Armenia

Slower but durably robust growth

Growth will remain robust in 2025, albeit at a more moderate pace, due to the gradual normalisation of exceptional migrations from Russia following the outbreak of war in Ukraine. Household consumption, which accounts for 65% of GDP, will benefit from rising real wages and subdued inflation, but the moderation of remittances from Russian expatriates (70% of the total, or almost 20% of GDP) will limit purchasing power, which reached a record high in 2024.

Businesses will again benefit from expansionary public policies, notably through increased infrastructure spending and incentives for foreign investment. FDI should improve by 2025, buoyed by growing international interest in the country and attractive measures, such as the refund of 60% of income tax paid on ICT salaries (8% of GDP) for employers from 2025. Despite greater diversification in foreign investments, notably with Europe and Saudi Arabia, Russia’s share will continue to be the largest in 2025 (at 65-70%). The approval of a new Country Partnership Framework by the World Bank (loans of USD 1.7 billion over 2025-2029) will also support the improvement of human capital and economic resilience. The Central Bank of Armenia (CBA) is expected to keep lowering its key interest rate in 2025 (6.75% in May 2025), subject to inflation being kept under control in the new target range defined in 2025 of ±3%, with a tolerance of ±1 percentage point (compared with 4% initially).

The job market remains a major challenge. Armenia’s unemployment rate stood at 12.9% in 2024, which is an ongoing cause for concern despite stimulus efforts and the influx of highly skilled labour from Russia to the country. Growth in the manufacturing sector (11% of GDP), particularly through gold and jewellery production, and the expansion of services (55% of GDP) via tourism, transport and the hotel industry should stimulate job creation and contribute to a gradual decrease in unemployment in 2025. Improving workforce skills through tailored training programmes such as the Strategic Employment Program 2025-2031 should curb the migration of talent abroad and support productivity growth. However, the need to improve the business climate and accelerate structural reforms will continue to pose a major challenge to ensuring sustainable expansion.

Military spending continues to put pressure on the budget deficit

In 2025, the Armenian budget will remain under pressure, mainly due to a significant increase in military spending (+20%) and the ongoing costs of hosting the 100,000 refugees from Nagorno-Karabakh, displaced following the Azerbaijani offensive in 2023. At the same time, capital expenditure will continue to rise, being earmarked in particular to modernise infrastructure and the road network. To meet these financing needs, the state will draw on the support of international financial institutions, with assistance from the European Union (EUR 270 million) and the IMF (EUR 110 million). Public debt, estimated at 48% of GDP in 2024, is set to increase slightly in 2025, albeit keeping at a moderate level. However, around 65% of this debt is external and denominated in foreign currencies (mainly dollars), which increases exposure to foreign exchange risk. This risk is nevertheless mitigated by the fact that almost 80% of this debt is contracted with multilateral institutions on concessional terms.

In 2025, the current account will continue to post a deficit and should widen slightly compared with 2024. Despite a surplus in the services sector, driven by the buoyant tourism and financial services sectors, it will not be enough to offset the chronic post-Covid trade deficit. Imports will continue to grow faster than exports, fuelled by strong consumer demand. Although the government is attempting to diversify exports and strengthen the agricultural and manufacturing sectors, these efforts are struggling to reverse the trend. Diamond exports will be particularly hard hit by the introduction by the US of a 10% tariff, while agricultural exports to Russia are subject to temporary restrictions. In addition, Armenia's dependence on energy imports, combined with rising domestic demand, will continue to weigh on the trade balance, despite initiatives to diversify exports and strengthen domestic industry.

On the brink of a major geopolitical crisis

Armenia is a parliamentary republic led by Prime Minister Nikol Pachinian (in power since 2018) and President Vahagn Khatchatourian (essentially an honorary post since 2022). In the snap parliamentary elections of June 2021, Mr. Pachinian's centrist Civil Contract party won an absolute majority with 71 of 107 seats. The main opposition parties are former president Robert Kocharian's center-left “Armenia Alliance” (29 seats) and the center-right, pro-Russian “I Have Honor Alliance” (7 seats), which has links to the former ruling party. The political landscape remains highly polarised. The opposition regularly accuses Mr. Pachinian of selling out on the national interests, particularly after defeats by Azerbaijan, and organises demonstrations calling for his resignation. Despite these tensions and calls for his resignation, the Pachinian government has remained in office thanks to its large parliamentary majority, but the protests reflect a civil society divided and distrustful of its leaders. The next parliamentary elections are scheduled for June 2026.

Relations between Armenia and Azerbaijan are marked by the Nagorno-Karabakh conflict, a source of wars and clashes since independence. A recent turning point came in September 2023, when Baku launched a blitzkrieg offensive that forced the capitulation of the separatist authorities in Nagorno-Karabakh. Azerbaijan thus regained full control of this disputed territory, putting an end to more than thirty years of Armenian presence. The ensuing humanitarian and political consequences were major, with over 100,000 Armenians from Nagorno-Karabakh – the overwhelming majority of the population – taking refuge in Armenia following the offensive, thereby posing an integration and resource challenge for Armenia. In terms of security, the 2023 attack demonstrated the vulnerability of Armenia, where the Russian troops supposed to ensure peace failed to take a position. At the same time, Azerbaijani forces have repositioned themselves on Armenia's borders, amplifying the border disputes. Another source of conflict with Azerbaijan is the Zangezour corridor, which is supposed to link Azeri territory to its enclave in Nakhchivan. While the corridor represents an alternative way of linking China and Europe by bypassing Russia, it is also a cause for concern for Iran, whose trade route to the North, and above all to Russia, would be hindered. Armenia insists that the construction of the corridor is not mentioned in the 2020 ceasefire agreement and therefore constitutes a violation of that agreement. In addition, the common border is still not fully demarcated, leading to sporadic clashes in 2021-2022. In the absence of a formal peace treaty, the risk of renewed conflict remains high: should the negotiation process fail, there is a strong likelihood of further outbreaks of violence between Armenians and Azerbaijanis.

Last updated:May 2025