For more information, see Republic of Armenia and the IMF

REPUBLIC OF ARMENIA: Policy Framework Paper, 1996-1998

Table 1. Armenia: Summary Description and Timetable of Macroeconomic nd Structural Adjustment Policies 1996-1998

Policy Area Objectives and Targets Strategies and Measures Timing
Fiscal Policy and

administration

Mobilize additional revenue: broaden tax base and increase tax rates Implement new tax measures:
Reduce VAT exemptions for social, cultural and humanitarian organizations. 1995
Impose VAT on non-CIS goods that transit through a CIS country. 1996
Remove VAT exemption for sewerage and water. 1996
Establish two band customs tariff at 0 and 10 percent. 1995
Introduce customs duties on coffee and cocoa. 1996
Impose excises on non-CIS goods that transit through a CIS country. 1995
Implement comprehensive property tax for households. 1996
Collect VAT on imports at customs. 1996
Increase excise on gasoline to 35 percent. 1997
Increase excise on tobacco products to 100 percent. 1996
Increase excise on cognac, vodka and other high proof liquors to 125 percent. 1996
Simplify withholding for the personal income tax on dividends and interest. 1997
Abolish the excess wage tax in tandem with increases in enterprise profit and personal income tax rates to ensure at a minimum revenue neutrality. 1996
Withdraw present discretionary privileges for accelerated depreciation, tax holiday provisions for new firms, and the 50 percent tax exemption for joint ventures with foreign participation. 1997
Improve tax administration Establish an Enforcement Unit within the State Tax Inspectorate (STI) to enhance compliance with current tax obligations and to deal with the stock of tax arrears. 1996
Formally designate a Steering Committee to oversee reorganization of STI along functional lines and create a project office to implement the modernization program. 1996
Complete assignment of Taxpayer Identification Numbers for all legal persons, including nonprofit organizations. 1996
Establish a Large Taxpayer Unit within the STI. 1996
Amend the tax laws to strengthen collection and assessment powers of tax officers. 1996
Replace the complicated system of depreciation schedule under the Enterprise Profits Tax by system of depreciation on a declining basis. 1997
Establish sales threshold under which enterprises could choose to pay the presumptive tax instead of paying the VAT. 1997
Implement a modern computer system in the STI. 1996
Improve customs administration by establishing customs clearance facilities at the border. 1996-98
Expenditure and budget control Avoid arrears and improve expenditure control and management. Reduce the stock of expenditure arrears to zero. 1995
Gradually introduce the Treasury system in the Ministry of Finance (MoF)

(i) adopt decision to separate budgetary and treasury functions within the MoF;

(ii) set up a Treasury department in the MoF;

(iii) create a ledger system of accounts;

(iv) consolidate government bank accounts into a single Treasury

Account; and

(v) replace the system of cash rationing with a more flexible system of financial planning

1995

1996

1996

1996

1996

Establish a Debt Management Unit within the MoF 1996
Improve targeting of social safety benefits Enact Pension Law 1995
Reduce the eligible age for child allowances to six years and increase amount of allowance per child. 1996
Formulate regulatory framework for private pension scheme. 1996
Administrative reform Restructure civil service Reduce the size of budgetary sector employment to:

360,000

320,000

290,000

By

1996

1997

1998

Public enterprise

reform

Impose hard-budget constraints Place the Nairit Chemical Company in the enterprise restructuring plan. 1996
Collect monthly data on energy arrears, tax arrears, and arrears to the banking system. 1996
Privatization Privatize all state enterprises except those with a clear public sector role. Complete privatization of 2,000 small-scale enterprises and 400 medium-to-large scale enterprises. 1996
Complete privatization of all small-scale enterprises and an additional

1200 medium-to-large scale enterprises.

