Identifier
Created
Classification
Origin
07YEREVAN251
2007-03-05 06:28:00
UNCLASSIFIED
Embassy Yerevan
Cable title:
HOW LONG CAN THIS GO ON? ARMENIA'S CONTINUED DOUBLE-
how-toVZCZCXRO4824 RR RUEHDBU RUEHLN RUEHVK RUEHYG DE RUEHYE #0251/01 0640628 ZNR UUUUU ZZH R 050628Z MAR 07 FM AMEMBASSY YEREVAN TO RUEHC/SECSTATE WASHDC 5022 INFO RUCPDOC/USDOC WASHDC RUEATRS/DEPT OF TREASURY WASHDC 0493 RUCNCIS/CIS COLLECTIVE RUEHAK/AMEMBASSY ANKARA 1220 RUEHIT/AMCONSUL ISTANBUL 0548 RUEHLMC/MILLENNIUM CHALLENGE CORP
UNCLAS SECTION 01 OF 03 YEREVAN 000251
SIPDIS
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EAID
SUBJECT: HOW LONG CAN THIS GO ON? ARMENIA'S CONTINUED DOUBLE-
DIGIT GROWTH
REF: A) 06 YEREVAN 269 B) 06 YEREVAN 1105
YEREVAN 00000251 001.2 OF 003
-------
SUMMARY
-------
UNCLAS SECTION 01 OF 03 YEREVAN 000251
SIPDIS
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EAID
SUBJECT: HOW LONG CAN THIS GO ON? ARMENIA'S CONTINUED DOUBLE-
DIGIT GROWTH
REF: A) 06 YEREVAN 269 B) 06 YEREVAN 1105
YEREVAN 00000251 001.2 OF 003
--------------
SUMMARY
--------------
1. Armenia's economy continued its significant expansion in
2006, with GDP up by 13.4 percent, the fifth consecutive year of
double-digit growth. As in previous years, construction, much
of which is funded by remittances, was the primary driver of
growth, up by 37 percent and accounting for 26 percent of total
GDP. Declines in diamond and industrial production, however,
and the striking appreciation of the dram, up almost 19 percent
against the dollar in 2006, pose significant challenges. Both
the Armenian government and IMF are predicting more modest
growth in 2007. END SUMMARY.
-------------- --------------
GDP GROWS 13.4 PERCENT LED, AGAIN, BY CONSTRUCTION
-------------- --------------
2. For a fifth consecutive year, ArmeniaQs GDP grew at double-
digit rates, up by 13.4 percent in 2006 to approximately USD 6.4
billion (AMD 2,665,036.6 million). GDP per capita in 2006 was
approximately USD 1,989. As in the past four years,
construction was the main driver of growth, expanding by 37.2
percent year on year, accounting for 26.7 percent of overall
GDP. The total volume of construction was USD 1,497.72 million,
90.6 percent of which was privately financed. International
assistance also contributes to the on-going construction boom.
Activities in real estate accounted for 49.6 percent of total
construction, 14.4 percent was in transportation and
communications sectors, 11 percent in electric power, gas and
water production and distribution. Eighty-two percent of
construction was in Yerevan. While exact numbers are not
available, it is likely that remittances, estimated to be
equivalent to 25 percent of GDP, are funding a large portion of
construction sector growth. Remittance flows are difficult to
measure and have been described by Armenian Central Bank
officials as a form of "second-hand Dutch disease" leaving the
economy extremely vulnerable to external shocks (ref B).
3. Agricultural output grew by 0.4 percent in 2006 and accounted
for 17.7 percent of GDP at approximately USD 1,336.17 million.
Services were the second largest contributor to GDP growth, with
trade and public catering up by 11.7 percent (accounting for 1.2
percentage points in GDP growth and 10.2 of total GDP).
4. The jewelry sector saw a significant contraction in 2006,
down by 24.3 percent due primarily to decreased global demand
for diamonds, increased competition from Asian countries and
deficiencies in workforce training. Overall industrial output
was down by 1.1 percent and tobacco production was also down by
5.1 percent.
--------------
PRICES INCREASE
--------------
5. Annual inflation in 2006 (December 2006 compared to December
2005) was 5.2 percent, due to higher energy and food prices,
while average inflation over the course of the year was 2.9
percent. The producer price index was up by 0.9 percent and the
price index in construction rose by 6.9 percent. Agricultural
product prices rose by 11.9 percent.
