## 1. Fiscal Rules

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### A. Introduction
- Purpose: Fiscal frameworks promote macroeconomic stability, resource allocation efficiency, and public confidence by constraining spending and borrowing, enhancing transparency and accountability (Wang et al., 2015).
- Medium-term perspective: Extends decision-making horizon beyond annual budgets to align spending and tax policies with long-term fiscal stances (Curristine et al., 2024).
- Role of fiscal rules: Establish specific, measurable constraints on aggregates (debt, deficit, expenditure) and act as commitment devices. Effective design balances clarity, monitoring ability, and flexibility via well-defined escape clauses. Rules without appropriate flexibility or with poorly defined escape mechanisms can become procyclical and undermine credibility (Davoodi et al., 2022; Ulloa-Suárez, 2024).
- Evolution: Effective frameworks now integrate medium-term planning, robust forecasting, and coordination (Caselli et al., 2022).
- Objective: Evaluate Armenia’s fiscal framework focusing on fiscal rules’ design and implementation to assess countercyclicality, flexibility, credibility, and transparency.

### B. Armenia’s Fiscal Framework — Overview
- Legal basis: Budgetary System Law (BSL); Public Debt Law; annual Budget Law.
- Medium-Term Expenditure Framework (MTEF):
  - Provides indicative spending ceilings and projections for revenues and key macroeconomic indicators over a three-year period.
  - Not binding; government approves MTEF annually by mid-year and submits it to Parliament for information.
- Annual Budget:
  - Detailed macroeconomic and fiscal outlook; sets expenditure envelopes, revenue objectives, and fiscal balance targets for the year.
  - Binding; approved before year end by Parliament.
  - Annual budget law (and the MTEF) can include a general reserve fund of up to 5 percent of total expenditures.
  - Budget provides flexibility to increase, cut, or redistribute spending within defined limits without separate parliamentary approval (subject to BSL provisions).
- Fiscal rules history:
  - 1997: Budget balance rule (deficit ceiling 10 percent of GDP).
  - 2003: Deficit ceiling decreased to 5 percent of GDP.
  - 2009: Deficit ceiling increased to 7.5 percent of GDP.
  - 2008: Debt rule added with debt limit of 60 percent of GDP.
  - 2018: Introduction of expenditure rule for multiple debt thresholds and a capital expenditure sub-rule under the balanced budget rule to improve countercyclicality and flexibility.

Box summary — Armenia: Fiscal Rules (Central Government Rules)
- Balanced budget in T+1:
  - Budget deficit < 7.5 percent of GDP.
  - Capital expenditures should not be below the level of the budget deficit if the government debt exceeds 40 percent of GDP.
- Expenditure ceiling in T+1:
  - Debt in T-1 < 60 percent of GDP, but >50 percent:
    - Average current primary expenditure growth < average nominal GDP growth in previous 7 years.
  - Debt in T-1 > 60 percent of GDP:
    - Average current primary expenditure growth < average nominal GDP growth in previous 7 years – 0.5 percentage points.
    - Current expenditures < tax revenues + state duties.
  - The expenditure rule was introduced in 2018 and applies for ex-ante planning purposes only.
  - The expenditure rule does not apply to capital expenditures.
- Debt in T+1 Upper threshold: 60 percent of GDP.
  - Debt in T-1 > 60 %: Submit an action plan to parliament to bring debt below 60 percent of GDP.
  - Debt in T-1 < 60 %: Present an action plan in MTEF to lower debt to 50 percent of GDP in 5 years.
- Escape clause:
  - Can be triggered in “exceptional cases” of large-scale natural disasters, wars, and economic shocks based on government interpretation of negative impact.
  - Formally activated once Parliament approves deviations from the rules with an amendment to the budget law as proposed by the government.
  - Legislation does not require a formal declaration on activating the escape clauses.

### C. Recent Refinements in Fiscal Framework (selected)
- MTEF and budget process reforms:
  - MTEF now focused on expenditure ceilings, macroeconomic projections, fiscal policy objectives and targets; simplified procedures.
  - Separate cycles for MTEF and budget submissions and approvals; MTEF approved by Government by early June.
  - MTEF requests will be published on state bodies’ websites.
  - Annual budget draft includes updated macro-fiscal and indicative expenditure frameworks for the following 2 years; scenarios with 5 percent and 10 percent spending cuts are presented.
  - More time allocated for preparation of detailed budget requests (February–July) and budget discussions (July–September).
- Legal tightening on PPPs and guarantees:
  - Amendments submitted to restrict government from taking on new PPP liabilities and budgetary guarantees if sum of central government debt, PPP liabilities and guarantees exceed 70 percent of GDP.
  - Further restrict taking on new PPP liabilities if central government debt exceeds 60 percent of GDP.

