## _cr08377

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---

### Assessment of PRSP-1 indicators
- Poverty and inequality outcomes (2003–07):
  - Poverty rate declined to 26.5 percent in 2006 (from 34.6 percent in 2004).
  - Extreme poverty rate declined to 4.1 percent in 2006 (from 6.4 percent in 2004).
  - Gini coefficient fell from 0.395 in 2004 to 0.369 in 2006.
  - Real GDP grew by 13.1 percent per year on average over the period 2003–07.
  - Inflation averaged 3.9 percent during 2003–07.
  - Social expenditures increased to 4.7 percent of GDP (PRSP-1 goal was 3.0 percent).
- Shortcomings and fiscal/economic underperformance:
  - Growth remained narrowly based on remittances (the level of remittances to GDP is, at nearly 20 percent, among the highest in the world) and construction.
  - Real growth in exports was less than 2 percent per annum in 2004–07.
  - Revenue-to-GDP ratio grew to 14.5 percent by 2006 (reached 16 percent by 2007), below PRSP-1 targets.
  - Total public spending decreased by 0.7 percent of GDP during 2003–07.

### Poverty diagnostic
- Drivers of faster-than-anticipated poverty reduction:
  - Double-digit economic growth, increases in labor income, private transfers from abroad, pensions, and increased social transfers through a well-targeted family poverty benefits program.
- Distributional and demographic findings:
  - Regional poverty disparities: higher incidence in marzes affected by the earthquake, border regions, areas with low irrigated agricultural land, and predominantly urban marzes.
  - Very little difference in poverty level by gender.
  - Better than average progress among the aged population over 2003–06.
- SDP projections and staff concerns:
  - With 2004 poverty lines held constant in real terms, projection: overall poverty incidence would fall to 8 percent in 2012.
  - Projection: incidence of extreme poverty (US$ 1 per day) would decrease to 1.2 percent.
  - Staffs note projections may be optimistic; poverty reduction becomes more challenging at lower poverty levels and economic growth may be necessary but not sufficient.
  - Staffs recommend expanding poverty and social impact analyses of key SDP policy measures beyond pensions and social protection.
  - Staffs recommend discussing the distributional impacts of increases in food and energy prices in 2006–08.
  - Staffs recommend presenting poverty incidence simulations based on alternative macroeconomic scenarios, noting that a decline in remittances due to a global slowdown could have important consequences.
- Minimum consumption basket (MCB) versus survey-based poverty line:
  - SDP envisages shift to an MCB, which is much higher than current survey-based poverty lines and is normative/politically determined.
  - Staffs recommend continuing to use the survey-based poverty line instead of switching to the MCB.

