Aid for Trade Needs Assessment Armenia: Trade and Human Development Vrej Jijyan, UNDP Armenia United Nations Development Programme

Background Info - Armenia Armenia is a landlocked, low middle income, country with a GDP of 9,4 bln USD and GDP per capita of 2,880 USD the annual GDP growth was, on average,12%. However, as a result of the crisis, in 2009, the GDP declined by 14% and in 2010 registered a modest growth of 2.1%. Main branches of economy are services (42%), industry (22%), agriculture (17%) and construction (14%). The country has a liberal trade regime with a simple two-band import tariff (at 0% and 10%) without import/export quotas. Armenia is a member of WTO and has FTAs with most of CIS countries and GSP+ arrangement with EU.

Main Findings (1) Though Armenia’s trade turnover in 2009 exceeded the same indicator of 1999 by 4 times (4 bln USD), Armenia’s trade openness and the share of export/GDP is rather modest (8%). Export consists 18% of the overall trade turnover and it is characterized by lacking diversification both in terms of product range (base metals, precious stones and foodstuff) and destination countries (EU 44.5%, CIS 20% and USA 10%, Georgia 7,6%), making it highly vulnerable to economic changes in partner countries. Imports are fuelled by the influx of external savings/remittances received (18% of GDP), which is leading to a situation similar to the Dutch Disease phenomenon, resulting in increasing demand for non-tradable goods and decreasing the competitiveness of tradable goods.

Main Findings (2) Despite the decrease in trade turnover with CIS countries, the products exported to these countries, as well as to Georgia continue to have significant impact on human development through income and employment creation. Comparatively products exported to EU and USA did not lead to significant increase in employment, however they affected human development through government revenue and spending, as well as CSR activities. Though Armenia has relatively open economy that enjoys certain preferential trade agreements (EU and most of CIS), however trade, in particular export, is not considered as an important source for economic and human development and the untapped potential in this regard is significant.

Main obstacles to trade (1) The main constraint is the geo-political position of Armenia, which increases the transportation/transaction cost linking the country to the outside World. Lack of sectoral diversification and the monopolistic structure of the main sectors of economy. Armenian history of double ‐ digit growth mostly took place due to several non ‐ tradable sectors and remittances from abroad. The economy does not operate to its full capacity and, as a result, its real production potential is not realized. Armenia’s economic scale/output are modest, especially in agriculture and certain processing industries, which is limiting the country’s participation in international commercial transactions.

Main obstacles to trade (2) The role of SMEs is being diminished, specially in fields like agriculture and light industry, by an unfavorable business environment and the lack of relevant institutions that can provide relevant information/knowledge to promote their exports to foreign markets. The absence of adequate institutions/infrastructures that can support and facilitate exports, such as EXIM banks, information/marketing centers and modern testing/certification facilities. Also, the lack of mechanisms and policies that promote the development and transfer of modern technologies/equipments, which can result in the improvement of the competitiveness of Armenian exports aboard.

Main Recommendations (1) Economic policy is mostly focused on macroeconomics and structural reforms. Those are extremely necessary; however, microeconomic regulation should also gain certain importance. Promote the diversification of exports/imports markets and products as well as the expansion of trade arrangements. Identify and target a few sectors that will form a base for industrial development among labour intensive and knowledge intensive sectors. Improve the business environment and increase the role of SMEs in the economy, through simplifying tax and customs regulations; developing the financial system; creating conditions that facilitate the establishment of start-ups; and promote the establishment of SMEs’ associations.

Main Recommendations (2) Establish information/marketing centers that will be qualified to distribute up-to-date information to exporters. This will facilitate new information/knowledge exchanges and will ease the entrance into foreign markets. Capacity-building for testing laboratories to enable them to adequately test the quality of exported products. This can facilitate the international accreditation and mutual recognition of Armenia’s laboratories and standardization bodies. Encourage the use and the transfer of new technologies and equipments through organizing of regular forums; financing researches on new technologies; VAT and other tax exemptions in case of importing new technologies, long ‐ term crediting/leasing for new equipments; and establishment of venture fund, etc.

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