### D. Compliance with Fiscal Rules — Key Observations and Statistics
- Reforms to strengthen macro-fiscal framework: strengthened macroeconomic projections, simplified procedures, improved transparency and reporting, better alignment of MTEF with the budget, and improved public investment management (PIM).
- Deviations and escape clause use:
  - Breaches concentrated in 2020-21 when escape clause activated after COVID-19 and the war with Azerbaijan. Government submitted annual amendments to the budget law; no formal published justification for triggering escape clause.
  - Breaches before and after 2020-21 also recorded.
- Balanced Budget Rule (BBR):
  - BBR breached in 2009 following the global financial crisis. No breaches since then.
  - Balanced budget sub-rule on capital expenditures breached in 2020-21 when the deficit exceeded capital expenditure.
- Debt rule:
  - Deviations in 2020-21 following a 7.2 percent contraction of real GDP in 2020 and a 9.0 percent depreciation of the exchange rate.
  - Central government debt-to-GDP ratio spiked to 63.5 percent in 2020 and 60.2 percent in 2021.
  - Government prepared a debt reduction plan for 2022-26; plans lacked depth and detailed measures to bring debt below thresholds.
- Expenditure rule:
  - Multiple ex-ante and ex-post breaches since inception, recorded in 2020-21 and in 2022-23.
  - Authorities consider ex-post breaches as technical deviations because the expenditure rule is legally binding for ex-ante planning only.
  - Authorities have adhered to sub-expenditure rule requiring overall current expenditures not to exceed tax revenues and state duties when debt exceeds 60 percent of GDP.

Selected quantitative adherence tables (exact figures as reported)

- Table 1. Adherence to the Capital Expenditure Rule (selected columns)
  - Debt in t-2 (in percent of GDP): 2018 51.9; 2019 53.7; 2020 51.2; 2021 50.1; 2022 63.5; 2023 60.2; 2024 46.7
  - Budget Deficit Projection: 2018 -2.7; 2019 -2.2; 2020 -2.3; 2021 -5.3; 2022 -3.0; 2023 -3.1; 2024 -4.6
  - Capital Expenditures Projection: 2018 3.0; 2019 3.3; 2020 4.1; 2021 3.4; 2022 4.5; 2023 6.0; 2024 6.8
  - Budget Deficit Actual: 2018 -1.8; 2019 -1.0; 2020 -5.4; 2021 -4.6; 2022 -2.5; 2023 -2.0; 2024 -3.7
  - Capital expenditures Actual: 2018 2.5; 2019 2.9; 2020 3.7; 2021 3.1; 2022 4.6; 2023 5.2; 2024 5.5
  - Deviation from rule/Escape clause: COVID, Martial Law

- Table 2. Adherence to the Primary Current Expenditure Rule (selected columns)
  - Debt in t-2 (in percent of GDP): 2018 51.9; 2019 53.7; 2020 51.2; 2021 50.1; 2022 63.5; 2023 60.2; 2024 46.7
  - Nominal GDP growth (average of 7 years): 2018 6.1; 2019 6.1; 2020 5.9; 2021 6.4; 2022 4.1; 2023 5.1; 2024 8.0
  - Primary current expenditures growth (projection/actual rows): 2018 -0.7 and -1.0; 2019 5.4 and 5.9; 2020 10.4 and 14.8; 2021 6.3 and 12.8; 2022 4.1 and 6.5; 2023 5.1 and 6.7; 2024 13.0 and 10.5
  - Deviation from Rule/Escape Clause: COVID, Martial Law; Ex post breach

- Table 3. Adherence to the Current Expenditure Rule Condition on Tax Revenues (selected columns)
  - Debt in t-2 (in percent of GDP): 2018 51.9; 2019 53.7; 2020 51.2; 2021 50.1; 2022 63.5; 2023 60.2; 2024 46.7
  - Current Expenditure Projection: 2018 22.4; 2019 21.1; 2020 22.1; 2021 25.6; 2022 23.4; 2023 21.9; 2024 23.9
  - Tax Revenue Projection: 2018 21.3; 2019 20.7; 2020 22.6; 2021 22.5; 2022 23.4; 2023 23.7; 2024 24.9
  - Current Expenditure Actual: 2018 21.6; 2019 22.0; 2020 27.0; 2021 25.6; 2022 22.3; 2023 21.9; 2024 23.7
  - Tax Revenue Actual: 2018 20.9; 2019 22.4; 2020 22.4; 2021 22.7; 2022 22.7; 2023 23.4; 2024 23.5
  - No breach of the rule observed.

### E. Assessment — Countercyclicality and Flexibility
- Countercyclicality outcomes:
  - 2018 reforms aimed to strengthen countercyclicality but gains have been limited.
  - Pre-2018 (2010–17): fiscal policy consistently procyclical in good times.
  - Post-2018: fiscal policy countercyclical during crises period 2020–21 when escape clause was triggered; remained procyclical ex-ante and ex-post as growth rebounded during 2022–24.
  - During 2018–2024, actual share of current expenditures in total expenditures averaged 1.8 percentage points of GDP higher than envisaged in annual budgets; this average increased to 2.8 percentage points of GDP in 2023–24.
  - Expenditure rule breached twice in this period; expenditure outturn consistently exceeded authorities’ projections driven by over-execution of current expenditures and under-execution of capital spending.
- Framework limitations:
  - Rules are inherently procyclical because they are backward-looking and become binding only above certain debt thresholds (expenditure rule binding when debt exceeds 50 percent of GDP).
  - Incentives for unrealistic planning: expenditure rule applies to primary current expenditures (incentivizing higher interest payment projections); capital expenditures are excluded, creating distortions.
  - Enforcement limitations: expenditure rule legally applies for ex-ante planning only, limiting ex-post monitoring and enforcement.

