IMF READY HELP ARMENIA IN CASE OF NEED

ARKA
10/11/2008 15:16

Below is an exclusive interview by IMF Resident Representative in
Armenia Nienke Oomes to the ARKA News Agency.

Question: What are the possible consequences of the international
financial crisis for Armenia?

Answer: We do not yet observe any serious consequences of the global
crisis in Armenia. The main reason is that Armenia’s financial system
is not so large. On the one hand, it is not so good for economic
development, but, on the other hand, it can even be viewed as an
advantage because Armenia is a little less subject to possible shocks
than other countries. Recently we received the latest information
on the level of crediting by commercial banks, and Armenia shows
good indicators.

We do not yet observe any serious consequences of the crisis in
the context of money transfers either. The amount of transfers and
crediting keeps on increasing. However, Armenia may be influenced by
the international crisis as it cannot be completely isolated. We cannot
yet say for sure, but we have fears that the worsening situation in
Russia may influence Armenia because Armenia’s economy is dependent on
Russian capital. Specifically, direct investment and money transfers
from Russia may decrease. I must say that the exchange price of shares
in Russia has fallen by about 80%. However, we do not think that the
situation in Russia will be similar to that during the 1998 default.

The current situation is quite different because the Central Bank
of the Russian Federation has huge foreign exchange reserves, and
the Russian Government has huge financial resources to support the
banking system, which is actually being done there. A certain growth
slowdown there is, course, being forecast, but I do not think that
the consequences will be too grave for Armenia.

Question: Does it mean that the IMF will not assist Armenia in dealing
with the financial crisis, and the assistance under the new 3-year
program will be reduced?

Answer: It was before the financial crisis that we discussed the
issue of the IMF’s new program with the Armenian Government, which
is most interested in its implementation. We already have agreements
on credit terms. The IMF Executive Council in Washington is to settle
the issue on November 17, and, if the IMF approves the credit, a new
program of Poverty Reduction and Growth Facilitation (PRGF) will be
implemented in Armenia, which will actually be a continuation of the
previous one. The expected financial resources will not be so huge –
about $14.5mln during three years. Twice a year the IMF will supervise
the program implementation and, if it receives a good rating, it will
be an important appraisal of the Government-implemented reforms.

However, in case the crisis exerts an essential influence on Armenia,
the IMF is ready to increase the credit and assist Armenia. An
Armenian delegation recently visited Washington, and the issue was
discussed there.

The IMF Director gave assurances that the IMF will support Armenia
in case of need.

Question: Since the new program will be aimed to facilitate the
completion of tax policy reforms, what aspects will be emphasized?

Answer: Emphasis will certainly be put on the tax policy and
administration.

But there are a number of terms involving the relations between
the Central Bank and Ministry of Finance, for example, the issue of
bonds. Both the Ministry of Finance and the Central Bank have issued
bonds over the last few years. But, if an agreement on this issue is
signed, the Central Bank will stop issuing its own bonds. In that case
the Ministry of Finance will have to agree on the issue dates, amounts
of issue and maturity dates for short-term bonds with the Central Bank.

We recommend that it is only the Ministry of Finance that should be
entitled to issue bonds. Also, it is most important that the Ministry
of Finance should not set marginal rates. A market mechanism must
work here, which is important for the development of bond market.

As regards the tax policy, the new program will contain a term
providing for mechanisms precluding any delays in VAT reimbursement
from 2009. The resolution of the VAT reimbursement problem is
most important for exporters because, at present, if taxation
authorities fail to reimburse VAT, it means an interest-free loan
to the Government. It is an additional burden for businessmen, which
is an obstacle to the increase of exports. So these measures are of
high importance.

In general, we support the tax administration reforms implemented by
the Government, for example, the arrangement of the Taxation Service’s
activity. In this aspect we propose the formation of a department for
major taxpayers because the major part of tax revenues (about 60%) is
formed due to 300 major taxpayers. The burden of small-scale business
must be reduced, as this sector pays a small percentage of taxes all
the same.

We also recommend taxation authorities to make audits in the context of
business risk. There is no need for constant audits of all taxpayers –
only those raising doubts about fulfilling their tax commitments.

There are many honest taxpayers in Armenia, who do not have to be
constantly audited, but must be trusted.

In general, the IMF supports the tax reforms strategy. We believe it
incorporates effective reforms, and the implementation of our program
has to do with the reforms.

Question: What is your appraisal of the Government’s steps to reduce
shadow economy? Have businessmen been made equally subject to taxation?

Answer: We believe the Government is making the right steps to reduce
shadow economy. It is most important because it is closely related to
tax administration. A considerable part of Armenian businesses is in
the shadow, but the most important thing is to lay emphasis on major
taxpayers. Shadow economy is very difficult to scale because no one
exactly knows its real scale. I think the reduction of shadow economy
requires the following two things. First, ensuring fair, transparent
and predictable tax administration for everyone to know how much they
have to pay.

It is not the tax rates that are the problem – they are not too high
in Armenia. It is the predictability of tax administration that is
the problem.

Under the circumstances businessmen find it very difficult to forecast
their tax payments. In this context it is most important that simple
and fair rules be laid down.

I think the reforms will facilitate the accomplishment of this task. If
businessmen trust the transparency, predictability and fairness of
taxes, they pay taxes. I do not think that all the taxpayers in Armenia
are against paying taxes. They just believe the present situation to
be unfair, so equal conditions for everybody are important.

The second problem is that businessmen are afraid of using banking
services as they fear that taxation authorities will be informed of the
details of their bank operations. So many businessmen prefer "keeping
their money under mattress", which is very bad for Armenian economy.

