IMF Adviced Against Institute Of Tax Representatives In Armenia

IMF ADVICED AGAINST INSTITUTE OF TAX REPRESENTATIVES IN ARMENIA

ArmInfo
2009-12-15 11:42:00

Arminfo’s Farewell Interview with the IMF Resident Representative to
Armenia, Nienke Oomes

The mission of Nienke Oomes in Armenia will finish soon. She will leave
Armenia by the end of 2009, and will celebrate New Year with her family
in Holland. After that, she will return to the United States and work
at IMF headquarters in Washington DC as deputy head of the division
that is in charge of Armenia, Georgia, Azerbaijan and Turkmenistan.

Mrs. Oomes, what is the last IMF projection of the 2009 annual GDP
decline in Armenia, as it seems to have been revised several times?

We actually have not revised our projection of a 15.6% drop in GDP
in 2009 since September. While earlier this may have been reported
as a 15% or 15.5% percent decline, our projection has not changed
since September.

Does the IMF agree with the authorities’ growth projection for
next year?

Yes, we expect that growth will resume next year. Since September,
we have projected that GPD will grow by 1.2% in 2010. In the last few
months we have already noticed positive trends in the economy. For
example, starting from August, seasonally adjusted monthly GDP growth
has been positive. Thus, the economy has already started to recover
and we believe that the worst is behind us.

What is the IMF assessment of the tax reforms implemented in 2009,
in particular, the introduction of tax representatives in large
companies? Don’t you think that this step could lead to additional
corruption risks given that the tax administration authority will be
in the hands of a single tax inspector and it could be possible to
bribe him?

Carrying out tax reforms during a crisis is of course difficult.

However, in 2009, a number of serious tax administration reforms were
implemented in Armenia. Many of them were part of IMF conditionality
and were supported by IMF technical assistance. As an example, I can
mention the provision of timely VAT refunds to exporters. We have
already observed some progress this year, as the number of late VAT
refunds has been substantially reduced. Under the new legislative
amendments, the government will have to pay interest on late VAT
refunds starting from 2010. We think that is a serious achievement,
because timely VAT refunds are extremely important for the efficiency
of businesses. In addition, tax credits have been reduced. Previously,
tax authorities often asked taxpayers for advance payments against
future tax liabilities. During this year, this practice has diminished.

Is this issue settled by law or did the tax authorities simply decide
to give up the practice of asking for advance tax payments?

This was a government decision that was in accordance with IMF
conditionality. As for the decision to install tax representatives in
large companies, we certainly hope that this will be an effective
measure, but unfortunately, the experience of other countries
shows that it could lead to higher corruption. We believe that the
government took this step with the sincere intention to increase
revenue collection from the large taxpayers. However, it is very
difficult to get large taxpayers to pay as much taxes as they should.

Theoretically, a tax representative can improve tax collection, but
in practice, it will be very difficult for him or her to monitor
everything that happens inside a company; moreover, he can be
cheated or colluded. International experience shows that the lower
the human factor and the fewer physical contacts with tax inspectors,
the higher the risks that someone will ask or offer something that
will make others close they eyes .

What you say now is quite correct, and our authorities have been
expressing the same approaches, however in fact they just did the
opposite. It is interesting to know whether the IMF recommended
the authorities to introduce the institute of tax representatives,
or objected against it or whether both sides came to a compromise?

No, the IMF did not recommend this. In fact, we adviced against it.

We know that the IMF provided a Stand-By Arrangement of around $822
million to the Government and the CBA. Is this amount sufficient
for support the CBA’s international reserves and for ensuring the
sustainability of the exchange rate in 2010?

Out of this amount, we actually allocated around $300 million to the
government for budget support. The government has already received
around $150 million in 2009 and will probably receive equal amount
in 2010, provided that it complies with the IMF conditionality. The
rest of the loan, which is around $522 million, will go to the
Central Bank. This should definitely be sufficient for supporting its
international reserves. Until now, the IMF has already disbursed $480
million, of which $150 million to the government and $330 million to
the CBA. The CBA may receive another $200 million by June 2011.

I would like to stress that these resources are provided to the CBA
not for supporting any particular exchange rate, but for smoothing
sharp short-term exchange rate fluctuations. The CBA should not
resist exchange rate changes if there are objective depreciation or
appreciation trends.

What is the IMF projection for 2010 inflation?

Several months ago our forecast for end-2009 inflation on a
year-on-year basis was 5.2 %. Now, it seems that this may have been a
bit optimistic. We hope that inflation will stay within the inflation
target range of 4% ±1.5%, but there is a risk that it can exceed 5.5%.

What could be the impact of inflation on interest rates?

Usually, inflation leads to higher nominal interest rates. Interest
rates have already been notably reduced, resulting in a significant
growth of banking sector liquidity. At present, banks have sufficient
liquidity and capital to provide loans. We expect that, due to the
economic recovery, banks will increase the level of lending. At the
same time, we think that it is still early to raise interest rates. We
therefore approve last week’s CBA decision to keep the repo rate at 5%.

You said that in 2010 banks will provide more loans. Does it relate
to SMEs only?

As the economy recovers, lending to all sectors should grow. During the
crisis, profits of banks have fallen. Furthermore, several profitable
banks incurred losses after the sharp depreciation of the dram in
March. However, compared to other countries, the Armenian banking
system has successfully withstood the crisis.

How does the IMF assess monetary policy conducted in Armenia? Do you
still think that this policy should be tightened?

We think that it is still early to tighten monetary policy, which
would imply higher interest rates.

How do you assess the 2010 state budget indicators?

In our view, the 6% deficit programmed in the 2010 budget is high,
but appropriate. What is important to us is a gradual lowering of the
deficit, which is needed to avoid excessive debt growth. In general,
the IMF recommends not to cut the deficit too rapidly, because
there is a risk that this could prevent the economic recovery of the
country. According to our preliminary projections, Armenia should be
able to reach the pre-crisis 3% budget deficit level no later than
by 2013. These projections are still preliminary, and may be adjusted
after discussions with the government during the next year.