A sharp rise in inflation must be contained
Overview:
While the Armenian economy posted positive GDP growth last year it was rather more modest than expected following a very poor harvest. This also contributed to rising inflation which has now risen back into double figures. The central bank is responding by raising interest rates and the government is tightening fiscal policy. Stronger GDP growth is expected this year - assuming a bounce back in agricultural output - with private sector credit growth now recovering. The current account deficit has fallen modestly (though remains large) and FX reserve coverage is healthy. However, the export base remains weak and there is a risk that stronger domestic demand will force the external deficits higher once more. It is important, then, that the exchange rate should not appreciate too far, too fast and exacerbate the situation.