Besides, I do not think that taxation authorities have access to
bank information. Armenia’s law guarantees the confidentiality of
this information, and banks have no right to provide it to taxation
authorities.

We consider it to be right, as it builds up businessmen’s confidence
in banks.

Question: However, some businessmen are discontent with the reforms. It
may be the result of their way of thinking, but how much time is
required for positive changes in the taxation field to take place?

Answer: Of course, the way of thinking is not a thing to change so
quickly, though in some countries, for example, Georgia, radical
reforms resulted in radical changes. I think the same may take place
in Armenia. If you are to get results sooner, radical changes are a
necessity. The coming of new people may always result in changes in
the way of thinking.

I think that Armenians’ way of thinking is changing to some extent. The
usual question is: what to begin with? – the Government or the
population. I do not think that population can change by itself, so
I believe that the Government must launch reforms and demonstrate to
the population that they are seriously working and laying down fair
rules for everybody.

Question: According to the IMF World Economic Outlook Report, economic
growth in Armenia is expected to slow from 10% this year down to 8%
next year and 6% in 2013. Does the international crisis account for
this forecast or are there other reasons?

Answer: Slowdown is a natural process. In principle, if growth
exceeds 10% it is a most rare phenomenon. It is good Armenia has
registered two-digit growth for many years running. But it cannot be
an everlasting process.

Theoretically, during a long term all countries register equal per
capita GDP. This means that poorer countries with low GDP levels are
supposed to show higher rates of growth, while rich countries make
slow progress. They will be at the same level in many years. So we
expect that the economic growth rates will be lower in Armenia when
the country becomes richer.

Question: This September, Head of the IMF mission to Armenia
Marta Castello Branco reported the IMF-forecasted 7.5% inflation
rates. However, this October the IMF report scaled the forecast up
to 9.4% for this year, scaling it down to 5% for next year. What is
the reason for the revision?

Answer: There were no changes in the forecast. 7.5% is our forecast for
this December as compared with last December. And 9.4% is the average
annual inflation rate. Inflation rates have been very high this year
not only in Armenia, but also in the entire world. The reason was high
prices for oil, grain and many food products. But the international
prices for oil and grain have fallen, and we expect this trend to go
on. We forecast an inflation rate of 5% in Armenia for next year.

Question: The August events in South Ossetia proved one of the
challenges to Armenian economy, which sustained losses estimated at
about $700mln. In your opinion how well is Armenian economy protected
from crises like that?

Answer: The influence of the Russian-Georgia conflict on Armenia
seemed to be restricted. However, the August events showed Armenia’s
economy to be very vulnerable in the case of closed borders, when
most cargoes intended for Armenia go through Georgia.

To make the country economically less vulnerable, the re-opening of the
border with Turkey is the best way. We are happy about some progress in
Armenian-Turkish relations. We are also informed of the Government’s
plans to construct a railway through Iran. It may be very expensive,
but alternative ways will make Armenia’s economy less vulnerable.

Question: Some Armenian experts fear that the re-opening of the
Armenian-Turkish border may pose a threat to Armenia’s economy in
the context of competitiveness of home-made goods?

Answer: Of course, there exists such a risk. When all countries are
engaged in trade, one of them may produce some goods at a lower price
than another, and Turkish products, for example, agricultural produce,
may be cheaper than Armenian. In the short-term prospect Armenian
products will face difficulties in meeting the competition, but in
the long-term prospect it is an advantage because each country will
focus on what it does best of all.

I think that the re-opening of the border will cause a setback in the
production of some goods, while other fields may register growth. I
am sure it will be beneficial for both countries in the long-term
prospect.

Question: What are the IMF’s recommendations for Armenia in the
context of the global financial crisis?

Answer: Before the crisis we recommended a tougher macroeconomic policy
to reduce inflation, that is, having a small deficit and implementing
a tough monetary policy. Those were our recommendations with no
account taken of the global crisis. However, if it starts seriously
influencing Armenian economy, we will have to revise them. But we
hope that Armenia’s banking system will not need a support similar
to that provided to the banking systems in Russia and in the USA.

We have approved the 2009 draft budget, where the budgeted deficit
is within 1%, which is of high importance for the reduction
of inflation. Of course, it is deficit in any case, which implies
that the Government will spend more than it will receive. So it is
important to increase revenues instead of reducing expenditures,
the more so because the poverty level remains high in Armenia – 25%.

The Government must help the poor sections of the population by
increasing tax revenues. That is why we are always putting emphasis
on tax reforms for the Government to have more financial resources
to support the population and improve the infrastructure.

Infrastructures and social programs are of high importance, and it
requires fair and honest payment of taxes. Although tax revenues
have increased in Armenia over recent years, they are less than in
other countries.

Question: The opening of an IMF office in Armenia was discussed at a
meeting with Prime Minister Tigran Sargsyan. Could you comment on this?

Answer: It was a misunderstanding. It was not an office that was
discussed, but the possibility of sending an expert in tax reforms
to Armenia to stay in the country and cooperate immediately with
taxation authorities.

The expert is supposed to assist the Armenian Government in
implementing reforms. No specific agreement has yet been reached,
but on November 17 the IMF Executive Council is to approve a new
program. Thereafter, On November 21-22, Murillo Portugal, IMF Deputy
Managing Director is to be on a visit to Armenia to attend a conference
to be held by the Central Bank on the occasion of the 15th anniversary
of the Armenian dram. During his visit he is to hold meetings with
the country’s top officials and discuss the issue of sending an IMF
fiscal expert to Armenia. Thus IMF makes it clear that it considers
Armenia an important country and wants to support the reforms the
country is implementing.