20 October 2020

Tuesday, 15:06



Armenia fails to hide economic problems behind the war with Azerbaijan



From the very beginning of the recent armed conflict provoked by Armenia on the border with Azerbaijan, experts claimed economic prerequisites as the main reason for sudden escalation of Armenian aggression. Statistical indicators for the first half of 2020 show that the conclusion of experts is correct, as Armenia has been the poorest in the region for many years. Armenian economy is literally breaking anti-records, failing all attempts of the would-be government to somehow stay afloat. Incitement of pseudo-patriotic sentiments in society is perhaps the only thing that can temporarily distract the Armenian population from realising the existing economic catastrophe and give the authorities a reason to beg for another portion of "help" from external donors and sponsors.


Pre-pandemic crisis

“The pandemic hit the Armenian economy and social sphere hard. Population’s mobility has decreased, trade is hampered, and the local health care system experiences unprecedented pressure. It is obvious that the preservation of peace and the absence of armed conflicts are prerequisites if we want to be successful in our combat against the pandemic and economic crisis.” This quite logical statement of Armenian Prime Minister Nikol Pashinyan does not fit the recent absurd actions of Armenian aggressors on the border with the Tovuz region of Azerbaijan...

After all, Armenian prime minister was lying again: Armenia was in a deep crisis even before the pandemic. “We remember that the new Armenian government led by Nikol Pashinyan promised that it would achieve an economic breakthrough... But in present conditions of conflict with Azerbaijan and the economic blockade (by Azerbaijan and Turkey), it is very difficult to fulfil the promise... Armenian Diaspora is rich, but it is not going to invest in a territory full of surprises,” Ismail Aghakishiyev, a political scientist and the head of the Center for Caucasian Studies at Moscow State University, said.

According to Global Knowledge Partnership for Migration and Development, the amount of money Armenia received in 2019 from abroad reached 11.4% of the country's total GDP. According to this official data, Armenia takes 153rd position in the world (25th from the end). It is mainly the diaspora and Russia that help Armenia. More than half of cash transfers to Armenia before Pashinyan came to power was from Russia. Thanks to the actions of the new prime minister, money transfers from Russia began to exhaust. At the same time, Armenia, which remains aside from all major regional projects, has no new alternative to replenish the budget either.

Just a few facts. According to official data, every fourth citizen of Armenia lives below the poverty line. The net migration rate in Armenia (the difference between immigrants and emigrants) is minus 5.6 for every 1,000 people. This means that for every 1,000 people in Armenia, the number of emigrants exceeds the number of immigrants by 5.6 times. The age of emigrants ranges from 15 to 65 years. Hence, it follows that for both young and older people, that is, for citizens with a wider age range, the opportunity to live and work in Armenia is low.

International Monetary Fund reports that in 2019 in Armenia the ratio of investments to GDP decreased by 5% compared to the previous year, and the savings ratio decreased by 2%. According to the IMF forecast, Armenia's strategic reserves will decline and will not reach the 2019 level by 2025. Along with savings in 2017-2020 in Armenia, the share of investments in GDP decreased by 2.9% and this trend is expected to continue this year. Armenia's current account deficit at 8.2% of GDP is a rather serious indicator of the crisis.

So the pandemic has only exposed and aggravated the already critical situation in the economies of our neighbours.


Quarantine made things worse

After quarantine measures introduced all over the world, Armenia lost even the small income that tourism brought, and due to low prices, its mining industry suffers from a decrease in exports. At the same time, the products of the mining industry in the form of raw materials account for $ 1 billion of Armenia's export revenues per year. The launch of investigations by the Pashinyan government in this area is fraught with a change in the owners of mining companies and undermines investor confidence. Other sectors that bring currency into the country are agricultural exports and gambling. The turnover of the gambling economy in Armenia exceeds the country's military budget. And the export of agricultural products is almost entirely dependent on the Russian market. The result of this was clearly demonstrated during the recent events at the frontline, when several large Russian entrepreneurs - immigrants from Azerbaijan - closed access to their markets for Armenian products for several days. The losses were so tangible that in panic the Armenians used all their diplomatic potential to at least partially regain their former positions...

Statistically, loans to households during the last year increased by 32%, and external remittances - by 1.5%. That is why the high level of consumption in Armenia has reduced the share of savings in GDP from 16.3% (2017) to 11% (2019).

“At the same time, the influence of consumption on economic growth is 11 times higher than the influence of fixed capital on economic growth and 88 times - the influence of net exports,” Vusal Gasimli, Executive Director of the Center for Analysis of Economic Reforms and Communication of Azerbaijan, said. "Economic growth based on consumption constantly makes the national and economic security of the country externally vulnerable, weakens the immunity of the economy, increases the volatility of the Armenian dram and creates inequality in society."

