VZCZCXRO6384
RR RUEHLN RUEHVK RUEHYG
DE RUEHYE #0229/01 0770243
ZNR UUUUU ZZH
R 170243Z MAR 08
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC 7217
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC 0535
RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1521
RUEHIT/AMCONSUL ISTANBUL 0672
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 03 YEREVAN 000229 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID AM
SUBJECT: ARMENIA - MACROECONOMIC OVERVIEW FOR 2007 
 
 
YEREVAN 00000229  001.2 OF 003 
 
 
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SUMMARY 
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¶1. Armenia's economy continued its double-digit growth trend of the 
past five years, again driven primarily by the construction and 
service sectors. The gap between import and export of goods and 
services continued to increase, and year-end inflation was 6.6 
percent.  The Armenian Dram appreciated a further 16.6 percent 
against the US dollar in 2007.  Foreign Direct Investment almost 
doubled year-on-year, most of the investment being made in the 
telecommunications sector.  Following higher-than-expected revenues, 
the state budget achieved a small surplus of 0.1 percent of GDP. 
End Summary. 
 
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STRONG GROWTH DRIVEN BY CONSTRUCTION AND SERVICES 
--------------------------------------------- ---- 
 
¶2. GDP growth remained high in 2007, at 13.7 percent, compared to 
the GOAM's projection of nine percent.  GDP in 2007 was USD 9.2 
billion at current prices, while GDP per capita was equal to USD 
2,844. 
 
¶3. As in recent years, the primary driver of economic growth has 
been construction, which accounted for approximately one-third (4.5 
percentage points) of the overall GDP growth rate, followed by the 
services sector, with a four percentage point contribution. 
Agriculture and industry (energy sector included) made modest 
contributions to GDP growth, with 1.7 and 0.6 percentage points 
respectively. 
 
¶4.  The construction sector expanded by 18.4 percent in 2007, and 
accounted for 25.6 percent of GDP.  However, this growth is 
considerably lower than the 38.9 percent growth registered in 2006. 
The bulk of construction growth occurred in the transport and 
communication sectors, as well as in road construction projects. 
Significant growth of capital construction was also recorded in the 
energy sector, particularly due to implementation of investment 
projects in small hydropower plants, and other energy sector 
facilities, including the construction of the second portion of the 
Iran-Armenia gas pipeline.  Private funds constituted 62 percent of 
spending in the construction sector. The volume of housing 
construction decreased considerably in 2007, due to the completion 
of some major residential and commercial construction projects in 
downtown Yerevan. 
 
¶5.  The service sector posted a 12.4 percent year-on-year increase, 
accounting for 32.5 percent of GDP.  High growth rates in transport 
and communication services persisted in 2007, with 20 percent and 
23.8 percent growth respectively compared with 2006.  Financial 
services posted 24.5 percent growth. 
 
¶6.  The industrial sector contributed 0.6 percentage points to 2007 
GDP growth. Industrial output (energy sector included), which 
comprised 15.7 percent of overall GDP (compared to 17.9 percent in 
2006) increased by 3.2 percent in 2007, against a 0.3% decline in 
¶2006.  Manufacturing output increased by 1.3 percent, with the two 
largest sub-sectors -- food processing and metallurgy -- growing 7 
percent and 13.8 percent respectively. However, contractions in the 
textile, tobacco, and diamond sub-sectors dragged down the 
manufacturing sector's growth as a whole.  The jewelry sector 
continued to decline in 2007, falling 47.3 percent from 2006. 
 
 
¶7.  The agricultural sector recovered in 2007, with output growth of 
9.6 percent, compared with 0.4 percent growth in 2006.  Agriculture 
contributed 1.7 percentage points to the overall growth of the 
economy, accounting for 17.5 percent of GDP.  Considerable growth in 
agriculture was mainly due to the 12.3 percent growth in 
crop-growing output. 
 
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PRICES INCREASE 
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¶8. While the inflation rate averaged 4.4 percent for 2007, a 10.9 
percent increase in food prices toward the end of the year raised 
the year-end rate to 6.6 percent. Also contributing to this rate was 
a 25.7 percent increase in household incomes due to large external 
remittances and an increase in average monthly wages.  Inflation 
exceeded the original 5.5 percent annual target set by the Central 
Bank of Armenia (CBA) by 1.1 percentage points. To dampen 
inflationary pressures, the CBA raised the repo rate (the rate at 
which it repurchases government securities from commercial banks) 
several times during the year, reaching 5.75 percent in December. 
However, due to an underdeveloped domestic money market and a low 
 
YEREVAN 00000229  002.2 OF 003 
 
 
level of banking intermediation, the impact of this rate change was 
limited. 
 
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DRAM CONTINUES TO APPRECIATE 
---------------------------- 
 
¶9.  The Armenian Dram (AMD) continued to appreciate in 2007 and was 
valued at 304.1 AMD to the dollar in December 2007, up by 16.6 
percent compared to December 2006.  While the exchange rate was 
relatively stable in the first half of 2007, the appreciation trend 
picked up sharply in the second half.  The main causes of the Dram's 
appreciation were large inflows of foreign remittances and the 
global weakening of the U.S. dollar.  According to the Central Bank 
of Armenia (CBA), individual cash inflows through commercial banks 
were equal to USD 1.32 billion in 2007, up by 37.3 percent compared 
to 2006.  The amount of actual remittances is considerably higher, 
however, as significant amounts flow into the country through 
non-bank transfers. 
 
