The global economic slowdown and conflict in Georgia have severely affected Armenian growth.
Remittance inflows, higher incomes, and robust private investment continued to fuel aggregate demand
in 2008, while construction and services continued to drive growth on the supply side. The sharp
deceleration of the Russian economy, reduced inflows of workers’ remittances and foreign investment,
and a bleak outlook for commodity exports will diminish growth in the short term. To sustain growth, the
authorities will have to diversify the economic base and continue implementing structural reforms.
Armenia is a small, open economy that relies heavily on remittances,
foreign investment, and imports. It is also landlocked by four countries.
The conflict between Georgia and the Russian Federation in August 2008
and the resultant disruption of trade, as well as the global economic
slowdown, therefore had a significant impact on growth, which slumped
to 6.8% (Figure 3.1.1).
On the aggregate demand side, private consumption and investment
continued to buttress growth through most of the third quarter,
underpinned by greater inflows of workers’ remittances, increased
domestic wages, and larger foreign direct investment (FDI). Most private
investment was channeled into construction and mining, and public
investment into developing and rehabilitating public infrastructure.
However, as the domestic economy is heavily dependent on developments
in the Russian Federation, the collapse of the stock market and the
sharp downturn of that economy toward the end of the year stanched
both remittances from Armenian workers there (the source of 75–80%
of remittances) and FDI inflows from Russian investors. Net exports of
goods and services made a sizable negative contribution to GDP growth.
Growth in aggregate supply was led by services and construction,
while industrial production and agriculture lagged (Figure 3.1.2).
Services expanded by 9.0%, driven by growth in communications and