Download comparison and forecasting of economic situations of armenia and

COMPARISON AND FORECASTING OF ECONOMIC SITUATIONS OF ARMENIA AND
AZERBAIJAN:BASED ON EMPIRICAL EVIDENCE
AZAT DAVTYAN
PhD in Economics
The aim of this research is tocompare and forecast economicdevelopments in Armenia and Azerbaijanfor the
upcoming 2-3 years. The research was conducted by using the Generalized Method of Moments (GMM) which became
one of the most effective empirical research methods in economics. It can be thought of as encompassing almost all of
the common estimation methods of economic developments such as maximum, ordinary least squares, instrumental
variables, and two-stage least squares (Guido W. Imbens: 2002).
Table 1 illustrates the results of GMM estimation of the relations between GDP per capita of Armeniawith a wide
range of independent variables (time span is 10 years, from 2005-2014).We can note that the value of P>|z| for a large
bulk of explanatory variables shows the statistical significance of those variables regarding the dependent variable. The
Shapiro-Wilk rate indicates the robustness of our results. If the Shapiro-Wilk rate is less than 0.05, the samples exhibit a
normal distribution.
As can be seen from the table the exports of goods and services, health expenditure per capita, public spending on
education, tax revenue and total reserves indicate the positive and significant effect (at 1% level) on the economic
expansion of Armenia. Therefore, the coefficients of those variables imply 99% of confidence. With regard to the foreign
direct investment, this variable shows the 5% significance and positive influence on the GDP growth. On the other hand,
the growing employment in agriculture fosters the economic development which is reflected at 10% significant level of
number of employees in agriculture sector.
The unemployment, inflation, GDP deflator, military expenditure, real interest rate and public debt have a negative
link with the economic growth of our country. In particular, the military expenditure of the government, real interest rate
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and inflation, GDP deflator exhibit the significant effect at 1% level. With regard to the public debt and unemployment
these variables show the statistical significance respectively at 10% and 5% levels, therefore, we can notice the 90% and
95% of confidence of those factors.
As a result of our research we can identify the main actions of the Armenian government to foster economic
development. First of all, the government needs to increase the employment in agriculture sector. This goal can be
achieved by the state subsidies, low taxes and bank credit rates. All those measures will support the export of agricultural
products which will lead to a higher employment in this sphere. On the other hand, the great stimulus for the agriculture
sector isthe accession of our country to the Eurasian Economic Union (EEU) due to the absence of customs payments.
Secondly, the government should increase the financing of education and health care and enlarge the total
reserves. The implementation of those triggering measures by the government will be conditioned by the optimization of
state expenses. In this regard the government should optimize the number of state employees considering budgeting
constraints. Moreover, the focus of government on the improvement of the tax system by increasing the tax burden for
large enterprises would lead to the diversification of economic activities and higher competitiveness in the domestic
market. Overall, such measures would compensate the large share of military expenditureof the national budget.
On the other hand, the Central Bank should reinforce the financial and price stability and keep the real interest rate
on a preferable level. Such policy will minimize the risk of forecasting in financial market and increase the reliability of
banking operations in the long term. Moreover, the reliable policy of the Central Bank would lead to the growth of foreign
investments.
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Table 1
Dependent
variable
Arellano-Bond
Independent variables
Std. error
z
P>|zǀ
autocorrelation
ratio
Unemployment rate (%)
Financial system deposits to GDP
(%)
Domestic credit to private sector
Foreign direct investment, net
inflows (BoP)
Exports of goods and services (%
GDP per capita
Coefficient
of GDP)
Imports of goods and services (%
of GDP)
Inflation, GDP deflator (annual %)
Bank non-performing loans to total
gross loans (%)
Health expenditure per capita
(current US$)
Improved sanitation facilities (% of
population with access)
Population growth
Shapiro-Wilk
rate
-1.69**
[0.002]
1.12
0.04
23.98
0.57
2.39
[0.132]
1.98
0.607
12.43
0.62
2.982
[0.491]
2.357
0.951
11.098
0.48
1.15**
[0.662]
1.406
0.05
2.629
0.59
3.056***
[5.598]
0.998
0.001
11.98
0.54
1.475
[2.408]
1.63
0.304
2.739
0.67
-2.751***
[3.871]
1.872
0.004
1.837
0.53
-1.003
[6.496]
1.005
0.203
2.983
0.59
1.105***
[10.57]
3.204
0.002
1.836
0.38
4.023
[0.405]
1.209
0.409
2.387
0.48
-1.981
[0.678]
1.478
0.221
2.832
0.12
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Tax revenue (% of GDP)
0.007***
[5.493]
3.029
0.002
1.392
0.34
-1.491***
[9.591]
2.462
0.001
2.492
0.09
1.561*
[3.702]
1.938
0.1
4.302
0.81
0.104***
[6.72]
1.382
0.009
1.102
0.96
0.028***
[2.491]
2.304
0.003
2.529
0.29
Real interest rate (%)
-0.481***
[4.832]
1.781
0.007
3.948
0.07
Public debt (% of GDP)
-1.927*
[9.367]
3.281
0.07
3.691
0.81
Military expenditure (% of central
government expenditure)
Employment in agriculture (% of
total employment)
Public spending on education,
total (% of government
expenditure)
Total reserves (includes gold,
current US$)
Notes: ***, **, * show the significance of results at 1, 5, and 10% level.
