Both leaders traded fierce accusations in their speeches at the OSCE summit. Mr Aliyev accused Armenia of dragging out the peace talks, and Mr Sargsyan claimed that it was Azerbaijan that had no interest in the conflict's resolution. More importantly, Mr Sargsyan threatened to formally recognise the self-proclaimed Nagorny Karabakh republic as an independent state if the

The ARF remains critical of the government

There is no progress in the Nagorny Karabakh conflict

Armenia 19


Azerbaijani leadership acted on its threats to try to forcibly win back the disputed territory and Azerbaijani districts surrounding it.

Ahead of the OSCE summit, Mr Sargsyan made a point of watching the final phase of what Nagorny Karabakh's ethnic Armenian army described as its largest ever military exercise. The exercise was held just several kilometres away from Azerbaijani army positions. The two-week manoeuvres reportedly involved thousands of soldiers, as well as hundreds of tanks, armoured vehicles and artillery pieces. Addressing the troops, the Armenian president warned that Azerbaijan would be dealt a "devastating and final" blow should it attempt a military solution to the dispute. The Armenian defence minister, Seyran Ohanian, insisted afterwards that Azerbaijan has not gained the upper hand, despite its significant increase in military spending in recent years. Azerbaijan plans to spend around US$3.1bn on defence in 2011, compared with spending of US$386m by Armenia.

Despite a lack of success at the OSCE summit in Astana, Russia has continued its mediating efforts in 2011, and has been praised by both the US and France. The Russian foreign minister, Sergei Lavrov, held trilateral meetings in Moscow with his Armenian and Azerbaijani counterparts one week after the OSCE summit and again on January 24th 2011. The conflicting parties and the mediators did not announce that any progress had been made after the talks.

Ahead of the meeting in January 2011, Mr Lavrov stated that the parties disagreed on two or three issues in the framework peace agreement put forward by the Minsk Group's co-chairs. One of the sticking-points is believed to be the timing and other practical modalities of a referendum that is proposed to be held in Nagorny Karabakh and would determine the territory's final status. A secret US State Department document published by WikiLeaks cited Mr Aliyev as complaining to a visiting senior US official in February 2010 that Armenia wanted a referendum date to be fixed in the text of any putative peace accord.

Democracy index: Armenia

Armenia's score in the Economist Intelligence Unit's 2010 index is unchanged from 2008 at 4.09 out of 10, although the rank improves to 109th (out of 167) from 113th, owing to a worsening of conditions in other countries. Other post-Soviet states that are classified as hybrid regimes include Georgia, Russia and the Kyrgyz Republic�although Armenia is the closest to an authoritarian state.

Democracy index Regime type Overall score Overall rank2010 Hybrid regime 4.09 out of 10 109 out of 1672008 Hybrid regime 4.09 out of 10 113 out of 167

Weak checks and balances weigh on the score

Armenia's poorest score is for the category of political culture, where survey data have indicated low levels of popular support for democracy as a form of government. Armenia scores similarly poorly in the category assessing the functioning of government. Here, the score is affected by the lack of accountability of governments, and the absence of a properly functioning system of checks and balances, including a weak legislature. Widespread corruption also poses a problem to the implementation of government legislation. The score in political participation is dragged down by low voter turnout, and the score in electoral process is dragged down by irregularities in this area, such as the unfair advantage given to incumbents owing to their access to administrative resources.

20 Armenia


Armenia's highest score is for civil liberties. Although in December 2010 the authorities refused to renew the licence of some independent broadcasters, Armenia continues to have a large number of private print media outlets. Citizens also have relatively free access to the Internet. Broadly, there is respect for human rights, personal freedoms and private property, although some restrictions and examples of lack of observance of these rights exist.

The ongoing economic recovery reduces the potential for social unrest

The global economic and financial crisis had a severe impact on Armenia; however, the country's economic outlook has since improved. The ongoing recovery in external economic conditions and a reduction in unemployment will provide support to private consumption. Providing further support to domestic demand, remittances from migrant workers, which fell sharply in 2009, have since started to increase as the economic situation in countries that have traditionally hosted Armenian labour, particularly Russia, has improved. These factors will reduce the risk of social unrest in Armenia. The authorities are likely to be more reluctant to crack down on protests with the use of force, following widespread international and domestic criticism after they violently clamped down on protests following the election in 2008. In addition, there is likely to be less international tolerance for repression following the overthrow of the regimes in Tunisia and Egypt in January and February 2011.

