We spoke to Martin Galstyan, Governor of the Central Bank of Armenia, to see how 2024 had shaped up for the banking and financial system of the country, and what lies ahead in 2025 and the years to come.
Interview : Arshak Tovmasyan
Photo : CENTRAL BANK OF ARMENIA
As 2025 approaches, how would you assess the overall health and stability of Armenia’s financial system?
— While 2025 is likely to be characterized by the persistence of geopolitical and regional uncertainty, Armenia’s financial system remains well-positioned to navigate these potential challenges. The predominantly bank-driven system is equipped with solid capital and liquidity buffers, ensuring its capacity to withstand potential risks that could materialize. Moreover, the CBA continues a proactive approach that not only fortifies the financial sector against unforeseen disruptions but also promotes sustained health and confidence within the economy, even in an uncertain global landscape.
Could you outline the Central Bank’s main strategic priorities for the next 5 to 10 years and the key challenges you anticipate?
— There are several ambitious challenges ahead of us. The first is the Digital reformation of financial regulation and supervision. New models and approaches are being implemented to enhance data analysis capabilities, monitoring, changes in the regulatory field, and compliance with existing laws and regulations through automated systems. These new technologies will reduce the workload associated with gathering data from reporting systems and financial institutions, thus decreasing the responsibilities and compliance costs of supervisors. The second focus is on a digital national identification system. The implementation of a nationwide electronic identification (eID) infrastructure will enable the secure and efficient identification of individuals within the financial system, significantly streamlining many processes in the banking system and beyond. Citizens will be the owners of their data, accounts, and transactions. This system will make personal finance management accessible and convenient, enhancing use cases and opportunities for mobile banking. Finally, we consider introducing an “open banking” or “open finances” system a major priority. We expect to have software systems with an advanced, flexible and modular system implemented in financial organizations, which are designed to provide an ecosystem of interoperable financial services through the use of open source Application Programming Interfaces (APIs).
What role does Armenia’s financial sector play in supporting the country’s broader economic development goals and regional economic stability?
— A robust and stable financial system is an important precondition for long-term, sustainable economic growth and continued improvements in the welfare of our country. In this context, Armenia’s financial system has undergone significant evolution and development over the past decade, increasing considerably in size and deepening financial intermediation. Banking system assets are almost equal to the national GDP, while the financial intermediation level stands at above 50%, which is a level comparable to that of many high-income countries.
Since 2022, Armenia has seen significant inflows of businesses and professionals relocating from Russia, particularly in the tech sector. How has this affected Armenia’s financial system, and what steps is the Central Bank taking to ensure banking infrastructure can support this rapid growth while maintaining stability?
— The significant influx of human capital was an important driver of the high economic growth we have witnessed since 2022, with positive impacts on the banking sector in terms of increasing the customer base and profitability. The banking system infrastructure was well positioned to support additional demand for transactions stemming from these inflows of people and capital. At the same time, however, it is important to note that the banking system reacted to these developments in a prudent, rather than short-sighted, manner, topping up liquidity buffers and refraining from engaging in risky and irresponsible lending practices.
Recent years have highlighted the importance of financial and digital literacy. What initiatives is the Central Bank undertaking to improve financial education and awareness among Armenia’s population, and what results have you seen so far?
— The Central Bank of Armenia recognizes that economic and financial literacy is a critical foundation for improving the financial well-being of the population. Since 2014, we have spearheaded a comprehensive National Strategy for Financial Education, implemented through an interagency steering committee that includes ministries, financial institutions, and educational organizations. This strategy has evolved over the years, with the current Financial Education Program for 2021–2025 targeting diverse groups, including schoolchildren, students, employees, rural communities, women, families, and the general public.
A key focus of our efforts has been integrating financial literacy into the school curriculum. Armenia has adopted an “inter-curricula” approach, embedding financial education into four subjects: “Me and the World around Me,” “Mathematics,” “Algebra,” and “Social Studies.” By 2021, over 9,500 teachers had been trained, and more than 425,000 students annually were learning financial literacy. Updated textbooks for primary and secondary grades are being developed, along with supplementary materials such as problem books and guides, all available on our educational platform, abcfinance.am.