1996
Financial sector reform Commercial bank restructuring Halt new lending to enterprises, individuals, and the interbank market by Savings Bank. 1995
Formulate program to reorganize the Savings Bank. 1996
Complete a detailed audit of Ardshinbank, Armagrobank, Armeconombank, and Armimpexbank. 1996
Enact loan loss provisioning rules. 1996
Change tax treatment of provisions for bad loans. 1996
Issue CBA resolutions to all banks recommending to stop divided payments from unrealized gains, or by banks that do not meet prescribed prudential regulations. 1995
Technical improvements Introduce an electronic payments system and establish a system for clearing interbank settlements. 1996-98
Introduce book-entry system to facilitate secondary market trading in Treasury bills. 1996
Start training on-site examiners. 1996
Monetary

policy

Strengthen monetary control and management Begin regular announcement of Treasury bill auctions.

1995

Limit banking system net credit to general government to dram 11,185 million. 1995
Limit CBA net domestic assets to dram

17,969 million.

1995
Achieve a minimum level of net international reserves for the CBA of US$19.3 million. 1995
Replace the current system of fixed term loans to Government by the CBA with a credit line arrangement. 1996
CBA to withdraw from regular participation in foreign exchange market. 1996-98
Provide CBA credit to banks only on a collateralized basis. 1996
Complete the audit of the 1995 CBA accounts by an internationally recognized auditing firm. 1996
Launch Lombard lending facility 1996
Enhance the reserve management function. 1996-98
Maximize nonbank financing of the budget deficit to reduce CBA financing. 1996-98
Eliminate credit auctions by the CBA. 1998
Exchange rate Eliminate multiple currency practice Set the official daily exchange rate based on market rate of previous day. 1995
Trade reform Remove remaining trade restrictions. Use minimum "reference" export prices solely for purpose of determining profits. 1995
Eliminate official clearing trade with Russia. 1995
Take initiative to regularize outstanding commercial gas arrears to Turkmenistan by proposing that write-offs or grants be contingent on remaining current or future deliveries. 1996
Settle undisputed outstanding debit balances on the correspondent accounts between the CBA and other central banks of the FSU. 1996
Eliminate direct government involvement in clearing trade with Turkmenistan. 1995
Introduce duty drawback scheme. 1997
Foreign investment Eliminate preferential treatment for foreign investors Review and revise existing foreign investment law. 1996
Energy sector

Improve efficiency and self-sufficiency Implement policy of terminating electricity supply to nonpaying, non-essential users. 1996
Implement new tariff structure for electricity so that it fully covers operational and maintenance costs. 1996
Complete restructuring and corporatizing Armenergo and Armgas. 1996
Restructure the electricity and gas sectors to achieve greater corporate autonomy and increase financial accountability of these enterprises. 1997
Implement tariff structure for all utilities so that it covers full cost of production. 1996
Improve maintenance of existing plants in the energy sector and also upgrade them. 1996-98
Legislative reforms Enact the Real Property Law. 1995
Provide IMF and World Bank staff with revised Law on Collateral and Law on Bankruptcy. 1996
Submit to Parliament for approval draft laws on Collateral and on Bankruptcy. 1996
Enact legislation to ensure an adequate legal basis for the collection of statistics by the State Department of Statistics. 1996
Provide IMF and World Bank staff with draft Law on the Central Bank. 1996
Enact revised Law on Central Bank. 1996
Provide IMF and World Bank staff with draft revisions of the Law on Banks and Banking, and the draft Law on Bank Insolvency. 1996
Enact revised law on Banks and Banking and Law on Bank Insolvency. 1996
Housing sector Privatization Complete housing privatization in line with effective legislation and ensure that rents on nonprivatized housing are increased to cost-recovery levels. 1996
Transport sector Improve efficiency Implement phased adjustment in user fees for roads and other transportation media. 1996
Establish commercially oriented railway management 1998
Expand facilities for air transportation. 1996-98
Health sector Improve efficiency Prepare a financing strategy which will include a Basic Benefits Package to be funded in priority by the State Budget. 1996
Reduce and restructure the facilities providing curative care by closing some underutilized facilities. 1996
Improve financing of health services Begin implementation of a fee-for-service system. 1996
Restructure the health sector by regrouping, closing and privatizing facilities in order to reallocate resources to basic primary health care programs. 1997
Education sector Improve efficiency Reduce subsidies for post-secondary education and allow increased decentralization in this sector. 1998
Environment Protect environment Enact a National Law on the Environment. 1997