### Priority public policies — Macroeconomic, fiscal, and growth framework
- Macroeconomic framework and growth outlook:
  - SDP medium-term framework is broadly consistent with the 2009 budget and MTEF and with staff reports.
  - SDP projects GDP growth slowing over 2008-11 but expects continued large remittances and capital inflows to keep growth at about 9 percent on average (staffs project average growth to be less than 8 percent over the same period).
  - Downside risks: worsening international environment, growing domestic imbalances, pressure on external current account deficit, and potential persistence of inflation expectations.
- Revenue and tax reform imperatives:
  - Tax revenue-to-GDP ratio remains very low by international standards; recent collection increases accompanied by accumulation of tax credits.
  - Identified reforms needed to achieve an average yearly increase in tax revenues of 0.4 percent of GDP include:
    - (a) emphasizing the introduction of self-assessment and self-declaration systems in tax and customs administrations, and upgrading risk-based audit and post-clearance review capacity;
    - (b) modernizing the organization and human resources of the new revenue agency, and strengthening cooperation between the tax and customs functions;
    - (c) introducing an effectively functioning appeal system; and
    - (d) improving taxpayer services.
  - Political resolve is required since time will be needed before noticeable revenue increases are achieved.
- Expenditure rigidities and pension reform concerns:
  - Significant increases in basic pensions and civil service wages increase rigidity of current spending.
  - Fiscal implications of the pension reform to be implemented in 2010 are not clearly accounted for; pension reform cost estimates appear based on optimistic assumptions and exclude administrative costs.
  - Introduction of a relatively large second pillar with an expansionary PAYG benefits policy may generate rising deficits even if the contribution base grows rapidly.
- Investment projects and fiscal costing:
  - Large investment projects in energy and infrastructure (potential nuclear power plant replacement; highways, rural roads, railways; national broadband backbone; IT parks) are planned but mostly not explicitly included in SDP projections.
  - Many projects will involve substantial government participation or guarantees; SDP and MTEF progress reports should include more detailed costing of major investment projects.
- Fiscal position and risks:
  - Overall budget deficit (GFSM 2001) expected not to exceed 2 percent of GDP over the projection period.
  - Public debt projected to increase from 17.8 percent of GDP in 2007 to 23.9 percent of GDP in 2021.
  - SDP projections do not provide alternative macroeconomic scenarios or discuss program risks; staffs highlight the need for strengthened expenditure appraisal and prioritization and cautious macroeconomic/fiscal stance given downside risks.
- Growth and competition strategies:
  - SDP proposes second generation growth and diversification strategy focused on deepening competition and private sector development.
  - Measures needed include:
    - strengthening the law on competition, reinforcing the Economic Competition State Commission, improving conflict of interest laws and enforcing them;
    - upgrading regulatory frameworks for public-private partnerships;
    - liberalizing civil aviation and telecommunications sectors;
    - easing administrative and legal barriers (including corporate governance weaknesses) for small businesses and firms outside Yerevan;
    - reducing costly tax and customs administration barriers.
- Financial sector risks:
  - Capital adequacy very strong, profitability high, nonperforming loans share 3 percent in the first half of 2008.
  - Deposit growth has lagged credit growth in last three years; banks increased external financing to the equivalent of 17 percent of all bank loans in 2007.
  - Rapid credit growth largely financed household mortgages, increasing exposure to a possible decline in real estate prices.

### Priority public policies — Governance and public sector reform
- Public administration reform priorities:
  - Focus areas: (a) increasing competitiveness of public service pay while improving performance management; (b) further developing and rolling out e-government systems; (c) introducing conflict of interest rules for public servants; (d) strengthening public expenditure management (PEM) through a comprehensive and prioritized strategy.
  - Conflict of interest rules should cover high level executive, legislative, and judicial officials and be developed as a priority.
  - Public service pay reforms should target strategic and functional priority areas and link pay increases to performance appraisal.
  - Expansion of e-government depends on broadband backbone development and meeting targets for ‘Government to Citizen’ and ‘Government to Business’ services; SDP currently addresses only G2G and G2E systems and lacks targets/strategy for an integrated system.
  - Automation of key “back office” functions is required for efficient integrated G2G and G2E systems.
- Legal and judicial reform needs and funding:
  - SDP lacks evidence of increased budget allocation sufficient to implement proposed judicial reforms.
  - Essential elements: sustainable increase in judicial salaries, capacity building for training judges, full development of the Judicial School, funding for arbitration and private bailiff systems, supervision by the Ministry of Justice, and commitment to an automatic and random case assignment system.
- Public expenditure management (PEM) challenge:
  - Move beyond fragmented initiatives toward an integrated PEM program.
  - Strengthen budget performance orientation via MTEF and program budgeting consolidation.
  - Strengthen fiduciary accountability: reporting and monitoring (including non-commercial organizations), internal audit, external audit, and parliamentary oversight.
  - Facilitate greater involvement of external stakeholders—from the National Assembly to the public—in budget monitoring using wide public availability of budgetary data.

