Country Report Armenia

Outlook for 2008-09

Armenia's presidential election, held on February 19th 2008, was won by Serzh Sarkisian, long the establishment's favoured successor to Robert Kocharian. Mr Sarkisian has pledged to strengthen the rule of law, reduce corruption and ensure fair business competition. However, the close links between Armenia's political and business circles will preclude substantial progress towards more transparent policymaking. Moreover, the controversial nature of Mr Sarkisian's victory and the violent crackdown on post-election protests have eroded his legitimacy among sections of the population. Investment in construction and industry will help to ensure annual average real GDP growth of around 9% in 2008-09. Strong remittance inflows, along with high food and fuel prices, will exert inflationary pressure, particularly in 2008, but base-period effects should reduce inflation in 2009. A widening trade gap will push the current-account deficit upwards, to between 5% and 7% of GDP.

The political scene

The controversial victory of Mr Sarkisian in the presidential election has thrust Armenia into its most serious political crisis in nearly a decade. Ten people were killed in post-election demonstrations, and the authorities imposed a 20-day state of emergency, including tight restrictions on the media. Mr Sarkisian has formed a four-party coalition government and has appointed the former chairman of the Central Bank of Armenia, Tigran Sarkisian, as prime minister.

Economic policy

The inclusion of social security taxes and payments to the pension fund in the state budget contributed to year-on-year rises in revenue and expenditure of 40% and 46%, respectively, in the first quarter of 2008. Tax revenue is rising, but evasion has kept revenue from corporate profit tax low.

The domestic economy

A strong base period and acceleration in inflation have resulted in a slowdown in year-on-year real GDP growth in the first quarter of 2008 to 8.8%. Industrial production has stagnated, but construction and some services are growing strongly. Year-on-year inflation accelerated to its highest rate in a decade in April, to 10.8%.

Foreign trade and payments

The trade deficit widened by almost 50% year on year in the first quarter of 2008, to US$614m, owing to a stagnation in exports and rapidly growing imports. The current-account deficit increased from US$117m (1.8% of GDP) in 2006 to US$571m (6.1% of GDP) in 2007.