According to the National Statistical Committee of Armenia, the indicator of economic activity in January-June 2020, compared to the same period in 2019, decreased by 4.7%. Moreover, in January-June 2020, the volume of foreign trade turnover decreased by 10.7%, with exports drop  by 6.5%, and imports - by 12.9%.

According to experts, this year the fiscal deficit of Armenia, which is among the countries with the worst rates of COVID-19 infection, will reach 5% of GDP.

On April 29, the National Assembly of Armenia approved the revision of budgetary indicators to counter COVID-19. Taking into account the adverse impact of the situation, the budget forecast on GDP has been lowered (a decline of 2%), while previously it was expected that the budget incomes grow by 4.9% in 2020. Deficit was increased to 5% of GDP (previously 2.3%). According to the new forecast of the Central Bank of Armenia, economic growth in 2020 will be minus 4% against the earlier forecast of 0.7%. At the same time, according to earlier forecasts, the Central Bank assumed that economic growth would mainly recover in 2021 (7.2%).


Hopeless debt pit

What do Armenian authorities do to survive in the current situation? They obviously go to beg for money. But their former sponsors seem more reluctant than ever to give as before. Therefore, the only way out is to borrow.

According to Armenian media, to prevent economic recession, especially to close the budget deficit and make foreign payments, Armenia had to take a stand-by loan from the IMF. This credit line is 100% of the 128 million SDR (Special Drawing Rights) quota of Armenia in the IMF. This means that Armenia borrowed the maximum amount it could get from the fund. Recall that a quota is set for each member of the IMF, which is generally based on its relative position in the world economy. A member's quota determines the maximum size of its financial liability to the IMF and its number of votes, and also affects its access to financing from the IMF.

In an article published by the influential organization Public Debt Management Network, Armenia faces a threat to financial security. In particular, the economic development of Armenia is increasingly dependent on external borrowings. The statistics of the Armenian Ministry of Finance for the first half of 2020 show that the country's total public debt reached $7.7 billion, with the share of external debt being $6 billion. In addition, 80% of the country's total public debt is in foreign currency, and a steady negative trend in this direction implies the fragility of Armenia’s financial security.

Presently, Armenia's external debt exceeds all financial security standards - 42% of the country's GDP. In recent years, the ratio of the total national debt to GDP has been steadily growing – from from 48 to 54%, and the external public debt - from 40 to 42%, compared to indicators of 2015.

External borrowings of Armenia reached $4.5 billion, which is 33% of the country's GDP. Yerevan attracted the most credit resources from the World Bank (International Bank for Reconstruction and Development, International Development Association), Asian Development Bank, Eurasian Development Bank, and from Russia, Germany and Japan.

“Following the forecasts of the World Bank, in the coming period, the ratio of public debt to GDP in Armenia will get worse, and by the end of the year will reach 57.2%. According to various scenarios of the IMF mission, in the next five years, the ratio of the country's total public debt to budget revenues will exceed 200%. A decrease in tax revenues and an increase in fiscal spending will further exacerbate the issue of the budget deficit, and, according to IMF experts, this year the share of the budget deficit in GDP will exceed 5%, and the share of total debt in GDP will be more than 60%,” Vusal Gasimly commented on the situation in Armenia.

At the same time, the country's foreign exchange reserves are decreasing and today do not exceed $2 billion.

Therefore, Armenia is unlikely to be able to get out of a deep recession in the coming years.


Classical episode

Under these conditions, the Armenian leadership, instead of preparing effective anti-crisis programs and starting the introduction of urgent measures to save the national economy, is distracting citizens by switching to patriotic rhetoric. As the head of the Foreign Policy Department of the Presidential Administration Hikmet Hajiyev noted, “the Armenian leadership is trying to exacerbate the situation and divert attention from internal problems amidst the socio-economic problems aggravated by the widespread use of COVID-19 in Armenia as a result of unfinished policy.”

These attempts have the opposite effect though: today Azerbaijan is four times ahead of Armenia in terms of population, three times - in territory, six times - in economy and 25 times - in terms of strategic foreign exchange reserves. Azerbaijani army is the 64th strongest army place in the Global Fire Power rating, while Armenia is the 111th. It is ridiculous even to compare the possibilities of waging war between the two countries.

Obviously, a military provocation against Azerbaijan not far from the main oil, gas and transport projects going to Europe, Armenia is trying to somehow influence the positive economic image of our country. In vain. Because the Armenian leadership forgets that not only the interests of Azerbaijan, Georgia and Turkey are involved in these projects, but Europe is looking forward to Azerbaijani gas, and the United States has openly supported these projects from the date of their inception. And which countries are the main donors of those international financial institutions which Armenia begs for loans?

As they say, harm set – harm get. In this case, Armenia’s clumsy calculations look exactly like this. And by irritating the international organisations and countries on which Armenia depends entirely, it is only bringing the beginning of the end of its economy closer.