Armenian News Network / Groong


Conversations on Groong: State of the Armenian Economy



November 21, 2021


     Vardan Aramyan


     Hovik Manucharyan

     Asbed Bedrossian



Hello and welcome to the Armenian News Network, Groong, In this Conversations on Groong episode, we’ll be talking about the Armenian economy. It’s post-war performance and future outlook.


We’re recording this episode on Friday, Nov 19, 2021.



Definitions Needed for the Discussion

           Tradable Sector: “The part of a country's economy which produces goods and services which can be traded internationally.” - Lexicon

           Demand-Pull Economic Growth: Demand-pull inflation is a period of inflation which arises from rapid growth in aggregate demand. It occurs when economic growth is too fast.

           Expansionary Fiscal Policy: “Expansionary fiscal policy is when the government expands the money supply in the economy using budgetary tools to either increase spending or cut taxes—both of which provide consumers and businesses with more money to spend.”

           Base Effect: Within the context of inflation, base effects refer to the impact of comparing current price levels in a given month against price levels in the same month a year ago. Yahoo News


State of the Armenian Economy


The war initiated by Azerbaijan in the fall of 2020, amid the pandemic, further complicated an already complex economic situation in Armenia. And as the world economy recovers from Covid-19 related shocks, we wanted to understand Armenia’s own post-war and post-covid-19 economic situation.

Now, it is not an easy task to separate the wheat from the chaff of economic analysis given the highly polarized post-war Armenia, where many things in life are viewed through the lens of political affiliation, but we’ll attempt to do just that with our guest.


To talk about the state of the Armenian economy we have a special guest today:


Mr. Vardan Aramyan, who is the former Minister of Finance of the Republic of Armenia from 2016-2018. He is currently Senior Vice President for Finance and Economy at Vallex Group in Yerevan.




2022 Budget & Economic Growth

Groong @1:29:

Let’s begin with the budget. The 2022 budget proposal is currently making its way through the Armenian parliament. There are lots of impressive goals, including:

      7% economic growth

      Sharp increase in expenses

      Sharp increase in income (based on improved taxation)

It even foresees a 0.7% decline in the government’s debt-to-GDP ratio.

Government representatives claim that this budget is a testament to Armenia’s strong economic recovery. Meanwhile, the Central Bank of Armenia (the CBA) called the budget proposal “quite ambitious”. (Maybe that’s code for unachievable?)

      What is your overall assessment of the 2022 Armenian budget? Is it realistic?

      If you don’t agree with the economic growth forecast, do you have a prediction of what growth can be expected?


Vardan Aramyan:

      Before making a judgement on the budget, we need to discuss the basis for the macroeconomic performance and growth.

      All around the world there’s a strong recovery and impressive V-shaped growth.

      Good News: In Armenia for the first 9 months, we’ve had 4.4 percent indicator of economic activity (which is an indicator of economic growth).

      Bad News: In order to make a judgement whether this is good or bad, we need to make a comparison with other countries and figures from previous year.

      Last year our economic downturn was 7.4%

      And current recovery of 4.4% or 5% is not enough to fully compensate.


Groong: @1:29

Previously there were claims by the government that the Armenian economy has essentially recovered. So you don’t agree with that assessment?


Vardan Aramyan: @3:42

Absolutely. The pace of the recovery is slow. The structure of the recovery is also worrisome.

           Need to pay attention to 2 facets, the structure and pace of the recovery from the downturn.

           And looking at countries, in neighboring Georgia the downturn was around 6% and they have quite an impressive recovery of more than 10%.

           This highlights how effective the government policies were in order to withstand the effects of the downturn.

           Looking at the micro-level, there are indications of shortcomings (for Armenia).

           Why is this important? Because it affects reliability of government claims for the planned figure of economic growth in the future.

           Aramyan fully shares the position of the Central Bank.

           Credibility is important!

           Budget is not about figures. Budget is about fiscal policy and messages to the economy

           Budget is about how effectively you want to anchor the expectation of businesses, which are the key players for generating economic growth

           Government must pay attention to the credibility, which comes from what you promise and how you perform against those promises

           If there is a big gap between your message and the real numbers, of course it harms your credibility.

