Exclusive interview with Guillermo Tolosa, International Monetary Fund Resident Representative in Armenia
1. Mr. Tolosa, what is the level of financing provided by the IMF to Armenia in 2011? How do you assess the degree of cooperation and progress in implementation of the IMF-supported programs in Armenia?
IMF provided USD 114 million to Armenia in 2011. The cooperation has been very good, and there was progress on the implementation of IMF-supported programs in Armenia. The government has met all the targets regarding fiscal deficit, the level of reserves of the Central Bank, the pace of money creation, and concessionality of debt. The government has also been meeting almost all structural benchmarks in a variety of areas regarding tax policy, tax administration, conduct of monetary policy, financial sector monitoring and supervision, and social policies.
2. What size of investments does the IMF plan to make in the Armenian economy in 2012 and what sectors will be regarded as a priority?
We expect to disburse around USD 100 million this year (but please note this year there will also be large repayments fr om the government to the IMF for USD 156 million). The new disbursements are for overall budget support and to bolster the reserves of the Central Bank. The key objective of our program is the continuation of policies that ensure macroeconomic stability. Our more specific areas of focus in Armenia will continue to be issues related to the tax sphere and the financial sector.
3. What is your assessment of the current macro-economic development in Armenia? What are the recent IMF forecasts concerning the dynamics of the key macro-economic measures of Armenia, including the GDP growth and inflation rates in 2012 in view of the existing level of development of the domestic economy and the global economy as a whole?
The macroeconomic situation in Armenia is sound. Inflation is low, growth is picking up, public budget deficit is moderate and has been cut significantly, public debt level is manageable, and the banking system is stable. For next year, we expect inflation to remain close to Central Bank inflation target and economic growth is expected to be very close to potential of 4% per year. However, we believe Armenia could achieve an even faster pace of growth. Using current projections of potential growth, Armenia will only be able to catch up with mature transition countries like Hungary in 75 years , and with Czech Republic in more than 100 years. We think there is room for a much faster convergence process (for example, given current and expected growth rates, Georgia is expected to achieve convergence in half of that time).
Despite the very good progress mentioned above in a variety of areas, a key remaining area is to ensure a proper and fair treatment of business endeavors. Once government substantially improves the nature of its interactions with businesses (critically so at the level of the State Revenue Committee), the impact on economic growth could be considerable.
Armenia has a generally sound legislative environment. In Armenia, there are dedicated, competent, and prudent policymakers at various levels of government which have been enacting important reforms and protected a sound macroeconomic environment. Armenia features a population that has proved on a world scale to be blessed with a vigorous entrepreneurial spirit. Armenia has a Diaspora with enormous financial and human potential which would be willing to step up investments. Armenia has the opportunity to have free trade with the largest economy of the world (the European Uni on) and also an emerging economic area with enormous potential like the CIS. The country is ready for next step in its stage of development, but unfortunately some remaining obstacles still imply that existing commendable efforts are not translating into particularly impressive economic outcomes so far.
4. The Armenian authorities have planned considerably higher tax revenues in the 2012 budget, and it is anticipated that this target will be met primarily through an economic growth. Do you think that the authorities will succeed in meeting this target?
In the context of moderate growth prospects (given business environment issues described before), the target for 2012 is indeed ambitious. However, there is a strong will on the side of the authorities to collect more taxes relative to the current size of the economy, and given that there is considerable potential to do so, we think the target is achievable. However, the first four months of the year have not been very encouraging and there needs to be a step-up in the effort for the rest of the year.
5. Do you think that the level of Armenia’s external debt is manageable? Is there a need for additional credit proceeds? If yes, then how much additional financing can be attracted? What will the public debt/GDP ratio be 2012?
Yes, external public sector debt is manageable. At slightly above 35% of GDP (with total public debt slightly above 40% of GDP) is considered to be below the safe thresholds. Also, its structure is very favorable, with a high share of concessional loans. Our analysis suggests that even under various “stress scenarios” involving deterioration of economic conditions debt will remain manageable.
Yes there will be a need for further credits in 2012 to finance the fiscal deficit and amortization payments. However, because economy will continue to grow, the effect on the total public debt/GDP ratio to be modest and we expect to end the year slightly above 42%. As fiscal consolidation continues, this ratio is expected to stabilize starting next year.
6. What concrete steps should the Armenian authorities take towards ensuring the country’s competitiveness in international markets?
Competitiveness is a very broad concept, and the agenda in this regard covers multiple dimensions, of which I will only cover a few that are particularly relevant in Armenia. In order to eventually compete in the global market, firms generally need to start by becoming competitive in the local market. They can only do so if they are able to compete fairly at this local level. So a key step for the government (in addition to, as discussed above, making sure that it is not interfering the normal functioning of the firm) is to ensure domestic competition is working well. While there have been important changes in the competition legislation in Armenia, there continue to be obstacles for small and medium firms to compete in the local economy which need to be addressed.
A firm and unwavering commitment to exchange rate flexibility is also critical for the country’s exports to be competitive. An overvalued currency would hurt Armenian goods competitiveness greatly as it would mean that they are rendered more expensive than they should be in the international markets, and therefore harder to sell.
There are other important steps that the government is trying to make in the context of the new “Export-Led Industrial Strategy”, mainly supporting competitiveness in sel ected sectors by delivering public goods specific to certain industries. There are very promising elements in this strategy, although there are also some risks that need to be avoided, including support to specific firms given governments have proven not to be very good in picking winners, and given it can eventually lead to rent-seeking behavior and corruption.
7. In your opinion, what are the trends of development in the global economy, in particular, in developing countries in 2012? How world economic trends can affect on situation in developed countries, in particular, in Armenia?
We expect the world economy to grow 3.5% in 2012, slightly below 3.9% rate achieved in 2011. Developing economies will continue to grow healthily at 5.7%, faster than advanced countries, but also softening relative to 2011. The world economy is affected by ongoing developments in Europe, wh ere unsettled confidence regarding the balance sheets of sovereigns and some banks, along with fiscal consolidation, have sent the economy into a new recession. The key for Armenia is that the Russian economy continues to perform well in spite of European woes. Russia is the source of the overwhelming majority of funds that enter Armenia, mostly in terms of remittances and foreign direct investments. As soon as Russia sneezes, Armenia will get a serious cold. Both consumption and investment will be directly affected by a potential weakening of the Russian economy. Armenia is also vulnerable, although to a lesser extent, on international prices of metals, which can also be further affected by the crisis in Europe. While the direct effect of this channel is more limited (mining represents only 3% of GDP), if metal prices to be affected by the European crisis, Armenia’s currency would suffer, and therefore imported prices would go up and this would affect Armenians’ purchasing power.
8. What kind of measures should countries like Armenia take as part of their preparedness to the second wave of the global crisis?
As I said we don’t think there will be a new wave of crisis at a global level. However, Armenia’s neighborhood could face increasingly difficult times because of events in Europe. Against that background, an absolutely key issue is for the time being to protect very carefully Armenia’s fiscal space. At this stage, the government should abstain from any large project that would require substantive fiscal support and is not envisaged in the budget or medium term expenditure framework. Also, the government should be very careful in preserving the reserves by the Central Bank by allowing considerable exchange rate flexibility. Finally, the Central Bank needs to continue to step up efforts in monitoring new bank credit being issued, especially in foreign currency. -0-