--------------
DRAM APPRECIATION
--------------
6. The Dram appreciated sharply against the US Dollar in 2006
and was valued at 364.64 AMD to the dollar in December 2006, up
by 18.9 percent compared to December 2005. The average AMD/USD
exchange rate for 2006 was equal to 416.04 AMD, compared to
457.69 AMD in 2005. According to the Central Bank of Armenia
and the IMF significant dram appreciation resulted from strong
growth of remittances, increase in productivity and incomes, de-
dollarization, and the general global weakening of the US
dollar. While some critics continue to claim that the Central
Bank has been manipulating the dram exchange rate, increased
remittances remain the most persuasive explanation for this
situation (ref B).
--------------
REVENUES AND EXPENDITURES INCREASE
--------------
YEREVAN 00000251 002.2 OF 003
7. According to preliminary data from the Ministry of Finance
and Economy (published by the National Statistical Service),
budget revenues for 2006 were approximately USD 1,056.68
million, up by 17.9 percent compared to 2005 (calculated in
terms of local currency). Expenses totaled USD 1,093.59
million, an increase of 15.1 percent compared to 2005. The
budget deficit was USD 36.91 million. Tax revenues grew by 18.2
percent in 2006 and reached USD 864.62 million, thanks largely
to increased VAT collections (up 13 percent) and increased
income tax and corporate profit tax (up by 33.3 percent and 40.3
percent respectively). Tax revenues accounted for 81.8 percent
of total budget revenues and the tax to GDP ratio was 14.4
percent.
8. Expenditures on education and science increased by 20 percent
to USD 169.55 million, and health expenditures were up by 18.2
percent equal to USD 86.44 million. The share of science and
education expenditures and health expenditures in the GDP
remained low at 2.6 percent and 1.3 percent respectively.
--------------
FOREIGN TRADE DEFICIT EXPANDS
--------------
9. During 2006 total trade turnover grew by 15.2 percent
reaching USD 3,198.3 million, with exports equal to USD 1,004
million and imports equal to USD 2,194.3 million. The trade
deficit grew by 44 percent to USD 1,190.4 million. Exports grew
a modest 3.1 percent and imports were up by 21.8 percent.
Excluding diamonds, exports grew by 6.7 percent. Export of
mining products (comprising 14 percent of total exports)
increased by 45.9 percent. ArmeniaQs main trade partners were
Russia (13.3 percent of total trade turnover),Germany (9.2
percent),Belgium (7.2 percent),Israel (6.1 percent),Ukraine
(5.9 percent) and the USA (5.4 percent). Exports of precious
and semi-precious stones and metals (accounting for 31.9 percent
of total exports) declined by 4.7 percent. Exports of non
precious metals (28 percent of total exports) and food products
(9.5 percent of total exports) declined by 12.8 percent and 1.6
percent respectively.
--------------
FOREIGN INVESTMENTS GROW
--------------
10. Foreign investment reached USD 297.43 million for JanuaryQ
September 2006 (up 31.8 percent compared to the same period in
2005) of which Foreign Direct Investment (FDI) accounted for USD
149.04 million (up 8 percent). FDI inflows were primarily in
telecommunication (23.7 percent of the total),mining (23.4
percent of the total) and air transport (16.4 percent of the
total). During JanuaryQSeptember 2006, FDI from Greece
accounted 23.7 percent of total FDI, followed by Germany (23.2
percent) and Argentina (19.8 percent). FDI from the US was
17.59 million and was mostly in IT and hotel services. Russian
Vimpelcom's purchase of Armentel in November 2006 for USD 440
million and possible investments in the mining sector in 2007
will likely lead to a significant increase in the Russian share
of overall FDI next year.
--------------
EMPLOYMENT AND WAGES INCREASE
--------------
11. According to the National Statistical Service unemployment
was 7.4 percent in 2006, down from 8.2 percent in 2005.
International organizations, however, believe the unemployment
rate is much higher than official statistics suggest (ref A).
According to the official figures, 65.2 percent of unemployed
were between ages 31-50, 15.6 percent between ages 23-30 and
71.7 percent of unemployed were women. Average monthly nominal
wages for January Q November 2006 were AMD 62,477 (approximately
USD 150),a 22.8 percent increase compared to the same period of
2005 and 4.2 times greater than the minimum wage. The highest
average wages were in the financial (USD 450) and mining sectors
(USD 323).