The CBA places a strong emphasis on evidence-based, research-driven initiatives to improve financial literacy and inclusion. A prime example is the Financial Education in Rural Areas Project, launched in 2016, which held two-day educational sessions on budget planning, credit management, and consumer protection in 100 villages. While participants initially showed improvements in financial literacy and trust in the financial system, follow-up research revealed the need for sustained and tailored interventions to ensure long-term behavioral change. This insight led to targeted strategies, including the Dram 30-30 Project, which aimed to increase the financial well-being of border village residents by creating conditions for convenient financial activities. The project was implemented among 120 residents in 4 border villages and evaluated the effectiveness of “Handholding,” a method where participants were provided with a bank card and mobile banking services, accompanied by six months of individual guidance and training. This approach helped villagers make lasting changes in their financial behavior.
Digital literacy is a critical complement to financial literacy in building a well-informed and financially capable population, which is why we have integrated digital tools into these financial literacy programs. The abcfinance.am platform offers interactive features such as calculators, games, and a wide range of educational materials to engage users and enhance their understanding of financial concepts. The fininfo.am platform allows users to compare and choose financial products, empowering them to make informed decisions. Additionally, podcasts and radio programs like “Dramapanak” on Public Radio of Armenia make financial awareness accessible and engaging.
Digital literacy is a critical complement to financial literacy in building a well-informed and financially capable population, which is why we have integrated digital tools into these financial literacy programs.
Armenia has been working to deepen its capital markets. What specific steps is the Central Bank taking to develop the local securities market and attract more investors?
— Capital market development is currently a strategic focus area for the Central Bank of Armenia. The Armenian financial system is bank-centered. However, banks alone are not capable of effectively solving the issue of financing the economy—the non-banking sector needs to expand to fill that gap and create healthy competition in financial markets, for which we need reforms.
Among the key reforms we have implemented, I want to stress the measures towards expanding the investor base. In order to also promote the inclusion of retail investors in Armenian capital markets, the CBA has taken such measures as encouraging a culture of investment through various educational initiatives. Though local investors are essential, they alone are not sufficient for the domestic capital market to develop in a sustainable way. An advanced trading and settlement infrastructure, links with the global securities depositories, diversified quality instruments, and hedging opportunities are important for easy and effective access of foreign investors to the domestic market.
We have established links with global depositories, which significantly facilitate and reduce the cost for foreign investors to invest in Armenian financial instruments, as well as for our participants to enter into securities transactions in foreign markets. Setting a path for integration into global markets is another measure taken by CBA. Increased competition and advances in IT worldwide highlight the importance of integrated capital markets. With this in mind, in 2022 we began our cooperation with the Warsaw Stock Exchange (WSE).
I would like to also add that the limited number of investment opportunities and quality instruments have always been a primary barrier to deepening the local capital market and attracting new investors. Therefore, we continuously take actions aimed at reducing the costs for large and reputable companies and promoting their entry into the capital market.
Reforms towards enhancing the hedging instruments are also paramount reform actions at the current stage. For this purpose, we are currently working on the standardization of derivatives transaction agreements. We have also taken measures to increase public awareness and interest in derivatives instruments.
What reforms or initiatives is the Central Bank prioritizing to improve Armenia’s investment climate and make the banking sector more attractive to foreign direct investment?
— The Central Bank of Armenia is actively implementing reforms and initiatives to enhance the country’s investment climate and increase the attractiveness of the banking sector to foreign direct investment (FDI). Among these measures is the development of a robust regulatory framework aligned with international best practices. This framework promotes financial stability, transparency, and trust within the financial system, laying the foundation for sustained economic growth.
One of the key components is the introduction of capital buffers for banks, which play a key role in strengthening the resilience of the sector. These are additional layers of capital beyond the regulatory minimum, which ensure that financial institutions are better equipped to absorb losses during periods of economic stress, protect depositors, and minimize the likelihood of systemic risks.
In addition to capital buffers, the Central Bank has implemented the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), essential components of the Basel III framework. The LCR ensures short-term liquidity by requiring banks to hold sufficient high-quality liquid assets to withstand a 30-day stress scenario. Meanwhile, the NSFR promotes long-term stability by mandating a stable funding structure to support longer-term assets and mitigate funding shocks. Together, these measures significantly reduce liquidity and funding risks, enhancing the stability and predictability of the banking sector. This level of resilience is especially attractive to foreign investors, who seek secure and well-regulated financial markets when allocating capital.
