The Armenian Statistical Service March report on Armenia’s economic activity is evidence that Armenia is not out of the woods of the economic crisis. Following 2009’s 14.3 percent decline – the second biggest drop in the world – it could have been expected that two years on, when the world has already come out of the crisis, our own economy would be growing at least 5 to 6 percent, year to year. Instead, it appears that Armenia’s economy in March 2011 grew not at all compared to the same period last year.
There are many reasons for this situation. The first is that in 2008-09, the government was unable to accurately assess the gravity of the global crisis for Armenia. Second, when they finally did comprehend that there would unavoidably be consequences for Armenia, they were unable to devise and implement appropriate policies in response. Third, in desperation, the sizeable financial resources which were quickly secured were not utilized wisely. And fourth, the government did not have the audacity to take advantage of the moment to impose very essential structural reforms.
As a result, today we are in a rather serious economic fix. The list of Armenia’s economic woes is long. But based on simple macro-economic considerations, there are two problems which are most urgent.
The first is the very low economic rate of growth coupled with high inflation — 11.3% according to recent figures — and the resultant increase in poverty. The second problem is Armenia’s four-pronged deficit: the budget deficit at 10% of GDP; the national debt at 43% of GDP; the trade deficit is 23% of GDP; and state reserves are decreasing daily as a direct consequence of ever-increasing interventions to maintain the AMD exchange rate.
These two problems are intricately intertwined and each is both a cause and an effect of the other. Solutions for one would set in motion solutions for the other.
First, interventions aimed at maintaining the currency exchange rate must cease, thus preserving state reserves. Thus, the government won’t be compelled to take on additional IMF debt – as it appears prepared to do in the near future — to preserve the minimum required reserve level. The real value of AMD on the market today, according to international financial experts is 425-430 to the Dollar. At that rate, Armenian exports would become more competitive, thereby somewhat reducing the trade deficit. Concerns about a resultant inflation could be allayed by ceasing to sanction import monopolies for primary commodities.
With economic growth, concerns about the budget deficit will be eased in the mid-term. Today, that deficit stands at a rather hefty 10% of GDP. Although that’s already high, it can be sustained, and even increased by up to two percent, but under one condition: if in addition to financing that deficit with internal and external resources, large businesses are brought completely out of the shadows and into the tax sphere, thus increasing budget revenues by as much as 5 percent. This would bring us closer to a more desirable correlation between budget revenues and GDP – 23 to 25 percent – something our neighbors have already achieved. In Armenia, that number is a much poorer 17%.
The same logic can be applied to our national debt. National debt cannot exceed 50% of GDP. Today it stands at 43 percent, but the government is already looking for ways to access that additional 7 percent. If it in fact does so, it is essential that earlier mistakes not be repeated and those additional funds be directed towards stimulating the demand side of the economy, specifically those areas which can have maximum multiplier effects on economic development.
There are two additional impediments to our economic growth. One is the excessively high cost of borrowing, which makes investing less attractive. The other is very shallow financial intermediation, which limits the opportunities for alternative sources of financing.
In recent years, despite government efforts, no success has been registered in these two areas. This is because the government has been unable to design an appropriate instrument by which the Central Bank’s monetary policies are reflected in the private sphere in a timely and effective manner. In other words, the Central Bank’s policy rate adjustments have not been replicated in the retail rates charged by commercial banks.
In addition, the government has not been able to create the financial instruments that can expand financing for investors.
As a consequence, there are two troublesome trends in Armenia’s banking sector today. The first is that interest rates are going up instead of down.
But the second, the second is more telling. Not only have consumer and mortgage loans decreased significantly, but short-term loans against collateral have increased. People are pawning what they have in order to survive. This indicator alone should sound the alarm for all of the problems mentioned above.
The article was published in Aravot daily on May 3, 2011.