ARMENIA COUNTRY COMMERCIAL GUIDE

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MARCH 1999
CHAPTER 2: ECONOMIC TRENDS AND OUTLOOK
2.1 MAJOR TRENDS AND OUTLOOK
Under the old Soviet central planning system, Armenia had developed a sophisticated industrialsector, that supplied to the USSR and foreign markets machine building equipment, defense andspace electronics and optics, chemicals, textiles, and other manufactured goods in exchange forraw materials and energy resources. Armenia today remains a large food importer.  Its mineraldeposits - copper, coal, molybdenum, and gold - appear so far to be relatively small. 
The economic decline, which started with the 1988 earthquake and the disintegration of theUSSR, was particularly severe in 1991-94 due to the ongoing conflict over the Armenian enclaveof Nagorno-Karabakh in Azerbaijan. Azerbaijan and Turkey shut down pipeline and railroadtraffic to Armenia in response to its support of the Karabakh Armenians. Georgia providedArmenia with its only means to receive deliveries of natural gas.  Most industrial enterprisesremain either shut down or operating at drastically reduced levels.  The conflict overNagorno-Karabakh has forced the government to militarize a number of its operating machinerymanufacturers, thus putting an additional non-productive burden on the weak economy. WithIMF help, the Armenian economy stabilized in 1993-1995. Inflation was brought under controland negative growth bottomed out.  The economy has remained stable since then.
The current Armenian government, since its formation in early 1998, has demonstrated a firmcommitment to moving Armenia from a centralized state with a planned economy to ademocratic society with a free market economic system.  The government is attempting throughtax policies and other means to improve export performance to reduce the large trade deficit. The Armenian electricity grid is connected to the Iranian and Georgian grids.   The country hasbegun to modernize its entire telecommunications system.  Modern switching equipment is beinginstalled in Yerevan. With USAID and World Bank help, considerable resources and training aredevoted to developing modern public and private banking and energy sectors.  Parliament hasbeen implementing an ambitious program of reforms to restructure the energy sector and otherkey areas, liberalize trade, attract foreign investment, establish a western accounting system, andimplement a private property regime.  Armenia has improved land transportation routes to its(currently only two) neighboring trade partners, Georgia and Iran. Political differences stillprevent reopening of the Turkish-Armenian border.  As of mid-1998, Russia, Belgium, and Iranare Armenia's main trading partners.  Armenia continues to run huge foreign trade deficits.  Airtraffic has increased and upgrades of the airport and national airlines are continuing.
Privatization of industries started in 1994, following land privatization in 1991. Progress inprivatization,  advances in private property legislation and banking reform should give furtherimpetus to economic development. Armenia was the first NIS state to register a positive GDPgrowth rate (in 1994).  In 1997, IMF estimates the economy grew 3.3.percent.  The targetestimate for 1998 is 6.0 percent.  This progress has earned Armenia increasing support frominternational institutions.  The IMF, World Bank, EBRD, as well as other financial institutionsand foreign countries are extending considerable grants and loans.  Total loans extended toArmenia in 1993-1998 are expected to exceed $800 million.  These loans are targeted at reducingthe budget deficit, stabilizing the local currency, developing private businesses,  energy,agricultural, food processing, land and air transportation and social sectors, as well as continuingrehabilitation work in the zone damaged by the 1988 earthquake.  At the same time, Armeniaremains heavily dependent on humanitarian aid. The main suppliers have been the United States,EU, and the United Nations.  In U.S.  FY 1998, the United States extended to Armenia $150million in aid; this figure is likely to be roughly the same in FY'99, though the proportiondevoted to humanitarian purposes will be reduced as developmental assistance is increased