### F. Key findings: limitations of current fiscal rules
- Escape clause shortcomings:
  - Provided flexibility during severe downturns but lacks clarity on activation, procedural details, transparency, monitoring indicators, guidelines on return path, and independent scrutiny.
  - No requirement for a formal declaration when activating escape clauses.
- Reserve fund weaknesses:
  - Reserve fund of up to 5 percent of total expenditures not binding in practice due to ability to redistribute funds.
  - Used as discretionary spending rather than risk management; contributes to over-execution of current spending and ex-post breaches.
- Complexity:
  - Rules composed of multiple conditional “if-then” statements with different rules by debt threshold; complexity creates incentives for inconsistent projections and reclassifications.
- Coverage:
  - Rules limited to central government; exclude subnational governments, SOEs, PPPs, and contingent liabilities.
  - Separate government decrees create more lax rules for guarantees and incentives for off-balance sheet transactions.
- Monitoring and enforcement:
  - Lack of independent monitoring and enforcement: MOF prepares the MTEF without independent scrutiny; PBO lacks mandate and resources; Audit Chamber not mandated to review fiscal rule implementation systematically.
- Transparency and reporting:
  - Progress: MTEF and annual budget prepared, approved and published in a timely manner with detailed projections and assessments.
  - 2019 IMF Fiscal Transparency Evaluation: Armenia met good or advanced practices on 16 out of 36 principles and basic practice on 14 principles; major gaps remain including limited institutional coverage.

### G. International comparison and measured performance
- Fiscal Rule Strength Index:
  - Armenia’s de jure fiscal framework quality exceeded peer group average after 2018 reforms.
  - Armenia ranks 19th out of 45 countries in its income group and 58th out of 106 countries for which the index was available in 2021.
  - Fiscal Rule Strength Index score range is -0.7 to 3.6 (higher values indicate stronger fiscal rule frameworks).
- Rule compliance and deviations:
  - Deviations from the debt rule mirror peer-group trends during the pandemic.
  - For the balanced budget rule, Armenia had smaller deviations relative to peers.
- Countercyclicality metric:
  - Armenia’s coefficient of countercyclicality is 0.13.
  - The average coefficient in the sample is 0.15.
  - Armenia ranks 31st out of 62 countries for which estimates are available.
  - The 2018 strengthening of the rule is associated with lower structural primary balances and more stable debt.

### H. Policy recommendations — improving countercyclicality and escape clauses
- Strengthen countercyclicality of the expenditure rule by:
  - Regular adjustment for past forecast errors to limit impacts of shocks that make rules too lax in upturns or too constraining in downturns.
  - Adding a forward-looking feature based on conservative, independent and credible forecasts of potential output (example cited: Chile).
  - Applying the expenditure rule to total expenditures including capital expenditures and interest payments to avoid incentives for forecast bias, procyclicality, and ex-post breaches.
  - Enacting stricter regulations and formal procedures on discretionary use of the reserve fund and flexibility to increase current spending to limit high-spending bias and reduce procyclical spending.
  - Considering redesigning the balanced budget rule into a more dynamic tool with countercyclical deficit targets or structural balance targets across economic cycles (examples cited: Serbia, Croatia).
- Strengthen escape clauses through improved clarity, transparency, and correction mechanisms:
  - Include clearly defined and measurable activation conditions and triggers (e.g., specific threshold for GDP contraction or certain size of fiscal impact from natural disasters or wars).
  - Codify such conditions in the Budget System Law and communicate them publicly in budget documentation.
  - Clarify the details required in the plan to return to the rules (escape clauses currently include a corrective mechanism requiring a plan to return to rules within 5 years of invoking the escape clause).
  - Mandate independent evaluation of compliance with the correction plan by an independent fiscal institution such as the PBO.
  - Draw on best-practice examples (Peru, Jamaica) for institutional procedures when designing escape clauses.

### I. Simplification, transparency, coverage, and oversight
- Simplifying fiscal rules:
  - Consolidate rules for current expenditures, current primary expenditures and capital expenditures into an “all inclusive” or streamlined expenditure rule; apply even for safe levels of debt with stricter provisions at higher debt thresholds.
  - Tradeoff between simplicity and countercyclicality noted.
- Enhancing transparency and broadening coverage:
  - Legally mandate timely, transparent, independent reporting of compliance.
  - Standardize and specify debt reduction plans when escape clause is triggered.
  - Consolidate all fiscal rules in a single primary legislation instead of multiple laws and decrees.
  - Consider expanding coverage beyond central government to include non-financial SOEs, PPPs and contingent liabilities.
- Strengthening oversight and enforcement:
  - Introduce accountability mechanisms (e.g., legal requirement to publish reasons and corrective measures for ex-post breaches).
  - Establish independent ex-ante and ex-post scrutiny (independent fiscal council or enhanced PBO and Audit Chamber roles).
  - Current capacity constraints: PBO lacks mandate and resources; Audit Chamber not mandated for systematic fiscal rule review.
- Illustrative institutional examples:
  - Canada, Sweden, Aruba, Croatia, Serbia cited as examples of effective independent fiscal oversight arrangements.

