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Armenia: 2001 Economy Sees High Growth But Little Impact

When a country sees its gross domestic product rise by over 9 percent, it should be cause for celebration. But as Armenia enters its 11th year of painful social and economic transformation, the mood is anything but jubilant. Despite government statistics trumpeting an economic upswing, the financial plight of most Armenians remains unchanged.

Yerevan, 31 December 2001 (RFE/RL) -- The official figures issued by the Armenian government are impressive. They show Armenia's economy growing at a record rate of 9.1 percent, with inflation steady at 3 percent from January through November 2001. Exports were up 14 percent, while imports remained virtually unchanged. The numbers put Armenia's account deficit on track to drop from 14.5 percent to 11 percent of GDP in 2001.

"Despite how unhappy people seem to be with the situation, there is a definite improvement here," a Western diplomat in Yerevan said. "Even if the statistics are not really entirely reliable, no one should question that there is a macroeconomic improvement going on."

The International Monetary Fund -- a key force behind the country's decade-long reforms -- describes Armenia's macroeconomic performance as encouraging. But IMF officials are also quick to point out what analysts and some government officials have said as well: Armenia's growth has largely benefited the wealthy, and has widened income disparity. At least half of the population remains mired in poverty, and unemployment is still high.

Garbis Iradian is the IMF's resident representative in Armenia. In an interview with RFE/RL, he says, "There is a robust growth in Armenia but we don't see the level of poverty declining as there is only one small class that enjoys its fruits."

President Robert Kocharian's chief economic adviser painted a similar picture in a recent interview with RFE/RL. Vahram Nercissiantz, who headed the World Bank office in Yerevan in the 1990s, argued that the rise in living standards is hampered by poor tax collection and the subsequently low level of public spending.

Indeed, tax revenues are expected to make up less than 15 percent of Armenia's $2.1 billion GDP this year -- a percentage that is more than doubled in other former Soviet states like Russia and Ukraine. As a result, Armenia's annual budget is less than $500 million -- nowhere near enough to meet its basic needs. Economists warn that the meager public funds allocated for education and health care may cost the country dearly in the years to come.

The government's tax revenues have increased this year, but not enough to meet the revenue targets set by the 2001 budget. And the government is now scrambling for funds to offset a shortfall in third-quarter revenues -- a fact critics say is an indication the country's growth is not being fully taxed or is not as rapid as authorities claim. Many believe it is Armenia's class of wealthy businessmen -- many with ties to the government -- who are reaping the profits of the country's growth. Otherwise, it is argued, there is no explanation for the government's inability to implement its modest budget.

The fiscal problems highlight the existence of a so-called shadow economy based on tax evasion. Some analysts suggest the size of this informal economy may be as large as Armenia's legitimate economy.

President Kocharian recently announced that more than 40,000 new jobs have been created over the past year -- a figure his political opponents question. But even if Kocharian's announcement is true, the situation on the ground has not improved markedly. Armenia's GDP is still at 70 percent of its 1990 level.

The IMF's Iradian says, "Such a growth -- from 8 to 9 percent -- has to continue for at least four or five more years in order to make a difference to the economy. One year is not enough."

Skeptics also cite the continuing dearth of foreign investment in the Armenian economy. Foreign investment is unlikely to exceed $100 million this year. The figure does not include substantial money remittances from Armenians working abroad, mainly in Russia and the United States. The Armenian Central Bank estimates that the total amount of private transfers reached $300 million this year. But the real figure could be even higher.

One Yerevan-based Western diplomat estimates that billions of dollars' worth of hard currency is in circulation in Armenia. But only a small proportion of that money gets into the local banks. Most business transactions are still conducted in cash.

One major hurdle to attracting investment is continuing conflict in the South Caucasus. Each of its three impoverished countries -- Armenia, Azerbaijan, and Georgia -- is too small to attract large foreign investors on its own.

As Eduard Aghajanov, a former government minister who now runs a private economic think tank in Yerevan, tells RFE/RL: "We risk being left on the sidelines of globalization. The regional states will be of little interest to international business unless they act together."

But a reopening of borders and the free movement of capital and goods throughout the South Caucasus is unlikely, without the settlement of conflicts in Nagorno-Karabakh and elsewhere in the region.