Economic Development

Trends of Agro-industry

ARMENIA
Key Economic Indicators GDP, US$ billion Manufacturing VA, % of GDP Agriculture VA, % of GDP Employment in Agric., % of total Gross Fixed Capital F., % of GDP FDI net inflows, % of GDP R&D, % of GDP Merchandise Trade, % of GDP Merchandise Exports, US$ billion Merchandise Imports, US$ billion Global Merchandise Exports rank 2009 8.71 15.7 21.0 45.6 30.8 8.92 0.26 45.9 0.70 3.30 155 Food and Beverages Industry Output, % of manufacturing Value Added, % of manufacturing Enterprises, % of industry Employment, % of manufacturing Investments, % of manufacturing FDI inflows, % of total FDI inflow R&D, % of Output Net Trade, US$ billion Exports, %of merchandise exp Imports, % of merchandise imp Exports annual growth, %

2011
2009 49.7 n/a 34.8 21.8 n/a 3.78 n/a -0.17 13.5 8.17 -45.7

Armenia is a landlocked and lower middle income country with GNI per capita as of US$ 3,100 in 2009 Total number of population is 3.08 million inhabitants, of which 36 percent live in rural area, and the annual population growth is 0.19 percent. Armenia enjoyed a strong economic growth from 2000 to 2007, with average real GDP growth of 24 percent. As a result of the global economic crisis, GDP growth sharply declined to 5.7 percent in 2008 and further to -36.2 in 2009. The economy was, and remains highly resource-dependent in mining sector and agriculture. The agricultural sector is still very important contributing with 21 percent of value added to GDP and employing around 46 percent of the total labour force in 2009. The agricultural productivity is low. Manufacturing industry generated about 16 percent of GDP with a negative annual growth as of -7.4% and employed 7.7 percent of total labor force in 2009 that down by 35 percent to the 2005 level. Armenia is a net importer of food products. With increase in international prices for metals Armenian economy driven by the mining sector began recovering with a positive growth in 2010.

Food and Beverages Demand

Armenia is a net food importer, and domestic agriculture cannot satisfy demand for a range of commodities such as vegetable oil, sugar, meat and poultry products, flour, rice and high-value grocery products. Total consumer expenditure for food and beverages above 40 percent of total expenditures. The highest share in food consumption refers to meat, dairy products and bakery & macaroni. The domestic market is underdeveloped and fragmented. There was estimated 22 percent of population to be undernourished in 2005-2007. Food and Agriculture Organization of the United Nations Regional Office for Europe and Central Asia

Agro-industry Outlook
The food and beverages industry forms a large part of the economy, generating AMD219.2 billion (US$ 0.58 bln), that represents about 50 percent of total manufacturing output, and employing 18.3 thousand people (or 21.8 percent of manufacturing labor force) in 2009. There are 831 enterprises (or about 35 percent of total number of industrial enterprises) operating, most of which are private small or medium-scale enterprises. The output declined by 6.4 percent in 2009 to the level of 2008 after a steady growth over time. Employment has declined in a number of employees by 25 percent in 2009 to the level of 2005. The F&B sector consumes 24 percent of total electricity use by the industry. Labour productivity is growing over time making twice higher in 2009 to the 2005 level. Important subsectors include alcoholic and as non-alcoholic beverages, preserving fruits and dairy processing. Wine, brandy and cheese production are the largest part of the food processing industry. The potential sectors are dried fruits and fish products using the local resources. Although the country could benefit from the increasing demand in the Western Europe for organic products counting but organic land represents only 0.03% of agricultural land.

