## The Economic Transition in Armenia -- Speech by John Odling-Smee, Director, European II Department _IMF News, July 31, 2001_ ## Source details **Canonical URL:** [The Economic Transition in Armenia -- Speech by John Odling-Smee, Director, European II Department](https://www.imf.org/en/news/articles/2015/09/28/04/53/sp073101) ## Other formats - [Markdown version](/en/news/articles/2015/09/28/04/53/sp073101/index.md) - [Structured JSON version](/en/news/articles/2015/09/28/04/53/sp073101/index.json) - [Bundle manifest](/en/news/articles/2015/09/28/04/53/sp073101/bundle-manifest.json) ## Bibliographic details - 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.* --- ## References - [Republic of Armenia and the IMF](http://www.imf.org/external/country/ARM/index.htm) - [Russian Federation and the IMF](http://www.imf.org/external/country/RUS/index.htm) - [The IMF and Good Governance -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2023/the-imf-and-good-governance) - [The IMF's Poverty Reduction and Growth Facility (PRGF) -- A Factsheet](https://www.imf.org/external/np/exr/facts/prgf.htm) - [Speeches](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp073101_