Armenia - Overview of economy

In 1920, Armenia was incorporated into what was then the Soviet Union. While it was under Soviet control, an effort began in the 1960s to industrialize the nation. From its previous state of minimal industrial development, Armenia became a significant manufacturing center, supplying machine tools, textiles, and various manufactured goods to the other Soviet Republics. In return, Armenia received raw materials and energy from these republics. Since independence in 1991, however, many large agro-industrial complexes were divided into small-scale agricultural units. New investments and new technologies are necessary for the healthy development of the agricultural sector. The government has given a high priority to privatization of the industrial sector, although the speed of privatization in this sector is slower

than that in the agricultural sector. For food, Armenia relies partially on imports, and it possesses only small mineral deposits (mainly gold and bauxite).

The county experienced a severe economic decline in the beginning of the 1990s, due to a devastating 1988 earthquake, the conflict with Azerbaijan over the Nagorno-Karabakh region (see below), and the disintegration of the Soviet system. In 1994, with assistance from the International Monetary Fund (IMF), the Armenian government introduced an economic reform program which resulted in increased economic performance during the 1995-99 period. Inflation was reduced from a staggering 1,885 percent in 1994 to a mere 2.5 percent in 1999. In 1998, about 200 medium and large-scale enterprises and about 600 small enterprises were privatized. Thus far, 74 percent of the country's large and medium enterprises and 64 percent of the small enterprises have been privatized. As a result of economic restructuring and privatization, Armenia's economy has grown since 1994. In 1999, the nation's gross domestic product (GDP) grew by 5 percent. GDP per capita has also increased to US$2,900 in 1999 from only US$459 in 1994.

Armenia had no foreign debt when it gained independence from the Soviet Union in 1991. At that time, it signed an agreement with Russia that relieved Armenia of any obligations related to the former Soviet Union's external debt . In exchange, Armenia could not claim any of the Soviet Union's external assets. However, after independence the nation ran up a significant foreign debt. By 1998, Armenia's total outstanding external debt was US$827.8 million, or 53.9 percent of its GDP. The nation also has a significant trade deficit : in 1999, it imported US$542 million more in goods than it exported.

External factors have both harmed and helped the Armenian economy. The longstanding ethnic conflict with Azerbaijan over possession of the Nagorno-Karabakh region—an Armenian-dominated region that lies wholly within Azerbaijan—has hurt the economy in a variety of ways, creating internal instability and closing the Azerbaijani markets to Armenian goods (Azerbaijan used to be Armenia's largest trade partner). The conflict also led Turkey, which supports Azerbaijan, to impose a trade embargo . However, Armenia has been the recipient of substantial foreign aid. In 2000, the World Bank granted Armenia US$45 million to reduce the government's budget deficit . The Bank has also granted Armenia US$30 million for economic aid. The country on average has received over US$200 million per year since the mid-1990s.