Armenia: Country outlook

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Economist Intelligence Unit
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Economy, Outlook, Forecast, Overview
Political Geography

Armenia: Country outlook


POLITICAL STABILITY: The prime minister, Nikol Pashinian, was appointed in May 2018 after mass protests had toppled the country's long-serving leader, Serzh Sargsyan. In a snap parliamentary election in December 2018, the My Step Alliance, a bloc led by Mr Pashinian, won two-thirds of the seats. Only two other parties have parliamentary representation--the Prosperous Armenia Party (PAP) of Gagik Tsarukian, a wealthy businessman, and the pro-Western Bright Armenia party; Mr Sargsyan's former ruling Republican Party of Armenia (RPA) is no longer represented. The government faces little parliamentary opposition to its reform agenda and has enjoyed high public approval ratings until recently.

ELECTION WATCH: In the December 2018 snap parliamentary election, Mr Pashinian's My Step Alliance won 70.4% of the vote and 88 of the 132 seats. The PAP came a distant second, with 8.3% and 26 seats. Bright Armenia, the only other party to secure representation, won 6.4% of the vote and 18 seats. The next parliamentary election is due in 2023. However, Mr Pashinian has announced that snap elections are possible in the first half of 2021 in response to rising public discontent. It is The Economist Intelligence Unit's core forecast that snap elections will not be held in the first half of the year. Since 2015 the president has been elected by parliament and not by popular vote. The next presidential election is scheduled for 2025.

INTERNATIONAL RELATIONS: The main focus of Armenia's foreign policy is the status of the Nagorny Karabakh region and its predominantly Armenian population. Following a violent war in the 1990s, the conflict has remained frozen with some major escalations throughout the years. Occasional international summits up until 2020 achieved little progress. In mid-July fighting broke out near Nagorny Karabakh along the northern border between the Tavush region of Armenia and the Tovuz district of Azerbaijan. The skirmishes resulted in at least 18 casualties. Both countries are engaged in diplomatic and disinformation campaigns against one another. On September 27th fighting along the line of contact intensified, with both sides reporting military and civilian casualties. In response, Armenia declared martial law and mobilised its male population.

POLICY TRENDS: The Pashinian government has called for a radical crackdown on corruption, resulting in an upsurge in corruption-related investigations launched by law-enforcement bodies. It has continued efforts initiated under the Sargsyan administration to reduce corruption in the customs and tax administrations, and increase procurement transparency, which will gradually improve the business environment. In 2021-25 (our forecast period) we expect that the government will continue implementation of its five-year strategy, which aims to boost economic growth via structural reforms, export promotion and greater foreign investment.

ECONOMIC GROWTH: In 2020 we expect Armenia's real GDP to contract steeply, by 7.8% year on year, owing to suppressed domestic demand and a sharp deterioration in external demand. The indicator of economic activity, which is issued by the Statistical Committee of the Republic of Armenia and approximates GDP growth, contracted by 10.3% in November--the largest contraction since May. This will be the country's deepest recession since 2009, when real GDP contracted by a staggering 14.1%.

INFLATION: In 2020 inflation averaged just 1.2%, owing to a slump in private consumption, slowing wage growth and low global oil prices. In 2021 inflation will increase to an average of 3.3% as domestic demand and oil prices start to rise. In 2022-25 we expect inflation to average 3.9%, reinforced by private consumption growth, faster global price growth for food, energy and manufactured goods, and a depreciating currency. However, inflation expectations are poorly anchored and there is a significant risk of price shocks.

EXCHANGE RATES: The dram remains exposed to fluctuations in the Russian rouble. When the US imposed new sanctions on Russia in 2018, the rouble weakened against the US dollar; the dram followed suit, but then recovered in line with the rouble.

EXTERNAL SECTOR: Armenia has traditionally run wide current-account deficits and has a significant external debt stock (about 88.6% of GDP in 2018). In 2020 we estimate that the current-account deficit narrowed to 6.2%, from 7.2% in 2019, owing to suppressed goods imports and a slightly improved services balance. In 2021 we expect the current-account balance to narrow slightly, to 5.9%, owing to better performance on the primary and secondary income accounts; increased imports will prevent a steeper narrowing.

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