The Armenian economy will likely contract by 1 percent this year due to spillover effects of Russia’s economic troubles, the International Monetary Fund has said in a sharp downward revision of its growth projections for Armenia.
“Armenia and Belarus are projected to enter into recession in 2015, and Georgia’s growth will slow. In all three economies, the downward turns reflect spillovers from Russia,” the IMF said in its latest World Economic Outlook released late on Tuesday.
Mark Horton, the head of an IMF mission visiting Yerevan likewise predicted last week that economic growth in Armenia will be “close to zero” in 2015. He too cited the fallout from the recession in Russia, the South Caucasus state’s leading trading partner and the main source of multimillion-dollar remittances.
Both the IMF and the World Bank forecast a 2015 growth rate of 3.5 percent as recently as last fall. The bank cut its outlook late last month, saying that Armenia’s Gross Domestic Product will at best increase by 0.8 percent in real terms.
The Armenian government recorded a GDP increase of 3.4 percent in 2014 and expected faster growth this year. The slowing growth is putting at risk its tax revenue and spending targets.
Apparently anticipating the downturn, the government sold about $500 million in dollar bonds in international markets late last month. It is due to spend $83 million of the Eurobond proceeds on covering the 2015 state deficit projected at roughly $250 million. Another $200 million is to be channeled into a government “stabilization fund” for special budgetary expenditures.
The IMF expects the Russian economy to shrink by 3.8 percent this year and another 1.1 percent in 2016 mainly because of recent months’ sharp fall in oil prices.
The Russian recession has already dramatically slashed the dollar value of remittances from scores of Armenia migrant workers in Russia. The resulting depreciation of the Russian ruble is hitting hard Armenian agribusiness firms and beverage manufacturers oriented towards the Russian market.
The IMF report said that Armenia and other ex-Soviet states dependent on Russia should “if necessary” further depreciate their national currencies. “Tighter monetary policy may be needed to address inflation pressure resulting from currency depreciation,” it said.
The Armenian dram weakened by roughly 17 percent against the U.S. dollar in November and December but has been largely stable so far this year. Its current exchange rate appears to have been bolstered by a 15 percent rally in the ruble’s value registered in the first quarter.
The looming recession coincided with Armenia’s recent accession to the Russian-led Eurasian Economic Union (EEU). President Serzh Sarkisian and his political allies have said all along that EEU membership will improve the country’s economic prospects.
But critics are already seizing upon the worsening macroeconomic situation to dismiss those assurances. “In the past three months we have had a fairly serious drop in trade [with other EEU member states,]” Vilen Khachatrian, a Yerevan-based economist, said on Wednesday. “This means that the EEU is still unable to function properly as an economic cooperation structure.”