IMF: new tax code for Armenia is critical.
15.02.2016,
17:13
In an exclusive interview with ARKA news agency, Hossein Samiei, the newly-appointed IMF Mission Chief to Armenia, spoke about the Fed rate increase’s affect on the emerging market currencies, and in particular, the Armenian currency as well as other issues
In an exclusive interview with ARKA news agency, Hossein Samiei, the newly-appointed IMF Mission Chief to Armenia, spoke about the Fed rate increase’s affect on the emerging market currencies, and in particular, the Armenian currency as well as other issues
Q. How would the rate increase by the Fed affect the emerging market currencies, in particular, the Armenian currency?
A. The U.S. Federal Reserve has begun its monetary policy normalization by increasing the Fed funds rate by 25 bps in December, with broadly favorable market reaction. Uncertainties surrounding future steps of normalization could create market volatility, especially since market and liquidity risks have been building. A bumpy exit could have significant and widespread implications for financial stability and the real sector, in advanced economies but especially in emerging markets. Policy coordination, clear communication and appropriate policy response are needed to mitigate spillovers.
Spillovers in the case of Armenia are expected to be mute, given the country’s relatively low level of integration with international financial markets. At present, portfolio foreign investment is almost null, and the external debt of both the private and public sectors are mostly with IFIs, in good terms as regards maturity and rates.
Q. What is in store for the Armenian currency in the short-term taking into account the current economic situation?
A. As explained in the last IMF Staff Report on Armenia (at http://www.imf.org/external/country/arm/index.htm), the dram appears to be close to its equilibrium value. This is reflected in the sizeable strengthening in the external current account that took place in 2015. This strengthening has been the result of the sizeable nominal improvement in the trade balance due to firstly, a sizeable decline in imports (in volume and value terms), partly as a result of 2014’s unusual increase in imports (because of uncertainty related to EEU), and lower gas imports (because of middle winter); and secondly, the relatively favorable performance of exports because of good agriculture production and the coming to stream of a new copper mine. These two developments have outweighed the large decline in remittances and helped to reduce potential tensions in forex markets.
However, Armenia is not fully immune to the currently high level of uncertainty in international markets, as the exchange rate (ER) pressures of last August showed, when the depreciation of the Kazakh tenge and the volatility in China translated into temporary ER pressures and punctual central bank of Armenia’s (CBA) interventions. In addition, the external adjustment observed in 2015 may not be sustainable, given the temporary nature of the favorable factors mentioned before. Consequently, there is a need for the CBA to remain vigilant and to step up its communication efforts with the public and markets, particularly ahead of likely seasonal market pressures.
Q. What is expected for the global economy in 2016? What are your forecasts for the Armenian economy in 2016?
A. As explained in the recent issue of the IMF World Economic Outlook Update, global growth is going to remain moderate and uneven.
http://www.imf.org/external/pubs/ft/weo/2016/update/01/. It is expected to decline from 3.4 percent to 3.1 percent in 2015, before strengthening to 3.4 percent this year – with substantial variation across the globe.
In advanced economies, a modest and uneven recovery is expected to continue, with a gradual further narrowing of output gaps. The picture for emerging market and developing economies is diverse but in many cases challenging. The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in 2016–17. Growth in Emerging Markets and Developing Countries is expected to strengthen from 4 percent in 2015 to 4.3 and 4.7 percent in 2016 and 2017, respectively. This pickup in growth in the next two years—despite the ongoing slowdown in China—primarily reflects forecasts of a gradual improvement of growth rates in countries currently in economic distress, notably Brazil, Russia, and some countries in the Middle East, though even this projected partial recovery could be frustrated by new economic or political shocks.
In Armenia, weaker global and regional conditions have translated into lower remittances, fiscal revenues, and banking sector profits. The authorities’ response so far has helped mitigate the impact of the shocks. This response has been a combination of a moderate fiscal impulse, tightened monetary conditions and ER depreciation. Growth also has held up because of one-off factors, including good agriculture production and the coming on stream of a new copper mine. As a result growth in Armenia is expected to weaken in 2015 and 2016—to 2.5 and 2.2 percent, respectively (from 3.5 percent in 2014).