Democracy index 2010 by category (on a scale of 0 to 10)

Electoral process Functioning of government Political participation Political culture Civil liberties4.33 3.21 3.89 3.13 5.88

Democracy index 2010: Democracy in retreat, a free white paper containing the full index and detailed methodology, can be downloaded from www.eiu.com/DemocracyIndex2010.

Note on methodology

There is no consensus on how to measure democracy and definitions of democracy are contested. Having free and fair competitive elections, and satisfying related aspects of political freedom, is the sine qua non of all definitions. However, our index is based on the view that measures of democracy that reflect the state of political freedom and civil liberties are not "thick" enough: they do not encompass sufficiently some crucial features that determine the quality and substance of democracy. Thus, our index also includes measures of political participation, political culture and functioning of government, which are, at best, marginalised by other measures. Our index of democracy covers 167 countries and territories. The index, on a 0 to 10 scale, is based on the ratings for 60 indicators grouped in five categories: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. The five categories are inter-related and form a coherent conceptual whole. Each category has a rating on a 0 to 10 scale, and the overall index of democracy is the simple average of the five category indexes. The category indexes are based on the sum of the indicator scores in the category, converted to a 0 to 10 scale. Adjustments to the category scores are made if countries fall short in the following critical areas for democracy: • whether national elections are free and fair; • the security of voters; • the influence of foreign powers on government; and • the capability of the civil service to implement policies. The index values are used to place countries within one of four types of regimes: • full democracies�scores of 8 to 10; • flawed democracies�score of 6 to 7.9; • hybrid regimes�scores of 4 to 5.9; • authoritarian regimes�scores below 4.

Economic policy

The fiscal position has improved significantly since the economic crisis of 2009, owing to an improvement in tax collection combined with an only modest increase in public spending. Data from the Ministry of Finance show

The budget deficit narrows sharply

Armenia 21


that the state budget deficit shrank by more than one-half in January-November 2010 compared with the year-earlier period, to Dram52.4bn (US$140m). (The data in the Economist Intelligence Unit's annual tables refer to consolidated budget data.) The deficit was equivalent to almost 1.7% of GDP in January-November, and was sharply below the government's full-year deficit estimate of Dram128bn. However, the full-year deficit-to-GDP ratio is likely to be higher, as the government had spent only 86% of its planned total budget expenditure in the first 11 months of the year. The government plans to narrow the deficit to just under 4% in 2011 and around 3% in 2012.

The narrowing of the fiscal deficit was helped by a 14.3% year-on-year increase in revenue, which totalled Dram690.2bn in January-November. Tax comprised almost 76% of budget revenue, to total Dram542.5bn, marking a year-on-year increase of 15.3%. At Dram275.8bn (an increase of 20.1% year on year), proceeds from value-added tax (VAT) were the largest component of tax revenue. VAT revenue is largely derived from the sale of imported goods. The improvement in this component of the budget can be attributed both to increased imports and to a stricter enforcement of the use of cash registers in retail trade and services (see Foreign trade and payments). Revenue from customs duties levied on importers rose by 25% year on year, to Dram27.8bn.

State budget, Jan-Nov (Dram bn unless otherwise indicated)

2009 2010 % change, year on yearRevenue 603.9 690.2 14.3Tax & duty revenue 564.4 641.0 13.6 Tax revenue 455.0 524.5 15.3 Value-added tax 229.7 275.8 20.1 Employee tax 52.9 67.2 26.9 Excise tax 38.4 42.2 9.8 Customs duties 22.3 27.8 25.0 Social security contributions 92.5 98.5 6.5Official transfers 3.2 5.9 89.9Other income 36.3 43.4 19.6Expenditure 718.8 742.6 3.3Public-sector wages 59.7 62.5 4.8Purchase of goods & services 129.8 137.6 6.0 Transfers 71.7 82.9 15.6 Pensions & other social programmes 218.1 222.3 1.9 Operations without financial activities 94.8 80.5 -15.1

Balance -114.9 -52.4 -

Source: National Statistical Service.

