EDB Macroreview, April 2019. Republic of Armenia: trends and forecasts

For the second consecutive year, Armenia remains the fastest-growing EAEU economy. In 2018, it grew by 5.2% after 7.5% the year before. The main factors behind the slowdown in its economic activity were the more moderate growth of household consumption than in 2017 and a decline of consumption in the public sector. The EDB projects Armenian GDP growth to accelerate somewhat in 2019, assisted by increasing investment activity as the extraction industry gradually adapts to the new requirements, a recovery in agricultural output, and Government policy that supports investment, exports, and improving social conditions. In the medium term, GDP will trend towards its potential rate, that we estimate at some 5% per annum. During 2018, inflation remained below the 4% CBRA target; in December 2018 it was 1.8% YoY. The main factor behind inflation trends in 2018 was food price volatility after a lower harvest. According to our estimates, inflation will accelerate to 2.8% in 2019, driven by increasing domestic demand as wages and lending grow. By the end of 2021 inflation will approach the CBRA target (4%). Given the economic background, the CBRA did not change its refinancing rate (6%) in 2018 and thus maintained a stimulative monetary policy. Interest rates on loans and deposits decreased during the year. According to our base scenario projection, as inflation gradually accelerates and approaches the CBRA target level, the CBRA will begin a series of rate rises that we expect to have a neutral impact on economic growth and inflation. In 2018, amid economic activity growth, the government pursued a tight fiscal policy to maintain debt and fiscal sustainability. In the medium term, the focus of fiscal policy will remain the same.