Armenia’s popular new government is undertaking an ambitious economic overhaul. The early reviews are good.
Next month marks the 30th anniversary of Czechoslovakia’s Velvet Revolution, when Czechs and Slovaks overthrew the Communist government, installed Václav Havel as president and started the transition to democracy and capitalism.
Investors are now paying attention to another Velvet Revolution, taking place in Armenia. In December, Prime Minister Nikol Pashinian, who had entered office seven months earlier after leading weeks of demonstrations against the former government, called a snap election to consolidate power. The ruling Republican Party suffered a defeat as severely as Czechoslovakia’s Communists did in 1990, failing to secure the 5% of the vote needed to remain in Parliament, now dominated by Pashinian’s My Step alliance and two smaller pro-reform parties.
The new government, broadly supported by President Armen Sarkissian, is losing no time reshaping both the economy and key institutions, particularly the judiciary, after years of mismanagement and corruption. Unlike most “color revolutions” in former Soviet states, Armenia’s stands a good chance of success, observers say, because conditions had simply become too untenable.
“Pashinian’s revolution is a predominately positive one; because it has swept away an authoritarian, patronage-based system that the country couldn’t afford and is being led by people with a genuine commitment to change,” says Laurence Broers, a Caucasus specialist at Chatham House in London. “The result is that Armenia now has its first properly legitimate government in 25 years.”
Armenia has benefited from Pashinian’s personality and, perhaps crucially, the fact that Russia has taken a pragmatic line; Armenia remains in the Moscow-dominated Eurasian Economic Union even as it seeks to improve relations with the EU and the West.
Reforming Institutions, Reducing Tensions
“We see a strong will to reform institutions, fight against corruption, bolster the rule of law and improve the quality of human capital,” says Marina Stefani, director of sovereigns at Fitch Ratings, which in May affirmed its B+ rating for Armenia.
Others agree. At the end of August, Moody’s upgraded Armenia from B1 to Ba3, saying, “Economic growth drivers have become increasingly diverse, [helping] strengthen the economy’s resilience to shocks.” Moody’s expects GDP growth of 5.5% to 6% in the medium term. The International Monetary Fund, which expects growth to moderate to 4.6% this year from 5.2% in 2018, has approved a $248.2 million standby facility to support Armenia; although the government says it views the money as precautionary and has no plans to draw on it.
Outgoing EU ambassador Piotr witalski praised the new government’s efforts to grow the economy, fight corruption and maintain a balanced foreign policy, telling one foreign news source that he saw “a feeling of freedom in [the Armenian people’s] eyes.”
Pashinian has also been seeking to improve relations with neighboring Azerbaijan—in particular, lowering tensions over the disputed territory of Nagorno-Karabakh, which Armenia has occupied since the late 1980s. Although borders remain sealed and there have been violations of a 1994 ceasefire, the establishment of a hotline between Pashinian and Azerbaijan President Ilham Aliyev is widely seen as a step in the right direction.
“Pashinian’s priorities are making the economy work for the people of Armenia, preparing them for peace after years of tension and installing a party system capable of representing different interest groups and promoting legitimate outcomes,” says Broers.
For now, most of the focus has been on the economy, which stands the greatest chance of bolstering the government’s legitimacy and support. In mid-February, the government launched a five-year plan it calls an “economic revolution,” aiming to significantly reduce unemployment and poverty and achieve GDP growth of some 5% a year, with exports accounting for over 40% of GDP by 2024. The government plan also prioritizes solar energy, which it projects will account for at least 10% of total energy consumption by 2022.
Although the opposition has criticized the five-year plan as overly ambitious and short on detail, the government has already taken steps to make the economy more attractive for investors. Sectors including IT and tourism have been earmarked for development and as targets for foreign direct investment (FDI). Infrastructure is another priority, especially the key transport corridor to Georgia.
A tax reform package passed in June aims to boost compliance, transparency and tax intake in what has traditionally been a low-collection economy. It includes cuts in corporate taxes, going to zero for smaller companies; new indirect taxes; and a new flat-rate income tax of 23%, falling to 20% by 2023.
“The authorities have moved to root out corruption, have initiated a major tax-reform program and have tackled monopolies in what were essentially uncompetitive, closed areas of the economy,” says Dimitar Bogov, the European Bank for Reconstruction and Development’s regional lead economist for Eastern Europe and the Caucasus.
Authorities have also taken on the oligarchs who have for years controlled large parts of the Armenian economy, including imports of such vital commodities as sugar, flour and bananas. The import and sale of such products has been made more competitive, which should lead to greater transparency and efficiency as well as lower prices for consumers.
Despite these steps, observers say it is important to keep Armenia’s progress in perspective. Unlike Georgia, the country’s political transformation hasn’t been matched by a radical economic overhaul. The latest World Bank Doing Business survey places Georgia in sixth place out of 190 economies for ease of doing business. By contrast, Armenia is in 41st place, up from 47th in 2018.
Armenia also needs to do more to attract FDI, currently at 1.6% of GDP and insufficient to cover the country’s current account deficit, which in 2018 was a high 9.4% of GDP. An important reference point will be the outcome of the current controversy over the Amulsar gold mine, which has been held up over environmental concerns. One of the largest FDI projects in Armenia, headed by Anglo-American firm Lydian International, the mine is expected to yield some 225,000 ounces of gold a year, employ 770 people and contribute $488 million in taxes and royalties to the state budget over its 10-year projected lifetime. “Given how much money has already been invested, and also given how much attention this project has attracted, it really matters how this is resolved,” says Bogov, noting that Armenia is a small, open economy, highly vulnerable to external shocks.
For this reason, and to maintain credit growth, bank reform is another priority, even though nonperforming loans are only around 5%, capital levels are strong and the sector is well regulated by the Central Bank of Armenia. “Armenia has 17 banks, of which the largest five account for just 55% of loans,” says Olga Ignatieva, senior director in the banks team at Fitch Ratings. “Compare this with, say, Georgia, where the top five account for 85% of loans. Consolidation is needed if banks are to realize economies of scale and play a bigger role in the economy.”
At least in the medium term, observers say, these factors add up to a relatively positive outlook. GDP grew by 6.8% in the first half of 2019, while exports also rose—contradicting expectations of a slight economic slowdown and suggesting that consumer confidence remains strong. New fiscal rules have led to a reduction in the budget deficit, and the ratio of public debt to GDP is expected to fall from 51% to around 45% by 2021–2022.
But can Yerevan’s Velvet Revolution attain the success of Prague’s 30 years ago? Armenia can’t match the Czech Republic or Slovakia’s proximity to Western markets, and it’s constrained by serious, unresolved geopolitical concerns. On the plus side, a poll conducted in May by the International Republican Institute found that 72% of Armenians express a favorable opinion of the prime minister’s performance, and 60% think the country is moving in the right direction. At a minimum, the government has been given a strong mandate to prove itself and has very little opposition standing in its way.