Download Armenia Monthly Economic Developments (February 2016) as a PDF |
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GDP growth slowed to 3.0 percent in 2015 in light of the weakening external conditions, in particular Russia’s recession. Despite the reduced exports to and remittances from Russia, growth was stronger than expected due to one-off factors including a good agriculture harvest and the opening of a new copper mine. In 2016, growth is projected to remain sluggish at 2.5 percent due to continued recession in Russia and structural weaknesses. The economic activity index increased to 5.5 percent in January 2016 (y-o-y) supported by the tradable sector. The relative boost in economic activity, including the agri-export expansion, is explained by the base effect in January 2015 and needs to be maintained for a few more months before suggesting any adjustments in projections.
The government introduced a fiscal stimulus in 2015 to support weakening economic activity, widening the fiscal deficit. The stimulus consisted of a combination of tax relief and increased spending in infrastructure investment, social protection and subsidized lending. The resulting fiscal deficit, of 4 percent of GDP (compared with 2 percent in 2014), was financed mainly by external borrowing, including Eurobonds and budget support from ACF/EEU and WB, leading to a build-up of government debt to 48 percent of GDP.
The approved 2016 Budget includes revenue-raising measures and modest expenditure cuts to accommodate fiscal consolidation. Some of the tax policy changes pertaining to excise tax base and rate increases introduced in the fall of 2015 will positively affect the revenue collection however the overall tax to GDP ratio is expected to decline by 1 percentage point. There are no other major tax policy and tax administration changes envisaged by the 2016 state budget as the government is leading a major endeavor to finalize and submit to Parliament a unified tax code which is assumed to enter into force in 2018 and bring about significant policy, procedural and administrative changes. Public expenditures are planned to reduce by 1.5 percentage point of GDP, to achieve a target deficit of 3.5 percent of GDP. Changes in the 2016 expenditure composition refer to the increased allocation for economic sectors in a form of subsides, increased debt service spending which will be accommodated by the envisaged cuts in public procurements for goods and services. Actual revenue collection in January 2016 was lower than a year ago, reflecting the trend of a continued decline in imports. The fiscal pressure observed last year may be experienced again in 2016 if the January trend continues.
Monetary policy was tight during the first half of 2015 but eased in the latter half, as inflationary pressures receded. A good agriculture harvest, lower international food prices and weak domestic demand resulted in the average annual inflation of minus 0.1 percent in 2015 – well below the CBA’s target range of 4±1.5 percent inflation. The Central Bank lowered the policy rate from 10.25 percent at the beginning of the year to 8.75 percent by the end of 2015. Inflation remained muted in January 2016 with 0.4 percent reduction of the over consumer price index helped by about 4 percent decline in food prices.
Overall the banking sector remained sound in 2015. However non-performing loans soared from 3.7 percent at the beginning of 2015 to above 9 percent towards the end of the year. Higher dollarization and currency mismatches in the balance sheet pose risks to banking sector stability and profitability. Total lending declined in 2015 by 3.1 percent with FX-denominated loans suffering the largest contraction reflecting expectation of further dram appreciation. Commercial banks deposited excess forex at the CBA, which contributed to an increase in gross reserves by US$282 million over 2015. 2016 is expected to be a challenging year for the banking sector as the new requirement for minimum capital will enter into force on January 1, 2017.
The current account position improved due to the sharp contraction in imports. Imports fell by 26.5 percent in 2015 and by 22 percent yoy in January 2016. Despite the decline in exports to Russia, there was only a marginal deterioration in exports of 3.9 percent in 2015, because of higher trade with China and Middle East. Overall exports contracted by 27.1 percent to the EEU – reflecting weak demand in Eurasia following the commodity price slump and the transactions costs associated with transitioning to the customs union’s procedures and requirements – and by 5.2 percent to the EU in 2015 compared to the previous year. The improvement in the trade balance compensated for the fall in remittances. Net remittances declined by 35.8 percent in 2015 (in USD, y-o-y,), driven by a 42.2 percent decline of net remittances from Russia. The improved current account position eased pressures on the dram, and the Central Bank reduced forex intervention sharply in the second half of the year, resulting in an increase in international reserves increased to US$1.77 billion at end-2015, compared with US$1.35 billion in January 2015. The trade deficit improved further in January 2016 as exports increased by 5.6 percent while imports contracted further by 22 percent.