An ongoing government crackdown on the informal sector of the economy led to a surge of almost 27% year on year in the collection of personal income tax, which comprised 12.4% of overall tax revenue in January-November. Indicating the extent of the problem, data from the National Statistical Service (NSS) show that nominal monthly wages rose by 7.8% in 2010. However, the authorities continue to fail to address in earnest what appears to be the largest source of tax evasion: the widespread underreporting of corporate earnings. According to the finance ministry, despite renewed economic growth, proceeds from corporate profit tax fell by 5.6% year on year in January-

22 Armenia


November and accounted for only 13.5% of total tax revenue, down from 16.5% of the total registered in the year-earlier period.

Total government expenditure in January-November was up by 3.3% year on year, at Dram742.6bn. Pensions and other social benefits remained the single largest spending category, absorbing Dram222.3bn worth of government funds, an increase of less than 2% year on year. The finance ministry reported a 6% year-on-year rise in spending on state procurements, which totalled Dram137.6bn in this period. Another Dram62.5bn was spent on public-sector salaries, representing an increase of 4.8% year on year. In contrast, government spending on capital projects contracted by 22.6% year on year, to Dram81bn.

Growth in state expenditure will remain relatively modest in 2011. Under the state budget for 2011 approved by parliament on December 9th, expenditure will rise by 7%, to just over Dram1trn (US$2.7bn). State revenue is forecast to increase to Dram852bn. Much of the planned increase in state expenditure will be channelled into social spending, leading the prime minister, Tigran Sargsyan, to declare that the budget had a "clear social orientation", a claim that has been strongly disputed by the opposition minority in parliament.

The government's ability to meet the budgetary targets received a modest boost in January 2011, when the World Bank provided it with a US$25m loan called the development policy operation (DPO), which is designed to finance a part of the 2011 deficit. In a written statement, the Bank indicated that its release was conditional on a government pledge to carry out reforms that would improve the investment climate. Jean-Michel Happi, the head of the World Bank office in the Armenian capital, Yerevan, said that another budgetary loan, worth US$20m, would probably be made available in the second half of 2011.

The World Bank approved further funding in late 2010, which will be used to finance infrastructure projects. A loan of US$24m was disbursed in late November and is aimed at fostering the spread of information technology (IT) in the country. Another credit line, of US$19m, secured from the Bank in December will be used for upgrading hospitals and other medical facilities outside Yerevan.

In December parliament approved changes to the tax legislation that aim to simplify the cumbersome taxation procedures for businesses by reducing the frequency of revenue reporting to the State Revenue Committee (SRC) and streamlining tax forms (November 2010, Economic policy). Mr Sargsyan and the governor of the Central Bank of Armenia, Artur Javadian, outlined these and other measures, which were either planned or had already been implemented, in a letter to Dominique Strauss-Kahn, the IMF's managing director, in November 2010. Mr Sargsyan and Mr Javadian stated that the authorities would also embark on structural and staffing reforms within the SRC, which is notoriously corrupt, and pledged to make tax audits of businesses, which have previously caused some controversy, less discretionary and "more risk-based". The authorities plan to develop a three-

Parliament approves the 2011 budget

The World Bank agrees to lend Armenia US$25m

The government amends tax legislation

Armenia 23


year strategic plan for tax administration, which will outline the reforms in greater detail.

Following the letter to the IMF, the Fund agreed to disburse the second tranche of a US$393.9m loan. The funding was made available through the extended fund facility (EFF) and extended credit facility (ECF) programmes; these replaced the IMF's earlier stand-by agreement, which was terminated in 2010 owing to renewed economic growth. In a press release on December 1st the Fund stated that "Armenia is on the right trajectory as it exits the crisis", again giving a largely positive assessment of the authorities' macroeconomic policies. However, the IMF again called for bolder and deeper improvements in governance, and said that government efforts to improve tax administration have had mixed success so far.

The World Bank's 2011 Doing Business survey claimed that Armenian taxation rules and procedures were more complicated than those in most other countries. In particular, the survey found that Armenian businesses had to pay some taxes as often as 50 times per year, and that businesses spent an average of 581 hours per year on tax administration.

Armenia was ranked 48th of 183 countries rated in the World Bank's survey, down from 44th in the 2010 survey. Its performance was below neighbouring Georgia, which ranked 12th,�but above Azerbaijan, which ranked 54th. The World Bank found an improvement in only one area of business regulation: trading across borders. In an address to parliament on December 9th, Mr Sargsyan declared that the tax and other reforms implemented by his government would substantially improve the business environment in 2011.

