Armenia’s double-digit economic decline continues, and is approaching 20 percent. The question in everyone’s mind is how long this drop will continue and whether the government’s policies are effective or sufficient to stop and eventually reverse it.
Today there are two substantial problems with the government’s response to this economic situation. The first is that the government’s guiding document, the budget adopted for 2009, is obsolete. The document is based on 9 percent economic growth while today we are experiencing 18 percent decline. There is a 27 percent discrepancy in the budget. Such a distorted document cannot serve as a blueprint or even a simple guideline for the government’s economic programs.
The second is that the government’s anti-crisis efforts have mainly focused on the supply side. Promoting supply side growth by financing certain industries so that they maintain production may generate short-term growth and enhance GDP. But this will not be sustainable even in the short term if approximate effort is not made to stimulate demand.
Clearly, the government’s main aim should be to do what most countries have already done: first, to revise its budget to reflect the current reality, and second to stimulate the demand side of the economy utilizing the nearly one billion dollars in financial resource that has already been received.
It is a truism that the main engine of growth for any economy is the demand for goods and services. Consumer demand, government spending, investments and foreign purchases (exports) are what constitute the aggregate demand in any economy.
We should look to see what is being done by the government to strengthen each component of the aggregate demand and what other steps can be added.
First: consumer demand; this is the most significant component. High unemployment, economic decline, decreased income and a sharp drop in remittances have all dramatically diminished the capacity of this component to fuel the economy. There is nothing in the government’s plan to address this. To revive consumer demand, a consumer needs more disposable income. This must be the case for all segments of society, indiscriminately. The only way to achieve that is to cut profit taxes on employers and income tax on the employed.
Second: government spending. This is a critical component that has immediate and direct impact in a time of crisis. Although the government envisages infrastructure projects, they are either too far off or too small to have a major impact on the economy. A new nuclear power plant and a rail line to Iran are long-term projects. Yet, the more immediate ones are too small in scope to serve as real stimulants. In fact, they are no different from projects that have been part of all budgets in normal pre-crisis times. The government can only make a real difference with well-thought out projects with the greatest multiplier effects and which create the most jobs.
Third: investments. This is possibly the most ignored component. This elements depend largely on investor confidence in the government and in the future of the country. Here, both confidence-building as well as tangible economic measures must be employed. The government should inspire confidence through both words and deeds. But as an immediate practical measure, the cost of borrowing must be brought down. Banks must be encouraged to reduce interest rates on both deposits and loans, and to do so in such a way as to maintain the same differential so that loans will still be profitable for banks yet affordable for borrowers. And, specifically to encourage and attract foreign investment, there must be tax holidays.
Fourth: foreign demand or exports. This component, too, has suffered greatly. Exports have declined an average of 46 percent in the past year and a half. Yet exports are critical for Armenia’s sustainable growth given the small size of our domestic market. Here of course the decline of international demand, low commodity prices and transportation
constraints have all contributed to this decline. Although, the government has no influence on these factors, some modest measures can ameliorate the situation. The two main impediments for our exports are first, our low competitiveness often due to higher costs of transportation, and second, the lack of financial resources to get our products out. These two can be compensated by revisiting our exchange rate policy and finding an optimal rate that will be win-win for both importers and exporters, and by setting up a mechanism for providing short-term concessionary export loans.
There is one additional danger. That is the one billion dollars in foreign loans which, in the next two years, will bring the country’s foreign debt to 50 percent of GDP. If the government is not able to direct those funds to stop the decline and reverse the trend and assure real sustainable growth, then that debt will become an additional burden on our economy, and in the coming years, pull us into even a deeper quagmire.
And finally, one of the shortcomings of the government’s program to beat the crisis is that solutions are sought exclusively within the economic sphere and within the context of the international economic crisis. However, Armenia’s problems are internal and unfortunately, not only in the economic sector. Rule of law, obviating monopolies, prohibiting the deepening linkages between business and government are exclusively internal issues and without real steps aimed at addressing those problems, it will be extremely difficult to achieve stable economic growth.
I am confident that if the economic and political interventions identified here can be implemented together, they will not only stop the decline, but will also create serious opportunities to reverse the negative trends.