Table 2. Armenia: Technical Assistance Requirements, 1996-1998

Policy Area

Timing

Provider of Assistance 1/

Fiscal Policy
Tax Reform 1996 IMF
Tax Administration
domestic taxes since February 1995 US Treasury (IRS)/IMF/USAID
customs taxes January 1996 IMF/UNCTAD/IBRD
computerization/EDP since September 1995 IMF/IBRD
Treasury System since February 1995 IMF
Civil Service Reform since August 1995 TACIS/IBRD
Government Finance Statistics 1996-1998 IMF/USAID (CEPRA)
Federal Budget-Law & Procedures 1995-1997 US Treasury/USAID
Municipal Finance 1996-1998 USAID

Monetary Policy

General CBA Advice

since February 1994

IMF

Banking Supervision since February 1995 IMF
CBA Accounting System since June 1995 IMF
Accounting Conversion for Enterprises, Banks 1995-1997 USAID
Financial Sector Study 1996 IMF/IBRD/USAID/TACIS
Monetary Statistics 1996-1998 IMF
Bank Law Reform since February 1995 IMF
Payments System 1996-1997 IMF/EU/USAID
Commercial Banks' Credit Risk Assessment 1996 IBRD/IMF
Treasury bill Secondary Markets since November 1995 IMF/US Treasury/USAID /TACIS
Capital Markets Project 1996 IBRD
Pilot Bank Workout Project 1996 IBRD
External Sector
BOP Statistics 1996 IMF
Trade Statistics 1996 IMF/USAID
Duty Drawback Scheme 1997 UNCTAD/IMF
Entry to WTO 1995-1998 TACIS/USAID (CEPRA)

National Accounts

1996

OECD

Enterprise Restructuring
Implementation of Privatization

Reorganization and Privatization

1994-1998

since August 1995

TACIS/IBRD

IBRD

Arrears Monitoring since April 1995 IBRD
Commercial Bank Restructuring/Auditing 1996 IBRD and Central Banks
Commercial Law 1996-1998 IBRD/USAID
Management Training
commercial banks 1996-1998 USAID/IBRD/GTZ
Price Statistics
Replace WPI with PPI 1996 IMF
Develop Foreign Trade Price Indices 1998 IMF
Housing Privatization, Legal Property Rights

1994-1998 USAID
Economic and Legal Training since 1994 IMF/IBRD/EBRD/OECD/USAID/TACIS/TARA
1/ CEPRA - Center for Economic Policy Research and Analysis.

EBRD - European Bank for Reconstruction and Development

GTZ - Deutsche Gesellschaft Für Technische Zusammenarbeit

IBRD - International Bank for Reconstruction and Development

IMF - International Monetary Fund

IRS - Internal Revenue Service

OECD - Organization for Economic Cooperation and Development

TACIS - Technical Assistance for CIS countries (agency of EU)

