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Country Context

Armenia has experienced significant socio-political and economic shocks in recent years. These events have included the 2018 Velvet Revolution, the 2020 twin shocks of the COVID-19 pandemic and conflict with Azerbaijan, and most recently a refugee crisis at the end of 2023. Addressing the needs of this new vulnerable group involves the provision of housing, jobs, expansion of social services and psychological support. Additionally, the country faces substantial uncertainty arising from geopolitical circumstances.

Despite these challenges, the economy has continued to demonstrate resilience, which can be attributed to prudent macroeconomic policies, including active inflation targeting, adherence to fiscal responsibility, and effective oversight of the financial sector.

In the last five years, Armenia has made substantial development gains. The country became an IDA donor in March 2023, only nine years after graduating from being an IDA recipient itself and four years after attaining upper-middle income (MIC) country status. Armenia has been actively engaged in a wide range of reforms, including in the justice sector, healthcare, tax and customs and social protection systems. 

However, Armenia needs to unlock key constraints to achieve inclusive and sustainable growth. Operating in a turbulent and uncertain geo-political context, the country struggles with low investment, weak attraction of foreign direct investment, limited human capital, connectivity constraints both within Armenia and with other countries, and little diversity in its export base and destinations. Armenia is also vulnerable to climate change.

Following Russia's invasion of Ukraine in 2022, the Armenian economy benefited from significant inflows of funds, migrants, and re-routed exports. This led to an impressive 10.5% average annual growth rate in 2022¨C2023. Recently, this growth momentum has begun to slow down due to a gradual outflow of funds and migrants, and a reduction in net exports.

Although notable progress has been made in recent years in reducing corruption and improving the business environment¡ªparticularly through more effective tax and customs administration¡ªother key structural challenges persist. There continues to be low private sector investment and constraints such as low labor force participation rates and a shortage of skilled workers. To address these challenges, the government is pursuing an ambitious plan to boost human capital through reforms in the education and health sectors.

Progress regarding the on-going peace negotiations with its neighbors which could lead to a reopening of its borders could expand Armenia¡¯s economic potential and boost growth.

Last Updated: Oct 22, 2024

Strategy

For 32 years, the World Bank Group has been a key partner for Armenia, helping make investments in priority sectors of the country¡¯s economy and helping advance policy reform dialogue. The new CPF for FY25-29 is under preparation and is aligned with the Government Program for 2021¨C26. ľ¹ÏÓ°Ôº Group has a rich and diverse portfolio in Armenia, financing projects across a range of sectors, including in health, education, energy, financial markets, and services. ľ¹ÏÓ°Ôº Group is also focused on sharing country knowledge and operational experience to leverage other development partners¡¯ resources for effective public investment.  

Key Engagement

On June 28, 2024, IBRD approved a new $109.4 million loan for the Armenia Enabling Universal Health Coverage Program (UHC PforR). This program¡¯s development objective is to improve the quality and utilization of primary health care, increase the efficiency of Government health spending, and reduce financial barriers to accessing healthcare.

On April 24, 2024, IBRD approved the $100 million loan for the Armenia Second Green, Resilient and Inclusive Development Policy Operation (DPO 2).The development objective of DPO 2 is to promote green, resilient and inclusive development in Armenia by i) fostering climate change mitigation and adaptation, ii) improving the regulatory framework for environmental management, iii) enhancing equity and promoting human capital development, and iv) strengthening the anti-corruption framework and justice sector efficiency.

On May 30, 2024, the IBRD approved $40 million loan for Armenia Enabling the Energy Transition Program (EEP PforR). The development objective of the project is to enable the integration of increased renewable energy capacity into the power transmission grid and enhance the commercial viability of the power transmission company. All three projects are expecting effectiveness to fully commence implementation activities.

Last Updated: Oct 22, 2024

Recent Economic Developments

Real GDP growth reached 6.5% (YoY) in H1 2024, down from 10.4% in H1 2023. Private consumption and investment, the main drivers of growth, expanded by 7.6% and 13.1%, respectively. On the supply side, growth has been driven by services, in particular by trade, financial, and real estate services which grew by 22%, 15% and 13% (YoY), respectively. Armenia's unemployment rate rose to 13.8% in H1 2024, up from 11.7% in H1 2023. The rise can be partly attributed to the inflow of refugees not yet integrated into the labor market.

Average inflation fell from 2% in 2023 to 0% during January- September 2024, largely due to a 3% fall in food and non-alcoholic beverage prices. In H1 2024, the budget posted a surplus of 0.1% of projected GDP, driven by an 11% under-execution of current expenditure, while capital expenditure was in line with the budget. On the other hand, tax revenues increased, in nominal terms, but they were still 9% below the planned budget. At end-September government debt was at 45% of the annual GDP forecast.

Balance of payment data for H1 2024 revealed that the trade deficit in goods improved but the service balance deteriorated. Specifically, there was a 62% (YoY) fall in the balance of tourism-related services, with a 6.1% (YoY) decline in the number of tourist arrivals in H1 2024 and a 25% decline in average spending per tourist after a stronger performance in 2023. Deterioration of the income balance, mostly due to a 28% decline in remittances, also contributed to lowering the current account balance. By end-September, the AMD had appreciated 4.3% against the US dollar, compared with the end of 2023.

Economic Outlook

Supported by domestic demand, growth in 2024 is expected to slow to 5.5% before gradually converging to a potential growth rate of 4.5% in the medium term. Average inflation is expected to rise gradually toward the 4% target in the medium term. The fiscal deficit is projected to rise to 4.7% of GDP in 2024, driven by continued support for refugees, elevated domestic interest payments, and substantial capital expenditure plans. A further deterioration of the fiscal balance is likely in 2025. As a result, the public debt stock is expected to increase over the next two years. The current account deficit (CAD) is expected to widen to 3.3% of GDP in 2024, and potentially deteriorate further in the medium term, mainly due to the positive impact of re-exports phasing out. The CAD is expected to remain below 4.5% of GDP in the medium term. Poverty, as measured by the upper middle-income poverty line of $6.85, is expected to remain about 49% in 2024

Downside risks to this outlook include geopolitical instability, challenges in refugee integration, and potential slowdowns in the economies of key trading partners. 

Last Updated: Oct 22, 2024