Consumer prices rose rapidly in the final months of 2010. According to data from the NSS, consumer price inflation rose by 9.4% year on year in December, up from 8.6% in September and 5.8% in June. The sharp increase was primarily driven by a surge in food prices. Food prices rose by 14% year on year in December, up from increases of 11.6% in September and 4.9% in June. In December the price of potatoes rose by 30.7% year on year, and similarly large increases were seen in the prices of other vegetables. Hail and a severe storm in the first half of 2010 resulted in a massive destruction of crops (see The domestic economy). The situation has been exacerbated by the regional drought and peat fires that damaged the harvest in Russia and Kazakhstan, large grain producers. Russia's consequent decision to ban wheat exports until June 2011 will have also pushed up the price of wheat in Armenia.

The government has tried to play down potential impact of the recent resurgence in inflationary pressures. The authorities stated that a resumption of growth in the agricultural sector in 2011 should lower inflation into their long-standing target band of 4% (±1.5 percentage points).

The IMF disburses a loan of US$53.4m

Survey shows tax rules need improvement

Consumer prices rise rapidly in the final quarter of 2010

24 Armenia


Consumer prices (% change, year on year)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average2008 6.6 7.6 9.7 10.8 10.0 9.7 10.9 11.8 11.6 9.0 6.8 5.3 9.02009 4.1 1.0 1.0 3.0 3.2 3.5 3.1 3.5 3.7 3.5 4.6 6.5 3.42010 7.0 9.4 8.8 6.9 6.3 5.8 7.8 9.6 8.6 9.1 9.6 9.4 8.2

Sources: National Statistical Service; IMF, International Financial Statistics; Economist Intelligence Unit.

The Central Bank was more cautious, however. On January 11th it stated that inflationary pressures could remain high in the coming months, because of uncertainty over developments in the agricultural sector and food price inflation. Concerns over food prices was the driving factor behind the Central Bank's decision to raise the refinancing rate by 0.5 percentage points, to 7.75%, at its board meeting on February 8th. The Central Bank added that although the ongoing economic recovery did not pose an inflationary risk, it was concerned about the possible impact of higher inflation expectations. The refinancing rate had been unchanged since May 2010. The Central Bank aims to bring inflation within its target band in the second half of 2011.

Consumer prices might have grown even faster without a 5.5% nominal appreciation of the dram against the US dollar in 2010. The currency averaged Dram360.5:US$1 in December 2010, compared with Dram380.5:US$1 in December 2009, although the dram appreciated much more sharply against the US dollar in the second half of 2010. In its December report, the IMF said that the authorities had helped the dram to strengthen and estimated that it was now overvalued by 10-12%. The authorities stated that they were concerned that if the dram was not allowed to appreciate, this could have led to higher inflation.

Exchange rates (Dram:US$ unless otherwise indicated)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2008 Average 306.8 308.7 308.6 309.0 307.4 304.9 302.4 302.0 302.6 306.2 305.2 307.8End-period 306.8 307.8 307.3 306.8 305.5 302.7 301.0 303.3 302.1 305.1 305.4 306.7 % change, year on yeara 17.1 15.2 17.9 16.3 13.9 12.7 12.0 10.9 11.1 6.6 0.0 -0.8

2009 Average 305.5 305.5 365.7 372.4 372.5 366.7 365.3 372.8 379.9 385.7 387.1 380.5End-period 305.2 305.8 367.8 370.9 370.3 360.1 370.3 374.9 384.3 386.4 385.8 377.9 % change, year on yeara 0.5 0.6 -16.5 -17.3 -17.4 -15.9 -18.7 -19.1 -21.4 -21.0 -20.8 -18.82010 Average 377.6 380.5 394.2 394.5 385.0 373.5 366.8 366.4 363.4 360.3 361.4 360.5End-period 376.7 384.7 400.5 384.9 379.0 367.5 370.2 362.7 361.3 358.2 359.1 363.4 % change, year on yeara -19.0 -20.5 -8.2 -3.6 -2.3 -2.0 0.0 3.4 6.4 7.9 7.4 4.0

a Based on end-period rate.

Sources: IMF, International Financial Statistics; Central Bank of Armenia.

The Central Bank raises the refinancing rate to 7.75%

The dram appreciates sharply in the second half of 2010

Armenia 25


The domestic economy

According to the National Statistical Service (NSS), real GDP expanded by 2.6% in 2010, compared with a 14.4% contraction in 2009. The modest growth was primarily driven by a pick-up in industry, led by the mining and metallurgy subsectors. The figure was much weaker than previously expected. In January-June 2010 real GDP expanded by 6.7% year on year; however, the ongoing crisis in construction and a steep fall in agricultural output led to a considerable slowdown in economic activity in the second half of the year.