### Priority public policies — Social services and protection
- Health sector:
  - SDP envisages budget allocation increase from 1.5 percent of GDP in 2006 to 3.5 percent of GDP in 2021 to increase access and quality of healthcare services.
  - Priority: further development of primary health care and transformation to a family medicine-based system.
  - Staffs find SDP lacks concrete descriptions of:
    - (a) concrete actions and measures to reduce out-of-pocket payments and provide financial protection from catastrophic health expenditures;
    - (b) cost-effective preventive measures for non-communicable diseases adequately covered through the public budget with target indicators;
    - (c) anticipated intra-sectoral allocations to priorities;
    - (d) outputs/outcomes targets for priorities beyond maternal and child health.
  - Recommendation: further elaboration in the SDP action plan.
- Education sector:
  - Public expenditure projected to reach 4.5 percent of GDP by 2021.
  - Commitment to improving quality and accessibility of preschool education is highlighted.
  - SDP lacks concrete references to financing preschool, inclusive education initiatives, or quality assurance and international accreditation of higher education institutions.
  - Tertiary education target: raise enrollment to 33 percent by 2012; achieving this and improving quality likely requires total spending on tertiary education to increase beyond current projections.

### Pension reform: design, costs, and risks
- Key design elements:
  - Considerable real increase in state pensions to provide minimum income security in old age and accommodate introduction of a mandatory funded pension pillar in 2010.
  - Pension system comprises state insurance pensions for employed persons and social pensions for specific cases not eligible for the former.
  - The average insurance pension is expected to reach 150 percent of the MCB by 2018.
  - The ratio of the average insurance pension to the projected average wage is expected to settle at 30 percent in the long run.
- Fiscal projections and burdens:
  - Spending on state pensions is projected to increase from a current 3 percent of GDP to 5.4 percent in 2021.
  - The funded pillar is estimated to generate an additional fiscal burden of 0.2-0.4 percent of GDP.
- Implementation and administrative challenges:
  - Projected pension reforms will require major administrative changes before implementation can commence.
  - The target implementation date of January 2010—requiring complete implementation of IT systems for collection, distribution, data reconciliation, and account management—seems unrealistic.
  - The SDP does not provide sufficient detail to assess feasibility of reaching critical implementation milestones; an action plan should be developed to indicate a credible path for launching the second pillar.
  - Development of the government debt market is essential for success but is an element whose success has eluded many other countries.
  - Given the current state of global financial markets, a highly cautious stance is warranted.
- Downside risk considerations:
  - If macroeconomic (GDP growth or investment rates of return) or demographic variables (lower population or contribution base growth rates) deviate from the SDP baseline, risk analysis should inform policy design on affordability and sustainability.

### Social protection and safety nets
- SDP objectives and resource allocation:
  - SDP lays out ambitious objectives on benefit levels, targeting, and moving toward European Union standards.
  - Except for pensions, resources projected to finance social assistance are kept unchanged relative to GDP at 1.7 percent until 2018 with a sharp drop to 1.4 percent in 2021.
- Practical concerns:
  - At these levels, budgets may not be sufficient to adequately cover envisaged safety net programs.
  - The progress report would benefit from discussion of risks such as higher food and energy prices (and possible increases in energy tariffs), and risks of increasing unemployment and declining remittances resulting from the international financial crisis.

### Improving infrastructure and energy: progress and recommendations
- Transport and roads:
  - Good progress noted in transportation, telecommunications, and energy, but road construction and routine maintenance allocations are insufficient to meet the current backlog, particularly rehabilitation and periodic maintenance.
  - Recommended that government develop a road infrastructure improvement strategy to balance capital and recurrent expenditures.
  - Urgent need to invest in improved traffic management and road infrastructure in Yerevan to address traffic congestion.
  - Need to establish an appropriate institutional framework to oversee railway concessionaire operations.
- Telecommunications:
  - Important achievement in liberalizing the telecommunications sector; current radio frequency spectrum policy still allocates excessive economically valuable spectrum to possibly low value public sector uses.
  - Staffs recommend completing an independent audit of spectrum uses as a first step, followed by a policy to transition allocations and assignments to commercial allocations and users.
  - Anticipated added demands on spectrum warrant establishment of an enhanced institutional and regulatory framework.
- Energy:
  - Government has diversified energy supply sources and increased utilization of indigenous resources.
  - In view of rising import price of natural gas, ensure end-user tariffs for natural gas and for electricity reflect true costs of supply to allow efficient allocation and encourage energy efficiency.
  - Staffs recommend considering gas tariffs based on actual costs of gas delivery to different consumer groups and introducing seasonal electricity tariffs reflecting actual costs during the winter peak.
  - Staffs urge government to address barriers to energy efficiency, which could bring significant savings to the Armenian economy.

