Identifier
Created
Classification
Origin
04YEREVAN349
2004-02-12 13:50:00
UNCLASSIFIED
Embassy Yerevan
Cable title:  

ARMENIA: DOUBLE DIGIT GROWTH

Tags:  ECON ENRG EFIN EAID EAIR AM RU 
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UNCLAS SECTION 01 OF 03 YEREVAN 000349 

SIPDIS

SENSITIVE BUT UNCLASSIFIED

DEPT FOR EUR/CACEN-MPAWLICK, EUR/ACE-MLONGI, EB/CBA
PASS TDA-DSTEIN, OPIC, EXIM-TUMMINIA, USTR-CKLEIN
COMMERCE FOR 4231/MAC/EUR/OEERIS/RISD/MLONDON
COMMERCE FOR 4201/ITA/IEP/OEERIS/BISNIS/MWALTERS
MOSCOW, KIEV, TBILISI, BAKU, ANKARA AND ISTANBUL - PASS
FCS
ANKARA ALSO FOR CFC/SNIDER/BALLINGER

E.O. 12958: N/A
TAGS: ECON ENRG EFIN EAID EAIR AM RU
SUBJECT: ARMENIA: DOUBLE DIGIT GROWTH


---------
SUMMARY
---------

UNCLAS SECTION 01 OF 03 YEREVAN 000349

SIPDIS

SENSITIVE BUT UNCLASSIFIED

DEPT FOR EUR/CACEN-MPAWLICK, EUR/ACE-MLONGI, EB/CBA
PASS TDA-DSTEIN, OPIC, EXIM-TUMMINIA, USTR-CKLEIN
COMMERCE FOR 4231/MAC/EUR/OEERIS/RISD/MLONDON
COMMERCE FOR 4201/ITA/IEP/OEERIS/BISNIS/MWALTERS
MOSCOW, KIEV, TBILISI, BAKU, ANKARA AND ISTANBUL - PASS
FCS
ANKARA ALSO FOR CFC/SNIDER/BALLINGER

E.O. 12958: N/A
TAGS: ECON ENRG EFIN EAID EAIR AM RU
SUBJECT: ARMENIA: DOUBLE DIGIT GROWTH


--------------
SUMMARY
--------------


1. Armenia's 2003 economic performance exceeded all
predictions; despite the rounds of elections and
political tremors during the year, the real Gross
Domestic Product (GDP) grew by 13.9 percent, a record
high since 1991 independence. Construction (mostly
donor financed) and industry contributed to the growth
by about 6 and 4.5 percentage points respectively. The
external sector expanded by more than 30 percent, with
exports growing faster than imports. The economy
posted positive trends in labor and financial markets
as well. The major price indices, however, show sharp
increases: the Consumer Price Index (CPI) grew by 8.6
percent, while the Producer Price Index (PPI) jumped by
21.1 percent, the highest annual inflation rate since

1998. End Summary.

-------------- --------------
MACROECONOMIC OVERVIEW: CONSTRUCTION DRIVES GROWTH
-------------- --------------

2. Although the annualized economic growth rate
declined by the end of December compared to November,
the annual growth rate finished the year at 13.9
percent, the highest since independence. The growth
pattern, however, was volatile in the first half of
2003, fluctuating from 7.5 percent in February to 14.9
percent in June. In the second half of 2003 the growth
rate was relatively stable hovering around 15 percent.

3. As in 2002, industry and construction continue to
drive growth. Year-on-year construction growth was
roughly 40 percent from January to December 2003 (with
residential construction growing by nearly 80 percent).
Diaspora-based Lincy Foundation financing supported
most of the growth in construction. Private
construction almost doubled, however, responding to
demand and sustained price increases in the real estate
market. (Note: Construction as a share of GDP is

estimated at 14.4 percent. End Note.)

4. Production of industrial goods increased by 14.9
percent with the level of electricity production was
unchanged. Within the manufacturing sector, tobacco
output was up 37 percent in volume terms, rubber and
plastic by 125 percent, metal processing by 46 percent
and machinery by almost 26 percent. These high rates
are partly attributable to a depressed base-period, but
also reflect considerable new investment in these
sectors. Industry has by far the largest share of GDP,
24.1 percent. Agriculture, constituting about 21
percent of GDP, grew at 4.3 percent, despite
pessimistic forecasts due to an unusually cold winter
in 2002-2003. Retail trade and services also grew
strongly (about 13 percent),indicating a consolidation
of domestic demand.

