US embassy cable - 05YEREVAN1705

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 
------------------------------------- 
 
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 
------------------------ 
 
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 
------------------------- 
 
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 
--------------------------------------------- --------- 
 
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