### Participation, coordination, and monitoring
- Institutional framework and participation:
  - SDP process benefited from institutional framework created after approval of PRSP-1: PRSP Steering Committee, Working Group, Secretariat, and the Open Forum.
  - Consultations included brain-storming discussions, Voices of Poor and other surveys, and consultations with development partners.
  - Government created new institutional arrangements to allow greater engagement of civil society organizations (CSO) through a CSO board and secretariat with direct and regular access to the SDP Steering Committee.
  - Controls over electronic media limited the reach and impact of the consultative process.
- Monitoring and integration with budget:
  - Staffs support the government’s intention to produce a time-bound action plan with specific measures, responsible agencies, agreed indicators, and accountability arrangements.
  - Action plans should present:
    - (a) a time-bound matrix of key policy actions and institutional reforms, anchored in the MTEF, over a medium-term horizon; and
    - (b) a selected set of corresponding core indicators to measure performance against targets.
  - Existing reporting arrangements are inadequate for several SDP priority areas; supplementary information collection and rationalization of reporting and evaluation cycles are needed.
  - Staffs recommend fully integrating SDP monitoring into the budget process; performance budgeting reforms provide an opportunity for full integration of SDP indicators with agency performance indicators.
  - Reporting, monitoring, and participation arrangements should be clarified and codified to allow stakeholders to offer focused feedback on a timely basis.

### Conclusions, risks, and suggested issues for discussion
- Macro and fiscal risks:
  - Deteriorating external environment could widen the external current account deficit; inflation may prove harder to reduce, requiring additional policy tightening that could negatively affect growth and poverty reduction.
  - Risks to the fiscal framework on both revenue and expenditure sides: underperformance on tax reforms could reduce revenue, while higher than expected spending on pensions could strain the budget.
  - These developments could impair the fiscal framework and lead to scaled down spending, negatively affecting growth and poverty reduction.
  - Political risks could materialize as resistance to the ambitious reform program.
- Areas needing stronger effort (extracted SDP priorities):
  - Clarify priority medium-term policy and institutional reform program and corresponding funding requirements in SDP action plans; increase selectivity among core monitoring indicators.
  - Prioritize and sequence key economic policy measures over the medium term; provide more detail on key measures, especially competition policy.
  - Provide a more detailed exposition of expenditure levels and key projects by sector; strengthen investment planning and appraisal capacity.
  - Tax and customs administration reform: successful implementation is critical; recent formation of the State Revenue Committee could aid reforms but is not a substitute for solid implementation; steady high level political support is needed to improve tax and customs administration while combating corruption.
  - Pensions reform: review the government’s pension reform proposal in light of macroeconomic, fiscal, and institutional risk and, if necessary, reformulate to reduce risk and improve sustainability.
- Issues suggested for Executive Directors:
  - Do Directors concur that the SDP focuses on the appropriate areas for poverty reduction?
  - Do Directors concur with staffs’ views on risks and core areas that would benefit from further strengthening?

*Source: IMF staff Joint Staff Advisory Note (JSAN) summarizing PRSP-1 implementation and advising on strengthening the SDP.*

### 1.      The Sustainable Development Program (SDP), approved by the government in

### The Sustainable Development Program (SDP), approved by the government in October 2008, is Armenia’s second Poverty Reduction Strategy Paper (PRSP-2).

