Below is an interview with RA Deputy Minister of Finance Vardan Aramyan
NEWS.am: According to international financial agencies, Armenia was among to the countries that were most seriously affected by the global economic crisis. Can we conclude that during the pre-crisis period the Armenian Government failed to accurately calculate its steps, and its initial actions did not produce the desired results?
V. Aramyan: It is usually much easier to voice opinions — including critical ones — of the past than to make forecasts for the future. But we could approach the issue considering the lessons we have drawn. The latest developments have shown that our economy was not so flexible nor was it capable of resisting external shocks. What we have now is the previous years’ heritage.
Before the pre-crisis period the Armenian economy was indirectly infected with the Dutch disease, which, in its classical form, was obvious in the Russian economy, Armenia’s major partner and main source of money transfers. The Dutch disease is typical of the countries exporting raw materials. They do not have any labor productivity problems – they export raw materials and receive huge funds, which are later accumulated in the construction and services sectors. As a result, theses sectors start developing, with prices there rising. Instead, the exporting sectors are ousted from the economy, with a lower price rise recorded there than in the non-exporting sectors. The result is that all the resources (both financial and human) flow into the non-exporting sector, which is much more vulnerable to external shocks, as productivity growth is normally limited there.
Armenia has no oil or gas reserves, but it received huge funds as money transfers, mainly from Russia, which indirectly provoked Dutch disease in the Armenian economy. Businessmen saw that the construction and services sectors were highly profitable. Instead of thinking of manufacturing export products, they rushed to the construction and services sectors and made them engines of our economy.
What is the right policy? Both theory and international experience show that symptoms of the Dutch disease are signals for improving administration and taxation of the highly productive non-exporting sector. Also, while most of the budget tax revenues are saved, the rest are directed to the development of economic infrastructures. That would be indirect assistance to the exporting sector and enhance economic efficiency. That is, an active business cycle policy would be launched.
I can say that the tax policy was not properly implemented during the previous years. Now aggressive reforms in this field must be one of the Armenian Government’s tasks, and the Armenian Premier has repeatedly stated the fact. Specifically, tax and customs administration must be improved at a higher rate. That is the funds formed by money transfers were finally accumulated in the non-exporting sector, which was prospering. The Government must find and develop mechanisms of proper taxation and direct part of the extra tax revenues to infrastructure development, which, as I have said, would enhance economic efficiency.
We cannot say that the tax policy was entirely wrong, but the reforms must have been slow. The lessons of the past show the need for the Government to implement a more aggressive policy of economic reforms. The Armenian market must become a diversified one.
NEWS.am: If the construction industry is not so efficient and proved to be one of the causes of economic decline, why did the Government provide a considerable part of the Russian stabilization loan to the construction companies?
V. Aramyan: I would like to note that a fire in a flat may be caused by an appliance out of order. The priority task is to put out the fire. Then the appliance can be repaired. This principle was incorporated in our short-term anti-crisis program. We also assisted both the construction and the services sectors by issuing mortgage loans by means of a newly established lending agency.
In fact, the Government did not allocate funds from the Russian stabilization loan to developers. Some companies were completing their construction projects. But, lacking circulating assets, they were unable to complete the projects. Banks did not want to provide funding, or issued credits at very high interest rates. The Government provided guarantees to several construction companies, which enabled them to receive credits at relatively low interest rates. Thus all the three sides gained: the banks, because they utilized their funds; the companies, because they resumed construction and created jobs; the Government, because it ensured GDP growth and relieved social tension, as it is citizens that are owners of the housing.
NEWS.am: Is economic recovery possible in Armenia, can the pre-crisis level be reached during a medium term?
V. Aramyan: I am sure that our economy will recover and the previous years’ indicators will be reached. First, our economy depends on global and regional developments, which are signaling stabilization and progress. The economic decline in Armenia reached the bottom in 2009. We forecast 1.2% economic growth for next year in the context of 1.5% economic growth planned in Russia – our economy is closely dependent on the Russian market. The International Monetary Fund (IMF), HSBC Group, and the Asian Development Bank (ADB) made optimistic forecasts for the region as well.
NEWS.am: How does the Government plan to restore the financial balance, considering a sharp decrease in the amount of money transfers? Want was the effect of this decrease on the Armenian economy?
V. Aramyan: Money transfers are really of high importance for the Armenian economy. They are rather equally distributed among the economic sectors thereby reducing social polarization. Transfers received in Armenia used to constitute up to 13-14 per cent of GDP yearly. The year 2009, however, saw a 30% decrease, which was evidence of decrease in the populations’ incomes. One of the Government’s tasks was attracting foreign funds to the economy and thus stimulating the demand, which actually depended on money transfers. In this aspect, I think, the Armenian Government, assisted by the IMF, Russian Government, World Bank, ADB and other donors, managed to make up for the decrease in the amount of money transfers. As a result, more budgetary funds were injected into the economy that the Government collected as taxes. So we should expect 7% budget deficit instead of 1%.
NEWS.am: Much less funds come to Armenia now than before. Under the circumstances, should the Central Bank of Armenia (CBA) revise its monetary policy, particularly, create new mechanisms of crediting small-to-medium businesses?
V. Aramyan: Indeed, the CBA’s priority task is price stability, which, in the case of Armenia, is a legal provision. This allows the CBA to assist the economy. The CBA achieves its aim by means of its monetary policy, with the financial market members – and through them the real sector – benefiting from this. When we say that the CBA should revise its monetary policy and render direct assistance to small-to-medium businesses, we should take into account that it is not so much encouraged, as quite a number of absurd phenomena can be observed on the market. Other nations’ experience shows that, even as an anti-crisis measure, Governments’ assistance to small-to-medium businesses is much more effective, while the Central Banks help the Governments by reducing interest rates. We adopted this experience. The CBA should keep its interest rates down for some time more, while the Government will be supporting small-to-medium businesses. If the CBA launches a policy similar to that of the Government, the two policies will come into conflict. I think that the Government and the CBA, especially during the crisis, should coordinate their policies.
NEWS.am: What export promotion measures does the Government plan for 2010?
V. Aramyan: Businessmen engaged in export receive help today as well. They are exempted from customs duties and other taxes. Also, the VAT is returned to them. Businessmen importing expensive production equipment enjoy a 3-year VAT deferral. Nevertheless, I think that improving the economic system, particularly tax and customs administration reforms, is one of the best mechanisms now. The Armenian Premier has focused his attention on it. The economic environment will not improve until the tax and customs policies have been reformed. No matter what export promotion mechanisms are invented, they will prove to be stillborn if the structural problems of the economic system remain unresolved.
NEWS.am: No increase in wages and pensions is budgeted for 2010. What are guarantees against inflation, and will the population retain its purchasing power?
V. Aramyan: First of all, we should not link inflation to purchasing power. Our purchasing power depends on price rise. I would like to note that one of our anti-crisis measures is full-scale execution of all the social expenses. If we expect a 5-5.5 pct price rise this year (and we aim at 4±1.5% for next year), we can say that the real social expenditures or the purchasing power of this amount will be maintained at the pre-crisis level.
T.P.