The government forecasts that real GDP growth will accelerate to 4.6% in 2011. In its annual global economic report released in January, the World Bank forecast the economy to expand by almost 5% in 2012. The IMF stated that over the medium term real GDP would grow at around 4% annually. In the medium term economic activity will be bolstered by high global prices of non-ferrous metals (the largest component of exports) and higher remittance inflows, owing to the ongoing recovery in the Russian economy. Nonetheless, annual growth will remain much slower than in the years leading up to the global recession of 2009.

A sharp downturn in agricultural production was the primary factor that dragged down headline real GDP growth in 2010. According to data from the NSS, agricultural production totalled Dram637.5bn (US$1.7bn) in 2010, a decline of 13.5%. A full annual breakdown is unavailable at the time of writing, but detailed data for January-November reveal that the production of fruit and vegetables, which typically account for nearly two-thirds of the sector's output, collapsed, contracting by 20.5% year on year. The sharp reduction in output from this sector was owing to highly unfavourable weather conditions in the growing season. Hail and a violent storm caused much damage to crops. The government plans to construct additional anti-hail stations to take the total to 250 by 2012.

Agriculture(% change, year on year)

Source: Economist Intelligence Unit.

-16.0

-12.0

-8.0

-4.0

0.0

4.0

8.0

12.0

16.0

100908070605040302012000

The agriculture minister, Gerasim Alaverdyan, decided to resign in late December 2010, stating that the poor performance of the sector as the primary reason. His successor, Sergo Karapetian, previously managed and has a large stake in one of the country's largest food-processing companies, Artfood.

Agricultural output contracts sharply

Real GDP expands by 2.6% in 2010

26 Armenia


Risking an expression of discontent from the opposition, on January 19th Mr Karapetian declared that the agricultural sector was inherently inefficient because it was dominated by hundreds of thousands of mostly low-income farmers owning small plots of lands. Mr Karapetian said that this seriously complicated their access to credit and agricultural machinery, and stated that he would therefore work to consolidate land holdings.

In 2010 industry was the largest sector of the economy. According to NSS data, industrial output rose by 9.7% in 2010, to Dram824.3bn. The robust performance of the interrelated mining and metallurgy subsectors was an important factor behind industry's ability to post a strong recovery. Both mining and metallurgy benefited from the recovery in global prices for base metals. At the time of writing, a full annual breakdown of industrial production data is unavailable; however, the trends in the first 11 months of the year demonstrate the shape of the performance of the recovery in agriculture. In January-November 2010 mining expanded by 23.8% year on year, to Dram130.8bn; the production of base metals was up by 6% year on year, at Dram122.5bn. The sharpest increase (of more than 100%) was in the amount of zinc ore concentrates produced by Armenian mining companies. The NSS also reported sizeable increases in the production of smelted copper and enriched copper ore, which are among the country's main goods exports.

Industrial production, 2010 Dram bn % change, year on yearTotal 824.3 9.7Mining 145.5 24.3

Manufacturing 544.7 11.5Electricity & gas 75.5 -1.9

Water supply & waste processing 17.9 6.7


The manufacturing sector expanded by 11.5% year on year in January-November. Output from the food-processing subsector, the largest component of manufacturing, rose by 9.3% year on year, to Dram168.7bn. The NSS recorded a 34.4% year on year surge in the production of brandy and other beverages, which totalled Dram61.5bn in the first 11 months of 2010. Both food processing and the production of beverages benefited from improving economic conditions in Russia, Armenia's main export market for such goods. Exports to Russia are a particularly important source of income for Armenian brandy firms. According to the NSS, 11,330 litres of brandy were distilled by Armenian alcohol producers in the 11-month period, up by 33.8% year on year. Manufacturing was also boosted by a 9.2% year on year increase in chemicals production in January-November. In the first 11 months Armenia produced almost Dram8bn worth of synthetic rubber and other chemicals.