### Assessment of PRSP-1 indicators
- Poverty and inequality outcomes (2003–07):
  - Poverty rate declined to 26.5 percent in 2006 (from 34.6 percent in 2004).
  - Extreme poverty rate declined to 4.1 percent in 2006 (from 6.4 percent in 2004).
  - Gini coefficient fell from 0.395 in 2004 to 0.369 in 2006.
  - Real GDP grew by 13.1 percent per year on average over the period 2003–07.
  - Inflation averaged 3.9 percent during 2003–07.
  - Social expenditures increased to 4.7 percent of GDP (PRSP-1 goal was 3.0 percent).
- Shortcomings and fiscal/economic underperformance:
  - Growth remained narrowly based on remittances (the level of remittances to GDP is, at nearly 20 percent, among the highest in the world) and construction.
  - Real growth in exports was less than 2 percent per annum in 2004–07.
  - Revenue-to-GDP ratio grew to 14.5 percent by 2006 (reached 16 percent by 2007), below PRSP-1 targets.
  - Total public spending decreased by 0.7 percent of GDP during 2003–07.

### Poverty diagnostic
- Drivers of faster-than-anticipated poverty reduction:
  - Double-digit economic growth, increases in labor income, private transfers from abroad, pensions, and increased social transfers through a well-targeted family poverty benefits program.
- Distributional and demographic findings:
  - Regional poverty disparities: higher incidence in marzes affected by the earthquake, border regions, areas with low irrigated agricultural land, and predominantly urban marzes.
  - Very little difference in poverty level by gender.
  - Better than average progress among the aged population over 2003–06.
- SDP projections and staff concerns:
  - With 2004 poverty lines held constant in real terms, projection: overall poverty incidence would fall to 8 percent in 2012.
  - Projection: incidence of extreme poverty (US$ 1 per day) would decrease to 1.2 percent.
  - Staffs note projections may be optimistic; poverty reduction becomes more challenging at lower poverty levels and economic growth may be necessary but not sufficient.
  - Staffs recommend expanding poverty and social impact analyses of key SDP policy measures beyond pensions and social protection.
  - Staffs recommend discussing the distributional impacts of increases in food and energy prices in 2006–08.
  - Staffs recommend presenting poverty incidence simulations based on alternative macroeconomic scenarios, noting that a decline in remittances due to a global slowdown could have important consequences.
- Minimum consumption basket (MCB) versus survey-based poverty line:
  - SDP envisages shift to an MCB, which is much higher than current survey-based poverty lines and is normative/politically determined.
  - Staffs recommend continuing to use the survey-based poverty line instead of switching to the MCB.