### J. Conclusion — key policy recommendations (summary)
- Improve countercyclicality: upgrade expenditure rule with adjustments for forecast errors and forward-looking potential output estimates; redesign balanced budget rule toward countercyclical or structural targets; tighten reserve fund procedures.
- Simplify and strengthen design: move to a simplified set of rules to improve clarity and monitoring; codify escape clauses with specified activation criteria and correction mechanisms.
- Improve transparency: mandate clear reporting of compliance and standardized debt reduction plans; consolidate rules in unified primary legislation.
- Broaden coverage: include off-budget entities, extra-budgetary funds, and contingent liabilities.
- Enhance oversight and enforcement: statutory codification of rules, ex-post enforcement mechanisms, and establishment or strengthening of an independent fiscal council, PBO, or Audit Chamber mandates.

*Prepared by M. Al Taj, N. Belhocine, V. Janvelyan, E. Prifti, with assistance from D. Hineva, B. Laumann and X. Shen. Source: IMF staff analysis (November 10, 2025).*

### 1. Fiscal Rules ___________________________________________________________________________ 4

### 1. Fiscal Rules

### A. Introduction
- Purpose: Fiscal frameworks promote macroeconomic stability, resource allocation efficiency, and public confidence by constraining spending and borrowing, enhancing transparency and accountability (Wang et al., 2015).
- Medium-term perspective: Extends decision-making horizon beyond annual budgets to align spending and tax policies with long-term fiscal stances (Curristine et al., 2024).
- Role of fiscal rules: Establish specific, measurable constraints on aggregates (debt, deficit, expenditure) and act as commitment devices. Effective design balances clarity, monitoring ability, and flexibility via well-defined escape clauses. Rules without appropriate flexibility or with poorly defined escape mechanisms can become procyclical and undermine credibility (Davoodi et al., 2022; Ulloa-Suárez, 2024).
- Evolution: Effective frameworks now integrate medium-term planning, robust forecasting, and coordination (Caselli et al., 2022).
- Objective of the paper: Evaluate Armenia’s fiscal framework focusing on fiscal rules’ design and implementation to assess countercyclicality, flexibility, credibility, and transparency.

### B. Armenia’s Fiscal Framework — Overview
- Legal basis: Budgetary System Law (BSL); Public Debt Law; annual Budget Law.
- Medium-Term Expenditure Framework (MTEF):
  - Provides indicative spending ceilings and projections for revenues and key macroeconomic indicators over a three-year period.
  - Not binding; government approves MTEF annually by mid-year and submits it to Parliament for information.
- Annual Budget:
  - Detailed macroeconomic and fiscal outlook; sets expenditure envelopes, revenue objectives, and fiscal balance targets for the year.
  - Binding; approved before year end by Parliament.
  - Annual budget law (and the MTEF) can include a general reserve fund of up to 5 percent of total expenditures.
  - Budget provides flexibility to increase, cut, or redistribute spending within defined limits without separate parliamentary approval (subject to BSL provisions).
- Fiscal rules history:
  - 1997: Budget balance rule (deficit ceiling 10 percent of GDP).
  - 2003: Deficit ceiling decreased to 5 percent of GDP.
  - 2009: Deficit ceiling increased to 7.5 percent of GDP.
  - 2008: Debt rule added with debt limit of 60 percent of GDP.
  - 2018: Introduction of expenditure rule for multiple debt thresholds and a capital expenditure sub-rule under the balanced budget rule to improve countercyclicality and flexibility.

Box summary — Armenia: Fiscal Rules (Central Government Rules)
- Balanced budget in T+1:
  - Budget deficit < 7.5 percent of GDP.
  - Capital expenditures should not be below the level of the budget deficit if the government debt exceeds 40 percent of GDP.
- Expenditure ceiling in T+1:
  - Debt in T-1 < 60 percent of GDP, but >50 percent:
    - Average current primary expenditure growth < average nominal GDP growth in previous 7 years.
  - Debt in T-1 > 60 percent of GDP:
    - Average current primary expenditure growth < average nominal GDP growth in previous 7 years – 0.5 percentage points.
    - Current expenditures < tax revenues + state duties.
  - The expenditure rule was introduced in 2018 and applies for ex-ante planning purposes only.
  - The expenditure rule does not apply to capital expenditures.
- Debt in T+1 Upper threshold: 60 percent of GDP.
  - Debt in T-1 > 60 %: Submit an action plan to parliament to bring debt below 60 percent of GDP.
  - Debt in T-1 < 60 %: Present an action plan in MTEF to lower debt to 50 percent of GDP in 5 years.
- Escape clause:
  - Can be triggered in “exceptional cases” of large-scale natural disasters, wars, and economic shocks based on government interpretation of negative impact.
  - Formally activated once Parliament approves deviations from the rules with an amendment to the budget law as proposed by the government.
  - Legislation does not require a formal declaration on activating the escape clauses.

