Prices in Armenia have increased for the first time following a prolonged period of disinflation, amid the strengthening of the national currency since the beginning of 2024. This is highlighted in the macroeconomic forecast of the Eurasian Development Bank (EDB).
"Prices rose by 0.3% in May after a 0.7% decrease the previous month. The reversal in price dynamics is attributed to the slowing deflation in the food segment.
In May, food prices fell by 2.0% year-on-year, compared to a 4.5% year-on-year decline the previous month. Key factors influencing consumer price dynamics included the reduced cost of imported food due to lower international market prices, the impact of tight monetary conditions, and the strengthening of the dram. Despite stable inflation in non-tradable goods and services, the rate of price growth slightly slowed to 2.4% year-on-year in March, indicating a cooling of inflationary expectations," the EDB forecast states.
It is noted that the Armenian dram has strengthened since the beginning of the year. "Compared to the end of 2023, the dram appreciated against the dollar by 4.3%, against the euro by 6.2%, and against the Russian ruble by 4.4% as of the end of May. This was primarily driven by high growth rates in the export of precious metals. However, the appreciation of the national currency is restraining external demand for the export of most goods and services. The strengthening of the dram from February to May this year has also limited the growth of consumer prices," the EDB forecast reports.
The report highlights the stimulative nature of fiscal policy in the medium term. According to the Eurasian Development Bank (EDB), fiscal policy is expected to have a stimulating effect on demand in 2024, considering the government's plans to expand the budget deficit to 4.6% of GDP from 2.0% in 2023. This is associated with an increase in expenditures by 1.1 percentage points to 28.7% of GDP.
"The government plans to raise the level of capital expenditures by 0.6 percentage points to 6.6% of GDP in 2024 and maintain this level until 2026. The implementation of this plan will contribute to increasing productivity and the potential growth of Armenia's economy in the medium term. According to the 'Medium-Term Expenditure Framework of the Government of RA for 2024–2026,' it is envisaged that the level of expenditures will stabilize at around 28% of GDP, while tax revenues will grow by 0.6 percentage points per year," the report states.
The Central Bank of Armenia, as noted in the report, reduced the refinancing rate for the ninth consecutive time on June 11, by 0.25 percentage points to 8%. "The decision was made amid weak inflation, which formed against the backdrop of declining international prices for goods and raw materials, the strengthening of the dram, and a cooling labor market. Since the beginning of the easing cycle in the second half of 2023, the refinancing rate has cumulatively decreased by 2.75 percentage points," the EDB analytical material states.