           In the end of the day it has a feedback effect to the economy.

           Armenian recovery is not so strong but there’s also a 2nd aspect, the structure of the economic growth:

           If you look at the structure, it is led by the non-tradable sector (compared with tradable sector)

           The breakdown of the 4.4% growth is as follows:

        Industry growth rounds down to 0

        Agriculture sector has negative growth

        Construction and services are growing at a higher pace

           This indicates there’s something wrong with the economic structure which the government must pay close attention to. The story of the 2000-2009 seems to be repeating.

        You will remember in the 2000s, there was a dot com crisis

        The federal reserve aggressively reacted by <inaudible> interest rates and injecting a lot of liquidity into the economy.

        In the developing world, this resulted in a demand-pull economic growth, where the non-tradable sector began to blossom and stole resources from the tradable sector.

           In our recovery mostly consumption is leading and that’s very dangerous.


Groong: @8:43

Does the structure of the economic growth in Armenia mirror worldwide growth or is the phenomenon local to Armenia?


Vardan Aramyan: There are two stages, and we need to look at economic development separately:

      The two stages of development are:

      After 2018

      After the crisis

      After 2018, what happened:

      Development is specific to Armenia:

      Armenia is not the first nor last country where such changes of power happened.

      Worldwide experience shows that such changes in power create biased expectations in society, where members think that there’s a new (better) government without paying attention to their productivity and skills.

      Based on this biased expectation, they up-front their consumption. This consumption needs finances, which came from banking credit.

      Consumer consumption of credit skyrocketed (40% annual increase).

      Global tendencies that have fueled consumption:

      There are global players (US, EU) whose currencies are considered as “world currency” and many assets are priced in dollars

      The US government, only through the fiscal channel, just inserted liquidity of $1.8T and this liquidity will affect different channels, such as:

      High commodity prices (including metals)

      Transfer of remittances (potentially 50% increase YOY)

      Aramyan: “My humble recommendation in this matter is that we need to be careful. And we need to do a policy where we have to tax consumption and do a lot of endeavors to support the tradable sector, including capital expenditures.”

      Now let’s turn to the budget:

      From a first glance, on a macro level, the structure of the budget is quite good.

      Fiscal rules introduced when Aramyan was minister of finance are being followed, after being violated recently (which is normal). After the crisis, countries that violated fiscal rules are taking action to consolidate and return to normal.

      For instance, is if you have a problem with debt and you are obliged to conduct an expansionary fiscal policy, then for 1 year you tolerate that your debt will violate the debt-to-gdp ratio targets, but for upcoming years you need to plan and execute such policies in order to bring the debt-to-gdp ratio into safe zone.

      However, there is a problem with the basis of this budget because if you’re going to be wrong in terms of economic growth and actual growth will be lower for the current and upcoming year, this means that something will happen to the budget.


Groong: @14:12

What happens if the growth is only 3%?


Vardan Aramyan: Right, and Aramyan is sceptical that the government will hit the 6.5% projected growth.

      “Perhaps we will hit 5.0-5.2%, which means with the base effect, we’re going to have a problem for the next year.”

      4-5% global growth is something that we can consider as best case.

      Our potential, based on different estimates, is 3-4%. Already 5% is above your potential.

      Hitting this target permanently, means embarking on deep and comprehensive reform. Very aggressive in terms of restructuring, in order to attract/capture stability, etc

      Thus, if actual growth will be lower, then we need to look at the structure of expenses.

      Current expenditures are very optimistic. Aramyan warned the government in 2019 not to incur new obligations (increases in pensions, salaries, etc…).

      Unfair approach towards citizens: It will be very difficult to scale down increases in salaries/pensions if the economy doesn’t perform well.

      “Populism is very dangerous here. We need to be sure that economic structure and fundamentals can generate 6-7% economic growth and after that I can promise to increase your pensions.”

      The good news is that the 2020 budget doesn’t envision increases in pensions/salaries, but they did it in 2018 and 2019.


