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Armenian Economy

Armenian Economy

Introduction

Since gaining independence, the Armenian economy has been growing until 2008 when the growth rate declined. The decline was partly attributed to the Russian-Georgian war that saw this developing nation lose more than $600 million as well as face the global financial recession (Avagyan 98). This country is a small economy that is still developing. In 2014, its GDP was $11.6 billion with exports being far much less in their value and amount than the imports (OEC 1). This shows that the nation is open to foreign trade, something that makes foreign influence substantial. Furthermore, Armenia uses its dram as a currency that is very convertible. Among some of the export goods are copper ore, molybdenum, gold, and hard liquor while the imports include refined petroleum and petroleum gas.

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Furthermore, the financial recession hit Armenia more negatively because the country was still struggling against the effects of the Russian-Georgian war before the economy could take a shape. As countries are busy managing the consequences of the2008 financial crisis, Armenia was busy trying to gain control and recover from the devastating effects of the war (Avagyan 98). The serious impacts of the global financial recession started hitting the country after international prices of minerals begun falling. Copper lost its value by two-thirds as the Armenian export trade dropped by 47% (International Monetary Fund 29). The situation further worsened because of the reduction of remittances that form part of the GDP. Notwithstanding that, the construction industry was hit the most because it registered a serious downfall as investors lost hope in real estate.

On the other hand, Armenia has implemented various policies to enhance the growth of its economy through upholding and encouraging foreign trade. The foreign trade policy lays a background through which the country can attract foreign investors. Moreover, the conversion and transfer policies have helped the country remove trading limitations concerning foreign investment activities. This paper discusses the Armenian economy and how it was impacted by the global financial recession of 2008. Additionally, it briefly reviews the foreign trade policy of Armenia as well as the conversion and transfer policies.

Section One: Armenian Economic Overview and the Policies

Armenia has been enjoying economic growth since gaining independence until the global financial recession that begun in 2008. Although it the economy is still improving, it is yet to fully recover from the impact of the devastating recession. According to Bertelsmann (14), the recession saw the Armenian GDP fall by 14.1%, but the improvements were witnessed from 2013 to 2014 by 4.1% and 5.2% respectively. The country has been trading with other foreign nations, something that has enhanced the growth of its GDP. It has a market-based competitive system of the economy that has been developing and strengthening with the private economy growing steadily to account for 80% of the GDP (Bertelsmann 14). Furthermore, in foreign trade participation makes Armenia one of the most open economies because the level of commerce relations with the international partners is outstanding.

The GDP of this country and the level of import and export activities show that it is somewhat a small economy. Table 1 shows some of the economic characteristics of the country and how it has been living from 2011 to 2015. Armenian total GDP was $11.6 billion in 2014 with exports reaching $1.62 billion making it the 141st largest exporter in the whole world compared to the $4.28 billion falling the 138th position among the largest importers of the world (Observatory of Economic Complexity [OEC] 1). Concerning imports, Armenia has shown an increase from over $3.25 billion in 2009 to $4.28 billion in 2014 (OEC 1). Therefore, this nation is increasing its openness to trade with many partners across the globe.

Several products take an enormous proportion of imports and exports. Petroleum gas and refined petroleum account for 9.9% and 6.88% of the imports respectively (OEC 1). Such a thing shows that the country is much open to the foreign trading partners because it imports exceed its export capacity. OEC further explains that the Armenian main export is copper ore that accounts for around 19% of all the exports. It is equivalent to $303 million in addition to the hard liquor and gold, which together account for $160 million (10% of the total export). Bertelsmann explains that other than having a flexible exchange rate regime, Armenia is one of the most open economies from the former soviet states since it lacks capital restrictions in addition to being praised for its positive investment policies and trade (Bertelsmann 4). Therefore, this nation is a small developing economy that is open to trade with other partners.