The energy sector contracted by 9.6% year on year in January-November, to Dram103.1bn. The dominant component of the sector, electricity generation, shrank by 9% year on year. This may have been driven by the warmer than usual weather in the final months of the year. A further factor that may have led Armenians to cut their electricity usage is that the price of electricity for

Industrial production expands by 9.7% in 2010

Manufacturing grows robustly in 2010

The energy sector contracts by 9.6% year on year

Armenia 27


households was raised by 25% in April 2009. Although this tariff has since remained unchanged, the price of natural gas increased by 37.5% from April 2010, which is likely to go some way towards explaining why gas consumption dropped by 12.5% year on year in January-November.

The Russian state-owned energy monopoly, Gazprom, which supplies the majority of Armenian gas, reaffirmed its intention again to raise the price of the gas that it delivers to Armenia from April 2011. The Armenian energy and natural resources minister, Armen Movsisian, stated in December that the government still hoped to prevent another price rise. Negotiations between the government and Gazprom were ongoing in mid-February 2011.

Foreign trade and payments

According to the National Statistical Service (NSS), exports rose by 42.4% in 2010, to just over US$1bn. Imports rose by 13.9%, but they dwarfed exports, totalling almost US$3.8bn. The sharp increase in exports was insufficient to offset the growth in imports, resulting in a larger trade deficit (on a customs basis), of almost US$2.8bn, up from US$2.6bn in 2009. The deficit narrowed slightly as a percentage of GDP, to 29.5% in 2010 from 30.7% in 2009.

In 2010 exports were boosted by a recovery in demand for Armenia's main exports of base metals and mineral products. Data from the NSS show that exports of mineral products rose by 89.9% in 2010, to US$276.5m, and exports of base metals and metal products were worth US$332.4m, an increase of 43.8%. Higher global prices for non-ferrous metals compared with 2009 were the primary reason behind the surge in exports. Export revenue from precious stones and metals increased by 27.6% in 2010, to US$134.1m. An improvement in the performance of the diamond-processing industry�which produced 60,881 carats of gem diamonds in January-November 2010�contributed to the increase in this component. According to the NSS, exports of prepared foodstuffs rose by almost 32% in 2010, to US$131.2m. The rapid recovery in the sector has mainly resulted from the improvement in economic conditions in Russia following the sharp downturn in 2009; Russia is the main export market for these products.

Foreign trade by commodity (US$ m)

2002 2003 2004 2005 2006 2007 2008 2009 2010Total exports 505.2 685.6 722.9 973.9 985.1 1,152.3 1,069.1 710.2 1,011.4 Base metals & metal products 44.8 90.4 137.6 322.0 280.9 390.2 346.8 231.1 332.4 Precious stones & metals 258.3 350.7 299.3 336.3 301.0 208.7 174.7 105.1 134.1 Prepared foodstuffs 54.4 72.2 69.2 96.9 95.1 144.5 176.2 99.6 131.2 Mineral products 42.1 50.3 99.9 93.5 136.6 173.5 174.2 145.6 276.5Total imports cif 987.2 1,279.5 1,350.7 1,801.7 2,191.6 3,267.8 4,411.6 3,321.3 3,782.9 Mineral products 171.4 179.5 209.4 297.4 366.0 516.4 660.1 540.6 679.2 Machinery & equipment 103.4 133.8 135.5 232.5 304.4 427.3 646.0 628.7 655.0 Transport equipment 40.2 78.5 92.5 151.8 196.6 422.8 572.0 241.6 309.4 Prepared foodstuffs 79.1 93.3 112.3 145.9 163.9 256.4 347.1 264.7 309.6


The trade deficit grows to almost US$2.8bn in 2010

Demand for base metals and mineral products rises

28 Armenia


According to NSS data, demand for mineral products (the largest component of imports) rose by 25.6% in 2010, to US$679.2m. However, a sharp drop in gas consumption in 2010 prevented a more a rapid increase in this component (see The domestic economy). The second-largest component of imports, machines and equipment, expanded by a much more modest 4.2%, to US$655m. Nonetheless, the increase in this component indicates that the unfolding recovery in capital-intensive sectors of the economy. Providing an indication of an improvement in consumer demand, imports of cars and other transport equipment rebounded in 2010, recording an expansion of over 28%, to total US$309.4m.