Agro-industry National Policy Framework

National Development Programme. The key documents setting out the Government policies for the country, agriculture, rural and agro-industry development include: (i) Sustainable Development Program for 2009-2021 (this is the Second Poverty Reduction Strategy); (ii) Strategy of Agriculture Development (2006); (iii) Food Safety Policy (2005); (iv) Cattle Breeding Program for 2007-2015; and (v) the Tax Administration Strategy for 2008-2011. Besides, organic agriculture is part of Armenias sustainable development concept and is a priority area in the governments agro-food policy. Organic farming is considered an excellent business opportunity for farmers and investors involved in agriculture and food production. Armenia has with the EU a Partnership and Cooperation Agreement since 1999 with an ENP Action Plan from 2006. Together with the UN organisations the country elaborated UNDAF for 2010-2015. In 2006 the Armenian Government established the Food Safety and Veterinary Services Inspectorate and the Plant Sanitary Inspectorate under the Ministry of Agriculture in order to control production of food on farms, animal and plant health, processing, distribution and catering, water used for production of food (in the production area). Legal Framework. Armenia adopted a number of laws and amendments to existing laws in
order to encourage agricultural, trade and foreign investments growth as well as agro-industry development, including laws on standardisation, conformity assessment, uniformity of measures, law On Organic Production (2009) based on the law is the Codex Alimentarius organic guidelines and the EU organic regulation with the established Armenian Organic Agriculture Foundation established. The selection of the priority sectors is still on-going process.

Chart 1: Food, Beverages and Tobacco Industry Performance

Chart 2: Products Output Share, 2007

Tr ad e L i be r al i z at i o n , W TO A c c e ssi o n an d Tr ad e Per fo r m anc e

Trade Regulation. Armenia has now a liberal trade and investment regime, according to a WTO Secretariat report on the trade policies and practices of Armenia. The comprehensive Customs Administration Strategy for 2008-2012 was further elaborated through the development and introduction of a Strategic Action Plan in Dec 2009. Strengthening enforcement mechanisms is one of the key goals for Armenia in meeting its WTO commitments. Armenia currently has incentives for exporters (no export duty, VAT refund on goods and services exported) and foreign investors (income tax holidays, and the ability to carry forward losses indefinitely). Armenia has no quantitative restrictions on exports or imports. Armenia signed free trade bilateral agreements with eight countries and with the CIS. WTO accession. Armenia has been a member of WTO since February 2003 and an observer to the
Agreement of Government Procurement (GPA) accession since 2009, contributing with 0.015 percent to WTO budget in 2011. Simple average of imports duties for agricultural goods applied in 2008 were 6.8 percent. The first Trade Policy review by the Trade Policy Review Body of the WTO was in April 2010. The WTO Committee on Government Procurement, in Dec 2010, adopted a decision that invites Armenia to accede to the GPA on the basis of a final coverage offer.

Foreign Direct Investments

Regulation. Law on Investments (1994) provides the legal basis for foreign investment in Armenia. No legal distinctions are made between domestic and foreign companies and no restrictions exist on the percentage of ownership of a local business that foreign investors can acquire. The government encourages foreign investment and approved a National Program on building a Center of Excellence for business and investments climate. FDI inflows. In 2009 Armenias FDI inflows accounted 8.9 percent of GDP grown in 3.3 times since 2005 but down by 17 percent to the 2008 level. Agriculture accounted USD6.7 million of FDI that is less than 1 percent of total amount. F&B sector generated about USD29.4 million of FDI in 2009 that was in 2.5 times higher than in 2006 and sharing about 4 percent of total value.
The most significant foreign investments in Armenia came from France (US$146mln) and Russia (US$122mln) constituting 38 and 32 percent of the total. The vast majority of FDI is

F o od S afe t y , C e r t i fi c at i o n & Qu al i t y C on t ro l
Food Safety regulation. Armenia is a member of the Codex Alimentarius Commission and of the International Organisation of Standardization (ISO). Food products are a subject to the Law on Food Safety (2006), the Law On Ensuring Sanitary-Epidemiological Safety of Population (1992), Law on Consumer Protection (2001), Law on Veterinary Medicine, Law On Plant Protection and Quarantine (2009), Law on Trade and Services and Law on Measurements. The Law on Food Safety is ensuring the quality of food at all stages of supply chain, which requires companies to integrate a self-control system based on HACCP system principles between 2011 and 2015. Armenia drafted a programme and an action plan on the development of the food safety system for the period 2009-2013. Besides, laws On Organizing and Conducting Audits (2000), On Compliance Evaluation and On Conformity Assessment and On Registration of Food Establishments were adopted among other legal-normative acts. Certification. Abolished in 2005, Armenia still follows the sanitary and
phytosanitary (SPS) agro-food standards from the GOST system that do not provide optimal food safety and agricultural health protection for the population and agriculture. There are eight Technical Regulations refer to F&B industry.