Q. The 2016 draft government budget provides for real GDP growth of 2.2 percent, and the fiscal deficit is to reach 3.5 percent of GDP. What is your take on these indicators built into the budget?
The budget for 2016 is supported by assumptions that are broadly in line with our macroeconomic assessment of subdued growth and moderate inflation. In addition, it envisages a moderate reduction in the deficit from the 3.9 percent of GDP projected for 2015 to 3.5 percent of GDP in 2016. The fiscal consolidation will rely on both revenue measures (e.g. the increase in excises approved in November) and expenditure restraint of non-priority spending (with social and capital spending protected). Starting the consolidation in 2016 is critical to ensure Armenia’s public debt remains sustainable. We still remain concerned about sizeable downside risks to revenue projections for 2016, because of uncertain growth and the potential negative impact of some tax measures introduced last year (e.g. increase in the threshold for the turnover tax, extension of the payment date for VAT on imports from EEU countries, etc). The government stands ready to introduce additional tax and/or expenditure measures, including making use of the legal provision to limit spending commitments to 90 percent of the budgeted amounts.
Q. What is your assessment of the public debt of Armenia in 2016? It is estimated that the external debt-to-GDP ratio for Armenia in 2016 would be close to 50 percent. Is this, in your opinion, a cause for concern for Armenia?
A. Our analysis concludes that Armenia’s public debt remains sustainable, although risks are elevated. In particular, external debt is a significant source of vulnerability, and the repayment of the 2013 Eurobond in 2020 increases sharply the government’s financing needs. Alternative scenarios and stress tests indicate that an adverse growth shock would have the largest impact on debt dynamics and government financing needs. To reduce the public debt level, fiscal consolidation should start as early as 2016. The consolidation should focus on revenue increases—addressing tax policy and revenue administration gaps—rather than on spending cuts to protect growth enhancing social and capital expenditures. This is why the approval of the new Tax Code, currently under public consultation, and which includes several revenue enhancing measures, is so critical. -0-
Q. How would the rate increase by the Fed affect the emerging market currencies, in particular, the Armenian currency?
A. The U.S. Federal Reserve has begun its monetary policy normalization by increasing the Fed funds rate by 25 bps in December, with broadly favorable market reaction. Uncertainties surrounding future steps of normalization could create market volatility, especially since market and liquidity risks have been building. A bumpy exit could have significant and widespread implications for financial stability and the real sector, in advanced economies but especially in emerging markets. Policy coordination, clear communication and appropriate policy response are needed to mitigate spillovers.
Spillovers in the case of Armenia are expected to be mute, given the country’s relatively low level of integration with international financial markets. At present, portfolio foreign investment is almost null, and the external debt of both the private and public sectors are mostly with IFIs, in good terms as regards maturity and rates.
Q. What is in store for the Armenian currency in the short-term taking into account the current economic situation?
A. As explained in the last IMF Staff Report on Armenia (at http://www.imf.org/external/country/arm/index.htm), the dram appears to be close to its equilibrium value. This is reflected in the sizeable strengthening in the external current account that took place in 2015. This strengthening has been the result of the sizeable nominal improvement in the trade balance due to firstly, a sizeable decline in imports (in volume and value terms), partly as a result of 2014’s unusual increase in imports (because of uncertainty related to EEU), and lower gas imports (because of middle winter); and secondly, the relatively favorable performance of exports because of good agriculture production and the coming to stream of a new copper mine. These two developments have outweighed the large decline in remittances and helped to reduce potential tensions in forex markets.
