The rise in prices is breaking new records in Armenia. The worst thing for the population is that, first of all, agricultural products are becoming more expensive. The general inflation rate in August of 2021, compared to the corresponding monthes of 2020 was 8.8%, and food prices increased by 15.1%. During the year, prices for bread increased by 8.6%, for meat - by 9.7%, for butter - by 15.9%, for sugar - by 39.4%, for vegetables - by 53%. At the same time, the growth in average wages was only 5.4%
Armenian economists are frantically looking for the reasons for such high inflation. Of course, the pandemic has led to a slight increase in the prices of imported goods. However, in Armenia, the cost of the consumer basket is increasing due to the rise in prices of not only imported goods (butter, sugar, etc.), but also local production.
The common reason for all the political and economic changes in Armenia undoubtedly lies in the defeat in the Karabakh War II. The country, apparently, will not recover soon from the crushing blow inflicted on the economy by the defeat. As a result of the return by Azerbaijan of the previously cultivated occupied lands, agriculture suffered serious damage. According to their own experts, because of this, Armenia "loses" $ 100-120 million annually.
Potatoes, which occupy an important place in the food ration of low-income families, rose 67% in September. At the same time, the cultivated area for potatoes decreased by only 1.8%. This means that production is becoming more and more "natural", it means, peasants consume most of their produce themselves and sell less.
War, as you know, requires huge expenses. Not every country (it is even worth talking about Armenia) is able to finance such high military expenditures. We have to go for additional money issue, and this, in turn, leads to an excess of money supply in circulation. This is the path that Armenia had to follow. According to the International Peace Research Institute, Armenia's military spending in 2020 amounted to 4.5% of GDP. And this despite the fact that the economy has significantly contracted as a result of the pandemic (GDP decreased from 42.1 billion Int. Dollars in 2020 to 39.4 billion Int. Dollars in 2019). And in 2021, military spending not only did not decrease, but, on the contrary, has increased.
High inflation and the lack of a favorable investment climate are dragging Armenia into a deeper economic crisis, which will be very difficult to overcome. Real production will decline as the production of new goods requires more and more money. Unemployment will rise and there is a risk that the national currency will depreciate. Given the high inflation rate, there is a risk of a decrease in contracts in the national currency. The behavior of households will also change - people will try to convert their deposits from the national currency into a more reliable currency.
Over the past few months, the Central Bank of Armenia has repeatedly raised the interest rate in order to artificially reduce the volume of money supply in circulation, to stop the rise in prices for goods. However, all the efforts made to date have been in vain. Prices continue to rise, people are unhappy, the future is uncertain.
Leili Allakhverdiyeva, Ph.D. in Economics, Associate Professor,
Scientific Secretary of the Institute of Economics of ANAS