### C. Recent Refinements in Fiscal Framework (selected)
- MTEF and budget process reforms:
  - MTEF now focused on expenditure ceilings, macroeconomic projections, fiscal policy objectives and targets; simplified procedures.
  - Separate cycles for MTEF and budget submissions and approvals; MTEF approved by Government by early June.
  - MTEF requests will be published on state bodies’ websites.
  - Annual budget draft includes updated macro-fiscal and indicative expenditure frameworks for the following 2 years; scenarios with 5 percent and 10 percent spending cuts are presented.
  - More time allocated for preparation of detailed budget requests (February–July) and budget discussions (July–September).
- Legal tightening on PPPs and guarantees:
  - Amendments submitted to restrict government from taking on new PPP liabilities and budgetary guarantees if sum of central government debt, PPP liabilities and guarantees exceed 70 percent of GDP.
  - Further restrict taking on new PPP liabilities if central government debt exceeds 60 percent of GDP.

### D. Compliance with Fiscal Rules — Key Observations and Statistics
- Reforms to strengthen macro-fiscal framework: strengthened macroeconomic projections, simplified procedures, improved transparency and reporting, better alignment of MTEF with the budget, and improved public investment management (PIM).
- Deviations and escape clause use:
  - Breaches concentrated in 2020-21 when escape clause activated after COVID-19 and the war with Azerbaijan. Government submitted annual amendments to the budget law; no formal published justification for triggering escape clause.
  - Breaches before and after 2020-21 also recorded.
- Balanced Budget Rule (BBR):
  - BBR breached in 2009 following the global financial crisis. No breaches since then.
  - Balanced budget sub-rule on capital expenditures breached in 2020-21 when the deficit exceeded capital expenditure (see Table 1).
- Debt rule:
  - Deviations in 2020-21 following a 7.2 percent contraction of real GDP in 2020 and a 9.0 percent depreciation of the exchange rate.
  - Central government debt-to-GDP ratio spiked to 63.5 percent in 2020 and 60.2 percent in 2021.
  - Government prepared a debt reduction plan for 2022-26; plans lacked depth and detailed measures to bring debt below thresholds.
- Expenditure rule:
  - Multiple ex-ante and ex-post breaches since inception, recorded in 2020-21 and in 2022-23.
  - Authorities consider ex-post breaches as technical deviations because the expenditure rule is legally binding for ex-ante planning only.
  - Authorities have adhered to sub-expenditure rule requiring overall current expenditures not to exceed tax revenues and state duties when debt exceeds 60 percent of GDP (Tables 2–3).

Selected quantitative adherence tables (exact figures as reported)

Table 1. Adherence to the Capital Expenditure Rule (selected columns)
- Debt in t-2 (in percent of GDP): 2018 51.9; 2019 53.7; 2020 51.2; 2021 50.1; 2022 63.5; 2023 60.2; 2024 46.7
- Budget Deficit Projection: 2018 -2.7; 2019 -2.2; 2020 -2.3; 2021 -5.3; 2022 -3.0; 2023 -3.1; 2024 -4.6
- Capital Expenditures Projection: 2018 3.0; 2019 3.3; 2020 4.1; 2021 3.4; 2022 4.5; 2023 6.0; 2024 6.8
- Budget Deficit Actual: 2018 -1.8; 2019 -1.0; 2020 -5.4; 2021 -4.6; 2022 -2.5; 2023 -2.0; 2024 -3.7
- Capital expenditures Actual: 2018 2.5; 2019 2.9; 2020 3.7; 2021 3.1; 2022 4.6; 2023 5.2; 2024 5.5
- Deviation from rule/Escape clause: COVID, Martial Law

Table 2. Adherence to the Primary Current Expenditure Rule (selected columns)
- Debt in t-2 (in percent of GDP): 2018 51.9; 2019 53.7; 2020 51.2; 2021 50.1; 2022 63.5; 2023 60.2; 2024 46.7
- Nominal GDP growth (average of 7 years): 2018 6.1; 2019 6.1; 2020 5.9; 2021 6.4; 2022 4.1; 2023 5.1; 2024 8.0
- Primary current expenditures growth (projection/actual rows): 2018 -0.7 and -1.0; 2019 5.4 and 5.9; 2020 10.4 and 14.8; 2021 6.3 and 12.8; 2022 4.1 and 6.5; 2023 5.1 and 6.7; 2024 13.0 and 10.5
- Deviation from Rule/Escape Clause: COVID, Martial Law; Ex post breach

Table 3. Adherence to the Current Expenditure Rule Condition on Tax Revenues (selected columns)
- Debt in t-2 (in percent of GDP): 2018 51.9; 2019 53.7; 2020 51.2; 2021 50.1; 2022 63.5; 2023 60.2; 2024 46.7
- Current Expenditure Projection: 2018 22.4; 2019 21.1; 2020 22.1; 2021 25.6; 2022 23.4; 2023 21.9; 2024 23.9
- Tax Revenue Projection: 2018 21.3; 2019 20.7; 2020 22.6; 2021 22.5; 2022 23.4; 2023 23.7; 2024 24.9
- Current Expenditure Actual: 2018 21.6; 2019 22.0; 2020 27.0; 2021 25.6; 2022 22.3; 2023 21.9; 2024 23.7
- Tax Revenue Actual: 2018 20.9; 2019 22.4; 2020 22.4; 2021 22.7; 2022 22.7; 2023 23.4; 2024 23.5
- No breach of the rule observed.

