Hidden Decline: What Does Armenia's Economy Live On?

Analysis of Armenia’s Economic Growth

In recent years, Armenia’s economy has shown impressive growth, reaching 12.6% in 2022. However, hidden behind these numbers are a number of concerning trends that call into question the sustainability and long-term prospects of this growth.

The Illusion of Economic Growth

Chart 1.

The first chart shows the dynamics of Armenia’s economic growth in recent years. Although the growth rates have been impressive recently, it is important to note that Armenia’s long-term average growth is 4.5%. Any system tends to return to its average value if there are no fundamental qualitative changes. Qualitative changes can be provided by the development of production, which can guarantee the long-term creation of sustainable added value. Armenia’s economic growth is mainly driven by external trends, which generally have a short-term nature.

The Armenian government has set a growth target of 5.6% for 2025, which is significantly lower than the previously set long-term goal of 7%. However, even this 5.6% target may be too optimistic given the structural problems of Armenia’s economy (Read more: 🌿🤨💎 The Precious Effect: Reasons for Economic Growth in 2024). The reasonable medium- to long-term growth potential of Armenia’s GDP is estimated at an average of about 4.5 percent. This is the number our economy will gravitate towards if the system does not undergo qualitative changes.

Analysis of Growth Drivers

Chart 2.

The second chart reflects the structure of Armenia’s GDP by economic sectors. It is obvious that a significant shift has occurred in recent years, with a decline in the role of agriculture and an increase in the services sector. In 2018, agriculture was in first place, providing 16.4 percent of the economy, but at this moment it has dropped to 4th place, providing only 9.0 percent of the economy.

Chart 3.

The third chart shows the cumulative growth rates of different sectors of the economy from 2018 to 2023. It is noteworthy that agriculture contracted by 16.2%, while the information technology and financial services sectors recorded significant growth, mainly driven by 💸🔚🏦 a large amount of capital from Russia and 🆘🇦🇲🧑🏼‍💻 the influx of IT workers.

The Role of External Factors

Armenia’s economic growth in recent years has been largely driven by external factors.

In 2022, there was a significant capital influx from Russia due to the Russian-Ukrainian conflict. 80 percent of the economic growth is due to exogenous factors (Read more: 💸🔚🏦 From Capital Influx to Outflow: The Inner Kitchen of Armenia’s Economic Miracle).

Starting in November 2023, large-scale gold re-exports boosted growth figures. Gold re-exports today have reached 71% of all exports from Armenia, which provided the economic growth of recent months (Read more: 🇷🇺💰🇦🇲 Armenia: A Haven for Russian Gold).

Growth is mainly driven by trade, real estate, and financial services, which are dependent on external factors.

These factors, while providing a short-term boost, do not represent drivers of sustainable, long-term economic growth.

Revision of Statistics and the Real Picture

It is noteworthy that in August 2023 the Statistical Committee revised the economic growth figures. The 9.2% growth in the first quarter was revised down to 6.6%. Similarly, the 4th quarter 2023 figure was adjusted from 7.7% to 6.4%. This is not a minor adjustment but a fundamental reevaluation of Armenia’s economic reality.

Fiscal Implications

The problems with the sustainability of economic growth have a direct impact on Armenia’s fiscal situation.

Currently, there is a significant 9% under-collection of tax revenues. Tax arrears amounted to about 9 percent based on the results of the first half of the year; it was planned to collect 1 trillion 305 billion AMD in taxes and duties, but deductions amounted to only 1 trillion 187.6 billion AMD, or 117.4 billion AMD less than planned (Read more: 🧮⏳🎲 Armenia is Taxing Time: Playing with Economic Growth). Plans to use about 150 billion AMD from the reserve fund are being discussed to cover expenses amid the revenue shortfall.

Chart 4.

The last chart shows the factors contributing to Armenia’s economic growth by quarters. It is clear that growth has mainly been driven by external factors and temporary phenomena.

Forecasts for 2024

It should be noted that based on the results of 2024, GDP growth could already be 5% or lower. This is significantly lower than the 7% target set in the budget approved by the government.

If the authorities fail to secure the 7% GDP growth stipulated in the current year’s budget, the government will be forced to spend funds from the reserve fund to ensure the execution of budget expenditure items.

Conclusion

The latest GDP revisions and sectoral analyses present a worrying picture for Armenia’s economic future. The heavy dependence of Armenia’s economy on external factors and the temporary boosts from activities like gold re-exporting indicate that maintaining high growth rates will be difficult without significant structural changes. The risk of rising national debt and potential fiscal instability in the coming years cannot be ignored.

As things stand, long-term forecasts for GDP growth are not positive at this time. Without a solid foundation of sustainable, long-term added value growth, Armenia may find itself chasing economic illusions instead of building sustainable prosperity. The coming months and years will be crucial in determining whether the country will be able to steer towards more sustainable economic strategies or continue to rely on volatile and temporary growth factors.

This analysis is a continuation of the article 🐅🌆💸 Armenia: Caucasian Tiger or Expensive Dream. If you would like to receive additional information and detailed analyses on the Armenian economy, please follow this link.