ARMENIAN ECONOMIC GROWTH REMAINS STRONG

UNCLAS SECTION 01 OF 02 YEREVAN 000682

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/CARC, EUR/ACE

E.O. 12958: N/A
TAGS: ECON EFIN EAID AM
SUBJECT: ARMENIAN ECONOMIC GROWTH REMAINS STRONG

REFS: A)YEREVAN 150 B)YEREVAN 364 C)YEREVAN 174

Sensitive but Unclassified. Please protect
accordingly.

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SUMMARY
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1. (SBU) Armenia's GDP grew by eight percent during
the first quarter of 2006, continuing a trend of
impressive, often double-digit, growth rates over
the past few years. Construction remained the
primary driver of growth, up 25.2 percent compared
to the first quarter of 2005. Retail trade was the
second largest contributor, up 13.6 percent.
Inflation for the first quarter was 4.2 percent due
primarily to higher food prices. (Note: Although
April 1 fuel price increases were anticipated during
the first quarter, they were not a factor in first
quarter inflation figures. End Note.) Overall
exports fell by 5.6 percent, largely as a result of
a 39.4 percent decline in diamond production.
Imports only grew by 13.6 percent (a significant
decline from 2005's 30.9 percent growth rate). Tax
revenues rose 16.2 percent, marked by a 73 percent
increase in the collection of corporate taxes. End
Summary.

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CONSTRUCTION CONTINUES TO DRIVE ECONOMIC GROWTH
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2. (SBU) The Armenian GDP grew by eight percent for
the first quarter of 2006 (reaching USD 590.2
million). As in previous years, construction was
the primary driver of growth (up 25.2 percent
compared to the first quarter of 2005). According
to Armenia's National Statistical Service,
construction volume in the first quarter of 2006 was
USD 61.8 million, with private financing accounting
for 91.7 percent of the growth in the sector. Forty-
five percent of total construction was residential.
Retail trade (up 13.6 percent) and agriculture (up
3.5 percent) were the second and third largest
contributors to GDP growth.

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INDUSTRIAL OUTPUT DOWN BY 4.7 PERCENT
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3. (SBU) Industrial output declined 4.7 percent,
mainly due to a sharp decrease in diamond production
(down 39.4 percent). Head of the Precious Stones
and Jewelry Department at the Ministry of Trade and
Economic Development Gagik Mkrtchyan attributed the
decline to an alleged theft at Armenia's major
diamond cutting factory, Shoghakn CJSC, which caused
a ten-day work stoppage. Non-diamond industrial
production grew by 1.1 percent, mainly due to
increased output from food and beverage industries
(up 13.6 percent) and metallurgy (up 5.7 percent).
Energy production, which accounts for 23 percent of
industrial output also dropped by 6.3 percent
following a ten-day cut in natural supplies from
Russia (ref A).

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INCREASED INFLATION LIKELY
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4. (SBU) The inflation rate at the end of the first
quarter of 2006 was 4.2 percent against December

2005. Higher prices for food, including fish (up
42.4 percent from December 2005),fruits and
vegetables (up 37.2 percent) and sugar (up 7.2
percent) fueled the increase. (Note: Inflation
will likely continue to rise in the coming months as
a result of increased natural gas prices (ref B) and
a planned 38 percent increase in water tariffs. The
April 1 fuel price increases were not a factor in
first quarter inflation figures, however. End
Note.)

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IMPORTS GROW, EXPORTS DECLINE
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YEREVAN 00000682 002 OF 002




5. (SBU) Foreign trade turnover grew at a moderate
pace of 7.0 percent in the first quarter of 2006.
Exports declined 5.6 percent to USD 184.4 million
and imports grew 13.6 percent to USD 422 million.
Diamond exports, which in 2005 accounted for 30
percent of the overall exports, declined by 36
percent in the first quarter of 2006. As a result,
the first quarter trade deficit as a share of GDP
grew from 34 percent in 2005 to 40.3 percent in

2006. Non-diamond exports totaled USD 138.1
million, up 2.7 percent. Non-diamond imports
totaled USD 368 million (up 25.6 percent) with
significant increases in imports from CIS countries
(up 39.3 percent) and Iran (up 38.3 percent).
Exports to the U.S. grew 25.8 percent to USD 11.9
million. Imports from the U.S. increased 37.5
percent to USD 28.5 million.
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CORPORATE TAX COLLECTION UP 73 PERCENT
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6. (SBU) Budget revenues were USD 182.1 million and
expenditures were USD 189.2 million, up 6 percent
and 24.9 percent, respectively. Tax revenues (USD
157.2 million) and state duties (USD 8.2 million)
grew 16.2 percent, accounting for 28 percent of GDP
(up from 26 percent in the first quarter of 2005).
Collection of direct taxes increased significantly
with corporate tax payments up 73 percent and income
tax payments up 46.4 percent. Despite the increase,
direct taxes only accounted for 25.7 percent of
total revenues. Indirect taxes (VAT and excise tax)
accounted for more than half of revenue at 54.8
percent, down from 61.2 percent in the first quarter
of 2005. According to the State Tax Services' list
of the 300 largest taxpayers (published on April
22),many large companies made payments for the
first time this quarter. Education and health
expenditures were up 29.1 percent and 49.7 percent,
respectively. Expenditure in education accounted
for 4.8 percent of GDP (up from 4 percent in 2005),
and health expenditures were 2.4 percent of GDP (up
from 1.7 percent in 2005).

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COMMENT:
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7. (SBU) Construction growth is likely to remain
strong throughout the spring and summer and continue
to support impressive overall growth rates. In
addition to an increase in privately funded
projects, we expect large infrastructure projects
funded by the Lincy Foundation (ref C) and
Millennium Challenge Corporation will spur
additional growth in this sector. Armenia's economy
remains, however, relatively small and lacks
diversity. The negative impact on Armenia's trade
deficit of a ten-day work stoppage at a single
diamond factory highlights Armenia's continued
vulnerability to economic shocks.

EVANS