Armenian Economy in Crisis Needs Rapid Change, New Premier Warns

November 23, 2016

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The Armenian Mirror-Spectator

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url-2 By Sara Khojoyan and Anthony Halpin

YEREVAN (Bloomberg) — Armenia’s new prime minister has what he believes is a vote-winning message before parliamentary elections in May: The economy’s in terrible shape and he’s the man to fix it.

The impoverished ex-Soviet republic needs “profound change,” Karen Karapetyan, who took office in September, said in an interview in the capital, Yerevan, on Saturday, November 19. “We’re proposing the most rapid change that’s possible,” including measures to combat corruption by streamlining bureaucracy and a government fund to support enterprise, he said.

“Businesses shouldn’t be obstructed” by corrupt officials seeking payments for administrative decisions or by dominant rivals using political ties to restrict competition, said Karapetyan, a former mayor of Yerevan who took office after returning from Russia, where he worked in Moscow since 2012 for a subsidiary of Gazprom PJSC, the world’s largest natural-gas exporter. “We will create an even, competitive, level playing field.”

Armenian President Serzh Sargsyan called the new premier a “symbol of change” when he named him to replace Hovik Abrahamyan. The economy’s in an “extremely bad” state and needs “structural” overhaul, Karapetyan told lawmakers next day. Sargsyan made the change after thousands joined street protests in July in support of armed men who took hostages at a Yerevan police station and demanded the president’s resignation.

The Caucasus nation of three million people is reeling from the impact of the recession in Russia, its main export market, as well as a slump in remittances from Armenians working in that country.

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Fiscal Rule

Karapetyan, 53, is seeking to expand the economy even as he must slash state spending next year to halve a budget deficit now running at 5.9 percent. A self-imposed fiscal rule obliges the government to limit the deficit to no more than 3 percent when foreign debt exceeds 50 percent of gross domestic product.

Armenia’s foreign debt is $5.8 billion with GDP at $10 billion, while growth of 3.2 percent in 2017 won’t be enough to raise living standards significantly, Karapetyan said. “We also have external debt growing faster than the GDP growth and growing faster than revenues,” he said.

While Armenians are desperate for change amid rising poverty, Karapetyan won’t be able to break the economic grip of a few wealthy oligarchs, particularly on imported goods, with support from powerful politicians, according to Hayk Gevorgyan, economic commentator at the Armenia Times newspaper.

“Monopolies and corruption are Armenia’s biggest problems because of the connections between business and politicians,” Gevorgyan said in an interview. “He can’t resolve this.”

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Changes in the leadership of the customs service and in the tax code are improving transparency, and he won’t allow dominant players to use “administrative support that isn’t available to others” to suppress competition, Karapetyan said. “No one is immune and no one is privileged,” he said.

While he’s focused on immediate improvements, Karapetyan said he’ll also form an advisory group including foreign specialists to “brainstorm how we can develop the country” for the long term, including with tax changes and support for businesses in areas such as health care, education and agriculture.

Armenia rejected a trade pact with the European Union to enter the Russian-led Eurasian Economic Union of former Soviet states in January last year. While critics say there’s been no economic benefit so far, nobody knows what would have happened if Armenia hadn’t joined and “the negative impact could have been much greater,” while membership doesn’t stop Armenia developing EU trade, Karapetyan said.

Armenia’s also seeking to bolster trade with Iran following the lifting of international sanctions over the Islamic Republic’s nuclear program. Karapetyan said he’s ordered plans developed by December 25 to implement a free economic zone near Armenia’s southern border to boost ties in areas including agriculture and food production.

Armenia’s in a “challenging” position after absorbing “tremendous shocks” when Russia’s ruble devalued following the fall in oil prices, Teresa Daban Sanchez, the International Monetary Fund’s resident representative in Yerevan, said in an interview. While the economy’s been more resilient than the IMF forecast, “the external environment is not going to improve,” domestic demand is subdued and price deflation has emerged, she said.

“There’s an issue of credibility” for the government in implementing its debt rule for the first time and “drastic” budget cuts are being made, mainly by rescheduling capital expenditure, she said.

“We clearly understand that reduced public spending may have a downside effect,” while businesses are delaying investment until after the elections, Karapetyan said. Amid speculation he’s a short-term appointment to improve the ruling Republican party’s prospects, it’s “inappropriate” to say if he’ll be prime minister after the vote because nobody can predict the outcome, he said.

Even so, he’s seeking to develop clear long-term plans over the next six months so that “from 2018 we’ll have sustainable year-on-year growth,” Karapetyan said.

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