Armenia: External imbalances feed currency instability
Overview:
The economy is growing at a reasonable pace although it is yet to make up the output lost during the crisis. While exports are growing strongly this is from an extremely small base and is likely to prove temporary given the signs of slowdown in the global economy. The current account has been reduced but yet remains very large despite large worker remittance inflows. FDI inflows are reasonable but the exchange rate ultimately remains volatile because of the need to cover the rest of the deficit with other capital inflows. The government is tightening fiscal policy in line with its IMF program. This helps the public debt situation and also helps reduce inflation and the external deficits other things equal. However, a stronger export base is needed to reduce FX volatility and make it easier for the central bank to hit its inflation targets.