### Priority public policies — Macroeconomic, fiscal, and growth framework
- Macroeconomic framework and growth outlook:
  - SDP medium-term framework is broadly consistent with the 2009 budget and MTEF and with staff reports.
  - SDP projects GDP growth slowing over 2008-11 but expects continued large remittances and capital inflows to keep growth at about 9 percent on average (staffs project average growth to be less than 8 percent over the same period).
  - Downside risks: worsening international environment, growing domestic imbalances, pressure on external current account deficit, and potential persistence of inflation expectations.
- Revenue and tax reform imperatives:
  - Tax revenue-to-GDP ratio remains very low by international standards; recent collection increases accompanied by accumulation of tax credits.
  - Identified reforms needed to achieve an average yearly increase in tax revenues of 0.4 percent of GDP include:
    - (a) emphasizing the introduction of self-assessment and self-declaration systems in tax and customs administrations, and upgrading risk-based audit and post-clearance review capacity;
    - (b) modernizing the organization and human resources of the new revenue agency, and strengthening cooperation between the tax and customs functions;
    - (c) introducing an effectively functioning appeal system; and
    - (d) improving taxpayer services.
  - Political resolve is required since time will be needed before noticeable revenue increases are achieved.
- Expenditure rigidities and pension reform concerns:
  - Significant increases in basic pensions and civil service wages increase rigidity of current spending.
  - Fiscal implications of the pension reform to be implemented in 2010 are not clearly accounted for; pension reform cost estimates appear based on optimistic assumptions and exclude administrative costs.
  - Introduction of a relatively large second pillar with an expansionary PAYG benefits policy may generate rising deficits even if the contribution base grows rapidly.
- Investment projects and fiscal costing:
  - Large investment projects in energy and infrastructure (potential nuclear power plant replacement; highways, rural roads, railways; national broadband backbone; IT parks) are planned but mostly not explicitly included in SDP projections.
  - Many projects will involve substantial government participation or guarantees; SDP and MTEF progress reports should include more detailed costing of major investment projects.
- Fiscal position and risks:
  - Overall budget deficit (GFSM 2001) expected not to exceed 2 percent of GDP over the projection period.
  - Public debt projected to increase from 17.8 percent of GDP in 2007 to 23.9 percent of GDP in 2021.
  - SDP projections do not provide alternative macroeconomic scenarios or discuss program risks; staffs highlight the need for strengthened expenditure appraisal and prioritization and cautious macroeconomic/fiscal stance given downside risks.
- Growth and competition strategies:
  - SDP proposes second generation growth and diversification strategy focused on deepening competition and private sector development.
  - Measures needed include:
    - strengthening the law on competition, reinforcing the Economic Competition State Commission, improving conflict of interest laws and enforcing them;
    - upgrading regulatory frameworks for public-private partnerships;
    - liberalizing civil aviation and telecommunications sectors;
    - easing administrative and legal barriers (including corporate governance weaknesses) for small businesses and firms outside Yerevan;
    - reducing costly tax and customs administration barriers.
- Financial sector risks:
  - Capital adequacy very strong, profitability high, nonperforming loans share 3 percent in the first half of 2008.
  - Deposit growth has lagged credit growth in last three years; banks increased external financing to the equivalent of 17 percent of all bank loans in 2007.
  - Rapid credit growth largely financed household mortgages, increasing exposure to a possible decline in real estate prices.

### Priority public policies — Governance and public sector reform
- Public administration reform priorities:
  - Focus areas: (a) increasing competitiveness of public service pay while improving performance management; (b) further developing and rolling out e-government systems; (c) introducing conflict of interest rules for public servants; (d) strengthening public expenditure management (PEM) through a comprehensive and prioritized strategy.
  - Conflict of interest rules should cover high level executive, legislative, and judicial officials and be developed as a priority.
  - Public service pay reforms should target strategic and functional priority areas and link pay increases to performance appraisal.
  - Expansion of e-government depends on broadband backbone development and meeting targets for ‘Government to Citizen’ and ‘Government to Business’ services; SDP currently addresses only G2G and G2E systems and lacks targets/strategy for an integrated system.
  - Automation of key “back office” functions is required for efficient integrated G2G and G2E systems.
- Legal and judicial reform needs and funding:
  - SDP lacks evidence of increased budget allocation sufficient to implement proposed judicial reforms.
  - Essential elements: sustainable increase in judicial salaries, capacity building for training judges, full development of the Judicial School, funding for arbitration and private bailiff systems, supervision by the Ministry of Justice, and commitment to an automatic and random case assignment system.
- Public expenditure management (PEM) challenge:
  - Move beyond fragmented initiatives toward an integrated PEM program.
  - Strengthen budget performance orientation via MTEF and program budgeting consolidation.
  - Strengthen fiduciary accountability: reporting and monitoring (including non-commercial organizations), internal audit, external audit, and parliamentary oversight.
  - Facilitate greater involvement of external stakeholders—from the National Assembly to the public—in budget monitoring using wide public availability of budgetary data.

