Armenia

After two exceptional years, a return to more moderate growth in 2024

Growth accelerated in 2022 and remained strong in 2023, stimulated by an influx of foreign currency, migrants, and businesses, mainly from Russia. In 2024, growth will remain dynamic, albeit at a slower pace, due to the slowdown of Russian flows into the economy. Activity will be driven by the services sector (55% of GDP in 2022), thanks in particular to tourism and information and communication services. The construction sector (7% of GDP) will benefit from public investment in infrastructure. In addition, the manufacturing industry (11% of GDP) will contribute positively to growth, through the production of jewelry and gold. The extractive sector will depend on the evolution of global commodity prices and the opening of new mining sites. By contrast, the agricultural sector (10% of GDP and around 30% of the working population) faces challenges such as soil degradation and low livestock productivity. Private consumption (67% of GDP) is set to slow as remittances from Russian expatriates moderate (in 2022, 70% of remittances came from Russia, and total remittances accounted for over 18% of GDP). Growth forecasts are mainly subject to downside risks, linked to ongoing tensions with Azerbaijan, geopolitical unrest, refugee integration and a possible slowdown in partner economies. The economy also faces other structural challenges, such as high unemployment (8.4% in 2023) and a high level of informality, estimated at 37% of the working population. Public spending will focus on investment in infrastructure, social protection services and the integration of refugees from Nagorno-Karabakh. Reforms will be supported by the IMF's 36-month loan facility of around USD 171.1 million granted in December 2022.

After a sharp fall in 2023 due to lower food prices, the appreciation of the dram and the delayed effects of monetary tightening, inflation should rise slightly in 2024. This would be partly due to robust domestic demand, which could lead to services price inflation. As a result of lower inflation, the Central Bank of Armenia (CBA) lowered its key rate by 2.5 points between June 2023 and April 2024, to 8.25%.

Public deficit weighed down by refugee aid and defense spending

Despite continued fiscal consolidation, the public accounts are set to deteriorate considerably in 2024 with the increase in aid granted to refugees (estimated at 1.5% of GDP). Spending (24.3% of GDP in 2022) will also focus on social protection, infrastructure (forecast at 6.6% of GDP in 2024) and national security. By 2024, defense spending should be over 80% higher than in 2020. Now accounting for 17% of the budget, this spending would include the construction of new barracks, military installations, and border fortifications. Revenues (26.4% of GDP in 2022) will benefit from a new universal income declaration system. They will also be boosted by the introduction of higher excise duties on tobacco and alcoholic products, upwardly revised royalty rates for mining, and new taxes on gambling. External debt accounts for half of public debt, most of which is owed to multilateral creditors (IMF, World Bank) on concessional terms. Public debt is relatively sustainable, with debt servicing amounting to 2.6% of GDP in 2023. However, with 54% of public debt denominated in foreign currencies in 2023, it is exposed to foreign exchange risk.

The current account will also be in deficit. The services balance will record a surplus, thanks to the strength of tourism and financial services. However, this will be offset by a deterioration in the trade balance. The upturn in infrastructure projects should boost imports of building materials, machinery, and equipment. Exports will grow slower and will increasingly focus on precious and semi-precious stones, linked to jewelry production, and re-exports of Russian products. Workers' remittances will also lose momentum. Capital inflows and FDI are also likely to be below 2022 levels. Foreign exchange reserves, which have fallen sharply since peaking in August 2023, to 2.6 months of imports in March 2024, will be of concern.

A country threatened and weakened by Azerbaijan

For over 30 years, Armenia has maintained tense relations with Azerbaijan, due to a history of tension and intermittent violence over Nagorno-Karabakh. This violence culminated in the Azeri offensive on the disputed territory in September 2023, which enabled Azerbaijan to take control of the territory. Since then, unable to count on its traditional ally Russia, which remained passive during the offensive, Armenia has found itself in a delicate situation. It is now seeking to turn away from Russia and move closer to India and Western countries (US, UK, France). In February 2024, Armenia suspended its participation in the CSTO, the Russian-led military alliance, and the EU announced a EUR 270 million aid package to support the Armenian economy. Although countries are offering Armenia their support, none is prepared to offer a security guarantee or a formal military alliance. Another source of dispute with Azerbaijan is the Zangezour corridor, which is supposed to link Azeri territory to its enclave Nakhchivan. While the corridor represents an alternative way of linking China and Europe by bypassing Russia, it also worries Iran, which would see its trade route to the North, and above all to Russia, hindered. Armenia insists that the construction of the corridor is not mentioned in the 2020 ceasefire agreement, and therefore constitutes a violation of that agreement.

In May 2024, as part of the process of normalizing relations between the two countries, the Armenian Prime Minister agreed to hand over control of four border villages in the Tavoush region to Azerbaijan. This region, located in the northeast of the country, is of strategic interest for its road link with Georgia. The agreement has led to a protest movement in the country, calling for the resignation of the current liberal centrist Prime Minister, Nikol Pachinian. His Civil Contract party won 54% of the vote in the last parliamentary elections in June 2021. However, in the municipal elections held in September 2023, Mr. Pachinian's party lost 33 of the 65 seats on the Yerevan City Council to the opposition parties National Progress (left-wing, pro-European) and Mother Armenia Alliance (pro-Russian), which won 14 and 12 seats respectively.

Last updated:May 2024