### E. Assessment of Armenia’s Fiscal Rules — Countercyclicality and Flexibility
- Countercyclicality outcomes:
  - 2018 reforms aimed to strengthen countercyclicality but gains have been limited.
  - Pre-2018 (2010–17): fiscal policy consistently procyclical in good times.
  - Post-2018: fiscal policy countercyclical during crises period 2020–21 when escape clause was triggered; remained procyclical ex-ante and ex-post as growth rebounded during 2022–24.
  - During 2018–2024, actual share of current expenditures in total expenditures averaged 1.8 percentage points of GDP higher than envisaged in annual budgets; this average increased to 2.8 percentage points of GDP in 2023–24.
  - Expenditure rule breached twice in this period; expenditure outturn consistently exceeded authorities’ projections driven by over-execution of current expenditures and under-execution of capital spending.
- Limitations of existing framework identified:
  - Rules are inherently procyclical:
    - Rules are backward-looking and enable additional spending during periods of high economic growth and could severely constrain spending during extended low growth.
    - Expenditure rule becomes binding only when debt exceeds 50 percent of GDP and does not warrant countercyclical policy below that threshold.
  - Incentives for unrealistic planning:
    - Expenditure rule applies to primary current expenditures, incentivizing higher projections for interest payments to create room for discretionary spending within current expenditure ceilings; can cause ex-post breaches.
    - Exclusion of capital expenditure from expenditure rule encourages planning for higher capital spending and lower current expenditure ex-ante, then deviating ex-post while meeting overall deficit target.
  - Enforcement limitations:
    - Expenditure rule legally applies for ex-ante planning only, limiting incentive for ex-post monitoring and enforcement.

*Prepared by M. Al Taj, N. Belhocine, V. Janvelyan, E. Prifti, with assistance from D. Hineva, B. Laumann and X. Shen. Source: IMF staff analysis (November 10, 2025).*

### 11.      Armenia’s fiscal rules provide sufficient flexibility to maintain an agile fiscal

### 11.      Armenia’s fiscal rules provide sufficient flexibility to maintain an agile fiscal framework, but there are key limitations:  

### Key findings: limitations of current fiscal rules
- Escape clause shortcomings:
  - Served to provide flexibility for countercyclical policy during severe downturns.
  - Lacks clarity and specificity about activation (how it is activated), procedural details, transparency and public communication, monitoring indicators, guidelines on the path back to the application of fiscal rules, and independent ex-ante and ex-post scrutiny.
  - Shortcomings create room for interpretation and make application ambiguous and discretionary.
- Reserve fund weaknesses:
  - Reserve fund rules are not binding in practice because funds can be redistributed from other allocations (e.g., capital expenditures to current expenses).
  - Use of the reserve fund can lead to deviation from planned spending, over-execution of current spending, and ex-post breaches of the expenditure rule.
  - In practice, the reserve fund is used more like a tool for discretionary spending rather than risk management.

### Complexity
- Armenia’s fiscal rules are complex and composed of several “if-then” statements with different rules for deficit and expenditures depending on debt thresholds.
- The expenditure rule:
  - Is not a typical expenditure rule that predetermines limits even for safe debt levels.
  - Has different rules for current and current primary expenditures relative to the deficit, revenues and moving average nominal GDP growth.
  - Exempts capital expenditure from the expenditure rule.
- Complexity creates incentives for inconsistent projections and reclassifications of expenditures.

### Coverage
- Fiscal rules coverage is limited to central government only.
- Excludes subnational governments, SOEs, PPPs, and contingent liabilities.
- Separate, more lax rules via government decrees cap the stock and flow of guarantees, creating incentives for off-balance sheet transactions and increasing monitoring complexity.

### Monitoring and enforcement
- Independent monitoring, compliance, and enforcement mechanisms are lacking.
- Institutional roles and practices:
  - MOF’s macroeconomic department prepares the medium-term macro-fiscal framework; the government approves and publishes it as part of the MTEF without independent scrutiny.
  - Ex-post compliance with fiscal rules is not legally binding; MOF conducts and publishes an assessment of ex-post deviation in the MTEF.
  - The independent Parliamentary Budget Office (PBO) occasionally conducts assessments of compliance for internal purposes only but lacks mandate and resources to assess fiscal forecasts or ensure ex-ante compliance.
  - The Audit Chamber focuses on ex-post financial audits but is not mandated to systematically review fiscal rule implementation.