-------------- --
INFLATION: BREAD PRICES HIT THE CONSUMER BASKET
-------------- --

5. Monthly price trends followed seasonal patterns in
deflationary summer. In September, however, when the
trend is also usually deflationary, prices rose by 2.5
percent, owing to a sharp jump in prices for bread and
related products. This brought year-on-year inflation
in September to more than 7 percent. Although in
September international financial institutions as well
as the Central Bank of Armenia (CBA) gave various
forecasts of up to 7 percent inflation for the year,
inflation for the rest of the year continued its trend
with the highest monthly price increase of 5.3 percent
in December. That brought the annual cumulative
inflation to 8.6 percent, the highest since 1998.

6. An estimated 5 percentage points of the inflation
is explained by an increase in wheat prices in Russia,
the main trade partner in this category. Wheat
products represent nearly 20 percent of the CPI basket,
and aggregate prices for this group increased by more
than 25 percent in 2003. In early September the
governor of the CBA, Tigran Sarkissian, said that there
was no need to adjust monetary policy for 2003,
implying only "moderate" growth in the money supply to
neutralize inflationary pressures. He referred to the
price increase as a "temporary external shock," without
which the CPI would be in line with the targeted level
of 3 percent. (Note: According to the Monetary Policy
Program, the CBA forecasts 7 percent inflation in 2004,
mostly due to anticipated increases in gas and water
tariffs. End Note.)

7. The GDP deflator, the indicator of price changes on
all products, increased in December by 0.2 percentage
points, bringing annualized growth in the deflator for
January-December to 4.7 percent, the highest since

1998. The Producer Price Index, an indicator of cost-
driven inflation, also trended upward by the end of the
year, increasing by 21.1 percent, the highest level
since 1998.

-------------- --
EMPLOYMENT: NUMBERS MIXED, BUT GENERALLY HIGHER
-------------- --

8. According to the National Statistics Services
(NSS),10.1 percent of the active population, or 124.8
thousand people, is currently unemployed, compared to
9.4 percent in 2002. Although this may appear
paradoxical in a period of high growth, the NSS finally
incorporated the 2001 Census results into the
unemployment calculus, according to which the
denominator used, active population, decreased from
about 1.4 million in 2002 calculations to 1.24 million
in 2003. Applying the new numbers back to the 2002
estimate, the unemployment rate would come to 10.8
percent. Thus, over the course of 2003, real
unemployment decreased by 0.7 percent. (Note: Official
unemployment counts only those who receive unemployment
insurance, not all those who are looking for jobs. End
Note.)

--------------
EXTERNAL SECTOR: RUSSIA LOSES MARKET SHARE
--------------


9. Armenia's trade turnover expanded rapidly in year-
on-year terms, with growth driven mainly by a
substantial increase in trade in precious stones and
metals. According to official data, export revenue was
up by 34.2 percent at USD 678.1 million, well above the
USD 590 million projected by the CBA. Import
expenditures grew at about 28.6 percent to USD 1.3
billion. Precious metals and stones continue to
dominate Armenia's trade structure: about 52 percent
of export growth and 41 percent of import growth is
attributed to precious stones and metals. The sector
has benefited from stable supplies of stones from its
main sources: Israel, Belgium and Russia.


10. Russia, although it remains Armenia's largest
trade partner, lost market share for the second year in
a row. Russia's total trade share decreased from 19.2
percent in 2001 to 17.3 in 2002 and 15.5 (or USD 302.3
million) in 2003. Imports from Russia, although they
increased in dollar terms, decreased as a share of
total imports from 19.5 percent in 2002 to 16.4 percent
(or USD 207.7 million) in 2003. Israel became the
largest export partner for Armenia, with total exports
of USD 142.3 million, up by about 84 percent. Belgium
and the USA remain the third and fourth trade partners
in terms of exports.

-------------- --------------
FINANCIAL SECTOR: DECREASING INTEREST RATES AND STABLE
ARMENIAN DRAM (AMD) HERALD LOWER COUNTRY RISK
-------------- --------------


11. During 2003, the CBA twice revised its refinancing
rate, eventually cutting it from 13.5 percent to 9
percent in August. The policy was designed to
stimulate the demand for money in the economy,
increasing money supply (M2) by 28 percent. (Note:
This provided yet another reason for increased
inflation. End Note.) In 2003 most interest rates
declined, including deposit and money market rates.
Nevertheless, high credit risks and the poor quality of
financial management between banks and enterprises kept
lending rates high, thus increasing profits in the
banking sector.


12. The Armenian national currency, the Dram (AMD),
fluctuated within a narrow band against the USD during
the year. In August a nominal depreciation of 4.2
percent year-on-year was recorded, partly reflecting
inflationary expectations. By the end of September,
however, the rate stood at AMD 570/USD 1, an
appreciation of almost 2 percent, mostly due to USD
inflow to the country via transfers and tourist
spending. (Note: According to the NSS, the number of
tourists in 2003 increased by about 27 percent to
205,000. End Note.) The AMD lost value during the
usual Christmas and New Year shopping frenzy, sliding
back to normal rates immediately after the holidays.
ORDWAY