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Yerevan reports double-digit GDP for 2007

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  • Yerevan reports double-digit GDP for 2007

    Eurasia Daily Monitor, DC
    Jan 15 2008


    YEREVAN REPORTS DOUBLE-DIGIT GDP FOR 2007

    By Emil Danielyan

    Tuesday, January 15, 2008


    Armenia's economy appears to have expanded at a double-digit rate for
    the sixth consecutive year in 2007 despite the unresolved conflict
    over Karabakh and the resulting high cost of the country's transport
    communication with the outside world. Official statistics show its
    gross domestic product increasing by 13.6% to about $9 billion in the
    first eleven months of last year.

    Economic growth continued to be primarily driven by the booming
    construction and services sectors, where output was up by
    approximately 20% from the same period in 2006. Other sectors such as
    agriculture and energy also posted major gains. The Armenian economy
    has also been greatly helped by rising large-scale remittances from
    Armenians working abroad. The money they send to their relatives not
    only boosts consumption but also allows Armenia to finance its huge
    trade deficit. The deficit jumped by as much as 70% to a new record
    high of $1.8 billion in January-November 2007, due to a surge in
    imports.

    While admitting the uneven distribution of the benefits of the
    double-digit growth, the Armenian government maintains that
    widespread poverty in the country has decreased significantly in
    recent years. According to government data, the proportion of
    Armenians living below the official poverty line dropped from 50% in
    2001 to 27% in 2006. The government has pledged to help reduce the
    poverty rate to 12% by 2012. Its critics question these figures,
    saying that the poverty line is set too low and does not take account
    of in the increased cost of living in Armenia.

    However, Western lending institutions find the figures credible.
    `Over this 12-year period, Armenia has achieved spectacular income
    growth ... and poverty reduction,' the World Bank said in a November
    2007 report that reviewed the results of its lending programs for the
    South Caucasus state. The International Monetary Fund also noted
    `good progress' in poverty reduction in Armenia as it disbursed a
    fresh $5.2 million loan to Yerevan later in November. `The
    medium-term [economic] outlook is positive, with a favorable outlook
    for investment,' the IMF's deputy managing director, Murilo Portugal,
    said in a statement posted on the fund's website (www.imf.org).

    Meeting with Armenia's leading businessmen on December 28, President
    Robert Kocharian said the double-digit growth rate can be sustained
    in the next few years. (Statement by the presidential press service,
    December 28). His government, though, set more modest growth targets
    of between 8% and 10% in its five-year program approved by parliament
    in June. The program commits the government to implementing
    `second-generation reforms' that Western donors say are essential for
    ensuring continued growth. Prime Minister Serge Sarkisian and other
    government officials have said those reforms will result in better
    governance, `unconditional rule of law,' less government corruption,
    and fair business competition.

    There is widespread skepticism about the seriousness of those
    pledges, which was only reinforced by the Kocharian administration in
    the past year. In October 2007 Kocharian, for example,
    controversially dismissed Pargev Ohanian, a judge who had
    sensationally acquitted two businessmen in a rare court ruling that
    went against the government's wishes. The businessmen, who ran a
    leading Armenian coffee packaging company, had been arrested and
    charged with fraud in 2005 after publicly accusing senior customs
    officials of corruption. Armenia's Court of Appeals overturned their
    acquittal and sentenced them to six and two years in prison in
    November. The developments made a mockery of the government's stated
    efforts to combat corruption and boost judicial independence in the
    country.

    The ruling regime also made it clear that it will not tolerate
    expressions of political dissent by wealthy entrepreneurs dependent
    on government connections. One of those tycoons, Khachatur Sukiasian,
    has been facing a government crackdown on his businesses since
    September 2007, when he voiced support for former President Levon
    Ter-Petrosian, a leading opposition candidate in Armenia's upcoming
    presidential election. There were also no visible government efforts
    to liberalize lucrative forms of economic activity, notably imports
    of fuel and basic foodstuffs, that have been effectively monopolized
    by `oligarchs' close to Kocharian and Sarkisian. In fact, Kocharian
    denied the existence of such monopolies at the December 28 meeting,
    saying that other businesspeople are not venturing into the imports
    business for purely `psychological' reasons.

    The obvious lack of fair competition might explain why the prices of
    imported products such as wheat and cooking oil went up considerably
    in the fourth quarter of 2007 despite the continuing strong
    appreciation of the national currency, the dram. The price hikes
    pushed up inflationary pressures on the economy, forcing the Central
    Bank of Armenia (CBA) to raise its refinancing rate twice. Even after
    that the CBA forecast that consumer price inflation will hit 7% in
    2007, well above the Armenian authorities' target rate of 4%.

    The tightening of the CBA's monetary policy was in line with the
    IMF's recommendations. The fund also continued to press for further
    improvement in Armenian tax collection. The government's tax revenues
    soared by 35% in January-November, allowing it to meet record-high
    spending targets set by the state budget for 2007. (Budgetary report
    by the Armenian Ministry of Finance and Economy, December 28). Still,
    those revenues made up only 16% of GDP. The proportion is very modest
    even by ex-Soviet standards and highlights the scale of widespread
    tax evasion in Armenia. The government has for years been promising
    to tackle the problem in earnest. But its declared crackdowns on tax
    fraud have so far mainly targeted small and medium-sized enterprises,
    with many large and far more profitable companies owned by
    government-linked individuals continuing to underreport their
    earnings.
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