Armenia's Economic Outlook: Migration, Growth, and Fiscal Challenges
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Armenia has benefited from a spillover of the war in Ukraine through net immigration of middle-class Russians and other CIS citizens, boosting services exports, domestic consumption and GDP, increasing its two-way trade with Russia and boosting budget revenues. Yet unless there is a new wave of immigration, growth is set to normalise amid still high unemployment and sluggish credit growth. Budget policy, prudent so far, may face higher military spending if tensions with Azerbaijan re-emerge.
Activity moderates but remains strong
Following a significant 12.6% spike in GDP in 2022 thanks to the increase in migration, trade and capital flows from Russia (in addition to a post-Covid rebound in tourism) and 12.2% YoY in 1Q23, Armenia’s GDP growth is set to moderate in 2023, but to remain robust at around 7-8%.
As most Russian immigrants, equating to around 2% of Armenia’s permanent population, are likely to stay in the medium-term, consumption seems well supported.
Meanwhile, with unemployment high in double digits, private credit growth negative, and fiscal policy not generous, local domestic support factors appear muted.
On the plus side, the deceleration of CPI from 10.3% at mid-2022 to 3.2% YoY in April amid a stronger Armenian Dram (AMD) and higher base effect, creates room for cautious cuts in the key rate from the current 10.75%.
GDP growth and CPI
Key parameters of consolidated budget
Fiscal discipline in focus
In 2022, Armenia showed fiscal restraint in the face of extra revenues, allowing it to halve the fiscal deficit to 2.2% GDP. Military tensions with Azerbaijan, despite recent diplomatic momentum, create upward risks to military spending, which totalled 5.6% GDP in 2022 and exceeded the initial plan by 40%, and with a 20%+ weight in total spending may put the overall fiscal discipline to the test.
In 2023-25, the deficit may gravitate towards 3% GDP and is likely to be financed mostly domestically in AMD amid little competition with private sector borrowing and elevated FX depreciation risks following AMD’s 24% appreciation to USD vs the end-2021 level, the strongest appreciation in the peer group.
The FX appreciation in 2022 was also a key factor in reducing government debt ratios, which will remain sensitive to FX movements.
Current account, remittances and Armenian Dram (AMD)
Correction in AMD not excluded
Immigration of c.65,000 people from CIS led to a positive balance of payments shock and 24% appreciation of USD/AMD since end-2021. Higher export of services (inward travel) was the main driver of a narrowing of the current account deficit by US$350m YoY to -US$170m. The merchandise trade deficit widened by US$500m due to proxy trade with Russia which accounts for 28% of exports and 43% of imports.
Net inflow of personal money transfers increased by US$1.7bn YoY to US$2.6bn but remained as FX within the banking system, not increasing the net capital inflow or lending. Mid-2022, AMD appreciation slowed to 2% per quarter, and the 4Q22 BoP points to a normalisation of flows, signalling potential correction in AMD. Yet the extra US$0.9bn accumulated by the Central Bank in 2022 could be used to smooth future AMD moves.
