Armenia's Stagnant Economy

Friday, 21 January, 2000

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Emil Danielyan

The Armenian economy expanded by more than 5 per cent in 1999 while inflation stayed in single figures and the government anticipates higher growth rates in coming years. But local analysts warned that macroeconomic stability has had little impact on living standards, which plummeted following the collapse of the Soviet Union and the outbreak of ethnic disputes in the Caucasus. So profound was the country's economic decline during 1991-1993, analysts agree it will be years before most Armenians benefit from the transition to a free market economy.

The turbulent political situation in Armenia, combined with the unresolved conflict in Nagorno-Karabakh, is the key factor hampering a quick economic recovery.

Armenia's GDP shrank by half between 1991 and 1993, plunging the country into hyperinflation. The tight fiscal and monetary policies introduced by a succession of governments finally halted the downward spiral in 1994. Regular financial injections from the International Monetary Fund (IMF) and the World Bank were crucial to the ensuing economic growth.

Over 80 per cent of state-owned enterprises were privatised. An end to crippling energy shortages in early 1996 gave a fresh impetus to economic growth. The national currency--the dram--has enjoyed a largely stable exchange rate over the past five years, with the Armenian Central Bank acting as an effective instrument of monetary regulation.

"I think that the economic reforms process is probably more advanced in Armenia than elsewhere in the region," Michael Lemmon, US Ambassador to Armenia, declared in early 1999.

However, most Armenians treat the official macroeconomic figures with some scepticism. Sedrak Sedrakian, president of the fledgling Yerevan Stock Exchange (YSE), feels that the growth period has seen "very little economic development". According to Sedrakian, Armenian industry, once the dominant sector in the economy, is struggling to remain afloat in the absence of adequate investment. Indeed the YSE - Sedrakian's barometer of economic activity - is a quiet place these days, lacking the usual buzz of trading transactions.

Unemployment, the principal social problem in Armenia, remains very high. According to official statistics 11 per cent of the national workforce are unemployed, but various unofficial estimates put the rate anywhere between 20 and 40 per cent. The high level of unemployment is a major contributor to the high rate of emigration from Armenia.

Since hitting rock bottom in 1993, living standards have failed to rise by very much. At present average income in Armenia is around $35 (US) a month, according to official figures. Given the extensive black economy in Armenia, the real figure is probably higher. But life is extremely tough for the vast majority of the population.

For many people, the economic situation deteriorated following the Russian financial meltdown in August 1998. The crisis in Russia drastically reduced the amount of money transferred back to Armenia from family members working in Russia. The meltdown also damaged several large Armenian enterprises dependent on the Russian market.

The crisis further weakened Armenia's trade links with Russia and other countries in the Commonwealth of Independent States (CIS). Armenia's foreign trade volume with the CIS fell to a record low of 23.3 per cent in the first six months of 1999. In what some analysts describe as the country's economic re-orientation, the European Union (EU) has become Armenia's number one trading partner and presently accounts for roughly a third of its external trade.

Trade is also responsible for what one government official has called "the saddest" of Armenia's macroeconomic indicators - the country's massive trade deficit. At present the country imports three times more than it exports. While the deficit decreased by 15 per cent in the first nine months of 1999, but was still a staggering $443 million.

According to a recent EU sponsored study, export promotion, in particular, is becoming the main factor in [continued] economic growth. Armenian economists largely agree with this conclusion, arguing that the small domestic market is now stretched to its limits and can not sustain further economic expansion.

A mid-term programme unveiled by the government in November 1999 set an ambitious target of increasing exports by 20 per cent year on year. The government projected that such an increase would produce a 7 per cent annual increase in gross domestic product (GDP) over the next four years.

Vahagn Khachatrian, an economist and former mayor of Yerevan, believes these targets are unrealistic. Khachatrian, once an economic adviser to former president, Levon Ter-Petrosian, shares his old employer's view that economic recovery is impossible without a solution to the Karabakh conflict.

"This is the key to our development," Khachatrian said. The conflict's settlement, he argued, would end Armenia's geographical isolation from world markets and make it attractive to foreign investors.

A staunch advocate of Armenian, Azerbaijani and Georgian economic integration, Khachatrian believes that the three neighboring states can only enjoy the most efficient use of their resources by forming a "single economic unit." Such a strategy would involve a harmonisation of economic policy and the construction of joint energy and transport networks.

Armenian President, Robert Kocharian, reaffirmed Yerevan's support for "regional economic projects" in the Caucasus last September. Kocharian said such schemes were "much more attractive" to international financial organisations.

The US is a strong supporter of a common Caucasus market. In April 1999, the US Government held a conference on "regional synergy" in Yerevan attended by senior US diplomats and aid officials. Ambassador Lemmon said at the time that the three Caucasian states would draw "tremendous benefit" from facilitating regional trade. He said Washington would help their governments put in place an adequate transport infrastructure and harmonised customs system.

But the dispute over Karabakh and other conflicts in the region remain deadlocked. There are few signs that such a co-operative idea could be put into practice in the near future.

Meanwhile, government disarray in Yerevan following the October 27 killings in the Armenian parliament continues to impact badly on the economy. The business community remains jittery about possible changes in the political leadership. And the internecine squabbling between the various government factions has undermined pledges to tackle the chronic problems hindering economic development --poor governance, endemic corruption, an inadequate judiciary and unfair business competition.

Continued political uncertainty does not bode well for badly needed investment, especially from abroad. Direct foreign investment in the Armenian economy declined last year to about $100 million from $240 million in 1998.

Disproportionately high interest rates are also strangling business growth. In an economy with a fairly stable currency and single-digit inflation, the central bank's benchmark re-financing rate is above 40 per cent.

Finally the government is plagued with serious budget difficulties. Armenia started 2000 without a state budget following the failure of the government to secure fresh loans to cover the bulk of the budget deficit. Talks with the World Bank are ongoing regarding further credit. Western lenders are unhappy with the government's tax collection record and are insisting on more realistic spending targets. Such pressure looks likely to ensure that the meagre $500 million budget in 1999 will not increase by much in 2000.

Emil Danielyan is a correspondent for RFE/RL in Yerevan.