Armenia: old reasons for new economic challenges

The National Statistical Service of Armenia published disappointing economic indicators for the first half of the year. For the first time since the crisis of 2009 the volume of foreign trade decreased by 20.6% in comparison with the same period last year. For the first time in the last 6 years a drop of 5.1% was registered in domestic trade. In the first half of this year the government managed to collect 13.5% less in taxes in comparison with the same period in 2014. Imports of products dropped by almost a quarter, a decline in domestic production was also registered. The largest decline was registered in the production of bread and bread products - by 1.8%, as well as pasta and vegetable oil. A decrease in volumes of local production against the background of the decline in imports seems to be contrary to the logic of the market. However, in this case this phenomenon has a clear explanation, which is based on factors such as the decline in the population and a further decline in solvency.

Despite the assurances of the authorities about economic growth and the fact that, according to official figures, in recent months the growth of the average salary amounts 6%, while prices rose by about 4.2%, several important indicators suggest that the country's economy has serious problems.

"The authorities speak about the growth of economic activity, GDP growth, but trade indicators are declining. It does not happen that the people reduced the volume of trade but the economy grew. In that case, at least the savings of citizens should increase. If people receive money they have to spend or save. So both our savings and the volume of trade declined, that is, we have a specific purchasing power loss," the economist Babken Tunyan believes.

Another new problem of the Armenian economy became the decline in transfer payments. In the first half of this year transfer payments amounted to $682.6 million, which is 28.4% less than the same period last year. The level of decline in remittances was also the highest since the 2009 crisis. Annually, Russia transfers to Armenia more than two billion dollars in remittances. According to the economist Vilen Khachatryan, any shock that occurs in the Russian economy, including a decline in oil prices, leads to a reduction of the incomes of Armenian migrants who send transfers to their homeland. According to the forecasts of some experts, the decline in transfer payments could exceed 40%, which would be a serious blow to the Armenian economy, since the GDP is only $10 billion, 2 billion of which is generated from private transfer payments.

A picture of the real estate market can be regarded as an important indicator of the situation. They registered a decline in activity in the first half of the year – the number of transactions reduced and apartment prices have fallen by 15%.

In addition, old problems such as the development of small and medium-sized business continue to deepen in the country. The crisis in the Russian economy, the appreciation of the dollar, purchasing power loss have led to the closure of many small businesses. According to research conducted by the Union of Employers of Armenia, among small and medium-sized enterprises (SMEs) the main factors that hinder development are frequent changes in legislation, the tax burden, bureaucracy, corruption and unfair competition. 69% of respondents believe the main problem of the Union is the unavailability of financial resources, including high lending interest rates. "As a result of the difficulties in obtaining loans from banks, business cannot take out loans. In fact, the underdevelopment of nearly 70% of the SMEs is due to the unavailability of finance. And if this problem is not solved, then the government's reforms will not produce significant results," the chairman of the Union of Employers of Armenia, Gagik Makaryan, said.

Against this background, the members of the government continue to claim that the country is experiencing economic growth. Recently, Prime Minister Hovik Abrahamyan made a strange statement at a meeting with journalists in Gyumri that GDP growth amounted 4.5% in the first half of this year, which is more than the planned GDP growth of 1%. According to him, in the second half of the year it will be possible to ensure economic growth of a few percent.

The economic observer of the Haykakan Zhamanak daily, Aik Gevorkian, ironically noted: "If this continues, then maybe we will finish the year with double-digit economic growth. It is not about the government being a little wrong in the percentages: a little more or a little less. We all understand that Armenia's economic growth is not 4.5%, it is doubtful that it will be above zero. The question is what constantly forces the government to declare such numbers?"

"If the country is doing so well – there is economic growth, the pace of salary growth is ahead of the pace of price growth, the growth of economic activity is constantly recorded, and the question of SMEs development is in the focus of the government, then why is unemployment rising and people continue to leave Armenia? Meanwhile, over the past five years more than 200 thousand people left Armenia."