### Transparency and reporting
- Progress has been made: MTEF and annual budget are prepared, approved and published in a timely manner and include:
  - Detailed macroeconomic and fiscal projections, scenario analysis, priorities and objectives of fiscal policy, assessment of compliance with fiscal rules in the medium-term, and assessment of macro and specific (SOEs, PPP, other) fiscal risks.
  - Annual execution reports include sub-sections on fiscal rules and MOF’s assessment of ex-post compliance.
  - General government financial statistics are published in line with international standards.
- The 2019 IMF Fiscal Transparency Evaluation results:
  - Armenia met good or advanced practices on 16 out of 36 principles of the IMF’s Fiscal Transparency Code.
  - Armenia met basic practice on 14 other principles.
  - Major gaps remain, including limited institutional coverage.

### International comparison and rule performance
- Fiscal Rule Strength Index developments:
  - Armenia’s de jure fiscal framework quality exceeded the peer group average after the 2018 reforms.
  - Armenia ranks 19th out of 45 countries in its income group and 58th out of 106 countries for which the index was available in 2021.
  - The Fiscal Rule Strength Index score range is -0.7 to 3.6 (higher values indicate stronger fiscal rule frameworks).
- Rule compliance and deviations:
  - Deviations from the debt rule limit have been in line with peer-group trends; many countries breached debt limits during the pandemic and regained fiscal space afterwards.
  - For the balanced budget rule, Armenia experienced smaller deviations relative to peers.
- Countercyclicality:
  - Armenia’s coefficient of countercyclicality is 0.13.
  - The average coefficient in the sample is 0.15.
  - Armenia ranks 31st out of 62 countries for which estimates are available.
  - The 2018 strengthening of the rule is associated with lower structural primary balances and more stable debt.

### Policy recommendations: improving countercyclicality and escape clauses
- Strengthen countercyclicality of the expenditure rule by:
  - Regular adjustment for past forecast errors to limit impacts of shocks that make rules too lax in upturns or too constraining in downturns.
  - Adding a forward-looking feature based on conservative, independent and credible forecasts of potential output (example cited: Chile).
  - Applying the expenditure rule to total expenditures including capital expenditures and interest payments to avoid incentives for forecast bias, procyclicality, and ex-post breaches.
  - Enacting stricter regulations and formal procedures on discretionary use of the reserve fund and flexibility to increase current spending to limit high-spending bias and reduce procyclical spending.
  - Considering redesigning the balanced budget rule into a more dynamic tool with countercyclical deficit targets or structural balance targets across economic cycles (examples cited: Serbia, Croatia).
- Strengthen escape clauses through improved clarity, transparency, and correction mechanisms:
  - Include clearly defined and measurable activation conditions and triggers (e.g., specific threshold for GDP contraction or certain size of fiscal impact from natural disasters or wars).
  - Codify such conditions in the Budget System Law and communicate them publicly in budget documentation to eliminate ambiguity.
  - Clarify the details required in the plan to return to the rules (escape clauses currently include a corrective mechanism requiring a plan to return to rules within 5 years of invoking the escape clause).
  - Mandate independent evaluation of compliance with the correction plan by an independent fiscal institution such as the PBO.
  - Draw on best-practice examples (Peru, Jamaica) for clarity and institutional procedures when designing escape clauses.

### Illustrative international examples (Box highlights)
- Serbia: a Budget Balance Rule with embedded countercyclicality (formula provided), debt rule capping general government debt at 45% of GDP, and a Fiscal Council to assess compliance; additional provisions restrict wages and pensions shares of GDP.
- Croatia: multilayered framework with expenditure, budget balance, and debt rules; growth-sensitive expenditure rule; structural fiscal position targeting; debt rule aligned with EU benchmarks; strengthened oversight via Fiscal Policy Commission and EU procedures.
- Chile: structural balance rule based on structural revenues, independent expert panels for potential output and long-run commodity prices, and a Fiscal Council that oversees key input estimation—producing a forward-looking, countercyclical framework.
- Peru (escape clause design): suspension process coordinated between Executive and Legislative branches; suspension up to three years under conditions:
  - When real GDP is declining: deficit ceiling can be raised to 2.5 percent of GDP, accompanied by a minimum annual reduction of 0.5 percent of GDP until the deficit ceiling of 1 percent is restored.
  - In emergencies declared by Congress: specific ceilings must be specified, with the same minimum annual reduction of 0.5 percent of GDP applying.
- Jamaica (escape clause design): can only be triggered under specific conditions (natural disasters, public health or other emergencies, or a quarterly GDP contraction of at least 2and the projected fiscal impact must exceed 1.5% of GDP); activation requires formal report to Parliament, approval by both houses, and independent verification by the constitutionally autonomous auditor general.

*Source: Excerpt from the provided IMF PDF content.*

### 21.      Armenia‘s fiscal rules could benefit from simplification. Armenia’s fiscal rules could be

### Armenia‘s fiscal rules could benefit from simplification.

### Simplifying fiscal rules
- Recommendation to consolidate separate rules for current expenditures, current primary expenditures and capital expenditures into an “all inclusive” or a more streamlined expenditure rule.
- Proposal that such a rule could be specified to apply even for safe levels of debt, with more restrictive provisions for higher debt thresholds.
- Tradeoff highlighted between simplicity and countercyclicality.
- Examples of simple expenditure rules:
  - Costa Rica: total expenditure cannot grow faster, on average, than revenue.
  - Peru: Responsibility Law caps nominal annual growth of non-financial expenditure at 4% (IMF, 2023b).

