Armenia: recession hits hard, -6.1% in first quarter

The Armenian National Statistical service has released the “Current-operative preliminary main macro-economic indicators” characterizing the socio-economic situation of Armenia for January-March 2009. The situation is sad – to say the least – the published data shows that the Armenian economy has shrinked by 6.1% compared with last year.

But the bare figure won’t tell you much. Consider this: data released for only January – February indicated a 3.7% slump in the economy. So March has gone that much wrong to affect the whole quarter so radically. As the economic activity starts to pick up, the difference in what economic (de)growth we have now and what we had only a year ago will likely become more obvious.

One of the key sectors leading the country into recession is the construction sector according to RFE/RL. It would be wrong to say, that the government is not doing anything to address the issue. Earlier this month Prime Minister announced government assistance to crisis-hit construction sector, which would hand out as much as 20 billion drams ($54 million) in loan guarantees for local construction firms lacking funds to complete their projects. The announcement about this is on Public TV these days, but we have yet to see how the measure will be implemented and will anybody actually risk taking the loan.

One thing the government can do – which it is reluctunt to, is to review the budget and make some major cuts. 

Admittedly, budget cuts in recession times are not the panacea. In fact, it makes sence to boost government spending in an attempt to stimulate the economy, in the hope, that in the years to come the eonomic growth will compensate for the losses. And it seems like this is the government’s main argument in their reluctance to cut the record high 945.5 billion drams ($2.6 billion) budget

However, let’s understand, that this year’s budget is based on over 9% economic growth estimation, and if the first quarter figures are any indication at all – the figure misses the point by as much as 15%. Naturally, the budget reveneues are set to decline accordingly, and government’s policy of ‘loaning their way into the budget’  will only mean huge deficit. Someone has to pay for all this… and I have that gut feeling, that it will be me and you!

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5 thoughts on “Armenia: recession hits hard, -6.1% in first quarter

  1. I don’t really pay much attention to the budget size as an indicator – only the surplus or the deficit, i.e. whether the treasury (the finance ministry) is going to pay off its debts with the surplus or borrow more to cover its deficit. As far as I know, the Armenian government has never had a year where the revenues (tax receipts) exceeded the expenditures and so has always operated with a deficit. A deficit means that you bankroll today’s expenditures with the future tax revenues (or, more likely, with a perpetual borrowing).

    I don’t know how developed the government bond market is in Armenia so I don’t know who lends money to the government – I think it’s the large banks that buy these things. Or if there are no buyers, the Central Bank may choose to print money and fund the deficit. Printing money is OK in a normal economy to some degree as you need a 2-3% growth in money supply annually for economic growth. More than that, and you have a recipe for disaster.

    So, where was I? Ah, what do I think?

    I think it’s a mistake to give money to the construction firms to build buildings that nobody is going to buy. It would have been a better idea to help the buyers with loans so that they are able to buy the stuff that the developers build. What they are doing is fueling the speculative real estate market – the developers will build and then bail out leaving behind empty buildings. Just like most of the economic decisions during the past 7-8 years or so, they are sticking with their absurd decision making with upside-down logic.

    As for the trimming the budget… If they trim it, the vulnerable populations like the pensioners or the poor will suffer. What is needed is a reform to cut down the size of the government. I think the bureaucracy can be cut down by 60% without any significant negative impact on the functioning of the state. heck, it might even improve things. Imagine, no red tape, no running around trying to get papers from different places, etc.

    Unfortunately, it will never happen.

  2. The laws and regulations make the life complicated. probably 80% of the laws and regulations are written to protect the interests of the 5% of the population and the State is nothing more than the implementer of this.

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