The Economic Transition in Armenia -- Speech by John Odling-Smee, Director, European II Department
IMF News, July 31, 2001
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- Published: July 31, 2001
I. Economic developments in Armenia since 1991
- Early transition outcomes:
- Liberalization of prices eliminated queues and forced saving; liberalization of economic activities increased access to goods and services.
- Output collapsed and inflation soared in the early years of transition.
- Three major shocks to Armenia after 1991:
- Collapse of central planning: many enterprises lost markets almost overnight.
- Terms of trade deterioration as an energy importer.
- The war over Nagorno-Karabakh, blockades, and trade disruptions.
- Key output and welfare indicators:
- By 1993, GDP in Armenia had declined to only 47 percent of its level in 1990.
- The proportion of the Armenian population living under the poverty line increased from around 20 percent in 1988 to around 55 percent by 1996.
- Stabilization and recovery:
- Average consumer price inflation fell from over 5,000 percent in 1994 to 175 percent in 1995.
- From 1996 to 1999, average inflation fell from 175 percent in 1995 to less than 1 percent in 1999.
- The economy grew on average by around 5 percent a year during 1996–1999.
- External shocks and 1998–2000 developments:
- Russian GDP fell by around 5 percent in 1998; Armenia was affected through reduced demand and remittances.
- Armenia’s GDP growth accelerated to over 7 percent in 1998, then slowed to around 3% in 1999 (note: source uses "3%").
- Budgetary expenditure arrears were reduced to well below 1 percent of GDP by Q3 1999, then rose to around 5 percent of GDP by end-September 2000.
- With restored political stability since mid-2000, arrears were reduced to around 3 percent of GDP.
- IMF engagement and program status:
- IMF Executive Board approved on May 23 a new three-year loan to Armenia under the Poverty Reduction and Growth Facility.
II. Challenges for the future: good governance
- Overarching challenge:
- Put the economy on a higher sustainable growth path to reduce poverty, unemployment, and emigration by promoting private economic activity and new investment.
- Policy priorities and reforms emphasized in the Poverty Reduction Strategy:
- Protection of property rights and strengthening the rule of law.
- Continuation of privatization in a transparent manner.
- Promotion of competition and reform of the financial sector.
- Creation of an efficient governance system, with public administration and anti-corruption as one of three pillars (alongside sustainable and equitable economic growth and the human development program).
- Specific governance issues and recommendations:
- Tax policy and administration:
- Armenia cannot rely indefinitely on external budgetary financing; tax collection must fund government size.
- Reforms in tax administration need expansion and acceleration.
- Tax liabilities must be calculated according to the law and not negotiated; negotiated settlements undermine revenues and involve corruption.
- Broaden the tax base and reduce incentives to evade taxes; end unfair systems full of exemptions and negotiated settlements.
- Expenditure management and transparency:
- Strengthen transparency in deciding expenditure priorities; make hard budget choices in an open environment.
- Improve controls over expenditure commitments to avoid new arrears.
- Ensure adequate auditing procedures to confirm intended expenditures deliver real value.
- Public administration and anticorruption measures:
- Civil service reform law and financial disclosure law for government officials are important to foster trust and investor confidence.
- Regulatory and judicial reforms:
- Eliminate unnecessary regulations and harassment of small private businesses to reduce government role in economic life and opportunities for corruption.
- Move expeditiously with judicial reform to improve business and banking sectors.
- Management of government assets and quasi-fiscal deficits:
- Energy sector: major cause of non-payments and external debt buildup; represents a quasi-fiscal deficit when losses are tolerated but not shown in the budget.
- Privatization recommended to improve management of state assets and remove financial drains from waste and theft.
- Complete privatization of electricity distribution companies quickly and transparently; use open, competitive bidding to obtain best prices and signal commitment to foreign direct investment.
- Governance diagnosis:
- Business interests can unduly influence economic policy-making and administration, often accompanied by growing corruption.
- Few major state institutions are immune from pressures of vested interests; this stifles growth, competition, and the government’s ability to finance social systems and reduce poverty.
- Improving governance so the government serves the interests of all, not just the few, is essential to sustain and exceed recent growth rates and reduce poverty.
III. Relations between Armenia and the IMF
- Historical engagement and lending:
- IMF has worked closely with Armenia since membership nine years ago.
- The first IMF loan to Armenia was made in 1994.
- Total lending has reached about $210m or 20% of the authorities' total external debt.
- Most lending has been under the Poverty Reduction and Growth Facility (PRGF), formerly the Enhanced Structural Adjustment Facility (ESAF).
- PRGF is available only to low income member countries and interest is paid at a low, subsidized rate.
- Conditionality and country ownership:
- IMF lending requires confidence that Armenia is pursuing policies to improve its economic situation and ensure timely repayment.
- The IMF seeks policies that lead to improved growth and poverty reduction; macroeconomic stability and structural reforms are essential prerequisites.
- Reforms succeed only with domestic support; the government’s poverty reduction strategy must be widely supported for continued PRGF disbursements.
- Mobilizing support requires broad public debate about economic reforms; IMF contributes to such debates.
- Current program status and outlook:
- IMF Executive Board approved a new three-year loan under the PRGF in May 2001 in support of the government’s poverty reduction strategy.
- A mission in Yerevan is assessing progress in the first few months of the PRGF; IMF will continue to work closely with Armenia during the three-year period and beyond.
- If the poverty reduction strategy is fully implemented, the IMF assesses the economic situation in Armenia will improve significantly; the IMF intends to work with Armenia to promote successful transition, sustained economic growth and poverty reduction.
Speech given at the American University of Armenia, Yerevan, July 31, 2001 — John Odling-Smee, Director, European II Department, International Monetary Fund.