IMF ready to help Armenia in case of need

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, having a small financial system is not so good for economic development, but, on the other hand, it can now 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 cutoff rates. A market mechanism must work here, which is important for the development of bond market.

As regards the tax reforms, the new IMF program will contain a condition 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 the tax 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 large taxpayers because the major part of tax revenues (about 60%) is formed due to 300 largest 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 the tax authorities to make risk-based audits. There is no need for constant audits of all taxpayers - only those raising doubts about fulfilling their tax liabilities should be audited. 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 Government’s tax reform strategy. We believe it incorporates effective reforms, and the implementation of our program is linked to those reforms.

Question: What is your appraisal of the Government’s steps to reduce the 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 focus on the large taxpayers. The shadow economy is very difficult to measure because no one exactly knows its real size. I think the reduction of the 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 will 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 tax authorities will be informed of the details of their bank operations. So many businessmen prefer keeping their money “under the mattress”, which is very bad for the Armenian economy.

Besides, I do not believe that the tax authorities have access to bank information. Armenia’s law guarantees the confidentiality of this information, and banks have no right to provide it to the tax authorities. We consider this to be important, 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 want to get results sooner, radical changes are necessary. Hiring new staff is a good way to speed up changes in the way of thinking.

I think that Armenians’ way of thinking is changing to some extent. The usual question is where to begin, with the Government or with the population? I do not think that the population will 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, growth rates exceeding 10% are a rare phenomenon. It is very impressive that Armenia has registered double-digit growth for many years in a row. But it cannot be an everlasting process.

Theoretically, in the long term all countries should 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, so that they will be at the same level after many many years. It is natural, therefore, that the economic growth rates in Armenia will gradually fall as the country becomes richer.

Question: This September, IMF mission chief 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 our forecast for the average annual inflation rate in 2009. 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 to lead to lower prices in Armenia as well. We forecast an average inflation rate of 5% in Armenia for next year.

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

Answer: The impact of the Russian-Georgia conflict on Armenia seemed to be limited. However, the August events showed Armenia’s economy to be very vulnerable in the case of closed borders, when the majority of Armenian imports go through Georgia.

To make the country economically less vulnerable, the re-opening of the border with Turkey is the best way. Speaking purely from an economic point of view, we are therefore happy that there is 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 it would be an alternative way to 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 countries are engaged in trade, one of them may produce some goods at a lower price than another, and some Turkish products, for example, agricultural produce, may be cheaper than Armenian. In the short term, Armenian products will face difficulties in meeting the competition, but in the long term 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. Overall, I am sure it will be beneficial for both countries in the long term.

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

Answer: Before the crisis we recommended tighter macroeconomic policies to reduce inflation, that is, having a small deficit and implementing a tight 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 a deficit in any case, which implies that the Government will spend more than it will receive. We believe that there is more scope to increase revenues than to reduce 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, so that  the Government will have more financial resources to support social programs 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 still 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 work directly with the tax 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 Board is to approve a new program. Thereafter, On November 21-22, Mr. Murilo 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. The IMF thus makes it clear that it considers Armenia an important country and wants to support the reforms the country is implementing.-0-