By Elen Muradyan
Armenia’s industrial output shrank by a staggering 18.5% in the first quarter of 2025, the sharpest contraction in recent years, raising red flags about the government’s ability to manage the economy and implement key public programs, according to a new report by the Luys Foundation.
Luys, a think tank affiliated with the opposition Republican Party of Armenia, released its critique of the state budget’s Q1 execution on May 23. The analysis points to broad underperformance in both macroeconomic growth and budgetary spending, and argues that “systemic management failures” are worsening Armenia’s vulnerability to external shocks.
According to the report, Armenia’s overall economic activity grew by only 4.1% in Q1 2025—roughly 3.5 times slower than the same period last year. The downturn is attributed to the fading of external advantages linked to the Russia–Ukraine war, such as redirected trade and remittance inflows. The report stresses that the most visible impact is in the industrial sector, which posted an 18.5% year-on-year decline. Manufacturing saw the deepest slump, but mining and metals also recorded significant drops due to falling export volumes and global price fluctuations.
Other sectors offered only modest compensation: agriculture grew by 10%, construction by 13.6%, and services by 11.5%, largely driven by banking and IT. Yet retail trade, a previous engine of growth, slowed sharply to just 6% from 26.5% a year ago. Perhaps most strikingly, Armenia’s foreign trade collapsed. Exports dropped by 61.8%, and imports by 47.9%, with overall trade turnover falling by more than half. The Luys Foundation attributes this to a “significant decline in re-exports,” which had previously propped up trade figures.
Despite the economic deceleration, the government exceeded its revenue plan by 2.1%, collecting approximately $1.53 billion. However, the bulk of this overperformance came from “other income” sources—such as penalties, dividends, and interest on government deposits—rather than core tax collection. The picture is far bleaker on the expenditure side. The state executed only 70.4% of its planned Q1 spending, falling short by over $620 million. Particularly concerning were capital expenditures (mainly infrastructure and defense investments), which reached only 32.9% of their planned levels.
Spending under the defense modernization program—touted as a priority by the ruling administration—was just 29.9% of the target, or around $130 million out of a projected $436 million. Programs under the ministries of Environment, High-tech industry, and Health were also heavily under-implemented, with completion rates below 50%. “Once again, the government appears unable to turn allocated funds into tangible outcomes,” the Luys report states, noting that similar underperformance patterns have been observed in previous years.
Due to lower-than-expected spending, Armenia registered a Q1 budget surplus of roughly $54 million, despite originally projecting a deficit of over $598 million. However, the Luys Foundation cautions that this surplus is not a sign of fiscal health but rather a reflection of the government’s failure to implement planned investments. “This surplus is a statistical illusion—money that was supposed to be invested in defense, education, and digital transformation has simply not been used,” the report claims.
Another critical point flagged in the report is the continued underperformance in receiving official grants. Only 77% of projected grant funding materialized in Q1, a recurring trend in recent years. Luys links this to Armenia’s failure to meet donor preconditions on project planning and transparency. “In nearly every reporting period under the current administration, grants have fallen short due to implementation delays and weak compliance,” the report notes.
The post Armenia’s budget underspent by $620 mln in Q1, report finds appeared first on CIVILNET.