Groong: @17:25

Previously, economic growth for Armenia was forecast at 1.4% for 2021 by the IMF and 3.1% by the World Bank. However, recently they upgraded this assessment to 6%. This is still less than the double-digit economic growth which the minister of economy Vahan Kerobyan promised. What accounted for the underestimation? Is this due to global or local effects?


Vardan Aramyan: We need to be careful to deliver neither too conservative nor optimistic messages. At the end of 2020 the IMF (and Central Bank) estimated Armenian economic growth to be at 2%.

The main factor in that expectation was Armenia’s reaction to Covid (anti-crisis measures).

      The lockdowns caused great strain on businesses.

      Rather than injecting liquidity quickly and uniformly.

      In the early stage (March/April 2020) they targeted credit channels, which means banks lent that money to businesses selectively and it was slow

      The recommendation to the government was to defer profit tax. The government didn’t implement this initially and “the message that the Prime Minister delivered is that we’re never going to touch this instrument”.

      Then, the government implemented tax-deferral 2-3 months later.

      The effect of all of this was loss of economic potential, which we’re currently witnessing.

When the expectation was upgraded to 6%, it was mostly on the account of the global recovery.


Major Growth Sectors


Groong: @23:28

What are the major factors for driving economic growth in the 2022 budget?


Vardan Aramyan: Government anticipates that its mostly going to be in the tradable sector.

      Industry: 8%

      Agriculture: 5%

Other sectors like construction and services are expected to perform well too but less than tradable sector growth.

Aramyan’s anticipation is that the mistake is around the structure of economic growth:

      Currently we have industry growth around 7% (mostly mining sector due to intl high prices of metal)

      For the upcoming year we need to identify drivers for high growth in industry and Aramyan fails to see major factors that contribute to 8% in the industry sector.

      If you look into investment structure, we don’t see much in terms of investment in industry and agriculture.

      If you look into credit performance, there’s a cut in credit going to the industry sector.


Groong @25:36:

Are prices for Copper/Aluminum extremely inflated? If so, will this also affect growth?


Vardan Aramyan: There’s lots of liquidity leading to high prices. Prices may be adjusted downward but not in a significant way.

However, the export tariffs introduced (very quickly) by the government create uncertainty in the industry.

Vallex and other researchers presented research to government anticipating that the move would:

      Cut down net worth of society

      Cut in net present value of taxes

Govt. failed to take into account cost factors, such as gasoline/transportation, inflation of spare parts of diff. equipment. Also, there is no such experience in the world where you insert export control in order to generate extra cash (usually it is meant to have some economic change, such as protecting local producers).

Government must improve the predictability of their actions.



Groong @32:36:

How much of the growth factors in the inflation that we’re currently seeing?


Vardan Aramyan: The question needs to be rephrased because there’s some level of inflation that the central bank targets in order to not impede growth. We need to look at whether in the future this kind of inflation will anchor, and return to 4%.

      Currently inflation is quite high, around 9% for 12 months. We have a supply side inflation (we imported this inflation, even in the US it is 5-6%).

      The problem is future inflation.

      If inflationary tendencies are not curbed, we will have a problem with economic growth and loss of economic potential.

      The question should be rephrased: “whether high inflation will harm future economic growth for 2022”. And there is a risk for that.

      The CBA is doing what they have to and increased their interest rate by 300 basis points (3%), which will affect investment which is already problematic.


      1st channel: High borrowing

      In the previous year the government absorbed around AMD 300B ($630M). For this year, there are plans for AMD 200B ($420M). For the upcoming year, they plan to absorb liquidity of around $500M.

      If alongside this, the interest rates are increasing, it will have a crowding out effect on the economy.

      2nd channel: Failure to anchor inflationary expectations in specific markets

      Inflation is going to remain high if the CBA will fail to anchor inflationary expectations, because the government fails to support the central bank

      When there is an inflationary shock in your economy, it not only concerns the central bank. Government must also support CB to absorb shocks.

      The government must be very aggressive to deliver messages and set expectations. To what extend does the govt support the central bank?

      Central bank is increasing the interest rate (which is the only tool at its disposal).

      But the government has shortcomings in performance, such as:

      They never explain why prices of gasoline are increasing at such a high pace. Compared to previous year we have a 60% increase in the gasoline price.