Trade Performance. Exports of merchandise products accounted for just over 8 percent of Armenias
GDP, and imports made up around 38 percent of GDP with main export commodities as ores, precious stones and steel products, which provide around 65 percent of total export revenue in 2009. Beverages, spirits and vinegar made about 12 percent of total merchandise trade and shared 87 percent in the F&B revenue. Armenia is an import-dependent country in F&B products, except fruit juices and wine products, making a negative trade balance. Processed F&B products accounted 3.3 percent of total merchandise imports and only 0.7 percent of total merchandise exports in 2009 with a sharp decline in both exports of F&B by 46 percent and imports by 21 percent after a steady growth over time. Products proven thus far to have export potential include wine and brandy, fish and crayfish, cheeses, and fresh and dried fruits and vegetables. Brandy is exported mostly to CIS countries. Latest trends are to develop export-oriented food products starting with dried fruits, cheese and organic products.

Quality Control. The country began a programme of introducing quality

management standards as HACCP and SPS supported by international donor organizations, especially by the EC, in terms of capacity development and harmonization of regulations. Currently there are two institutions are involved in food safety control at plants: the newly established Food Safety and Veterinary Inspectorate under the Ministry of Agriculture and the Hygienic and AntiEpidemiological Surveillance State Inspectorate under the Ministry of Health. This duality creates confusion among food processors. Inspections in food production plants are implemented on an annual basis by conducting examinations and interviews, monitoring the production process, analyzing results, evaluating and disclosing risks. In case the violations, administrative penalties are applied according to articles the Code on Administrative Legal Violations.

directed to energy, telecommunication and agro-industry as beverages production,

vegetable and fruit canned production, tobacco.

Top destinations for F&B products: Russia (73%), Ukraine (7%), United States (6%) and Belarus (4%); Top origins for F&B products: Russia (28%), Ukraine (19%), Brazil (10%) and Iran (3.5%) in 2009

In 2004 there were 347 foreign affiliates located in Armenia.

Chart 3: Food and Beverages Trade Performance over time

Chart 4: Share of Exported Product Groups of F&B in total exports, in 2009

Business Environment and Competitiveness

Business Environment. According to the Doing Business Report 2011 Armenia
has through business reforms improved in starting and closing business, getting credit, enforcing contracts, dealing with construction permits and trading across borders, it was ranked (out of 183 economies) as 48 in 2011 (down by 4 points to 2010). Trading across the borders is ranked as of 82 (up 21), paying taxes 159, protecting investors 93, getting credit 46, and starting business - 22.

Taxation Relieving. The tax burden on companies is still to be eased as the

country is considered as one of the slowest countries in the world in tax paying procedures. Most of latest amendments to laws have to get in force from January 2011, e.g. introducing electronic filing on tax invoices. Armenia is also a party to 32 double tax treaties. Since 2010 agricultural producers are not exempt from VAT due to the WTO requirements. Government regulations exempt the duty on the fish feed. There is a 10% excise tax on beer over 1 liter, 10% for wine, AMD180 for apple cider and 30% for alcoholic drinks.

Competitiveness. According to the Global Competitiveness Report 2010-2011

Armenia is in transition stage from 1 to 2, it got 98 overall Global Competitiveness Index among 139 countries, having the most five problematic factors of doing business as follows: corruption, tax regulation, access to financing, inefficient government bureaucracy and inadequate supply of infrastructure.

Agr o- indu str y Br ief