Armenia’s recent remarkable economic growth, driven by an influx of businesses, has also been supported by microfinance institutions.
Since its independence from the Soviet Union in 1991, Armenia has undergone significant economic transformations. The transition to a market economy has been fraught with challenges, particularly regarding the privatization of state-owned enterprises and the need to control inflation. While agriculture, mining and manufacturing have long been the drivers of the economy, Armenia has recently seen growth in the services, information technology and non-banking financial services sectors. .
In 2022, Armenia experienced substantial economic growth, becoming the fastest growing country in Eastern Europe and Central Asia, with a growth rate of 12.6%. This rapid development has been fueled by the recent influx of migrants, businesses and additional investment, following Russia’s invasion of Ukraine. Armenia has received around 150,000 immigrants from India, with a similar number also from Russia. This dynamic continued in the first half of 2023, with double-digit GDP growth of 10.5% in relative terms compared to the previous year. This growth mainly benefited the services sector, trade and transport.
Much of Armenia’s economic success during this period can be attributed to increased consumer spending and higher levels of investment. At the same time, inflation has seen a significant decline, mainly due to lower food and transport costs, thereby reducing pressure on households and businesses (from 8.6% in 2022 to 3.1% in 2023) . Armenia’s public finances have also seen a remarkable recovery, with tax revenues (6% higher than forecast) exceeding expectations, leading to a budget surplus. This new financial stability allowed the country to significantly reduce its national debt, laying a solid foundation for future growth and prosperity.
However, several economic challenges persist:
- Limited access to traditional financing: In rural areas and among low-income populations, access to conventional banking services remains limited.
- High levels of poverty: Despite the progress made, a significant part of the population still lives below the poverty line, thus accentuating income inequalities.
- Dependence on remittances: Much of the economy relies on money sent home by Armenians living abroad, making the country vulnerable to economic changes in other countries.
Despite these challenges, microfinance institutions (MFIs) have become essential in providing financial services to small and medium-sized enterprises (SMEs) and individuals who typically do not have access to traditional banks.
Local businesses – a success story
The MFI sector is growing rapidly. Institutions like Mikro Kapital Armenia play a key role in expanding financial access. By focusing on responsible lending, these MFIs ensure that borrowers not only receive funds, but also develop the skills needed to maintain and grow their businesses.
A notable example of the significant impact that MFIs can have in Armenia is that of Edgar Petrosyan’s bakery. This small bakery, which has been operating for four years with the financial support of Mikro Kapital, is a striking example. Thanks to various loans totaling 115,000 euros, Edgar was able to expand his bakery, invest in new equipment and renovate his premises, thus considerably boosting his activity. Stories like this show how microfinance can empower local entrepreneurs to grow their businesses and create jobs.
Challenges for economic resilience
Despite these positive developments, Armenia’s economic outlook faces significant risks. The Nagorno-Karabakh crisis, which erupted in September 2023, has led to the displacement of tens of thousands of ethnic Armenians, creating major humanitarian challenges. Border tensions, potential declines in remittances and slowing economies of Armenia’s trading partners add to this uncertainty.
Additionally, Armenia faces labor shortages due to low birth rates and emigration, a dependence on Russia for economic and security support, as well as ‘vulnerability to climate change. The country also struggles to attract foreign investment and faces connectivity issues and limited diversity in its export markets.
As Armenia continues to navigate a complex geopolitical and economic environment, MFIs are essential to fostering long-term economic development. They play a crucial role in expanding financial inclusion, providing small loans to underserved populations and businesses. With a focus on responsible lending, MFIs not only provide funds, but also help borrowers build their capacity to maintain and grow their businesses. This support is vital to empower local entrepreneurs to create jobs and promote community development.
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