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Armenia’s economy is picking up. Foreign trade is an important driving force. The new government’s reform package is boosting competition, SME promotion and investment.

Economic development: Significant growth in sight

Armenia’s economy is expected to grow by around six percent in real terms in 2018 and 2019 respectively. Good export prospects in the traditional sales markets, growth in the manufacturing industry, the construction sector, agriculture and above all in incoming tourism, as well as a revival in private consumption, speak in favour of this.

Last but not least, the new government’s reforms are fueling hopes of visible economic growth. With the election of former opposition leader Nikol Paschinjan as prime minister on 8 May 2018, the country now has a real opportunity to curb rampant corruption and create conditions for free competition.

Initial successes in unbundling oligarchic structures and curbing the influence of market-dominating entrepreneurs on economic policy are visible. However, there is still a long way to go towards fair competition, a less shadow economy and a noticeably improved social situation for the population. In addition, external conditions are difficult. These include the conflict with Azerbaijan over the Nagorno-Karabakh region, the tense relationship with Turkey and the country’s strong political and economic dependence on Russia. The latter was also decisive for Armenia’s accession to the Eurasian Economic Union in 2015.

Nevertheless, the country is struggling to intensify its economic relations with the European Union. This is based on the comprehensive and deepened partnership agreement (CEPA) concluded between Armenia and the EU at the end of 2017. It has been gradually implemented since 1 January 2018. A key issue is the further liberalisation of trade and services in mutual economic relations. The EU is funding reforms and priority infrastructure projects with 170 million euros between 2017 and 2020. In the medium term, the Armenian government will focus on expanding the ICT sector, the food industry and the tourism industry.

Investment: Reform wave brings new projects

The government’s reform efforts strengthen the confidence of the economy in the feasibility of expansion and renewal projects. This is evidenced by the increasing use of banks’ own funds and financial assistance from foreign institutions to lend to companies. For example, the Eurasian Development Bank is providing a further 270 million US dollars (US$). The European Bank for Reconstruction and Development (EBRD) is providing US$ 17 million for new SME projects.

The government gave the go-ahead for the first major engagement in the new free economic zone Meghri on the Iranian border. Bonwaron plans to invest US$ 195 million in manufacturing, logistics and trade. Gross investment in Armenia is expected to reach US$ 2.2 billion and US$ 2.4 billion in 2018 and 2019, respectively, calculated according to the use of gross domestic product. At the end of the last decade they still reached more than US$ 3 billion.

Consumption: Consumer confidence grows after a long slump

After several years of real declines, private consumption has been picking up again since 2017. This trend can be seen in retail trade, including imported goods sold, and in the service sector. Rising real wages, rising private remittances from Armenian guest workers from Russia and growing consumer interest in installment loans should continue to stimulate private consumption in 2019. Retail sales are expected to rise to around US$3.2 billion this year, up from an expected US$3 billion. It amounted to US$ 2.8 billion in 2017.

Nevertheless, the market opportunities for foreign consumer goods and population-related services remain limited. An official poverty rate of just under 30 percent and an unemployment rate of almost 18 percent (unofficial: up to 30 percent) as well as low average gross monthly wages of around US$ 400 are dampening consumption (figures for 2017). The majority of consumers rely on inexpensive domestic and foreign products and special offers. Yerevan, the capital, accounts for 83 percent of the country’s retail sales.

Foreign trade: strong growth in imports and exports

Foreign trade is one of the main drivers of the economic upswing in Armenia. Imports are expected to rise to around US$ 4.4 billion in 2018, bringing them closer to the pre-crisis level of 2013/2014. Growth compared with the previous year can be observed for almost all product groups.

Remarkable are the rising imports of machinery and equipment (January to July 2018: +72 percent to US$ 512 million compared to the same period last year), means of transport (+100 percent to US$ 210 million) and many consumer goods, including food and textiles/clothing. In the first seven months of 2018, the main countries of supply were Russia (US$779 million), the People’s Republic of China (US$200 million), Germany (US$145 million) and Iran (US$128 million).

Growth in exports in 2018 will concentrate on the product groups clothing, food (primarily fruit and vegetables) and metals. In the first seven months of 2018, Russia (US$ 340 million), Switzerland (US$ 189 million), Bulgaria (US$ 143 million) and Germany (US$ 93 million) dominated among Armenian goods buyers.