TARA - Technical Assistance for the Republic of Armenia

UNCTAD - United Nations Conference on Trade and Development

USAID - United States Agency for International Development

Table 3. Armenia: Selected Economic and Financial Indicators

(Units as indicated)
1994 1995 1996 1997 1998
year year year year year
Actual Est. Proj. Proj. Proj.
Real sector projections
Nominal GDP (millions of drams) 187,453 542,499 693,217 842,595 979,620
Real GDP (percent change)
compared with the previous year 5.4 5.0 6.5 7.0 7.0
Fiscal projections (percent of GDP)
Budget deficit (cash) -10.1 -10.9 -7.6 -4.4 -3.8
Total revenue and grants 27.6 18.2 16.2 16.5 16.7
Tax revenue 13.0 11.0 12.3 13.4 14.3
Total expenditure and net lending 44.1 26.9 23.7 20.9 20.6
Current expenditure 34.2 20.5 18.6 15.9 15.2
External sector projections
Current account balance (US$ million) 1/ -231.4 -353.3 -285.9 -297.9 -280.7
as percent of GDP -35.5 -26.4 -17.3 -15.4 -12.5
Targets
Inflation (in percent)
average monthly rate within period 28.3 2.0 1.4 0.8 0.6
Gross international reserves
(months of imports) 0.7 1.5 2.3 3.2 3.5
Instruments (in percent)
Growth in nominal monetary variables(end period)
Monetary base 833.1 73 .. .. ..
Broad money 684.2 65 .. .. ..
NDA of CBA 703.4 56 .. .. ..
NDA of banking system 1,051.4 69 .. .. ..
Velocity 4.8 3.9 .. .. ..
Money multiplier 1.6 1.5 .. .. ..
Exchange rate
Period average 287 406 .. .. ..
1/ Not including official transfers.

Table 4. Armenia: External Financing Requirement
1994 1995 1996 1997 1998 Program period

1996-98

(In millions of U.S. dollars)
Financing requirement -286.6 -408.0 -366.4 -350.0 -288.6 -1,005.0
Current account -231.4 -353.3 -285.9 -297.9 -280.7 -864.5
Capital account -1.0 4.0 -36.3 15.9 27.4 7.0
Amortization -0.6 -51.7 -50.1 -26.1 -29.6 -105.8
Change in gross official reserves -30.2 -58.7 -44.1 -68.0 -35.4 -147.5
Arrears reduction -24.0 0.0 0.0 0.0 0.0 0.0
Sources of financing 286.6 408.0 366.3 276.0 242.3 884.6
Official transfers 237.3 182.5 166.3 117.0 90.0 373.3
IFIs other than the Fund 18.7 115.1 142.0 108.1 102.0 352.1
World Bank 7.2 91.8 102.0 45.7 51.7 199.4
EBRD 11.5 23.3 40.0 62.4 50.3 152.7
BOP and other financing 23.7 19.1 6.9 0.0 0.0 6.9
Errors and omissions -16.6 -5.3 0.0 0.0 0.0 0.0
Change in overdue obligations 1/ 0.0 50.3 0.0 0.0 0.0 0.0
Fund financing 23.6 46.2 51.1 50.9 50.3 152.3
Gross financing 23.6 46.2 51.1 50.9 50.9 152.9
Repurchases/repayments 0.0 0.0 0.0 0.0 -0.6 -0.6
Residual financing gap 0.0 0.0 0.0 74.0 46.3 120.3
Memorandum items:
Current account (in percent of GDP) -35.5 -26.4 -17.3 -15.4 -12.5 -15.0
Gross Fund financing
(In percent of total financing needs) 8.2 11.3 13.9 14.5 17.6 15.2
Gross official reserves (convertible) 32.3 91.0 135.1 203.1 238.4 192.2
(In months of imports of G&NFS) 0.7 1.5 2.3 3.2 3.5 3.0
External debt 2/ 200.4 384.7 564.2 679.1 836.6 693.3
Debt/GDP (in percent) 2/ 30.7 28.8 34.1 35.1 37.2 35.4
Debt service (in mlns. of US$) 2/ 7.8 64.5 65.0 41.4 51.8 158.1
Debt service ratio (in percent of exports of G&NFS) 2/ 3.0 19.9 18.3 10.3 11.0 13.2
1/ Arising from the non-repayment of the EU loan that fell due in August 1995.
2/ Including transactions with the Fund and debt service arising from potential financing associated with the cumulative financing gap. 75 percent of the financing gap is assumed to be in the form of debt, which is to carry an interest rate of 3.0 percent, a grace period of 2 years, and a maturity of 12 years.

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