To further strengthen the sector, the Central Bank has mandated the adoption of advanced risk management practices, such as stress-testing and comprehensive risk evaluation. These initiatives are designed to proactively identify and mitigate vulnerabilities, reinforcing the sector’s stability and reliability.
The Central Bank of Armenia is actively implementing reforms and initiatives to enhance the country’s investment climate and increase the attractiveness of the banking sector to foreign direct investment (FDI)
The Armenian Dram has shown remarkable strength in recent years. What are the main factors behind this stability, and will this be sustainable in the future?
— Following the onset of the Russia-Ukraine conflict in March 2022, Armenia faced significant challenges and also opportunities stemming from many of the conflict’s externalities. This period brought a substantial external demand shock, marked by increased tourism, higher demand for Armenian goods and services, and a large inflow of capital, labor, and financial resources. These factors collectively led to more than 20% appreciation of the Armenian Dram since 2022. Despite recent cooling in capital and financial inflows and somewhat reduced external demand from Russia, the Dram has remained strong. This resilience is attributed to sustained external trade, strong capital inflows, and gradually decreasing inflation and depreciation expectations among economic agents.
Looking ahead, the trends in the exchange rate would depend on whether Armenia has expanded its production and export capacities by effectively channeling capital and labor into high-productivity sectors, such as IT, which will sustain currency inflows and maintain the dram’s strength over time. The other potential outcome depends on whether the appreciation simply reflected a natural response to external demand shock, and could be potentially reversible when external demand normalizes.
There is an increased interest in Environmental, Social, and Governance (ESG) topics in Armenia’s finance sector. What objectives does the Central Bank have in this domain, and how have the commercial banks been responding?
— The objectives of the CBA in ESG-related topics are well established in the National Sustainable Finance Roadmap, developed and approved by the CBA Board in 2023, the purpose of which is to increase awareness and transparency among financial institutions regarding the need to mitigate and manage ESG risks. The roadmap is built upon four pillars, each with specific objective and concrete initiatives, altogether comprising of thirteen actions/initiatives. Those pillars are - mobilizing sustainable finance and funding, enhancing markets, embedding sustainable finance, and building awareness.The CBA established an interbank working group on sustainable finance in spring of this year to communicate its work in progress on climate and ESG-related topics. A climate and ESG risk management tool, Risk Radar, has been introduced to the banks to be published on the CBA website by the end of the year. Social considerations for the financial sector, covering initiatives in diversity, inclusion and social investments have been developed, to be published by the year-end as well. Finally, ESG data tracking and internal reporting procedure has been put in place, which will be finalized in 2025.
The cost of living in Armenia has increased dramatically over the past two years, but the average income of residents has yet to catch up. Does the Central Bank see a risk of increased borrowing by citizens that does not match their ability to pay back? Has lowering the interest rate been an effective tool?
— The cost of living has risen significantly in many countries worldwide; however, in Armenia, this increase has been accompanied by substantial real income growth, which has partially offset the impact on public welfare. Additionally, I think the CBA’s efforts to combat inflation have been quite successful and balanced, swiftly bringing general price levels back on track.
The rise of inflation in Armenia since the onset of the pandemic was primarily driven by global factors, similar to trends observed in other parts of the world. Globally, inflation surged from 2021 onward, and in some countries, the problem of high inflation still remains unresolved. The Central Bank of Armenia has been prudent in effectively managing inflation through proactive and aggressive monetary policy actions, while allowing the flexible exchange rate regime to absorb external shocks. As a result, the high inflation observed in 2021 and 2022 has been followed by low inflation since 2023 due to restrictive monetary policy, the effects of the appreciated Dram, and deflationary pressures from the external world. Comparing our experience with that of peer nations or even many advanced economies, one could certainly argue that Armenia has managed this inflationary period better than many other countries facing similar shocks. Over the past three years, inflation in Armenia has averaged 4.3%, only slightly above the target, and has remained well below the target since 2023, standing at 0.6% as of October 2024.
Armenia has also seen substantial income growth across the economy, with real GDP growing by around 10 percentage points, on average, since 2022. Although GDP growth and income gains have been somewhat concentrated and uneven across the economy, income growth has generally outpaced inflation, resulting in improved real wellbeing. Rising incomes have also led to an accumulation of savings and a reduction of households’ debt burdens, which has strengthened the resilience of economic agents’ balance sheets. As a result, increased demand for loans and strong credit growth has not significantly impacted households’ ability to repay their debt.
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