Transition Report 2013 Stuck in transition?

Country assessments


Main macroeconomic indicators %
  2009 2010 2011 2012
GDP growth -14.1 2.1 4.6 7.1 2.5
Inflation (end-year) 6.5 9.5 4.7 3.2 7.9
Government balance/GDP -7.5 -5.0 -2.8 -1.6 -0.5
Current account balance/GDP -15.8 -14.8 -10.9 -11.2 -10.0
Net FDI (in million US$) 725 562 447 474 408
External debt/GDP 58.1 67.9 72.9 76.7 n.a.
Gross reserves/GDP 23.2 20.1 19.1 18.1 n.a.
Credit to private sector/GDP 24.8 28.4 35.3 42.5 n.a.

Note: Govt balance refers to augmented general government balance.

2013 sector transition indicators





Source: EBRD.
Note: Water – Water and wastewater; IAOFS – Insurance and other financial services; PE – Private equity.


  • The economy has been affected by a significant increase in the prices of energy imported from Russia, which the authorities are striving to re-negotiate. If maintained, the 50 per cent increase in gas import prices, which the government partly passed on to households, would slow the pace of improvement in the trade and current account deficits.
  • The authorities continued to deregulate the economy and strengthen competition. Reduction of red tape and the implementation of inspection reform enabled the country to continue to improve its ranking in international business environment surveys.
  • The government announced the country’s decision to seek membership of the Eurasian Customs Union. The formal accession process may take several years to complete. It remains to be seen whether membership of the Customs Union would be consistent with further approximation with the European Union (EU).

Key priorities for 2014

  • Further steps are needed to improve the business environment and strengthen competition in the economy. The competition authority should strengthen its analytical, investigative and enforcement capabilities, and the government should continue tackling monopolies and simplifying other regulatory norms for enterprises.
  • The authorities should implement the announced commitment to deepen economic ties with the EU, while benefiting from access to the Eurasian Customs Union. As Armenia negotiates the terms of its accession to the Customs Union, it will be important to maintain the momentum of much-needed institutional reforms, and to ensure that membership of the Customs Union does not prevent further approximation with the EU.
  • Development of the local capital market and de-dollarisation of the banking system remain top priorities. The introduction of the second compulsory pillar in the public pension system will help to generate resources for market development, provided that they are invested in a range of public and private sector securities.

Macroeconomic performance

The pace of economic growth has slowed. After expanding by 7.1 per cent in 2012, output growth decelerated to 3.6 per cent in the first half of 2013, as a result of a decline in construction and the continued weakness of industry, trade and services. Investment activity slowed, the external environment deteriorated and the government continued to pursue fiscal consolidation under an International Monetary Fund-supported programme (extended credit facility/extended fund facility), which expired in July 2013. Annual credit growth moderated towards a single digit rate, after averaging 33 per cent in 2012. Inflation accelerated to 9.3 per cent in August 2013, as the authorities raised gas and electricity tariffs, effective from July, in response to a 50 per cent hike in the wholesale price paid to Russia for gas imports, and despite the authorities’ discussions with Russian counterparts to reverse or contain the import price increase. Although the external adjustment has continued, the current account deficit remains high, at about 10 per cent of GDP. Remittances were the leading source of financing of the trade deficit, while official flows and foreign direct investment slowed.

Immediate macroeconomic risks are related to energy price increases and the slow-down in Russia. Domestic demand is expected to be affected as the hike in energy tariffs reduces households’ real disposable income and spending. As the Russian economy slows, the flow of remittances and demand for Armenian exports will suffer. While a real exchange rate adjustment could help support competitiveness, the likely impact of this would be limited due to very high dollarisation in the banking system. In this context, a new IMF arrangement may be needed.

Longer-term prospects depend on the pace of reforms and the country’s ability to gain access to international markets. Armenia’s potential growth is constrained by its landlocked position and limited access to neighbouring markets, which significantly limits the development of its export industry and lowers its investment attractiveness. The country’s dependence on undiversified, low value-added commodity exports and remittances flows makes it vulnerable to negative terms of trade shocks. In order to increase the country’s competitiveness and prosperity, Armenia still requires substantial investments to diversify its industrial base and improve its physical infrastructure, as well as further efforts to promote openness and liberalisation.