--------------
COMMENT
--------------
12. Many observers were surprised that Armenia was able to
sustain its impressive double-digit GDP growth in 2006. The
construction sector boom, the primary driver of growth, cannot
be sustained indefinitely and both the IMF and the Armenian
YEREVAN 00000251 003.2 OF 003
government are predicting more modest (9 percent) GDP growth in
2007. The substantial appreciation of the Armenian Dram has
also raised serious concerns, particularly among exporters who
fear the exchange rate will negatively impact their
competitiveness. While the Armenian economy has had an
impressive run over the past five years, it is becoming
increasingly clear that this is unlikely to continue
indefinitely.
GODFREY
SIPDIS
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EAID
SUBJECT: HOW LONG CAN THIS GO ON? ARMENIA'S CONTINUED DOUBLE-
DIGIT GROWTH
REF: A) 06 YEREVAN 269 B) 06 YEREVAN 1105
YEREVAN 00000251 001.2 OF 003
--------------
SUMMARY
--------------
1. Armenia's economy continued its significant expansion in
2006, with GDP up by 13.4 percent, the fifth consecutive year of
double-digit growth. As in previous years, construction, much
of which is funded by remittances, was the primary driver of
growth, up by 37 percent and accounting for 26 percent of total
GDP. Declines in diamond and industrial production, however,
and the striking appreciation of the dram, up almost 19 percent
against the dollar in 2006, pose significant challenges. Both
the Armenian government and IMF are predicting more modest
growth in 2007. END SUMMARY.
-------------- --------------
GDP GROWS 13.4 PERCENT LED, AGAIN, BY CONSTRUCTION
-------------- --------------
2. For a fifth consecutive year, ArmeniaQs GDP grew at double-
digit rates, up by 13.4 percent in 2006 to approximately USD 6.4
billion (AMD 2,665,036.6 million). GDP per capita in 2006 was
approximately USD 1,989. As in the past four years,
construction was the main driver of growth, expanding by 37.2
percent year on year, accounting for 26.7 percent of overall
GDP. The total volume of construction was USD 1,497.72 million,
90.6 percent of which was privately financed. International
assistance also contributes to the on-going construction boom.
Activities in real estate accounted for 49.6 percent of total
construction, 14.4 percent was in transportation and
communications sectors, 11 percent in electric power, gas and
water production and distribution. Eighty-two percent of
construction was in Yerevan. While exact numbers are not
available, it is likely that remittances, estimated to be
equivalent to 25 percent of GDP, are funding a large portion of
construction sector growth. Remittance flows are difficult to
measure and have been described by Armenian Central Bank
officials as a form of "second-hand Dutch disease" leaving the
economy extremely vulnerable to external shocks (ref B).
3. Agricultural output grew by 0.4 percent in 2006 and accounted
for 17.7 percent of GDP at approximately USD 1,336.17 million.
Services were the second largest contributor to GDP growth, with
trade and public catering up by 11.7 percent (accounting for 1.2
percentage points in GDP growth and 10.2 of total GDP).
4. The jewelry sector saw a significant contraction in 2006,
down by 24.3 percent due primarily to decreased global demand
for diamonds, increased competition from Asian countries and
deficiencies in workforce training. Overall industrial output
was down by 1.1 percent and tobacco production was also down by
5.1 percent.
--------------
PRICES INCREASE
--------------
5. Annual inflation in 2006 (December 2006 compared to December
2005) was 5.2 percent, due to higher energy and food prices,
while average inflation over the course of the year was 2.9
percent. The producer price index was up by 0.9 percent and the
price index in construction rose by 6.9 percent. Agricultural
product prices rose by 11.9 percent.
--------------
DRAM APPRECIATION
--------------
6. The Dram appreciated sharply against the US Dollar in 2006
and was valued at 364.64 AMD to the dollar in December 2006, up
by 18.9 percent compared to December 2005. The average AMD/USD
exchange rate for 2006 was equal to 416.04 AMD, compared to
457.69 AMD in 2005. According to the Central Bank of Armenia
and the IMF significant dram appreciation resulted from strong
growth of remittances, increase in productivity and incomes, de-
dollarization, and the general global weakening of the US
dollar. While some critics continue to claim that the Central
Bank has been manipulating the dram exchange rate, increased
remittances remain the most persuasive explanation for this
situation (ref B).
