PRESIDENTIAL CHIEF ECONOMIC ADVISOR’S STATEMENT AT WB-IMF CONSTITUENCY MEETING IN YEREVAN

Arka News Agency, Armenia
June 19 2006

Statement by Vahram Nercissiantz
Chief Economic Advisor to the President of Armenia
at
IMF/WB Dutch Constituency Meeting
(Yerevan, June 18, 2006)

Ladies and Gentlemen,

On behalf of the President’s office, I wish to welcome our
distinguished guests and colleagues to Armenia for the IMF-World
Bank Dutch Constituency Meeting. We hope you will have a memorable
stay in our small Republic, and will share with us your experiences
in economic management and development.

Experience has shown that economic development requires growth and
growth requires stability. Experience has also shown that whilst
stability is necessary for growth, it is not sufficient. Ultimately,
private and public investments generate growth, and poverty reduction
is best achieved through growth by investing in people, and promoting
a free and competitive business environment so that investments are
made and jobs created. Fiscal policy, therefore, must have a long-term
growth strategy without impairing macroeconomic stability.

This requires increasing efficiency in public expenditure, and
efficient revenue enhancement, particularly in tax administration,
and efficient use of external aid. This, in a nutshell, is President
Kocharian’s strategy for country economic management.

The results are clear. The economy has been stable as the annual
inflation rates since 1998, when President Kocharian was elected,
have been around low single digits, and the national currency, Dram,
has been the most stable currency in the Region for several years.

The economy has been growing steadily from 1994 to 2000 around 5.5%
annually; and then since 2001 the economy has been growing around 12%
annually; and last year the economy grew at 14%. We expect another
double digit growth rate also for this year. And most important of all:
poverty has declined from 56% in 1998 to around 25% and it continues
to decline rapidly.

Looking into the fiscal space, we see increasing efficiency in public
expenditures through privatization of public utilities, and parastatal
enterprises, and dramatic reduction and targeting of subsidies. Today,
over 80% of the economy is private, and growing, both in terms of GDP
and employment. The remaining public sector, mainly physical and social
infrastructure, is top priority and is developing rapidly through
IDA assisted projects, where Armenia’s performance, in both progress
of reforms and implementation of project portfolio, is ranked number
one amongst all IDA countries. We are told that this IDA score is a
composite of many factors, including institutional development, fiscal
management and social development. Clearly, government’s expenditure
program is the poverty reduction strategy, endorsed by all donors,
underpinned by a medium term expenditure framework, and, of course,
annual budgets debated and approved by the Parliament. Looking forward,
the Administration is strengthening public expenditure management,
strengthening social safety net, and increasing public investment to
support private sector growth. And these objectives will be integrated
further when we update the PRSP later this year.

With respect to efficient revenue enhancement measures, particularly
taxes, the picture is not as strong. Annual tax collections have been
only around 14.5% of GDP (or around 17.5% of GDP if social security
payments are included) mainly due to tax evasion. Mobilization
of private sector savings by the commercial banks have also been
rather low as loan assets of the entire banking sector comprise only
around 8% of GDP. There are several reasons for this, including lack
of confidence by depositors, and then lack of borrowing interest by
creditworthy enterprises, that finance working capital, and sometimes
capital investments, through internal cash that they accumulate by
evading taxes. Moreover, equity markets have not yet developed mainly
because of closed family driven and opaque corporate governance.

Greed and vanity have sometimes induced deviations from economic
policy causing waste and misallocation of scarce resources. Simply
said, abuse of both power and freedom during this rapid economic
transition has at times obstructed implementation of otherwise sound
economic policies. If unchecked, such deviations will distort the
markets, undermine economic performance and create serious economic
and social problems. Clearly, country economic management must be
driven by policy and not transactions.

President Kocharyan’s Administration, therefore, has undertook
decisive measures to improve governance to enhance efficient resource
mobilization in both public and private sectors. For efficient
mobilization and allocation of public resources, the strategy now
calls overhaul of the government machinery through a comprehensive
civil service reform program so as to substantially reduce waste and
corruption, and to reform administration of taxes and customs. In fact,
the 2004-2006 Tax and Customs Reform Plan has already yielded some
modest improvements in revenue mobilization, but we recognize more must
be done. For mobilization of private resources, the strategy calls for
an extensive and coordinated set of measures to simplify administrative
procedures and remove obstacles to trade and investment, and encourage
development of the enterprise sector through open and transparent
corporate governance and thus enhance confidence that is necessary for
the financial sector to mobilize savings into investment. In short, the
strategy here is to substantially reduce the cost of doing business,
so as to enhance Armenia’s competitiveness in the global economy.

Clearly, reforms in Armenia require a great deal of personal
sacrifice and behavioral modification by all of us during transition,
and benefits of the reforms are not immediately available to all
segments of the population at this stage. We are determined, however,
to continue to implement the reforms through democratic processes of
open debate and due process of law. We believe reforms implemented
through democratic institutions are more stable and sustainable, and
enhance public confidence. By improving the business and investment
climate through reform of public and corporate governance, and with
additional foreign and domestic private investment, we expect to
maintain our high economic growth rates for this decade and with
progressive distribution of the yields of that growth, the benefits
of the reforms will be appreciably felt by the entire population
through gradual improvements in quality of life.

Thank you for your attention.