      What will be the behavior of citizens?

      Central bank has no mandate to explain the situation in a particular commodity market, but this creates expectations.

      If I don’t get a message from the govt., whether this is subjective or objective, citizens may adjust their behavior/spending. The rational behavior then would be to purchase more than necessary in order to protect myself in the future, upfronting the consumption.

      In addition to the above, if banks feel some risks in the market, they’d rather give the liquidity back to the government rather than injecting in the economy (because the govt. bond interest rates will react to the central bank rates).


Groong @41:24:

How will inflation affect increases in salaries, income inequality, poverty, and other socioeconomic markers?


Vardan Aramyan:

      Salaries have increased 5-6% on an annual basis since 2018.

      The mistake of the government was the dramatic increase of basic salaries, which has a negative effect on the cost curve of businesses. Care needs to be taken during such moves (paying attention to the basis of economic growth).

      There’s an expectation that inflation will affect socially vulnerable people (whose salary is below the average).

      Of course, the poverty rate will go up.

      During these types of shocks, such outcomes are inevitable. The issue is not a 1yr increase in poverty rate or decrease in real wages. The problem is what will happen in the following years.


Unblocking of Corridors

Groong: @45:43

Last month PM Pashinyan said that unblocking transportation and infrastructure links in the South Caucasus would provide a “qualitative boost” to the Armenian economy. The prime minister is essentially referring to the implementation of Point 9 of the November 2020 ceasefire agreement that ended the 44-day war.

      Should we be optimistic about these prospects?


Vardan Aramyan: This is a very populistic declaration unless you demonstrate what the roads are going to be. Cost of transportation is measured by tonnage and total length of the road. For AZ, there will be a direct road between Azerbaijan and Nakhijevan/Turkey, which is plain to evaluate.

What is going to be the benefit for Armenia?

      To Russia/EAEU:

      Our main market.

      We already have one road going through Lars.

      Having a second much longer road going through Baku to Russia doubles the road length and adds security concerns.

      To Iran:

      We don’t need anyone else for roads to Iran.

If markets to Turkey are opened, then there’s a risk of Turkey absorbing Armenia’s companies. (“Batumization”)

      Turkish economy very diversified

      Strong competitive Turkish businesses with lots of money

      Limits political maneuvering (e.g., “Why Georgia can’t confront Turkey/Azerbaijan”?)


EU $2.6B Aid Package

Groong: @50:27

Let’s talk about the lofty $2.6B aid package allocated to Armenia by the EU over the past 5 years.

      Is this a grant, a loan, or is it a promise to insure or guarantee for the institutions who are willing to loan money to Armenia?

      If all funding were to materialize, $2.6 Billion is a large amount of infusion into the Armenian economy over the coming decade. With so much money pumping into the economy, how can the government manage inflation, wage growth, wage price spirals, labor shortages, and so on?


Vardan Aramyan:

      In short it’s early to say if this is a good deal for us.

      No clarity on the amount of money that will be available in grants. Usually as a rule of thumb, it is 20-25 percent.

      Even grants have conditions. Room to negotiate if you have skilled negotiators.

      There may also be technical assistance which goes back to the EU as consulting money.

      Even credit may have conditions attached.

      If we manage to convince them to use the money in Syunik, the South, then it will be good.




Groong: @57:41

Have you visited Artsakh recently? What is the situation there for Vallex companies operating in Artsakh?


Vardan Aramyan:

      Overall mood in Artsakh is not very favorable. A lot of uncertainty.

      Not only Vallex, but all businesses in Artsakh are very cautious and sensitive to the political negotiations between Armenia and Azerbaijan.




That concludes this Conversations On Groong episode, and we hope you found it helpful. As always we invite your feedback, you can find us on most social media and podcast platforms, or our website


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Vardan Aramyan, Vahan Kerobyan, 2022, Budget, Inflation, Economic Growth, Industry, Agriculture, Construction, Services, Covid, Economic Recovery, Armenia, Artsakh, EU, Syunik, Transportation Links, Communications, Corridors, Nakhijevan, Azerbaijan, Turkey,