Rana Karadsheh: Armenia’s private sector is key to sustained economic growth

25.04.2023 | 18:01 Home / News / Articles /
Rana Karadsheh, IFC’s Regional Director for Europe, wrote in her Banks.am column about the programmes implemented in Armenia, the country’s potential and ways to make it more attractive for investors.

She also presented the key priorities of IFC, the provided financial support and pointed out to some gaps existing in Armenia.

Direct investment in Armenia is reviving

There’s good news in Armenia: its foreign direct investment is reviving, increasing 36 percent in the first three quarters of 2022 compared to the full year of 2021. That’s a very welcome $708 million. While it’s great to see this after the battering the country took from COVID-19, and the 7.6 percent contraction in gross domestic product (GDP) in 2020, Armenia still faces strong headwinds and uncertainty triggered by international and regional tensions.

To continue on a sustained growth trajectory, Armenia needs to fully realize the potential of a private sector-driven growth model. While there are several aspects to achieving this, I would like to highlight a few key areas:

Energy security

Improving the reliability of Armenia’s power supply by focusing on the replacement of old and inefficient power plants and the reduction of electricity losses in the network was an important step forward. This, along with the multi-year strategic efforts to green Armenia’s generation mix by introducing tenders and standard-form power purchase agreements for utility-scale solar and wind projects, has definitely positioned Armenia as an attractive destination for investors.

The country’s recent opening of the energy market, allowing for more transparent pricing and contracting is an important step in attracting more foreign direct investment and will promote the increased resilience of the sector. This resilience is becoming even stronger as Armenia focuses on increasing the share of renewables beyond hydropower in the energy mix. It’s great to see the government’s ambitious target of increasing the share of non-hydropower renewables from 10 percent to 26 percent by 2025.  

As a result of these efforts, over the last 7 years we have seen sizeable private sector investments in solar and hydro generation, in modern gas-fired power plants and in the electricity distribution network. IFC has been proud to help play a role in this, providing over $360 million of much needed long-term finance, including mobilization to improve Armenia’s energy security.   
Green is now the key word everywhere. Tackling climate change - one of the most defining challenges of our time - tops the agenda of many countries and Armenia is no exception. The need for sustainable and green finance is greater than ever. So, Armenia needs to continue down this pathway.

Climate

However, greening of the energy sector is not enough. There is much more that can be done across the whole of Armenia’s economy. An Assessment of Investment Needs for Climate Action in Armenia up to 2030, estimated that Armenia needs $5.7 billion to meet its own climate targets for 2030. It found that Armenia’s energy supply is by far the biggest sector needing investment for climate action – at about $1.4 billion – but large investments are also needed to improve energy efficiency in residential buildings ($1.2 billion), in water supply ($420 million) and in a low-carbon transport system ($265 million) as well as agriculture ($150 million). All of this will require billions of dollars in fresh investment and so attracting foreign direct investment is the ideal recipe for pulling all of this together.

Bringing in more foreign investors

Given the economic potential of Armenia and the large needs for investing in a climate resilient future for the country, bringing in a larger and more diversified pool of foreign direct investment will be critical. Armenia has started on this pathway. In 2019, the government established Enterprise Armenia, a national investment support center to provide professional support to new and existing investors.

IFC was proud to get behind this ambition through its Armenia Economic Growth Project, implemented in partnership with the UK’s Good Governance Fund and the government of Japan, which leveraged best practices to provide critical advisory services. Over the past two years, Enterprise Armenia has worked with 150 foreign investors encouraging them to consider Armenia as an investment destination. It has also successfully supported existing investors, so that they can continue to reinvest in the country. This is just one of many programs Armenia has launched, all of which will help to reinforce more and better investments in the country.

To continue on this pathway, Armenia needs to support ongoing pro-competition reforms and market liberalization as this helps to improve the business environment and leads to further investments in the country. A holistic competition policy can help achieve further progress, promote a level playing field, and ensure the effective enforcement of the competition laws.

Access to finance

However, much more needs to be done, as a robust private sector cannot be fully developed without a deep and inclusive financial sector. Access to funding is critical for the growth of the private sector. Armenia has made some important progress in financial inclusion over the past few years though, and now scores better than many other countries in the region. For example, Armenia scores well on account ownership at a financial institution (48 percent of the population aged over 15) compared to the Caucasus and Central Asia average. But it remains behind many emerging market peers. According to a World Bank survey, access to finance was identified as the main obstacle for doing business by 30 percent of respondents.

This is why supporting the financial sector is one of the key priorities for IFC. We work with local banks, providing trade and funding for micro, small and medium enterprises (MSME). Alongside financial products, IFC has also brought in its advisory services through its DigiLab Finance Program to help Armenia’s financial services sector enhance its digital transformation strategies.

Digitalization

This brings me to my last point – digitization. Advancing the digital agenda is critical for any economy as this enhances productivity, reduces transaction costs, promotes more inclusive growth and is a great enabler for businesses. The Central Bank of Armenia is pursuing digitalization in the financial sector, including a particular emphasis on an updated national payment system strategy. Significant opportunities exist in further advancing digital payments by addressing constraints posed by the identification infrastructure and regulatory environment for developing non-bank payment services to improve competition, diversification, and inclusion. These efforts will support the implementation of Armenia’s digital transformation strategy and will help foster innovation in the digital financial services space. This is a great start, but Armenia should do more. In fact, the country is rich with talent in technology and should really look at leveraging this more to enhance its economic growth model.  

The path forward

Armenia has already shown that it is more than capable of staying the course on the path of strategic reforms and in adapting to new challenges. Consider the steps taken over the past five years to improve the business environment.
 
The strategic targeting of renewable energy with a focus on sustainable and green development is now essential. Business services and the digital economy also need support, especially with upgrading and increasing physical infrastructure to connect Armenia to its export markets. The points I highlight will be essential for Armenia’s sustainable growth. There’s much to be positive about in several sectors though. Tourism, both cultural and medical, has potential for growth, as do the technology and pharmaceutical sectors and the creative industries.  

There is plenty to think about as Armenia bounces back after the hardships of the pandemic and sets a course to a more dynamic, resilient, green, and prosperous future. In encouraging this, IFC with its focus on the private sector, stands ready to increase its support to the country on its journey. We aim to actively support new sustainable investment in the financial sector, green energy, and infrastructure, and provide advisory services for increasing investment opportunities across sectors.
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