Robust economic growth with upward potential

Economic situation remains robust

The Armenian economy ended 2024 with real GDP growth of 5.9% yoy, still benefitting from the various special effects related to migration from Russia. Although growth continues to slow down, the overall economic situation remains robust. This is also supported by expansionary fiscal policy, which will remain an important factor in the current year. Forecasts assume growth of 4.9% in 2025 and 4.5% in 2026, with the possible conclusion of a lasting peace with Azerbaijan potentially providing growth momentum. However, a deterioration in economic relations with Russia remains a risk to the forecasts.

At the sectoral level, growth remains high in those sectors of the economy that have benefited from positive external shocks. However, momentum is slowing here too. On a positive note, however, the decline is gradual: many experts had feared a drastic outflow of funds from the financial sector or a sharp exodus once the situation in Russia has calmed down.

Low inflation and new inflation target

At 1.5% yoy, inflation remained low in 2024. One key reason for this was the strong Armenian dram, which remained at a significantly higher level than before the start of the war in Ukraine. Inflation is currently rising slightly again. It stood at 3.2% in May 2025 and is forecast to reach 3.9% by the end of the year. In addition to a slight depreciation of the dram in the wake of the subsiding special effects, expansionary monetary policy is also playing an important role here. A similar inflation rate of 4.0% is expected for the end of 2026.

After several adjustments last year, the key interest rate was lowered only once in February 2025, to 6.75%. This marks the gradual end of the expansionary monetary policy cycle. Furthermore, the Central Bank of Armenia has lowered its inflation target in 2025 to 3.0% with a variation band of +/- 1 percentage point.

Dram remains stable, reserves increase slightly

The Armenian dram has remained strong against the US dollar for several years, well above its pre-war level. Apart from slight fluctuations, the exchange rate has also remained stable so far in 2025. The international reserves, which recently declined slightly, have stabilised again following the issuance of a Eurobond worth USD 750 m in March 2025 and stood at USD 3.9 bn in April. This also increases the import coverage ratio to 3.6 months, providing an additional buffer against possible geopolitical shocks.

Fiscal policy remains expansionary

In 2024, the budget deficit increased to 3.7% of GDP, driven by additional expenditures for refugees from Nagorno-Karabakh, as well as higher investment and defence expenditures. However, there is also a technical reason for this: instead of the previous loans “below the line” to Nagorno-Karabakh, refugees are now being supported directly from the budget. This ongoing spending will lead to a further increase in the deficit to 5.5% in 2025, before falling slightly to 4.5% in 2026. Fiscal policy will therefore remain expansionary, with higher government expenditures continuing to support the country’s economic growth.

In order to finance the planned increase in spending, government debt rose to 50.3% of GDP in 2024. A further increase to 53.7% and 55.0% of GDP is expected in 2025/2026. This means that government debt will remain above the fiscal rule threshold of 50% of GDP for several years.

Normalisation of the external economic situation

The external economic situation has been marked by numerous shocks in recent years. These are now subsiding, which is particularly evident when looking at exports and imports. In the first three months of 2025, these fell by 62% and 48% yoy, respectively.

Foreign trade will continue to normalise over the course of the year. The current account deficit, which stood at 4.5% of GDP in 2024, will remain at a similar level in 2025/2026.

Outlook

Economic growth in Armenia is returning to its long-term potential. On a positive note, the numerous shocks have been well absorbed and there has been no drastic slowdown in growth. Although the Armenian economy has proven robust, new growth momentum is still needed. Among other things, this could come from a long-term peace agreement with Azerbaijan. New progress on this issue was announced in March 2025, but the agreement has yet to be signed. In addition to the advantages of a possible reopening of the border with Turkey, lasting peace in the region could bring positive momentum especially in the areas of fiscal policy, investment and energy.

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This newsletter is based on the 13th issue of the Economic Monitor Armenia