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EMPLOYMENT AND WAGES INCREASE 
------------------------------ 
 
¶10.  The official unemployment rate was 7.1 percent in 2007, down 
from 7.4 percent in 2006, due primarily to expansion of services and 
construction activities.  However, the real unemployment rate, 
according to household surveys conducted by the National Statistical 
Survey in 2006, remains very high at around 27 percent. According to 
official figures, 30.2 percent of unemployed were between ages 
35-45, and 24.8 percent between ages 46-57. Unemployment among women 
is much higher than among men.  Average monthly nominal wages were 
equal to approximately USD 220 in January to November 2007, a 20.2 
percent increase compared to the same period in 2006.  The highest 
wages were registered in the financial services sector (USD 645), 
followed by the mining sector (USD 460) and the energy sector (USD 
320). 
 
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HIGHER REVENUES RESULT IN SMALL BUDGET SURPLUS 
--------------------------------------------- - 
 
¶11.  According to preliminary data from the Ministry of Finance and 
Economy, total revenues and official transfers under the State 
Budget were equal to USD 1.67 billion, up by 29.7 percent compared 
to 2006 (as calculated in AMD).  Expenses totaled USD 1.65 billion, 
an increase of 24.4 percent compared to 2006.  The budget posted a 
small surplus of USD 12.3 million.  Total tax revenues grew by 34.5 
percent, due principally to a large increase in VAT proceeds (up 
49.5 percent).  Tax revenues accounted for 84.8 percent of total 
budget revenues, state duties 3.8 percent, and non-tax and capital 
revenues 10.2 percent. Tax/GDP ratio (without state duties) was 
equal to 15.4 percent, compared to 13.5 percent in 2006. 
 
¶12.  Expenditures on science and education increased by 23.8 
percent, equal to 2.8 percent of GDP.  Health expenditures were up 
by 25 percent, or 1.4 percent of GDP. 
 
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FOREIGN TRADE DEFICIT EXPANDS 
------------------------------ 
 
¶13. During 2007 total trade turnover grew by 39.7 percent, reaching 
USD 4.44 billion, with exports equal to USD 1.16 billion and imports 
equal to USD 3.28 billion.  Imports showed a robust 49.7 percent 
growth in 2007, largely owing to increased imports of food, 
minerals, chemicals, base metals, as well as machinery and 
equipment.  Exports grew by 17.5 percent in 2007, compared to a 
modest 3.1 percent growth in 2006.  Leading export product groups 
included food products, minerals, base metals and precious and 
semi-precious stones and metals, as well as products made from them. 
 The trade deficit was equal to USD 2.12 billion.  Armenia's main 
export partners were Russia (17.4 percent of total exports), Germany 
(14.7 percent), Netherlands (13.5 percent), Belgium (9.1 percent), 
Georgia (7.5 percent).  The leading import partners were Russia 
(15.3 percent), Ukraine (7.7 percent), Kazakhstan (7.3 percent), 
Germany (6.8 percent) and China (5.9 percent).  Armenia's trade with 
Russia increased by 65 percent, with the volume of bilateral trade 
reaching USD 704 million.  Overall, the trade with CIS countries 
increased by 58.7 percent, totaling USD 1.44 billion.  Trade with 
European Union countries increased 44.9 percent, totaling USD 1.7 
billion.  The U.S. share was equal to 4.4 percent of overall trade 
turnover. 
 
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FOREIGN DIRECT INVESTMENT DOUBLES 
---------------------------------- 
 
YEREVAN 00000229  003.2 OF 003 
 
 
 
¶14.  Foreign investment increased by 58 percent in January-September 
2007, compared to the same period in 2006, totaling USD 469.9 
million.  Foreign Direct Investment (FDI) more than doubled in this 
period to USD 311.6 million.  The leading foreign investor was 
Russia (USD 175.9 million), followed by Lebanon (USD 134 million). 
As in the previous year, FDI inflows were primarily in 
telecommunications (40.9 percent of the total), followed by the 
energy (17.6 percent) and mining sectors (8.3 percent).  Investment 
in the telecommunications sector came from Russia and Lebanon, 
through two telecom operators in Armenia, Vivacell and Armentel, 
which are now owned by Russian companies MTS and Vimpelcom, 
respectively.  Investment in the energy sector also came primarily 
from Russia, through ArmRosgazprom, which has a monopoly on gas 
supply and distribution in the Armenian market. The main investor in 
the mining sector is Germany, through Cronimet company.  FDI from 
the U.S. was still low at 15.9 million (a 10 percent decrease 
compared to the same period in 2006) and was mostly in hotel 
services, research and development, and other service sectors. 
 
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COMMENT 
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¶15. Although construction remains the main driver of economic 
growth, trade, communications and transport are also now making 
considerable contributions as well. With the expansion of the mining 
and metallurgy sectors, the industrial sector should also post 
higher growth in 2008.  Despite these positive trends, however, the 
potential of continued appreciation of the Armenian Dram could 
create a serious threat to the competitiveness of Armenian products 
in international markets. 
 
PENNINGTON