London, 16 April 1997 (RFE/RL) -- A report published by the European Bank for Reconstruction and Development (EBRD) says the Armenian economy has been growing at a brisk pace since 1994 despite border closures and interruptions in the supply of energy.
The report says Armenia's success in achieving positive results is "remarkable" in view of the deadlock caused by the long-running dispute with Azerbaijan over the Nagorno-Karabakh enclave.
The report -- prepared on behalf of Armenian authorities by the EBRD's country promotion team and bank staff -- was released at the EBRD's sixth annual meeting in London this week.
The report says GDP grew by 5.8 percent in 1996 and is projected to grow by 6 percent in 1997. It says Armenia's growth in the past three years have made it the first former Soviet republic after the Baltics to achieve economic recovery. But growth came from a very low base.
The report says average inflation last year was 18.8 percent but a drop is projected for 1997, perhaps to 9.4 percent.
The report says the legal and regulatory framework is being reshaped in line with the requirements of a market economy and privatization should be completed by the end of 1997.
Government finances are under pressure because of the difficulties in raising revenue and expensive energy imports. Real incomes remain low. Many workers are idle and many no longer have formal jobs.
But real disposable incomes have started to recover because of rising non-wage earnings and income from the shadow economy. However, real wages in the public sector remain far below their earlier levels.
The report says domestic savings are negative and the current account deficit in the balance of payments remains "quite large." It says Armenia will continue to require large capital inflows.
The report says a vigorous response from the private sector is needed if Armenia is to "reap the benefits of its courageous reforms." But this is unlikely to happen before the conflict over Nagorno-Karabakh is resolved as this has placed an extremely heavy burden on the economy.
As a result of the lack of a proper settlement, Armenia's borders with Azerbaijan and Turkey remain closed, severely restricting trade and important transport routes, and resulting in an economic blockade.
The report says Armenia's substantial progress toward macroeconomic stability and structural reform reflects its close cooperation with the International Monetary Fund since 1993. But despite the sweeping economic reforms and the start of economic recovery, the "medium-term outlook remains fragile."
The report says there has been a significant rise in private sector activity since the energy situation started to improve, and as the still-closed borders slowly became more permeable.
Many Armenians have set up small family businesses, such as flower or fruit production for export to Russia. Having accumulated capital, these entrepreneurs are now participating in the privatization process.
The report says this should lead to the emergence of a private manufacturing sector, particularly agro-processing and light industry. This trend will gather pace once the financial sector strengthens, but deficiencies in banking services are a serious constraint on growth.
In the agriculture sector, almost all of the more than 800 state and collective farms have been broken up, and over 300,000 private farms have been created. Privatization of housing is now virtually complete.
The report says the private sector share of GDP in 1996 exceeded 55 percent. This reflects the sharp contraction in the state sector and rapid privatization in trade, services and agriculture. There were some 18,000 private enterprises registered in November, 1995.
The report says that exports rose by 7.1 percent in 1996 but imports climbed by 27.8 percent over the same period. The main export markets are Russia and Iran. Belgium and Germany dominate exports to the EU, which are mostly of cut precious stones. Many are rough diamonds imported to Armenia for finishing by its experienced craftsmen.
In conclusion, the report says: "Armenia's success in economic stabilization and structural reform is exemplary."