Rising interest rates and stricter lending rules set by commercial banks after recent exchange rate fluctuations are dealing another blow to economic growth in Armenia which looks set to slow down considerably this year.
According to official statistics, the average cost of borrowing in the country rose by 2 percentage points in February to 19 percent despite a stabilization of the Armenian dram’s exchange rate. The dram had weakened by roughly 17 percent against the U.S. dollar since October, leading the Central Bank of Armenia (CBA) to sharply raise its benchmark refinancing rate.
Lending has also been complicated by Armenian commercial banks’ apparent fears of renewed dram depreciation. This has translated into stricter requirements for businesses seeking credit. As a result, the total amount of commercial lending fell by 23 billion drams ($48 million) in February compared to January, according to the National Statistical Service (NSS). NSS data also shows a sizable increase in the share of “bad loans” in the banks’ credit portfolios.
“In this situation we are trying to look at things and assess our risks more rigorously before extending loans,” Mihran Khachatrian, a senior executive of the VTB Armenia bank, told RFE/RL’s Armenian service (Azatutyun.am) on Thursday.
Hrachya Tokhmakhian, the executive director of the Armenian branch of the U.S. microfinance organization FINCA International, reported a record-high number of clients, most of them small business owners, unable to repay their loans on time. He said that is the result of falling multimillion-dollar remittances from Armenians working in recession-hit Russia.
“There is still lending but it’s down,” said Babken Tunian, an economic writer for the “168 Zham” newspaper. “The decreased credit portfolios mean that the banks now spend more time on getting their money back than lending it.”
The CBA blames the recent exchange rate volatility, also caused by the remittance fall, for the tighter credit. It has warned that commercial banks and microcredit firms must provide written explanations for every decision to turn down a loan application.
The Armenian government registered an economic growth rate of 3.4 percent last year. It forecast as recently as in November that Armenia’s Gross Domestic Product will increase by 4 percent in 2015.
The World Bank and the International Monetary Fund now expect much slower growth because of the knock-on effects of Russia’s economic troubles. A senior IMF official said on Wednesday that the Armenian economy may not grow at all this year.