--------------
REVENUES AND EXPENDITURES INCREASE
--------------
YEREVAN 00000251 002.2 OF 003
7. According to preliminary data from the Ministry of Finance
and Economy (published by the National Statistical Service),
budget revenues for 2006 were approximately USD 1,056.68
million, up by 17.9 percent compared to 2005 (calculated in
terms of local currency). Expenses totaled USD 1,093.59
million, an increase of 15.1 percent compared to 2005. The
budget deficit was USD 36.91 million. Tax revenues grew by 18.2
percent in 2006 and reached USD 864.62 million, thanks largely
to increased VAT collections (up 13 percent) and increased
income tax and corporate profit tax (up by 33.3 percent and 40.3
percent respectively). Tax revenues accounted for 81.8 percent
of total budget revenues and the tax to GDP ratio was 14.4
percent.
8. Expenditures on education and science increased by 20 percent
to USD 169.55 million, and health expenditures were up by 18.2
percent equal to USD 86.44 million. The share of science and
education expenditures and health expenditures in the GDP
remained low at 2.6 percent and 1.3 percent respectively.
--------------
FOREIGN TRADE DEFICIT EXPANDS
--------------
9. During 2006 total trade turnover grew by 15.2 percent
reaching USD 3,198.3 million, with exports equal to USD 1,004
million and imports equal to USD 2,194.3 million. The trade
deficit grew by 44 percent to USD 1,190.4 million. Exports grew
a modest 3.1 percent and imports were up by 21.8 percent.
Excluding diamonds, exports grew by 6.7 percent. Export of
mining products (comprising 14 percent of total exports)
increased by 45.9 percent. ArmeniaQs main trade partners were
Russia (13.3 percent of total trade turnover),Germany (9.2
percent),Belgium (7.2 percent),Israel (6.1 percent),Ukraine
(5.9 percent) and the USA (5.4 percent). Exports of precious
and semi-precious stones and metals (accounting for 31.9 percent
of total exports) declined by 4.7 percent. Exports of non
precious metals (28 percent of total exports) and food products
(9.5 percent of total exports) declined by 12.8 percent and 1.6
percent respectively.
--------------
FOREIGN INVESTMENTS GROW
--------------
10. Foreign investment reached USD 297.43 million for JanuaryQ
September 2006 (up 31.8 percent compared to the same period in
2005) of which Foreign Direct Investment (FDI) accounted for USD
149.04 million (up 8 percent). FDI inflows were primarily in
telecommunication (23.7 percent of the total),mining (23.4
percent of the total) and air transport (16.4 percent of the
total). During JanuaryQSeptember 2006, FDI from Greece
accounted 23.7 percent of total FDI, followed by Germany (23.2
percent) and Argentina (19.8 percent). FDI from the US was
17.59 million and was mostly in IT and hotel services. Russian
Vimpelcom's purchase of Armentel in November 2006 for USD 440
million and possible investments in the mining sector in 2007
will likely lead to a significant increase in the Russian share
of overall FDI next year.
--------------
EMPLOYMENT AND WAGES INCREASE
--------------
11. According to the National Statistical Service unemployment
was 7.4 percent in 2006, down from 8.2 percent in 2005.
International organizations, however, believe the unemployment
rate is much higher than official statistics suggest (ref A).
According to the official figures, 65.2 percent of unemployed
were between ages 31-50, 15.6 percent between ages 23-30 and
71.7 percent of unemployed were women. Average monthly nominal
wages for January Q November 2006 were AMD 62,477 (approximately
USD 150),a 22.8 percent increase compared to the same period of
2005 and 4.2 times greater than the minimum wage. The highest
average wages were in the financial (USD 450) and mining sectors
(USD 323).
--------------
COMMENT
--------------
12. Many observers were surprised that Armenia was able to
sustain its impressive double-digit GDP growth in 2006. The
construction sector boom, the primary driver of growth, cannot
be sustained indefinitely and both the IMF and the Armenian
YEREVAN 00000251 003.2 OF 003
government are predicting more modest (9 percent) GDP growth in
2007. The substantial appreciation of the Armenian Dram has
also raised serious concerns, particularly among exporters who
fear the exchange rate will negatively impact their
competitiveness. While the Armenian economy has had an
impressive run over the past five years, it is becoming
increasingly clear that this is unlikely to continue
indefinitely.
GODFREY