### Priority public policies — Social services and protection
- Health sector:
  - SDP envisages budget allocation increase from 1.5 percent of GDP in 2006 to 3.5 percent of GDP in 2021 to increase access and quality of healthcare services.
  - Priority: further development of primary health care and transformation to a family medicine-based system.
  - Staffs find SDP lacks concrete descriptions of:
    - (a) concrete actions and measures to reduce out-of-pocket payments and provide financial protection from catastrophic health expenditures;
    - (b) cost-effective preventive measures for non-communicable diseases adequately covered through the public budget with target indicators;
    - (c) anticipated intra-sectoral allocations to priorities;
    - (d) outputs/outcomes targets for priorities beyond maternal and child health.
  - Recommendation: further elaboration in the SDP action plan.
- Education sector:
  - Public expenditure projected to reach 4.5 percent of GDP by 2021.
  - Commitment to improving quality and accessibility of preschool education is highlighted.
  - SDP lacks concrete references to financing preschool, inclusive education initiatives, or quality assurance and international accreditation of higher education institutions.
  - Tertiary education target: raise enrollment to 33 percent by 2012; achieving this and improving quality likely requires total spending on tertiary education to increase beyond current projections.

*Source: IMF staff Joint Staff Advisory Note (JSAN) summarizing PRSP-1 implementation and advising on strengthening the SDP.*

### 22.      Perhaps the most significant new policy in the SDP is the considerable real

### _cr08377 - 22.      Perhaps the most significant new policy in the SDP is the considerable real

### Pension reform: design, costs, and risks
- Key design elements
  - Considerable real increase in state pensions to provide minimum income security in old age and accommodate introduction of a mandatory funded pension pillar in 2010.
  - Pension system comprises state insurance pensions for employed persons and social pensions for specific cases not eligible for the former.
  - The average insurance pension is expected to reach 150 percent of the MCB by 2018.
  - The ratio of the average insurance pension to the projected average wage is expected to settle at 30 percent in the long run.
- Fiscal projections and burdens
  - Spending on state pensions is projected to increase from a current 3 percent of GDP to 5.4 percent in 2021.
  - The funded pillar is estimated to generate an additional fiscal burden of 0.2-0.4 percent of GDP.
- Implementation and administrative challenges
  - Projected pension reforms will require major administrative changes before implementation can commence.
  - The target implementation date of January 2010—requiring complete implementation of IT systems for collection, distribution, data reconciliation, and account management—seems unrealistic.
  - The SDP does not provide sufficient detail to assess feasibility of reaching critical implementation milestones; an action plan should be developed to indicate a credible path for launching the second pillar.
  - Development of the government debt market is essential for success but is an element whose success has eluded many other countries.
  - Given the current state of global financial markets, a highly cautious stance is warranted.
- Downside risk considerations
  - If macroeconomic (GDP growth or investment rates of return) or demographic variables (lower population or contribution base growth rates) deviate from the SDP baseline, risk analysis should inform policy design on affordability and sustainability.

### Social protection and safety nets
- SDP objectives and resource allocation
  - SDP lays out ambitious objectives on benefit levels, targeting, and moving toward European Union standards.
  - Except for pensions, resources projected to finance social assistance are kept unchanged relative to GDP at 1.7 percent until 2018 with a sharp drop to 1.4 percent in 2021.
- Practical concerns
  - At these levels, budgets may not be sufficient to adequately cover envisaged safety net programs.
  - The progress report would benefit from discussion of risks such as higher food and energy prices (and possible increases in energy tariffs), and risks of increasing unemployment and declining remittances resulting from the international financial crisis.

