The Government of the Republic of Armenia

Dear Colleagues,

Many States worldwide are summing up the results of the first quarter of 2010 and the effectiveness of their anti-crisis program. We, too, have such a possibility since a couple of days ago the National Statistics Service published official data on the first quarter. We can state now that strong with a 5.5% GDP growth, our economy has ushered in the stage of recovery. It is very important to have the breakdown of this economic indicator. First of all, it should be noted that we have a 10% growth in industry and a 10% growth in the energy sector, as well as a 3.2% increase in agriculture. In the meantime, construction keeps on falling. On the one hand, this testifies that we deal with economic diversification leading to less dependence on the pace of growth in construction, on the other hand, this means that the sector is still short of private investments. 75% of construction activities were done with private funds in 2008. New facilities are waiting for private investment. I wish to stress this fact as the government is often thought to have invested in this area which is not the case. No cash injections have been made into construction: instead, we have urged and encouraged trade banks to finance such facilities as have at least 50% completion status and high market value of pledged assets. The government has only provided guarantees on this basis to the trade banks which themselves have assessed the existing risks. Guarantees have been extended to the amount of AMD 5bn, while the funds used as mortgage lending are at least 3 times as much as the resources funneled toward unfinished facilities by trade banks. You may remember that AMD 12bn was invested in the project of mortgage fund, and AMD 3bn was made available to young families under the affordable housing program. This is just where the State has projected cash investments while we have not provided but State guarantees in the sphere of construction. It is important that retail trade increased and services grew by about 6% in the first quarter. Exports and imports have gone up 60% and 23% respectively. The rise in exports is mainly due to the recovery in Armenia’s mining industry and improved global economic indicators. The Ministry of Economy is monitoring specific enterprises and if we try to understand in which areas we have growth, we can see that the IT sector has maintained the pace of growth with a 3% increase recorded in the first quarter. Mining industry increased by 21%, the output of building materials rose by about 50% in the first quarter of this year. The bulk of the output was exported leading to a 3-fold increase in exports as compared to the same period of 2009. Chemical industry has bettered, too, growing by about 2.5 times as favored by increased performance in the sphere of pharmaceuticals production. Jewelry and diamond processing have recorded a 40% growth. Machine-tool production grew threefold and the manufacture of instruments rose by about 15%.

At the same time, light, timber and electrical industries continue downward like construction. In the meantime, tourism has grown by about 5%, with a 5% increase in airborne passenger traffic as compared to the first quarter of 2009. Yesterday, the IMF declared that they were going to revise the forecasts for 2010 as the first quarter proved far better than expected, which means that the recession is slowing down throughout the global economy. Similar statements have been made by the prime ministers of Russia and Ukraine. Many of you may have followed the report of Vladimir Putin which contained statements to that effect. Both Russia and Ukraine have recorded 5 % growth in the first quarter of this year. Note that these countries have a strong impact on Armenia’s economy. The stated trends are expected to be maintained by yearend which can favor private investment and exports in Armenia. Based on these indicators, as well as on the level of deflators, the National Statistics Service displays a 10 to 10.2 deflator which is twice as high as the government’s forecast.

The structural change in the economy in the first quarter of 2010 makes us revise the base of taxation and its estimates. I have charged the Minister of Finance to submit new estimates of taxation base within this week since the current high growth rate of GDP is deteriorating the taxes –GDP ratio. We expected the taxes –GDP ratio to go up by 0.4% in 2010. As of this point of time, considering that the GDP growth is 3.5 times higher than projected, it seems to be natural that the taxes-GDP ratio has deteriorated as compared to the same period of 2009. This means we have to revise the base of taxation for the year 2010. This will improve macroeconomic performance as in general. In particular, there were concerns that the foreign debt-GDP index might deteriorate which means that macroeconomic stability will be maintained throughout the year, if the mentioned indicators remain the same. Moreover, I wish to advise you that the bulk of our anti-crisis action was not at all supported by foreign debt. We have given the proceeds of the Russian credit to private enterprises, including through the system of trade banks. This means that part of the foreign debt will be serviced by the private sector. According to finance ministry estimates, this makes about USD 800mn as of this point of time. While this is the State’s liability, no direct settlements will be made from the budget. This means that we have not exceeded the legislative benchmarks and will continue the talks over new foreign debt aimed at boosting economic growth and subject to repayment at the expense of economic entities’ own profit just as yesterday’s RA President-attended opening of the new power unit of the Yerevan TPP.

We have contracted USD 247mn-worth of foreign debt under the mentioned TPP project. This amount will be serviced by the TPP in full due to the fact that the debt was allowed for in the cost-price estimates. Therefore, the debt burden will be incurred by the entity itself.

Also, this means that we must abide by a more proactive growth-targeted policy line diversifying the economy in order to minimize the impact of external shocks on the economy.

In this respect, quite positive trends were recorded over the past two years, including the betterment of Armenia’s business environment. Notwithstanding some shortfalls and delays in schedule, we were able to improve the business environment in the Republic of Armenia, as a whole, which is the key to economic growth. Now, we must focus on microeconomic management by implementing job-targeting projects.

The social-economic estimates of the first quarter and the report on public perceptions are being prepared for publication. Employment is the problem number one of concern to our citizens. The jobs problem is still high on the government’s agendas in spite of the stated 5.5% growth of the first quarter. Our next steps will be aimed at creating new jobs so that our citizens can benefit from the outcome of economic growth.