The outlook for the Armenian economy remains challenging as investment, remittances and imports continue to fall, eroding export revenues and purchasing power, and prices of copper - one of the country's key exports - stay subdued, the International Monetary Fund (IMF) said in a report on July 21. While GDP is projected to grow moderately by 2.2% in 2016 and 2.5% in 2017 on the back of a supply-side boost from agriculture and mining, the short-term outlook for growth remains uncertain as the recession in Armenia's leading commercial partner continues, and commodity prices remain depressed.

The small Armenian economy is highly dependent on agriculture and mining, sectors that have received a boost thanks to the commissioning of a new copper mine in December 2014 and higher-than-expected agricultural yields, as well as higher trade resulted from changing trade relations in the region - such as Russia's temporary ban on imports of Turkish products earlier this year. While the sectors drove growth in 2015 to a respectable 3.1%, conditions in the country have worsened as bank lending dried up and remittances from Russia, on which some Armenians depend for livelihood, continued their steep decline started in 2014. Consumer demand fell by 5.5% in 2015, which, accompanied by the low value of imports, brought the current account deficit down to 2.5% of GDP.

On the bright side, monetary conditions have stabilised in the country, where the central bank has reduced its net foreign exchange (FX) sales from $167mn in Q1/2015 to $95mn this year, in part supported by gas provider Gazprom Armenia's phasing of FX purchases to pay for gas imports from Russia. Inflation has remained below the government's 4% target, prompting the regulator to cut rates by 2.5 percentage points since August 2015, the IMF said after concluding the third review of the country's extended arrangement with the institution.

The IMF expects inflation to remain low at 1% and for fiscal consolidation to resume in 2016, with the budget deficit declining to 4.1% of GDP. Public debt is approaching 50%, prompting the need for fiscal discipline to reduce the primary deficit below 0.8% of GDP, the debt-stabilising level, to increase quality and efficiency of budget spending, particularly social spending, and the urgent passing of a new tax code. The latter will "close loopholes" by introducing a 5% tax on dividends for residents, subjecting agricultural businesses with revenues above AMD40mn (€76,000) to value added tax, exacting VAT on fuel, and increasing the excise tax on alcohol and tobacco.  

The banking sector, however, has seen its performance plummet despite adequate capitalisation thanks to new regulations that raise minimum capital requirements. Loan performance, in particular, has continued to deteriorate, with sector-wide non performing loans (NPLs) reaching 10% of GDP this year, up from 6% in 2014. Meanwhile, profits turned slightly positive (0.3%) in the first quarter of 2016, up from low negative rates (-0.3%) throughout 2015.

In addition to external economic risks, geopolitical ones pose a threat to near-term growth, particularly as they relate to the conflict with neighbouring Azerbaijan over the breakaway region of Nagorno-Karabakh, the IMF concludes.