### Improving infrastructure and energy: progress and recommendations
- Transport and roads
  - Good progress noted in transportation, telecommunications, and energy, but road construction and routine maintenance allocations are insufficient to meet the current backlog, particularly rehabilitation and periodic maintenance.
  - Recommended that government develop a road infrastructure improvement strategy to balance capital and recurrent expenditures.
  - Urgent need to invest in improved traffic management and road infrastructure in Yerevan to address traffic congestion.
  - Need to establish an appropriate institutional framework to oversee railway concessionaire operations.
- Telecommunications
  - Important achievement in liberalizing the telecommunications sector; current radio frequency spectrum policy still allocates excessive economically valuable spectrum to possibly low value public sector uses.
  - Staffs recommend completing an independent audit of spectrum uses as a first step, followed by a policy to transition allocations and assignments to commercial allocations and users.
  - Anticipated added demands on spectrum warrant establishment of an enhanced institutional and regulatory framework.
- Energy
  - Government has diversified energy supply sources and increased utilization of indigenous resources.
  - In view of rising import price of natural gas, ensure end-user tariffs for natural gas and for electricity reflect true costs of supply to allow efficient allocation and encourage energy efficiency.
  - Staffs recommend considering gas tariffs based on actual costs of gas delivery to different consumer groups and introducing seasonal electricity tariffs reflecting actual costs during the winter peak.
  - Staffs urge government to address barriers to energy efficiency, which could bring significant savings to the Armenian economy.

### Participation, coordination, and monitoring
- Institutional framework and participation
  - SDP process benefited from institutional framework created after approval of PRSP-1: PRSP Steering Committee, Working Group, Secretariat, and the Open Forum.
  - Consultations included brain-storming discussions, Voices of Poor and other surveys, and consultations with development partners.
  - Government created new institutional arrangements to allow greater engagement of civil society organizations (CSO) through a CSO board and secretariat with direct and regular access to the SDP Steering Committee.
  - Controls over electronic media limited the reach and impact of the consultative process.
- Monitoring and integration with budget
  - Staffs support the government’s intention to produce a time-bound action plan with specific measures, responsible agencies, agreed indicators, and accountability arrangements.
  - Action plans should present:
    - (a) a time-bound matrix of key policy actions and institutional reforms, anchored in the MTEF, over a medium-term horizon; and
    - (b) a selected set of corresponding core indicators to measure performance against targets.
  - Existing reporting arrangements are inadequate for several SDP priority areas; supplementary information collection and rationalization of reporting and evaluation cycles are needed.
  - Staffs recommend fully integrating SDP monitoring into the budget process; performance budgeting reforms provide an opportunity for full integration of SDP indicators with agency performance indicators.
  - Reporting, monitoring, and participation arrangements should be clarified and codified to allow stakeholders to offer focused feedback on a timely basis.

### Conclusions, risks, and suggested issues for discussion
- Macro and fiscal risks
  - Deteriorating external environment could widen the external current account deficit; inflation may prove harder to reduce, requiring additional policy tightening that could negatively affect growth and poverty reduction.
  - Risks to the fiscal framework on both revenue and expenditure sides: underperformance on tax reforms could reduce revenue, while higher than expected spending on pensions could strain the budget.
  - These developments could impair the fiscal framework and lead to scaled down spending, negatively affecting growth and poverty reduction.
  - Political risks could materialize as resistance to the ambitious reform program.
- Areas needing stronger effort (extracted SDP priorities)
  - Extraction of priority medium-term policy actions: clarify priority medium-term policy and institutional reform program and corresponding funding requirements in SDP action plans; increase selectivity among core monitoring indicators.
  - Economic policy reform: prioritize and sequence key measures over the medium term; provide more detail on key measures, especially competition policy.
  - Investment program: provide a more detailed exposition of expenditure levels and key projects by sector; strengthen investment planning and appraisal capacity.
  - Tax and customs administration reform: successful implementation is critical; recent formation of the State Revenue Committee could aid reforms but is not a substitute for solid implementation; steady high level political support is needed to improve tax and customs administration while combating corruption.
  - Pensions reform: review the government’s pension reform proposal in light of macroeconomic, fiscal, and institutional risk and, if necessary, reformulate to reduce risk and improve sustainability.
- Issues suggested for Executive Directors
  - Do Directors concur that the SDP focuses on the appropriate areas for poverty reduction?
  - Do Directors concur with staffs’ views on risks and core areas that would benefit from further strengthening?

*Source: _cr08377 - 22.      Perhaps the most significant new policy in the SDP is the considerable real*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08377.pdf_