YEREVAN (RFE/RL)–Armenia’s economy will contract by 5 percent this year and will not start growing again until 2011, the International Monetary Fund said on Monday in a further downward revision of its economic outlook for the country.
Senior IMF officials also reaffirmed the fund’s endorsement of the Armenian authorities’ response to the global recession and, in particular, their controversial exchange rate policy.
As recently as in early March, the IMF expected Armenia’s Gross Domestic Product to shrink by only 1.5 percent in 2009. However, subsequent official statistics showed the economic downturn accelerating in March and resulting in a first-quarter GDP decline of 6.1 percent.
“The projections we have for Armenia mirror those you see in the global economy as well as in the rest of the region,” Mark Lewis, head of an IMF mission visiting Yerevan, said as he and other officials presented the fund’s latest economic outlook for the region. It forecasts zero growth for the Armenian economy in 2010.
Lewis singled out a sharp decline in the local construction sector as the key factor behind the revised projections. “There was a rapid boom in the construction sector in recent years, reflecting strong demand for residential and commercial property,” he said. “That pace of development in the construction sector will be difficult to maintain this year, and that will be the key thing.”
According to the National Statistical Service (NSS) the total volume of construction work carried out in Armenia tumbled by almost 22 percent in the first quarter of this year. The country’s first-quarter macroeconomic performance was also greatly affected by a 9.5 percent fall in industrial output. It resulted, in large measure, from a last year’s collapse in international prices of non-ferrous metals, the number Armenian export item.
Echoing statements by other IMF officials, Lewis praised the Armenian government and Central Bank for their “sensible and sound approach to managing the crisis.” “We think that the authorities are doing a very good job,” he said. He stressed at the same time the importance of further structural reforms and, in particular, improved tax administration for mitigating the impact of the global economic crisis.
External assistance is vital for the success of the government’s anti-crisis strategy that envisages, among other things, increased spending on infrastructure projects and financial support for private firms. The IMF’s managing director, Dominique Strauss-Kahn, described that strategy as “strong and credible” as he announced the impending release of a $540 million “stand-by” loan to Yerevan on March 3.
The announcement came immediately after the authorities allowed a nearly 20 percent devaluation of the national currency, the dram. The Central Bam of Armenia (CBA) had injected at least $700 million worth of hard currency in the local financial market to keep the dram’s value virtually unchanged since last fall.
Opposition politicians and economists critical of the government have strongly criticized that as a needless waste of the country’s scarce external reserves which stood at around $1.4 billion a year ago. They believe that the authorities should have ensured a smoother dram depreciation instead.
But Ratna Sahay, an IMF deputy director for the Middle East and Central Asia, dismissed the criticism. “It is a balance because if sometimes depreciation is not warranted by fundamentals then it does make sense for countries to prevent or smooth out the [exchange rate] fluctuations that might happen,” she said. “And to make the right judgment is very hard. We think that the authorities did the right thing in stabilizing the exchange rate.”
Lewis agreed, calling the authorities’ exchange rate policy “sensible.” “It made sense to proceed in a cautious way on this front to avoid a more destabilizing impact on the financial system,” he said.