The EU remained Armenia's leading trade partner in 2010. NSS data show that EU states accounted for US$1.5bn of Armenian foreign trade in 2010�an increase of 27% from 2009 and equivalent to 32% of the country's total turnover. Armenian trade with EU members has been boosted by the country's inclusion in the EU's preferential trading regime, the Generalised System of Preferences (GSP) from January 2009 onwards. The system, which will remain in place until the end of 2011, allows Armenia to sell about 6,400 items in EU markets with significant discounts on import duty or no duty at all. According to a statement from the Ministry of Economy, GSP applied to 96% of Armenian exports to the EU. In 2010 exports to the EU rose by 61.6%, to US$501m. In January 2011 officials from the economy ministry stated that the government planned to negotiate and extension of the scheme with the EU. Russia was Armenia's second-largest trading partner, accounting for 20.8% of total trade, followed by China, with a 9.7% share.

Top trade partners, 2010 (total foreign trade turnover)

US$ m % of totalRussia 995.1 20.8China 463.7 9.7

Germany 346.3 7.2Iran 269.7 5.6

Bulgaria 269.0 5.6Total incl others 4,794.3 100.0


The current-account deficit widened to US$906.2m in January-September 2010, up from US$820.5m in the year-earlier period. A larger trade deficit�US$1.5bn, compared with almost US$1.4bn January-September 2009�was the primary driver of the expansion. Exports posted a robust year-on-year recovery of 47.7% in January-September, to total US$762.3m. However, this figure was dwarfed by imports, which expanded by 20.4% and totalled almost US$2.3bn. The expansion of the trade deficit was modestly offset by a rise in the current transfers surplus to US$665.2m from US$562.8m a year earlier. The rise in this component is linked to an increase in remittance inflows from Armenians working abroad. The improvement in economic conditions in Russia, which is the main destination for Armenians working abroad, provided a boost to this indicator. According to full-year remittance

The current-account deficit widens in January-September

The economic recovery supports a rise in imports

The EU remains Armenia's leading trade partner

Armenia 29


data from the Central Bank of Armenia, net non-commercial money transfers by individuals via commercial banks totalled almost US$1.1bn in 2010, up from US$929m in 2009. Russia accounted for over 88% of net transfers by individuals in 2010.

Balance of payments (US$ m)

2008 2009 2010 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 QtrCurrent-account balance -303.8 -219.1 -346.2 -513.7 -267.6 -268.7 -284.2 -548.9 -321.3 -346.3 -238.6Goods: exports 248.0 297.7 317.6 248.7 130.4 168.6 217.2 232.6 211.2 259.8 291.3Goods: imports -722.1 -889.8 -1,053.5 -1,110.2 -564.3 -605.9 -738.2 -921.7 -699.0 -774.1 -825.3Trade balance -474.0 -592.1 -735.9 -861.5 -433.9 -437.2 -521.0 -689.2 -487.8 -514.3 -534.0Services: credit 113.5 156.3 204.2 171.0 105.8 140.3 190.0 153.4 118.6 172.1 206.3Services: debit -173.1 -232.8 -301.8 -265.4 -152.3 -195.6 -261.9 -247.8 -170.6 -234.5 -271.6Services balance -59.6 -76.5 -97.6 -94.5 -46.5 -55.3 -72.0 -94.4 -52.0 -62.4 -65.3Income: credit 174.9 243.2 308.9 267.5 128.9 169.4 204.9 211.9 149.9 174.5 235.1Income: debit -133.7 -65.9 -180.2 -143.4 -60.6 -126.3 -133.8 -228.5 -105.2 -149.6 -160.2Income balance 41.2 177.2 128.7 124.1 68.3 43.1 71.2 -16.6 44.7 24.9 74.9Current transfers: credit 208.6 299.3 386.3 345.3 160.8 201.9 257.7 274.5 191.8 227.9 312.4Current transfers: debit -20.0 -27.0 -27.6 -27.2 -16.3 -21.2 -20.1 -23.3 -18.0 -22.4 -26.5Current transfers balance 188.6 272.3 358.7 318.1 144.5 180.7 237.6 251.2 173.8 205.5 285.9Financing Net foreign direct investment 116.5 137.7 244.5 426.5 32.5 151.2 171.2 369.9 126.0 117.9 166.9Net portfolio investment 0.0 3.6 2.8 1.9 0.2 10.0 -4.4 -9.7 6.5 3.2 0.5

Source: Central Bank of Armenia.

Documents

Country Report - WikiLeaks · Armenia 1 Country Report February 2011 ' The Economist Intelligence Unit Limited 2011 Contents Armenia 3 Summary 4 Basic data 5 Political structure 6