Table 1: Armenia Economy Data: Adopted from the Focus Economics 2016

 

2011

2012

2013

2014

2015

Population (million)

3.3

3.3

3.3

3.3

3.3

GDP per capita (USD)

2,962

3,166

3,270

3,606

3,241

GDP (USD billion)

9.7

10.4

10.7

11.9

10.7

Economic Growth (GDP, annual variation in %)

4.7

7.2

3.3

3.5

3.0

Industrial Production (annual variation in %)

13.7

9.8

7.3

2.6

5.1

Unemployment Rate

16.5

15.7

16.2

17.8

19.6

Fiscal Balance (% of GDP)

-0.5

-2.8

-2.9

-2.1

-2.5

Public Debt (% of GDP)

40.7

40.4

39.9

43.5

48.7

Inflation Rate (CPI, annual variation in %)

7.7

2.6

5.8

3.0

3.7

Exchange Rate (vs. USD)

383.2

405.5

405.3

463.5

482.9

Exchange Rate (vs. USD, aop)

372.5

401.8

409.6

415.9

477.9

Exports (USD billion)

1.4

1.5

1.6

1.7

1.6

Imports (USD billion)

3.5

3.6

3.7

3.8

2.8

Exports (annual variation in %)

19.2

6.3

7.9

3.7

-4.1

Current economies thrive on several policies that control trade between the domestic and foreign traders. Armenia is not a different case since it has established several policies to allow a conducive environment for economic growth and development. Among the policies, there are the Foreign Trade Policy and the Conversion and Transfer Policies of Armenia.

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Foreign Trade Policy of Armenia

The government of this growing nation officially allows foreign investments. This softness to allow international activity in building the economy has made it receive both respectable and improved rankings on many global indices that measure the business climate (US Department of State 2). The rankings have enabled investors from foreign nations to view the country’s business environment as conducive for investments. This may explain the reason as to why this country imports more than exports. Additionally, it has an educated and strong human capital, especially in the field of science. The nature of this capital has resulted in the subsequent attraction of foreign investment in the sectors of information, technology, high-tech industry, and communication. International business organizations have established branches in Armenia that can utilize the available pool of qualified specialists (US Department of State 1). Although the foreign trade policy plays a huge role in the propulsion of international trade, the Armenian business climate is a massive threat. The three million population is a small market to investors in addition to being landlocked. However, these and many other challenges have not seen the country fail struggling to achieve strong economic muscles. Therefore, the foreign trade policy has allowed investors to participate in the country’s economic activities.

Conversion and Transfer Policies

Conversion and transfer policies have helped Armenia to cope with many limitations. It lacks restrictions on both the transfer and conversion of money as well the repatriation of earnings and capital including dividends, profits, royalties, service fees, and interest (US Department of State 4). The banking system is one of the best among the small economies in the world because it is sound and well regulated. The only problem is that the sector of finance is not highly developed. These policies have further factored in the issue of foreign trading and investors. Foreigners without special permits for residence are allowed to lease land but not to own it (US Department of State 1). However, foreign registered companies have the right to buy and own land. The country further lacks restrictions on the rights of foreigners to acquire, dispose, or establish business interests in the vibrant developing economy. Most Armenian banks can transfer money internationally for two-four days. That notwithstanding, the Armenian dram remains the freely convertible currency. Therefore, the conversion and transfer policies further show that Armenia is an open economy.

Section Two: Armenian International Trade Deterioration Due to the Global Financial Crisis

Currently, the Armenian economy is experiencing turbulent times due to the global financial recession. The crisis began in 2008. Although most people have asserted that Armenia did not experience the massive effects of the recession, the consequences were lethal to the economy of this developing landlocked nation. The impact of this devastating crisis was indirect since Armenia is not exposed to global financial markets the way most other countries are (Hovsepyan 45). International trade started declining because of the associated drastic reductions in export volumes, remittances, and Foreign Direct Investments. As a result, the currency value dropped as the country experienced poor economic indicators such as hiking of prices and growth in the rate of unemployment.

The officials in Armenia had a lot of hope that the country could emerge from the crisis unaffected because of its robust system of banking. Fortunately, the banking system was stable failing to collapse like that of Ukraine and many other nations (Avagyan 98). However, the effects of the crisis could not be completely evaded. The Central Bank of Armenia worked hard to stabilize the Armenia currency (dram) at an exchange rate of 307 drams for every single dollar (Avagyan 98). In 2008, the real estate industry did not experience serious falls like in many other affected nations despite some marked decreases in transactions. However, the commencement of September the same year saw the country start experiencing severe problems that troubled international trade.

