SPEED OF SOCIAL REFORMS LAGS BEHIND RATE OF MACROECONOMIC REFORMS IN ARMENIA

Noyan Tapan
April 2, 2008

YEREVAN, APRIL 2, NOYAN TAPAN. The implementation of social reforms
will make an important part of Armenia’s socioeconomic policy in
2008-2009. Today the speed of social reforms lags behind the rate of
macroeconomic reforms.

The government has taken a lot of measures to direct the economic
growth at raising the population’s standard of living. However,
strategic investments are necessary in order to deal with the tendency
of growing inequality in the society and the problems of the edication
and health sectors. These conclusions were presented in the Economic
and Social Survey for Asia and the Pacific 2008 of the UN Economic
and Social Commission for Asia and the Pacific (UNESCAP).

The survey reminds that in 2007 the Armenian government adopted a
5-year political program of poverty reduction, which envisages reducing
the poverty level from current 30% to 12% in 2012. It is said that the
number of people with low incomes on the verge of poverty declined
from 55% in 1988 to 34% in 2005. The Gini coefficient for measuring
income inequality, in which high values show large inequality in
income distribution, made 44.42 in Armenia in 1996 and 33.8 in
2003. Nevertheless, income inequality continues to be a big problem
in the country.

According to the survey, in 2007 Armenia registered a two-digit
economic growth for the sixth consecutive year and was among the most
rapidly developng countries in the world. Armenian GDP grew by 13.8%
in 2007, with construction, agriculture and services being the main
factors of GDP growth in the country. Construction growth increased
thanks to a considerale growth in construction of industrial,
residential and office buildings. The growth of economy included
such services as trade and communication. In 2007, the growth
of agricultural output made 9.6%, with wheat harvest doubling and
reaching 450 thousand tons.

The survey notes that in 2008-2009 Armenia gives priority to management
improvement, poverty reduction, as well as to increasing the tax
collection (by abolishing tax exemption) and improvemenet of small
and medium business environment. It is envisaged to ensure 10% GDP
growth in 2008 and at least 8% growth in 2009.

According to the survey, in 2007 the Armenian state budget registered
a surplus equivalent to 0,1% of GDP at the expense of a growth in
tax collection. However, taking into account expenditures on social
programs and infrastructure development, it is expected that by 2009
the budget will again have a deficit of 2.6%. State revenues may
increase in 2008-2009 thanks to the amendments to the tax legislation
and tax and customs administration improvement, but tax collection
will continue to be serious problem in Armenia.

Besides, it is said in the survey that monetary and credit policies
in North and Central Asia, as well as in Armenia pursued the goal of
suspending inflation and preventing a large growth of the real exchange
rate. The governments of these countries tightened the monetary and
credit policy by increasing the deposits of their governments and
banks, regularly raising the initial interest rates and refinancing
the central banks. In particular, the Central Bank of Armenia raised
refinancing to 5.75% and increased the use of such internal instruments
as sale and repurchase (repo) agreements.

The survey notes that the growth of consumer prices in Armenia
increased from 2.9% in 2006 to 4.4% in 2007 as a result of increasing
food prices, further rise of salaries and household incomes. This rapid
monetary expansion and high import prices resulted in considerable
inflation in Armenia. In the last quarter of 2007 the Armenian dram
appreciated by about 10% against the US dollar. The appreciation of
the dram causes concern of those households whose incomes depend on
remittances from abroad.

It is noted that although exports of goods from Armenia increased by
9.1%, the trade deficit notably grew in the first nine months of 2007 –
from 826 mln USD in 2006 to almost 1.4 bln USD. Imports grew by 1.9%
to 2.2 bln USD in the first nine months of 2007 at the expense of
the import of ores, cars and equipment for construction programs. The
deficit of current accounts grew from 78 mln USD (equivalent to 1.9%
of GDP) in the first nine months of 2006 to 327 mln USD (5.7% of GDP)
in the first nine months of 2007 at the expense of the growing trade
deficit.

The UNESCAP experts indicated that remittances from abroad have become
an important source of foreign financing for Armenia’s economic
development. In 2007 these remittances represented a considerable
investment in the socioeconomic sphere. Remittances from those,
who left abroad for temporary and permanent work, amounted to
1.32 bln USD (equavalent to 14% of the country’s GDP) in 2007. The
foreign investment inflow continued to play a major role in Armenia’s
economic development and modernization in 2007. The foreign investment
inflow made 351 mln USD in Armenia in first nine months of 2007 –
against 202 mln USD in the same period of 2006. Considerable part
of growing foreign investments was allocated to communication and
municipal sectors and for financing of the deficit of the country’s
current account.