The economic situation in Azerbaijan is analyzed based on the developments in the financial sphere and state
policy. Table 2 illustrates the interactions between GDP growth and economic, financial and social indicators in the
country. Since Azerbaijan is an oil export oriented country, large amounts of foreign investments are directed to that
sector, leading to high dependence on foreign financial flows. The tax revenue from the oil industry is also considered a
crucial factor for the economic growth of this country. Moreover, the high tax revenue also enlarges the total state financial
reserves. However, the long-term variations of oil prices and weak economic diversification can harm the economy of
Azerbaijan.
The negative and significant economic factors for Azerbaijan are the unemployment, inflation, GDP deflator, bank nonperforming loans to total loans (%), military expenditure, real interest rate and public debt. The banking system of
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Azerbaijan it is highly concentrated. Another problem is the large volume of foreign currency in financial sphere and the
considerable non-performing loans in credit portfolio of financial institutions which hit the financial stability of Azerbaijan
and hamper economic development. The economic situation also worsens by the growing military expenditure and rise of
public debt which increase the risks in the business environment. The influence of negative factors would also continue in
upcoming years due to the fluctuations of oil prices and high business and financial sector risks.
Table 2
Dependent
variable
Independent variables
Unemployment rate (%)
Financial system deposits to GDP
GDP per capita
(%)
Domestic credit to private sector
Foreign direct investment, net
inflows (BoP)
Exports of goods and services (%
of GDP)
Imports of goods and services (%
of GDP)
Inflation, GDP deflator (annual %)
Coefficient
Std.
error
z
P>|zǀ
Arellano-Bond
Shapiro-
autocorrelation
Wilk
ratio
rate
-1.98***
[0.473]
1.382
0.001
28.48
0.07
2.83***
[1.347]
1.394 0.0002
23.98
0.34
0.495
[1.389]
2.438
2.493
4.982
0.69
1.039***
[2.492]
0.392
0.004
5.948
0.74
3.592**
[0.388]
1.382
0.05
1.398
0.39
1.829
[2.829]
1.492
1.783
5.751
0.28
-4.092*
[0.399]
2.482
0.1
1.943
0.81
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Bank non-performing loans to total
-1.283***
[2.493]
1.932
0.002
0.948
0.09
2.483
[5.394]
0.293
3.98
3.857
0.1
0.3827
[0.293]
1.329
0.392
2.948
0.43
Population growth
3.493
[1.382]
4.948
0.943
2.839
0.49
Tax revenue (% of GDP)
6.984*
[4.942]
0.392
0.08
1.83
0.48
-0.293*
[6.938]
2.938
0.06
2.392
0.72
4.384
[4.939]
1.382
2.04
1.938
0.62
-2.883
[0.291]
3.273
5.92
0.492
0.48
0.281***
[0.392]
4.593
0.007
1.893
0.82
Real interest rate (%)
-9.482***
[1.382]
4.483
0.009
1.943
0.73
Public debt (% of GDP)
-7.839*
[4.839]
2.497
0.07
1.483
0.63
gross loans (%)
Health expenditure per capita
(current US$)
Improved sanitation facilities (% of
population with access)
Military expenditure (% of central
government expenditure)
Employment in agriculture (% of
total employment)
Public spending on education, total
(% of government expenditure)
Total reserves (includes gold,
current US$)
Notes: ***, **, * show the significance of results at 1, 5, and 10% level
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CONCLUSION
Resuming, the advantages of Armenian economy are characterized by the economic diversification, credible
monetary policy and minimizing external spillovers. Furthermore, the policy of a low fiscal deficit, reinforced exchange rate
flexibility, sound buffers, broadly adequate reserves and growth enhancing reforms is the main feature of the economic
strategy of Armenia. On the other hand, the foreign market pressures and high dependence from the Russian economic
perspectives (particularly, dollar-ruble exchange variations) will make the Armenian economy vulnerable.
With regard to the Azerbaijani economy the high dependence on the oil revenue, large military expenditure and
fragile monetary policy bears serious risks for thedomestic market. The large financial buffers of the government could
offset the short and mid-term influence of spillovers but the long-term perspectives of the economy will remain unstable
due to very low oil prices in the world market. Such developments will lead to the large depreciation of the national
currency and the constraints of the state budget, and therefore, deteriorate the competitiveness of domestic enterprises.
REFERENCES
1. World Bank databases (http://data.worldbank.org/indicator), (http://datacatalog.worldbank.org/)
2. National Statistical Service of the Republic of Armenia (http://armstatbank.am/Menu.aspx?rxid=002cc9e9-1bc84ae6-aaa3-40c0e377450a&px_language=en&px_db=ArmStatbank&px_type=PX)
3. The State Statistics Committee of Azerbaijan Republic (www.stat.gov.az)
4. Guido W. Imbens, “Generalized Method of Moments and Empirical Likelihood”, American Statistical Association,
Journal of Business & Economic Statistics, vol. 20, no. 4
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