The Crisis 2009: The world’s woes reach Armenia

The year of 2009 was a year full of ordeals for Armenia’s economy, bringing the boisterous growth of the past 10 years to a jarring end.

Armenia has not managed to avoid the influence of the world economic crisis, which revealed a weakness in the economy that some had warned against but none heeded – primarily focusing on the precarious balance from growth generated by non-sustainable sources (i.e., mining, construction).

A 16-percent economic decline was registered in Armenia during 11 months of 2009, as compared with the same period last year. December is expected to produce slightly less than a one percent increase, yield a 15 percent decline for the year.

Financial expert Bagrat Asatryan, former head of the Central Bank in Armenia (1990s) and lecturer of economy at Yerevan State University says that the economic decline is more severe if the gross domestic product (GDP) is expressed in dollars.

“Last year the GDP of Armenia was $12 billion, this year it will be about $8 billion, which means that the economic decline will be about 30 percent,” Asatryan says. (Most loans are taken in dollars and exports are largely conducted on a dollar ratio.)

The Government of Armenia developed an anti-crisis program to confront the economic crisis that paralyzed the economy of Armenia. As Prime Minister of Armenia Tigran Sargsyan explains, the essence of this program is the following:

“To essentially increase the expenditures directed at infrastructures, to improve the atmosphere for small and medium-sized business, to aid those companies which have temporary difficulties conditioned by the negative impact of the world contraction (the state of the market).”

The Government turned to foreign funds as part of its crisis management, which resulted in tripling the foreign debt of Armenia, because the state debt of the country was 37 percent (last year it was 13 percent). Currently the foreign debt of Armenia totals $3.6 billion.

Moreover, as Aristomene Varoudakis, Chairman of Word Bank’s Yerevan Office, estimates, in 2011 the foreign debt of Armenia will reach 50 percent of the country’s GDP – a troubling figure that some economists fear could lead to insolvency.

In 2009, the main reason for the economic decline was the dependence of the country’s economy on several sectors – mining (two major and several minor mining plants stopped working as a result of crisis) and construction (volumes of construction were reduced by 38.4 percent in January-November 2009, as compared with the same period in 2008).

And in spite of the Government’s intentions to diversify the economy of the country, these two sectors were also paid attention to. In spring, the Government made a decision to underwrite the construction industry by more than $50 million, and it assigned funds to the mining sector from loans included in the loans secured to strengthen the economy.

Nevertheless, as financier Asatryan believes, the steps made by the Government within the framework of the anti-crisis course, were not productive, because there are systemic problems in the country.

“The system oligopoly and corruption are among the systemic problems. The essence of oligarchy is that it hinders the normal development of an economy, and corruption simply kills the economy,” Asatryan says.

As a consequence, the most evident fall in 2009 was registered in the sphere of social maintenance, where the number of the poor increased by 90,000 -- three percent more as compared with last year, and the number of the officially registered unemployed – grew by more than 11 percent.

At the end of 2008 and during the first two months of 2009, the dollar-dram exchange rate was continuing to be stable, contrary to the international tendency, where the dollar was getting stronger. But on March 3, Central Bank of Armenia switched to a ‘floating exchange rate’, sparking “Black Tuesday” – a day on which the dram/dollar fell from 300 to 360.

Nienke Oomes, former Resident Representative of the International Monetary Fund (IMF) touched upon this issue with an earlier this month, saying that she had been campaigning for a “floating rate” since January and, if heeded, could have saved Armenia $700 million in foreign reserves.

Export growth determined by dollar evaluation, however, was not registered in Armenia. Even though the Government simplified the processes of export – for example lifting the prohibition of exporting fish products, crayfish and cheese from Armenia into Russia (in effect since 2007) – the index of Armenia’s export within 11 months of 2009 was decreased by 37.4 percent totaling $624 million.