US embassy cable - 04YEREVAN2407

UNCLAS SECTION 01 OF 02 YEREVAN 002407 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, EFIN, EAID, AM 
SUBJECT:  ARMENIA'S STEADY GROWTH, STABLE ECONOMY: 
WINNING THE GAME OF INCHES 
 
1. (U) This cable is sensitive but unclassified. Please 
protect accordingly. 
 
------- 
SUMMARY 
------- 
 
2. (SBU) Armenia's 2004 economic performance should 
lend confidence to investors and development economists 
alike.  Armenia's oft-cited problems maintaining a 
transparent and fair business climate notwithstanding, 
the economy continues to grow, driven largely by 
private investment across several sectors.  All 
indicators suggest a stable macroeconomic environment 
and steady (but slow) progress reducing poverty.  End 
Summary. 
 
--------------------------------------------- 
MACROECONOMIC OVERVIEW: GROWTH REMAINS STRONG 
--------------------------------------------- 
 
3. (SBU) GDP growth remained strong at 9.7 percent 
during the first three quarters of 2004, vice 14.8 
percent for the same period last year.  The 
government's estimate of a year-end growth rate of 8 
percent is likely to be right:  growth in the fourth 
quarter is typically slower than the year average.  By 
sector, growth was strongest in construction, retail 
trade and agriculture.  A decline in the diamond 
polishing industry due to reduced imports of raw 
diamonds from Russia accounts for a fall in industrial 
growth to 2.8 percent from 27 percent last year as well 
as a similar fall in Armenia's export and import 
numbers.  Non-diamond industrial growth was 9 percent, 
in line with overall growth in GDP. 
 
----------------------------- 
PRIVATE CONSTRUCTION THRIVING 
----------------------------- 
 
4. (SBU) As in 2002 and 2003, construction is one of 
the key growth sectors.  The continuing growth in the 
construction industry has proven wrong the popular 
assertion that last year's construction boom depended 
wholly on the Lincy Foundation's humanitarian financing 
of USD 115 million of improvements in 2002 and 2003. 
Construction is up 18 percent on last year's level, 
which includes the Lincy Foundation's contributions, 
and 60 percent of all construction is privately 
financed.  In addition to providing a good source of 
employment to unskilled workers, Yerevan's ongoing 
construction boom (largely housing) bears witness to 
the rising level of local investor confidence. 
 
----------------------------------- 
INFLATION AND EXCHANGE RATES STEADY 
----------------------------------- 
 
5. (SBU) Despite concerns about inflation earlier in 
the year, the government is likely to meet its three 
percent inflation target.  In August 2004 the Central 
Bank allowed the dram to appreciate against foreign 
currencies making many imports cheaper.  Controlled 
annual inflation and the relative stability of 
Armenia's currency create a stable environment for 
business.  The dram's sudden adjustment against the 
dollar this year appears to be sticking:  we do not 
expect volatility in the currency market. 
 
--------------------------------------------- ---- 
CASH POVERTY PERSISTS DESPITE SLIGHT IMPROVEMENTS 
--------------------------------------------- ---- 
 
6. (SBU) Despite several years of high growth, 
commensurate improvements in poverty levels have been 
less evident.  In October the GOAM statistics service 
announced the first significant drop in the poverty 
rate in several years, to 42.9 percent from 49.7 
percent of the population.  Although the official 
poverty line (about USD 24 per month) is probably too 
low to reflect the cost of living, lower-income 
Armenians are "cash poor."  People generally have 
shelter and clothing and even old luxury items like a 
television, but they lack income beyond meager pensions 
or cash remittances from relatives living abroad.  In 
rural areas there are more serious poverty issues 
related to access to water and electricity. 
 
------------------------------------ 
LOWER INTEREST RATES A POSITIVE SIGN 
------------------------------------ 
7. (SBU) No sign is more important to Armenia's 
investors than the steady fall in lending and deposit 
rates in the banking sector.  Government treasury bond 
yields have fallen to under 7 percent, illustrating a 
perception of lower country risk and allowing 
commercial banks to attract deposits more cheaply. 
Although bank lending rates remain prohibitively high 
at 18 percent, the sharp fall in deposit rates from 18 
percent in 2001 to 4.8 percent today suggests that 
banks will be able to lend money more cheaply in the 
future.  Armenia's banking sector is still a woefully 
inadequate source of capital and people depend on 
friends and family to finance investments. 
Nevertheless, government measures designed to 
strengthen the banking sector have done so and interest 
rates are market-determined. 
 
----------------------------------- 
COMMENT: WINNING THE GAME OF INCHES 
----------------------------------- 
 
8. (SBU) While Armenia's critics rightly disparage what 
appears to be worsening corruption and further 
consolidation of wealth into the hands of a few 
oligarchs, statistics continue to suggest that Armenia 
is winning the game of inches.  As Armenia's economy 
continues on its path of strong growth, the overall 
macroeconomic environment remains stable and there are 
noticeable positive effects on poverty.  The government 
has had small success in raising its tax revenues by 18 
percent, which should help it meets its targets to 
reduce poverty among those populations that depend on 
government salaries and pensions.  The constantly 
improving situation explains the public's general 
acquiescence to Armenia's oligopolistic economy:  the 
course of Armenia's development and the distribution of 
its wealth may not be fair, but inch by inch the 
situation is improving for most people. 
EVANS