Study points to the need to stimulate demand in Armenia

Construction site in Yerevan (c) photo by Artur papyan, http://www.ditord.com

Construction site in Yerevan (c) photo by Artur papyan, http://www.ditord.com

Study by a local think-tank reveals decline in household incomes and investment skepticism in businesses, points to the need to stimulate demand.

The Economy and Values Research Center (EV Consulting), the Armenian counterpart to the World Economic Forum in producing its annual Global Competitiveness Report, has attempted to assess the impact of the current economic crisis on Armenia in its recent study.

The recently published survey carried out among 1 thousand sample households of various backgrounds throughout the country and 60 leading businesses in March-April, 2009, notes that 90% of Armenian businesses and 70% of  households are feeling the negative consequences of the economic crisis.

“Prices of raw materials, especially copper went down hitting the mining industry, key exporter in Armenia”economist Sevak Hovhannisian, expert of EV Research explains.

“As things got worse in the Russian economy, the largest investor in Armenia’s business sector, and impacts on Armenia’s economy became damaging. The flow of large-scale remittances coming from abroad, sent from guest-workers and migrants to Armenian households dwindled and slowed down domestic demand for real estate. This in turn, greatly hurt the construction sector,” Hovhannisian noted.

Landlocked Armenia has been hard-hit by the global economic crisis following a period of prolonged growth since the end of 90’s. According to preliminary data from the National Statistics Service (NSS) the country’s Gross Domestic Product fell by 15.7 percent in the first five months of this year.

Much of the dramatic economic downfall can be accounted to nearly 56 percent slump in the construction sector which has been the key driving force behind the growth-economy in recent years. Government efforts to help the sector with tax rebates, loan guarantees and setting up a government funded mortgage fund which would make housing credit available in Armenia have not yet succeeded in reversing the decline pattern.

“All the government’s efforts will only be useful if they succeed in restoring demand. The government is pumping money into a sector [construction, mining] with dubious prospects for competitiveness. Meanwhile, we should concentrate on more technological and science-related sectors,” this is the conclusion of the expert.

EV Researche’s report notes, that 30-40% of surveyed businesses have pointed to difficulties in finding financial resources. Most have decided to cut administrative costs, put off investment projects. Around 20% are planning to cut staff. More importantly, 80% of businesses are pessimistic about the state of the economy in the upcoming year. The same percentage holds for pessimism among the surveyed households, the majority of whom say they’ll prefer buying cheaper products.

The government expects economic indicators to improve by the end of year as assistance measures put in place by anti-crisis loans render first results. Armenia’s Central bank has forecast a contraction of 5.8 percent this year.

Armenia has secured a $500 million anti-crisis loan from Russia to combat the economic decline, much of which will be used as loans to mining sector, and construction, especially in the northern regions of Armenia.

The government has also received the seal of approval for getting nearly $823 million of emergency assistance from the International Monetary Fund (IMF).

The World Bank has also committed to providing as much as $700 million to help Armenia fight the impact of the economic crisis over a 3 to 4 years period. $50 million of that assistance will be used as loans to small and medium size business.

Economist Andranik Tevanian, the director of «Politeconomy» research center sees low efficiency in government’s anti-crisis measures.

“They are trying to blow up the exploded balloon of the construction sector again,” the economist says, “As to the loans to business, there is, firstly, a problem of transparency. Secondly, it is not the loans that business needs right now. They have their circulatory capital. What is necessary is to spur productive demand so they can sell their products.”

Meanwhile, IMF and the World Bank have both projected a 9-9.5 decline in Armenia’s GDP in 2009, but said they expect the economy to pick up in 2010 and possibly post a 1.5-2 percent growth.

By Artur Papyan

Originally published by the Armenian Chronicles

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