### Enhancing transparency and broadening coverage
- Improvements to fiscal transparency could make fiscal rules more effective by:
  - Adequately reporting compliance with fiscal rules, mandated by law, in a timely, transparent, independent, and simplified manner.
  - Enhancing standardization and providing concrete revenue mobilization and expenditure rationalization measures in debt reduction plans mandated after the escape clause is triggered.
  - Consolidating all fiscal rules in a single primary legislation instead of multiple laws and decrees.
- Example of fiscal transparency practice:
  - New Zealand: open budget process, fiscal responsibility act mandating clear long-term fiscal strategies and regular performance reporting; treasury ensures credible analyses and projections (Căpraru et al., 2024).
- Broadening coverage of fiscal rules:
  - Consider expanding coverage beyond central government to include non-financial SOEs, PPPs and contingent liabilities to avoid separate rules and limits for each.
  - Cover flexibility for discretionary spending and use of the reserve fund within fiscal rules with clearly defined enforceable rules.
  - Draft 2008 Debt Law revision expands public debt coverage to include state-owned and municipal entities, but excludes public guarantees.
  - Examples of broader coverage:
    - Ecuador: debt rule limits non-financial public sector debt to 40 percent of GDP; Article 125 of the Código Orgánico de Planificación y Finanzas Públicas limits decentralized entities’ debt to 200 percent and debt service to 25 percent of their annual revenue.
    - Panama and Peru: limit non-financial public debt to 40 and 30 percent of GDP respectively.

### Strengthening oversight and enforcement of fiscal rules
- Possible reforms:
  - Introduce an accountability mechanism (e.g., legal requirement to publish the reasons and corrective measures for ex-post breach of the rule) for the expenditure rule to strengthen ex-post implementation commitment.
  - Put in place an independent mechanism for ex-ante as well as ex-post scrutiny of fiscal projections and compliance with fiscal rules (IMF, 2019).
- Institutional options:
  - Roles could be vested in an independent fiscal council, or in the Parliamentary Budget Office (PBO) for ex-ante and the Audit Chamber for ex-post evaluation.
- Current capacity constraints:
  - PBO, formally independent since 2016, currently lacks the mandate and resources to assess fiscal forecasts or ensure ex ante compliance with fiscal rules.
  - Audit Chamber focuses on ex-post financial audits but is not systematically mandated to review fiscal rule implementation.
- Example of oversight arrangements:
  - Aruba: Board of Financial Supervision (CAft) oversees compliance with fiscal rules (IMF, 2025).
  - Canada, Croatia, Serbia, and Sweden cited as examples of good country practices on independent fiscal oversight.
- Box 5 — country experiences with independent fiscal institutions:
  - Canada: Federal Accountability Act (FAA) 2006 created the Parliamentary Budget Office (PBO). Operational since 2008, PBO mandated to assess national finances and economic trends with two divisions focused on economic analysis and budget costing. Bill C-44 in 2017 made the PBO an independent Officer of Parliament; reforms included fixed-term appointments with removal only for cause, direct reporting to Parliament, an expanded mandate, improved access to government data, ability to cost election platforms during the 120-day pre-election period, and requirement to publicly table reports to both house and senate speakers.
  - Sweden: Swedish Fiscal Policy Council (FPC), established in 2007, composed of six academic economists and two former politicians, operates as a government agency with a small staff and external consultants. Broad mandate includes evaluating fiscal policy, economic trends, budget clarity, and forecast quality. Despite modest budget and lack of legal authority for ex-ante forecasting or costings, FPC is respected for rigorous analysis and promotes transparency and accountability.
  - Aruba: referenced as an example where a supervisory board oversees fiscal rule compliance.

### Conclusion — key policy recommendations (as listed)
- Improve the countercyclicality features of fiscal rules:
  - Upgrade the expenditure rule to incorporate adjustments for past forecast errors and forward-looking elements based on credible estimates of potential output.
  - Redesign the balanced budget rule to include countercyclical or structural deficit targets.
  - Institute stricter procedures governing the use of reserve funds and current spending flexibility.
- Simplify and strengthen the design of fiscal rules:
  - Move to a simplified set of rules to improve clarity and facilitate monitoring.
  - Establish transparent, well-defined escape clauses linked to well-specified economic or emergency conditions (Lledo et al., 2018).
- Improve transparency of fiscal rules:
  - Legally mandate clear reporting of compliance, standardized and detailed debt reduction plans as part of the escape clause, and consolidation of fiscal rules in unified primary legislation.
- Broaden the coverage of fiscal rules:
  - Include off-budget entities, extra-budgetary funds, and contingent liabilities to improve comprehensiveness and coverage of fiscal risks.
- Enhance oversight and enforcement of fiscal rules:
  - Statutory codification of rules and ex-post enforcement mechanisms to strengthen accountability and compliance.
  - Establish an independent fiscal council or enhance the mandate of existing oversight bodies such as the PBO and Audit Chamber to improve transparency, support rule-based fiscal policy, and foster public accountability.

*REPUBLIC OF ARMENIA  INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1armea2025003-source-pdf.pdf_