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Armenia Grapples With Galloping Inflation, Mushrooming Foreign Debt

President Serzh Sarkisian, left, assures businessmen that the economy will improve in the new year, but some reports disagree with the president's optimism.
President Serzh Sarkisian, left, assures businessmen that the economy will improve in the new year, but some reports disagree with the president's optimism.
Meeting on December 24 with representatives of Armenia's business community, President Serzh Sarkisian predicted the country will fully emerge from its recession in 2011. Sarkisian said it is "encouraging that in difficult conditions, we managed to stabilize the situation and ensure some economic growth." GDP growth for January-November was in fact a modest 2.6 percent, compared with last year's negative 14.4 percent.

But the annual overview of 2010, compiled by the Civilitas Foundation in Yerevan, offers a more nuanced and less optimistic picture, highlighting such pernicious trends as high inflation, an unsustainable budget deficit, and the huge increase in Armenia's foreign debt over the past three years.

Inflation emerged as a major problem from the very start of the year, hitting 8.4 percent year over year by the end of the first quarter, despite successive increases in the Central Bank's refinancing rate. On April 1, Prime Minister Tigran Sarkisian (no relation to the president) downplayed higher than anticipated consumer price inflation as the natural consequence of an expansionist fiscal and monetary policy intended to spur economic growth. He predicted that "by the end of the year we will manage to slightly restrain inflationary pressures, and these indicators will decrease."

The 7.8 percent inflation registered for January to September was among the highest in the CIS, according to Civilitas. Finance Minister Tigran Davtian predicted in early October that inflation would fall and could even approach the government target by the end of the year. But the annual figure is 8 percent -- double the 4 percent envisaged in the 2010 annual budget. Parliament deputy Ara Nranian (Armenian Revolutionary Federation--Dashnaktsutiun) has pointed out that in 2010 the inflation rate exceeded the rise in the average wage for the first time. He said he fears it will prove impossible to reverse the trend in 2011.

Government officials have blamed high inflation on external factors, primarily higher food prices resulting from a sharp fall in domestic agriculture production and the increased cost of wheat and other cereals on international markets. But former Central Bank Chairman Bagrat Asatrian rejects that argument, saying that the primary contributing factors are economic monopolies and the size of the "shadow" economy. Aristomene Varoudakis, who heads the World Bank office in Yerevan, quoted unnamed Armenian experts in June as estimating the shadow economy could account for as much as 35-40 percent of Armenia's GDP.

Government officials and independent experts similarly disagree over the threat posed by Armenia's foreign debt, which has risen from just 13.5 percent of GDP in 2008 -- the year Serzh Sarkisian was elected president -- to 36 percent of GDP in 2009, and an estimated $3.3 billion, or 42 percent of GDP, at the end of 2010.

Prime Minister Sarkisian has predicted that in 12 months time the figure will have risen to $4.3 billion but does not think that increase poses a threat to the economy. Economy Minister Tigran Davtian similarly argues that the current level of debt does not constitute a macro-economic risk; he said the risk threshold is 60 percent of GDP.

By contrast, former Yerevan Mayor Vahagn Khachatrian says the magnitude of the debt would not pose a problem if the Armenian authorities had used the money to expand production capacity, but they failed to do so. He termed that failure "irresponsible."

Hrant Bagratian, who served from 1993-1996 as prime minister under then-President Levon Ter-Petrossian, said the foreign debt level is "dangerous" insofar as it reduces the country's leaders to "puppets" in the hands of creditors. The three largest creditors are the International Monetary Fund ($823 million), the World Bank ($545 million), and the Russian Federation ($500 million).

The annual Civilitas overview enumerates economic options available to the Armenian government in 2011, including fundamental reform to reduce the role of monopolies and the size of the shadow economy, abandoning "the reactive emergency mode thinking of the last two years" and re-focusing on overall growth, and allowing the dram (Armenia's national currency) "to depreciate sufficiently to create a monetary situation beneficial to exports and increase the purchasing power of the population, especially those dependent on outside remittances."

President Sarkisian pledged to crack down on economic monopolies in his ground-breaking December 19 address to the ruling Republican Party of Armenia, and five days later he stressed the need for "deepening economic diversification" and unspecified "new and creative steps." Whether the government will deliver on those promises, and how effective the chosen measures will be, remains to be seen.

About This Blog

This blog presents analyst Liz Fuller's personal take on events in the region, following on from her work in the "RFE/RL Caucasus Report." It also aims, to borrow a metaphor from Tom de Waal, to act as a smoke detector, focusing attention on potential conflict situations and crises throughout the region. The views are the author's own and do not represent those of RFE/RL.


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