MACROECONOMIC NEWS: ARMENIA'S DOUBLE-DIGIT GROWTH

UNCLAS SECTION 01 OF 02 YEREVAN 001705

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN EAID AM
SUBJECT: MACROECONOMIC NEWS: ARMENIA'S DOUBLE-DIGIT GROWTH
CONTINUES FOR NOW


This cable is sensitive but unclassified. Please protect
accordingly.

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SUMMARY
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1. (SBU) Based on raw data provided by the National
Statistical Service, Armenia's economy grew by 10.2 percent
in the first six months of 2005 (compared to the same period
in 2004). The inflation rate during the same period was 2.3
percent. Budget revenues and expenditures increased by 25.4
and 21.5 percent respectively, but tax revenue as a
percentage of GDP remained low at 18.9 percent. Budget
expenditures on education and health were low, 3.4 and 1.7
percent of GDP respectively. Foreign investments in Armenia
grew by 11.6 percent (primarily because a new Lebanese
mobile telephone operator entered the market). Despite the
fluctuations in foreign exchange rates, both exports and
imports grew steadily at rates of 28.4 and 26.2 percent
respectively. Imports were almost twice as large as exports
in nominal terms. The GOAM continued to service its foreign
debt, reducing the debt by USD 68.4 million during the first
six months of 2005. End Summary.

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MACROECONOMIC OVERVIEW: STRONG GDP GROWTH
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2. (SBU) The GDP grew at an impressive 10.2 percent
(compared to the same period in 2004) during the first six
months of 2005, exceeding the GOAM forecast for annual
growth of 8 percent. As in previous years, construction was
the primary GDP driver constituting 43 percent of overall
growth. Agriculture made up 10.2 percent of overall growth
and industry contributed 5.3 percent. Construction spending
totaled USD 251.6 million and was largely privately financed
(91.5 percent). The construction boom is likely to slow
down during the winter months and to surge again in Spring
2006 in part because the Lincy Foundation has pledged USD 60
million largely for construction projects due to start
around that time. Industrial sector growth was based
primarily in metallurgy (45.2 percent).

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PRICES DECREASE
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3. (SBU) The abundant agricultural harvest continued to
drive down food prices resulting in deflation of 1.4 percent
in June and a total inflation rate of 2.3 percent for
January-June 2005. The price index for agricultural
products in June decreased by 20.7 percent compared to the
previous month. Inflation in Armenia is usually cyclical
because a large portion of the consumer basket is made up of
food which is cheaper during the summer months. Prices for
construction materials rose by 15.2 percent during the first
six months of 2005. This trend is expected to continue
through the fall. Given rising fuel prices and the cyclical
nature of inflation in Armenia, the government remains
likely to meet its three percent inflation target by year's
end.

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BUDGET REVENUES AND EXPENSES INCREASE
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4. (SBU) According to consolidated budget data provided by
the National Statistics Service, which is generally
considered to be objective and relatively accurate, budget
revenues for the first six months of 2005 were USD 422.55
million (up by 25.4 percent over the same period of last
year). Expenses totaled USD 422.05 million (an increase of
21.5 percent). Collected tax revenues were USD 292.71
million (up by 20.8 percent). The increase was due largely
to increased VAT collections which reached USD 132.25
million (up 18.8 percent) and increased corporate tax
collections which reached USD 49.88 million (up 62.9
percent). Indirect taxes, such as VAT and excise taxes,
fell as a share of total tax revenues from 62.7 percent for
January-June 2004 to 57.4 percent in January-June 2005.
Expenditures on education and science increased
substantially to USD 22.44 million or 3.4 percent of GDP
compared to 2.7 percent in the last six months of 2004.
Despite a slight increase in health expenditures to USD 9.32
million, the share of health expenditures to GDP remained
very low: 1.7 percent in 2005 compared to 1.5 percent in

2004.

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FOREIGN TRADE EXPANDS
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5. (SBU) Foreign trade continued to grow during the first
six months of 2005. Exports increased to USD 429.12 million
(28.4 percent more than the same period last year) and
imports grew to USD 787.96 million (26.2 percent growth over
the same period last year). Armenia's primary trade partners
remained Russia (14 percent of total trade),Belgium (12.3
percent),Israel (9.9 percent) and Germany (9.5 percent).
Non-diamond exports were valued at USD 290.80 million (a
31.3 percent increase over the same period last year). Non-
diamond imports were valued at USD 634.3 million (a 24.2
percent increase over the same period last year).

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FOREIGN INVESTMENTS GROW
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6. (SBU) Foreign investments increased by 11.6 percent
during the first six months of 2005, and reached USD 139.6
million. The largest investments were in
telecommunications. Greek-owned Armentel invested USD 58.3
millions (41.7 percent of the total investment growth),and
a new Lebanese mobile telephone operator, VIVACELL, entered
the market with an investments of USD 20 million (14.3
percent of the total investment growth). The other major
investors by country remained Russia (USD 13.5 million),USA
(USD 9.3 million),France (USD 8.8 million),Cyprus (USD 7.6
million) and Argentine (USD 4.6 million).

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REDUCTION IN FOREIGN DEBT
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7. (SBU) Armenia's foreign debt as of June 30, 2005 was USD
1,114.5 million -- down by USD 68.4 million since the end of

2004. The majority of the debt is owed to the World Bank
(67.4 percent),and IMF (17.3 percent). Other creditors
include the German development bank and the International
Fund for Agricultural Development (IFAD) with debts of USD
61.7 million and USD 39.7 million, respectively. (Note:
All of this debt is at highly concessionary interest rates.
End Note.)

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COMMENT: SLOWER GROWTH LIKELY AS CONSTRUCTION DECLINES
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8. (SBU) The past six months have been marked by impressive
growth and overall positive indicators for the Armenian
economy. Improvements in tax collection have made more
resources available for much-needed public expenditures in
the fields of education and science, though overall spending
remains inadequate to meet local needs. While growth is
likely to remain strong for the remainder of the year, the
double-digit growth that Armenia has enjoyed over the past
four years is probably not sustainable. The European Bank
for Reconstruction and Development representative is
particularly concerned about the construction boom which has
focused primarily on high-end residential real-estate.
Given that construction is the primary driver of GDP growth
in Armenia, as demand for new high-end residential space
tapers off in the next few years, GDP growth rates are
likely to decline.
GODFREY