Armenian economy faces capital outflow, debt burden, and growth slowdown

Despite an impressive 8.1% growth in Armenia's economic activity from January to October 2024, experts and analysts are highlighting significant structural issues and the risk of further economic slowdown.

According to Armenian media reports, citing data from the Statistical Committee of Armenia, the growth rate sharply slowed to 4.2% in October, down from 8.1% in the first ten months of the year. Compared to September, the economy contracted by 4.6%, per Caliber.Az.

The main drivers of economic growth for the first ten months of 2024 were trade (18.8%), construction (15.5%), and industry (11.7%), while the services sector grew more moderately by 5.8%. Foreign trade showed remarkable performance, with total turnover increasing by 67.6%, driven by a 95.1% rise in exports and a 50.8% increase in imports.

Alarming Trends and Forecasts

However, economist Suren Parsyan points out that behind these seemingly positive figures, serious issues persist. He explains that the pace of economic activity continued to decline in October, with a total growth of 8.1% for the first ten months of 2024. The key factors contributing to this slowdown were a 12% drop in crop production and a decline in jewellery production. Parsyan forecasts that the downturn will likely continue through November and December, exacerbated by a drop in gold re-exports.

Systemic Issues in State Administration

A report by the Luys Analytical Foundation on the execution of Armenia’s state budget for the first nine months of 2024 revealed critical issues in the implementation of state programs, which are negatively impacting overall economic activity. The growth in both general and tax revenues was below the adjusted plan by 6.4% and 7.8%, respectively. Capital expenditure performance was particularly concerning, with an underperformance 3.2 times greater than that of current expenditures.

The analysts from the foundation highlighted that this inefficiency in the state apparatus is weakening Armenia's economic growth potential. The most problematic areas of under-implementation were urban planning, high technology, and environmental protection programs, with under-execution rates reaching as high as 69%. The analysts also pointed to the education sector as an example of poor state management: "The program for the construction and modernization of educational institutions had a plan of $121 million, but only $20 million was spent in the first nine months. This raises doubts about the realism of the declared plans to build 300 schools and 500 kindergartens."

The situation was even more alarming in strategic sectors, such as the military-industrial complex, where the development program was completely unimplemented, and the digital transformation program, where only 2.6% of the planned activities were carried out.

Experts argue that these inefficiencies in public investment, combined with the general slowdown in growth, pose serious risks to Armenia’s economy. The country is already facing challenges in attracting private investment due to geopolitical risks, the threat of military conflict, transportation constraints, and a limited domestic market. Without adequate public investment, Armenia’s economy risks entering a phase of premature recession, which could further damage the country's long-term growth prospects.

Fiscal Policy Risks and Investment Climate

The Armenian government’s plan to substantially increase tax revenues in 2025 is causing concern among experts. They predict that this will lead to an increase in tax pressure on businesses, which will worsen the already challenging investment environment. Former Armenian Finance Minister Vardan Aramyan expressed serious reservations about the government’s approach: "This will lead to distortions in the economy and negatively affect the investment environment, which is already going through bad times."

Aramyan also pointed to the worrying trend of capital outflow from Armenia. "Already in the first half of this year, we see capital outflow from Armenia. The total balance of direct foreign investments for the first half of the year is negative — minus $55 million. This is a dangerous phenomenon, as foreign investors are not considering Armenia’s economy as an attractive environment for investment," he warned.

Debt Burden and Slowing Growth

According to analysts at the Luys Foundation, Armenia's public debt grew by 5.5% in the first nine months of 2024, surpassing $12.5 billion. A particular concern is the rising share of domestic debt, which reached a record 51.8%. This will inevitably lead to higher debt servicing costs due to rising interest rates.

The slowdown in economic growth has been noticeable over the quarters: in the first quarter of 2024, growth was 6.6%, compared to 11.8% in Q1 2023; in the second quarter, it was 6.4%, compared to 9.3% in the previous year; and in the third quarter, growth slowed to 5.2%, down from 7.4% in Q3 2023. Analysts attribute this to the diminishing impact of external factors, such as the Russian-Ukrainian conflict, and a lack of effective government measures to stimulate the economy.

In light of these challenges, Vardan Aramyan expressed doubts about Armenia's ability to meet its 5.6% economic growth target for 2025. "The implementation of the 2025 budget will face serious problems, and the achievement of the planned economic growth rate is under great doubt," he concluded.

By Tamilla Hasanova