The crisis began creating rippling negative effects when Armenia the world saw the fall in mineral resources. Countries that rely on minerals for the growth and developing of the economy could not evade this detrimental consequences. The Armenian mining industry faced a danger of closing down when the prices of metals begun falling (Avagyan 98). Its exports constitute of mainly copper and molybdenum. The value of copper concerning price decreased by two-thirds while that of molybdenum was more than for copper; as a result, the Armenian export trade fell by a whole 47% while the Foreign Direct Investments by almost $250 million (International Monetary Fund 29). Due to the decline in metal prices on the international market, some mining enterprises were compelled to close temporarily down. Consequently, the hardships made the Armenian economic growth slow down from 9.2% to 6.2% between September and December 2008 (Avagyan 98). Therefore, the crisis undermined trading activities of this noble nation.

Also, the effect of the crisis on Russia meant a huge problem to Armenia, a country that relies on the Russian economy for survival. Armenia depends on remittances from Russia that account for about 15% of its GDP [$1.5 billion annualy] (Avagyan 98). The situation was worse when the pre-crisis growing remittances stopped growing and begun to fall all the way from +30% to -30% (International Monetary Fund 31). The drop in remittances substantially affected purchasing. As a result, the currency, Armenian dram was negatively affected because traders lost trust in it. Although the Central Bank tried its best to stabilize it, investors preferred changing their currency into dollars. The diminishing of the currency value and preference of the dollar because of losing trust in the dram further struck the already crawling economy.

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The consequence was also seen in the fall of the construction output that, in turn, led to the drop in real estate prices. Avagyan reiterates that the real estate industry suffered the most since it recorded a staggering -55% downfall (Avagyan 99). Both the private apartment and house construction immensely shrunk because of this massive downfall. International and foreign real estate investors have lost hope and trust in this industry, which is influenced by lucrative transactions that involve members of the Armenian industry. Therefore, the looming crisis had shaken the open global trading activities and the whole economy to a great extent.

Although the crisis is over, the Armenian economy is still facing challenges. Currently, economic growth is still weakening because of the deterioration of international trade. The fall is attributed to the weakening and slowdown of the Russian economic growth (Coface 1). Russia is the primary source of income for this struggling nation because of the remittances and transfer of expatriates. Furthermore, Russia is the primary market for most of the Armenian exports meaning that any problem from the Russian side directly affects Armenia. Due to the fall in foreign investment and Armenian trade activities, its GDP has significantly dropped while the national debt has overwhelmingly increased with many indicators of the economy showing a huge alarm. Table 2 provides a clear overview on how the Armenian economy is deteriorating all because of the troubled international trading arena since the onset of the global financial crisis.

Armenian Major Macro Economic Indicators: Adopted from Coface 2015

 

2012

2013

2014

2015 (f)

GDP growth (%)

3.5

3.4

0.7

1.2

Inflation (yearly average) (%)

2.5

5.8

3.1

6.4

Budget balance (% GDP)

-1.6

-1.7

-2.1

-4.5

Current account balance (% GDP)

-11.0

-8.0

-9.2

-9.5

Public debt (% GDP)

38.9

40.5

44.2

53.1

Foreign trade has also led to the emigration of human resources leaving the country with unreliable labor. Unemployment attributed to the challenges in international trade has reached 18% and is likely to grow if the situation cannot be curbed (Coface 1). Coface further says that this is because Armenia is not creating enough jobs that results in the emigration of over 40,000 people to foreign nations in search of employment. Therefore, when international trade recovers, the country will make its economy start growing the way it used to be during the pre-crisis period.

Conclusion

Armenian economy has been growing steadily until the onset of the global financial recession. Its foreign trade was among the most affected sectors of the economy. The country relies on minerals such as copper, molybdenum, and gold as well as other commodities like hard liquor as exports. However, the recession saw the demand and prices of the mineral substantially drop, which negatively impacted the exporting operations. The value of copper and molybdenum fell by not less than two-thirds. The landlocked country with an open developing economy imports more than it exports. Among the imports, there are petroleum gas and refined petroleum. Apart from the deterioration of the export trade, Armenia’s currency lost value, something that resulted in the loss of trust among the investors who opted to convert the currency into dollars. Moreover, the economy dropped because of the decline in remittances from +30 to -30%. On the other hand, Armenia has several policies that control its economy, especially when it comes to foreign trading. They include the foreign trade policy and the conversion and transfer policies. All these policies give the foreign investors an advantage to invest.

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