III. ECONOMIC TRENDS AND OUTLOOK Major Trends and Outlook The present Armenian government, since its formation in 1991, has demonstrated a firm commitment to turning Armenia from a centralized state with a planned economy into a democratic society with free market economic relations. That said, Armenia's economy has been in freefall since independence. Since being introduced in November 1993, the value of the Armenian national currency (the Dram) has been steadily eroded by inflation. Industrial production has collapsed. The standard of living has plummeted, and a virtually unprecedented out-migration of the population has occurred. In order to stabilize Armenia's negative trade balance, the government is working to improve operating industries' export performance. Concentrated efforts are being made to upgrade the energy industry infrastructure and to search for new sources/suppliers of energy and fuel. The major privatization of national industries planned for 1994- 1995 is considered one of the key steps to improve the economic situation in Armenia. At the same time, the conflict over Nagorno- Karabakh has forced the government to militarize many of its operating machinery manufacturers, and thus, has put an additional non-productive burden on the weak economy. The solution to the country's economic problems is primarily connected with the ending of the regional conflict around Nagorno- Karabakh, reestablishing normal relations with neighbors and lifting the blockade. At present, the situation around Armenia remains unpredictable and explosive, despite numerous peace initiatives on the part of the international community. On the other hand, the end of the conflict will drastically change the economic picture in Armenia and, considering the country's existing industrial potential and highly educated and skilled human resources, will allow a rapid rehabilitation of its economy and establishment of normal trade and supply links. At the same time, a liberal foreign trade policy and numerous peacetime business opportunities could catalyze foreign investment. Principal Growth Sectors None, at present. Government Role In The Economy The government through its ministries still controls most of the manufacturing and servicing industries, which are scheduled for privatization in 1994-1995. Through the Central Bank the government tries to exercise control over the currency market and inflation rates. The Supreme Council is attempting to pass laws which could create the framework for a free market oriented economy. Balance of Payments Situation Since Russia assumed the foreign debts of all former USSR states in 1992, Armenia has accumulated more than USD 220 million in foreign debt (by the end of 1993). The trade balance of the country was negative (USD 55,180,000) in December 1993. Trade and Investment Barriers - Road and Rail blockade of the country - Shortages of energy resources - Lack of modern telecommunications means - Limited inner convertibility of the Armenian dram - High and uncontrolled inflation - Non-efficient and backward banking system - Poor protection of foreign investments - Low buying power of the population - Insecurity in the country's border areas Labor Force Armenia offers a highly educated and well-trained work force at exclusively inexpensive labor rates. The average labor wages at state enterprises are 0.3 % of the average in U.S. and about 5-10 % of the Russian average. On the whole, the population is market- economy oriented and entrepreneurship is readily accepted. Of all the former USSR republics, Armenia is second only to Russia in its per capita number of scientists and technological specialists. The enrollment of Armenian students in institutions of higher education puts it third among CIS states (per capita). 1,530,000 people were employed in Armenia as of May 1994. 102,600 were registered as unemployed, although the actual unemployment rate may be much higher. A significant percentage of the labor force is represented by people with higher education in technical or humanitarian areas. Major Local & Third-Country Competitors in Specific Sectors Only rudimentary local competition exists in Armenia. There are few foreign or joint businesses, and they face no real competition. Iranian, Russian, Ukrainian, Turkmenistani, and Kazakhstani governments and private companies remain the main importers of food, fuel and raw materials. As of late, Iran is showing a growing aggressiveness in its attempts to explore Armenian markets and establish long-term business relations. This process is encouraged by the Armenian government which views Iran as the only neutral neighboring country capable of engaging in significant foreign trade. Infrastructure Situation: goods/services distribution Goods produced in Armenia or imported by the state are distributed through so-called "torgs" - state wholesaler divisions (incorporated into appropriate ministries), which specialize in the trade of certain goods and control chains of relevant state stores. Services are also rendered through numerous subdivisions and state companies controlled by appropriate ministries and state agencies, e.g. the Ministry of Construction, The Ministry of Communication, the Ministry of Justice. Goods produced or imported by private companies or individual entrepreneurs are largely realized through private stores, or sold to separate retailers. The "pure" wholesalers who buy products from local manufacturers or importers and then resell them to retailers are still rare in Armenia. Major Infrastructure Projects Underway 1. Construction of a cargo terminal at Yerevan's Zvartnots airport. 2. Reopening of the Armenian Nuclear Power Plant in Metzamor. 3. Renovation of old and construction of new, small hydro electric plants, and thermal power plants.