Major structural reform developments

The authorities have continued to adopt various measures to enhance the business environment and to promote transparency. The implementation of inspection reform, the reduction of red tape, and the easing of tax administration burden have resulted in a tangible improvement in Armenia’s business climate. In the World Bank 2014 Doing Business report Armenia ranked thirty-seventh of 189 countries. The Competition Agency is preparing a twinning programme with the EU in order to acquire better investigative skills and to improve enforcement. In order to encourage transparency, the government is working with international financial institutions to improve public procurement procedures. In August 2013 the authorities prohibited large Armenian companies from participating in public procurement procedures unless they had received a positive assessment from independent auditors in 2012. However, the government has not yet taken more decisive action against informal competition, nor in tackling corruption issues, especially in the tax and customs areas.

The forthcoming launch of the compulsory funded pension pillar should help develop the local capital market. As a part of the 2011 pension system reform, to be effective from 1 January 2014, a funded pension system will become obligatory for all those born in or after 1974. Although the mandatory contributions will be taxed, future pension income and capital gains will be tax exempt. The funded pension system is expected to provide an inflow of 1.0 to 1.5 per cent of GDP in long-term capital annually to the local market, creating funding opportunities for private companies, as investments will gradually shift from government bonds to corporate bonds and equities. As of August 2013 the authorities were finalising the tender for selecting asset managers and revamping the custodian system.

The government has chosen to pursue membership of the Eurasian Customs Union. In September 2013 Armenia’s president, Serzh Sargsyan, announced the country’s decision to become a member of the Customs Union, to join current members, Belarus, Kazakhstan and Russia. This decision is likely to mean that the signing and initialisation of an Association Agreement and a Deep and Comprehensive Free Trade Agreement with the EU in the negotiated format will not be feasible at the Eastern Partnership Summit in Vilnius in November 2013. Compliance with formal procedures to join the Eurasian Customs Union will take some time, and, according to government officials, this is unlikely to occur earlier than 2015. Following Armenia’s decision to join the Customs Union, in October 2013 Armenia and Russia signed a long-term programme of economic cooperation lasting until 2020, and the countries have been negotiating to bring down the price paid by Armenia for Russian natural gas, towards the Customs Union level.

Air traffic liberalisation is progressing slowly. In March 2013 the national carrier, Armavia, declared bankruptcy, after enjoying a monopoly on lucrative routes for 10 years. This created an opportunity for the authorities to consider opening up the country’s air transportation market. Concerned about national security, the government considered selecting three Armenian companies as flag carriers, through a tender process. The selected carriers would each enjoy a five-year exclusive monopoly over several main routes. Before making a definitive decision about how to proceed, the authorities contracted an international consulting firm to consider alternative solutions that would allow for greater competition in the sector. In parallel, the government is negotiating with the EU over the terms of Armenia’s accession to the EU’s Common Aviation Area, which would be an important step towards opening up the sector to competition, increasing the flow of passengers and cargo, and improving air traffic services.

Armenian authorities are looking for ways to mitigate the economic consequences of the country’s landlocked position. The border crossing with Georgia is being modernised. Construction of the 556 km north-south highway is ongoing, although the project is now delayed, after technical and financial violations were discovered in June 2013. Armenia is also studying the prospect of building a new railway and highway to its southern border with Iran. Concession agreements for these projects on a public-private partnership basis were signed in November 2012, with the Dubai-based investment company, Rasia, although financing of the projects remains uncertain. Completion of the railway and the road would increase access to the country’s natural resources along the north-south transport corridor. The improvement in transportation infrastructure would also significantly reduce transport costs and foster regional trade, potentially linking the countries of the Black Sea region with the Persian Gulf and India. In September 2013 the Russian authorities indicated that Armenian Railways, run by Russian Railways since 2008 under a 30-year concession agreement, may benefit from investments of up to US$ 500 million in the coming years.