MARCH 1999

CHAPTER 2: ECONOMIC TRENDS AND OUTLOOK

2.1 MAJOR TRENDS AND OUTLOOK

Under the old Soviet central planning system, Armenia had developed a sophisticated industrial sector, that supplied to the USSR and foreign markets machine building equipment, defense and space electronics and optics, chemicals, textiles, and other manufactured goods in exchange for raw materials and energy resources. Armenia today remains a large food importer. Its mineral deposits - copper, coal, molybdenum, and gold - appear so far to be relatively small.

The economic decline, which started with the 1988 earthquake and the disintegration of the USSR, was particularly severe in 1991-94 due to the ongoing conflict over the Armenian enclave of Nagorno-Karabakh in Azerbaijan. Azerbaijan and Turkey shut down pipeline and railroad traffic to Armenia in response to its support of the Karabakh Armenians. Georgia provided Armenia with its only means to receive deliveries of natural gas. Most industrial enterprises remain either shut down or operating at drastically reduced levels. The conflict over Nagorno-Karabakh has forced the government to militarize a number of its operating machinery manufacturers, thus putting an additional non-productive burden on the weak economy. With IMF help, the Armenian economy stabilized in 1993-1995. Inflation was brought under control and negative growth bottomed out. The economy has remained stable since then.

The current Armenian government, since its formation in early 1998, has demonstrated a firm commitment to moving Armenia from a centralized state with a planned economy to a democratic society with a free market economic system. The government is attempting through tax policies and other means to improve export performance to reduce the large trade deficit. The Armenian electricity grid is connected to the Iranian and Georgian grids. The country has begun to modernize its entire telecommunications system. Modern switching equipment is being installed in Yerevan. With USAID and World Bank help, considerable resources and training are devoted to developing modern public and private banking and energy sectors. Parliament has been implementing an ambitious program of reforms to restructure the energy sector and other key areas, liberalize trade, attract foreign investment, establish a western accounting system, and implement a private property regime. Armenia has improved land transportation routes to its (currently only two) neighboring trade partners, Georgia and Iran. Political differences still prevent reopening of the Turkish-Armenian border. As of mid-1998, Russia, Belgium, and Iran are Armenia's main trading partners. Armenia continues to run huge foreign trade deficits. Air traffic has increased and upgrades of the airport and national airlines are continuing.

Privatization of industries started in 1994, following land privatization in 1991. Progress in privatization, advances in private property legislation and banking reform should give further impetus to economic development. Armenia was the first NIS state to register a positive GDP growth rate (in 1994). In 1997, IMF estimates the economy grew 3.3.percent. The target estimate for 1998 is 6.0 percent. This progress has earned Armenia increasing support from international institutions. The IMF, World Bank, EBRD, as well as other financial institutions and foreign countries are extending considerable grants and loans. Total loans extended to Armenia in 1993-1998 are expected to exceed $800 million. These loans are targeted at reducing the budget deficit, stabilizing the local currency, developing private businesses, energy, agricultural, food processing, land and air transportation and social sectors, as well as continuing rehabilitation work in the zone damaged by the 1988 earthquake. At the same time, Armenia remains heavily dependent on humanitarian aid. The main suppliers have been the United States, EU, and the United Nations. In U.S. FY 1998, the United States extended to Armenia $150 million in aid; this figure is likely to be roughly the same in FY'99, though the proportion devoted to humanitarian purposes will be reduced as developmental assistance is increased

Long term resolution of the country's economic problems will depend on solving the Nagorno-Karabakh conflict, reestablishing normal relations with the neighboring countries of Turkey and Azerbaijan, and lifting the embargoes. A settlement would give full play to the country's existing industrial and agricultural potential, and highly educated and skilled human resources, while extending Armenia's regional trade and supply links with Azerbaijan, Turkey and the Middle East. Integration into ongoing regional development is also essential to realize potential growth.

2.2 PRINCIPAL GROWTH SECTORS

In 1997, according to the official Armenian statistics (highly unreliable), the total physical output of manufacturing industries (including machinery, energy, chemical, agricultural, and construction sectors) grew by only 0.9 percent as compared with 1996. Production rates of 60 percent of 135 main types of products declined. Physical output in such industries, as metallurgical, electrical, machine-building, agri-machinery, car-building, gem-cutting, and wood-processing declined by 10-25 percent on average as well. Production of consumer goods declined also, by 20 percent percent on average. Cargo transportation increased by 2.0 percent (aviation - declined by 3.8 percent).

The sectors that showed growth (5 percent on average) included energy generation, chemicals, telecommunications, agriculture, construction and construction materials. Significant growth in the overall number of businesses was observed in wholesale and retail trade (31 percent, mainly food), restaurants (38 percent), passenger and cargo transportation (12 percent), real estate brokerage (29 percent), education (39 percent), and health care and social services (39 percent).

In 1997-1998, there were a number of institutional investments recorded. More than $25 million was invested in oil and gas exploration; at least $15 million investment was made in gold processing; and $30 million was invested into the purchase of the Yerevan Cognac Factory and $150 million into the privatization and purchase of the Armenia Telephone Company. The Embassy's Commercial Section projects that if the political/military status quo is preserved, many traditional and large Armenian manufacturing industries will continue to decline. They will be replaced by emerging small production companies, the number of which will increase in 1998-1999 as the financial environment improves. Foreign investments will continue to grow, mostly from Diasporan Armenians. Also, trade and services will continue their fast development.

