There have been some positive developments in the past year with regard to the structural economic outlook for RA. In some 3-7 years these improvements will result in higher productivity growth and less reliance on foreign funding.
Generally a country’s international financial independence is judged by the metrics Net International Investment Position and Current Account Balance.
NIIP is the sum of the aggregated Current Account deficits/surpluses through time. Said otherwise, CA is the first derivative of NIIP. (In turn, CA = Trade Balance + Transfers + Investment income.)
Each year of a CA deficit, as is usually the case for RA, implies accumulation of debt/liabilities toward foreigners.
The first chart decomposes RA’s International Investment Position into asset and liability categories. Assets are mainly Reserve Assets of the CBA and private RA residents’ holdings of foreign currency (categorized as Other Investment Assets).
Liabilities are principally Other Investments, which at present are mostly loans from supra-national organizations such as IMF, WB, ADB, etc. It is notable that FDI (Direct Investment Liabilities) into RA, a “good” type of Liability spurring knowledge sharing and productivity improvement, has remained stagnant since 2011.
Second chart plots the balance, that is the Net International Investment Position (NIIP) versus GDP. The metric has stabilized at low levels and has yet to reverse. It is when NIIP turns positive that a nation becomes creditor to the world economy rather than a debtor. Current levels of NIIP are on par with other vulnerable developing nations.
The third chart depicts the Current Account balance, that as mentioned drives the NIIP. The CA has improved, but mainly due to lower goods imports into RA. Such dynamics usually take place when a country experiences an economic downturn. This decreases consumer spending & business investment and thus also demand for foreign goods.
The final 2 charts present the Goods and Services Trade balances as well as balances for Tourism and IT Services specifically.
As illustrated, the Tourism surplus has now been reversed, likely due to lower economic growth abroad as well as the strength of the AMD versus EUR and RUB in particular.
IT services outlook is more beneficial as the category continues to grow rapidly although from a low base. Moreover, the positive balance on this category is likely to be understated as data releases elsewhere show numbers twice as high. (IT services are also more difficult to track which makes them prone to being underreported, i.e. activity is in the shadow economy). Finally, recent private sector educational/training initiatives are likely to increase the domestic supply of qualified labor which will help satisfy currently unmet foreign demand.