However, Armenia is not fully immune to the currently high level of uncertainty in international markets, as the exchange rate (ER) pressures of last August showed, when the depreciation of the Kazakh tenge and the volatility in China translated into temporary ER pressures and punctual central bank of Armenia’s (CBA) interventions. In addition, the external adjustment observed in 2015 may not be sustainable, given the temporary nature of the favorable factors mentioned before. Consequently, there is a need for the CBA to remain vigilant and to step up its communication efforts with the public and markets, particularly ahead of likely seasonal market pressures.
Q. What is expected for the global economy in 2016? What are your forecasts for the Armenian economy in 2016?
A. As explained in the recent issue of the IMF World Economic Outlook Update, global growth is going to remain moderate and uneven.
http://www.imf.org/external/pubs/ft/weo/2016/update/01/. It is expected to decline from 3.4 percent to 3.1 percent in 2015, before strengthening to 3.4 percent this year – with substantial variation across the globe.
In advanced economies, a modest and uneven recovery is expected to continue, with a gradual further narrowing of output gaps. The picture for emerging market and developing economies is diverse but in many cases challenging. The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in 2016–17. Growth in Emerging Markets and Developing Countries is expected to strengthen from 4 percent in 2015 to 4.3 and 4.7 percent in 2016 and 2017, respectively. This pickup in growth in the next two years—despite the ongoing slowdown in China—primarily reflects forecasts of a gradual improvement of growth rates in countries currently in economic distress, notably Brazil, Russia, and some countries in the Middle East, though even this projected partial recovery could be frustrated by new economic or political shocks.
In Armenia, weaker global and regional conditions have translated into lower remittances, fiscal revenues, and banking sector profits. The authorities’ response so far has helped mitigate the impact of the shocks. This response has been a combination of a moderate fiscal impulse, tightened monetary conditions and ER depreciation. Growth also has held up because of one-off factors, including good agriculture production and the coming on stream of a new copper mine. As a result growth in Armenia is expected to weaken in 2015 and 2016—to 2.5 and 2.2 percent, respectively (from 3.5 percent in 2014).
Q. The 2016 draft government budget provides for real GDP growth of 2.2 percent, and the fiscal deficit is to reach 3.5 percent of GDP. What is your take on these indicators built into the budget?
The budget for 2016 is supported by assumptions that are broadly in line with our macroeconomic assessment of subdued growth and moderate inflation. In addition, it envisages a moderate reduction in the deficit from the 3.9 percent of GDP projected for 2015 to 3.5 percent of GDP in 2016. The fiscal consolidation will rely on both revenue measures (e.g. the increase in excises approved in November) and expenditure restraint of non-priority spending (with social and capital spending protected). Starting the consolidation in 2016 is critical to ensure Armenia’s public debt remains sustainable. We still remain concerned about sizeable downside risks to revenue projections for 2016, because of uncertain growth and the potential negative impact of some tax measures introduced last year (e.g. increase in the threshold for the turnover tax, extension of the payment date for VAT on imports from EEU countries, etc). The government stands ready to introduce additional tax and/or expenditure measures, including making use of the legal provision to limit spending commitments to 90 percent of the budgeted amounts.
Q. What is your assessment of the public debt of Armenia in 2016? It is estimated that the external debt-to-GDP ratio for Armenia in 2016 would be close to 50 percent. Is this, in your opinion, a cause for concern for Armenia?
A. Our analysis concludes that Armenia’s public debt remains sustainable, although risks are elevated. In particular, external debt is a significant source of vulnerability, and the repayment of the 2013 Eurobond in 2020 increases sharply the government’s financing needs. Alternative scenarios and stress tests indicate that an adverse growth shock would have the largest impact on debt dynamics and government financing needs. To reduce the public debt level, fiscal consolidation should start as early as 2016. The consolidation should focus on revenue increases—addressing tax policy and revenue administration gaps—rather than on spending cuts to protect growth enhancing social and capital expenditures. This is why the approval of the new Tax Code, currently under public consultation, and which includes several revenue enhancing measures, is so critical. -0-