2.3 GOVERNMENT ROLE IN THE ECONOMY

Government control over industry progressively diminishes as more and more enterprises are privatized. A few factories which the government considers "strategic" will not be privatized in the near term. Privatization results in the reduction in size or mergers of ministries and in the transition of their functions from direct management and control to policy making and special support. Through the Central Bank, the government supervises the banking system and currency market. The National Assembly (Parliament) is steadily developing and passing laws which create the framework for a free market oriented economy. However, concurrently with these reform measures, a greater number of government officials are engaged in private businesses and frequently use their influence to expand and protect their enterprises, often in an illegal way.

2.4 BALANCE OF PAYMENT SITUATION

In 1997, the chronic structural trade deficit further increased as registered imports grew by 18.1 percent , while exports declined by 20 percent. The imports, including $94.1 million worth of humanitarian assistance, totaled $893.4 million. Of these, 30.8 percent were food, 23.6 percent were mineral products (fuel), and 11.4 percent were machinery and equipment imports. Exports totaled $232.6 million, of which 23.7 percent were gems (cut diamonds), 24.8 percent metals (mostly scrap), 11.4 percent machinery and equipment, and 10.6 percent finished food products. Thus, the trade deficit reached $660.8 million (or $566.7 million without humanitarian aid). In first six months of 1998, the foreign trade balance improved somewhat, with exports growing 31 percent over the same period in 1997.

2.5 INFRASTRUCTURE

Geography and Environment
Location: The Caucasus, between Turkey, Georgia, and Azerbaijan
Total area: 11,496 sq. miles
Land area: 10,956 sq. miles
Comparative area: slightly larger than Maryland
Land boundaries: total 779 miles, Azerbaijan (east) 345 miles, Azerbaijan (south) 137 miles, Georgia 102 mi., Iran 22 mi., Turkey 166 mi.
Coastline: 0 km (landlocked)
Maritime claims: none; landlocked
Climate: highland continental, hot summers, cold winters
Terrain: high Armenian Plateau with mountains; little forest land; fast flowing rivers; good soil in Arax River valley
Natural resources: deposits of gold, copper, molybdenum, zinc, aluminum and coal.
Land use: arable land - 17percent; permanent crops - 3 percent; meadows and pastures - 20 percent; forest and woodland - 0 percent, other - 60 percent
Irrigated land: 1,177 sq. miles (1990)
Current Environmental issues: soil pollution from toxic chemicals such as DDT; pollution of Hrazdan (Razdan) and Arax Rivers; the falling water level of Lake Sevan, a result of its use as a source for hydropower.
Natural hazards: the possibility of earthquakes (25,000 people killed in major quake in 1988); subject to occasional drought.

Industries

Traditionally diverse, including metal cutting machine tools, forging-pressing machines, electric motors, tires, knitwear, hosiery, shoes, silk fabric, washing machines, chemicals, trucks, watches, industrial tools, mainframe computers and microelectronics (mostly defense oriented), and software. Currently, much of industry is either idle or operating at a fraction of its capacity. The defense industry is being partially converted to civilian purposes. Armenia's international production code: 485.

Agriculture

Only 17 percent of land area is arable. Armenian fruits are superior in quality. The U.S. Department of Agriculture is implementing a horticulture and agriculture export project. There is a minor livestock sector. Armenian vineyards are famous for cognac and other liqueurs.

Communications

Railroads: 522 miles exist (does not include industrial lines); from four international rail connections (with/via Georgia, Azerbaijan, Turkey) but only the connection with Georgia (to Black Sea ports) is presently used.
Highways: total 7,019 miles, paved 6,522 miles, unpaved, dirt 497 miles (1990); road connections exist with all neighboring states (only roads with Georgia and Iran are used presently).
Pipelines: natural gas 559 miles (1991)
Ports: none; landlocked
Airports: 12 total, 10 usable; 6 with permanent-surface runways; 1 with runways over 3,659 m; 3 with runways 2,440-3,659 m; 2 with runways 1,060-2,439 m; note: a C-130 can land on a 1,060-m airstrip. Of the six civil airports with artificial field surfacing, only the largest ones - Zvartnots (in Yerevan), Erebuni (in Yerevan), and Shirak (in Gyumri) operate at present. Zvartnots is an international/domestic airport which can handle all types of planes, including the largest cargo aircraft. Shirak can handle IL-76 type cargo planes, and Erebuni - YAK-42 and similar small commuter aircraft. Besides regular flights to many NIS cities, including Moscow, regular weekly flights connect Armenia with Paris, Amsterdam, Athens, Frankfurt, London, Zurich, Sofia, Beirut, Tehran, and Dubai (UAE). Armenian Airlines also operates a regular charter flight to Istanbul twice a week.

Telecommunications

An Armenian-Greek company, ArmenTel, is installing fiber optic cable, digital telephone switches, and cellular and paging services. Siemens is providing over $100 million in credits for this project for procurement of equipment. Armenia has about 576,800 telephones; average telephone density is 17.7 per 100 persons; international connections to other former republics of the USSR are by landline or microwave, and to other countries by satellite and by leased connection through the Moscow international gateway switch. Broadcast stations: almost 100 percent of the population receives Armenian and Russian TV programs (some areas also receive Turkish, Iranian, Georgian, and Azerbaijani TV broadcasts). Private TV broadcasting stations, cable networks, and Internet providers are increasing in number.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)