By Atom Markarian
The government of Prime Minister Andranik Markarian will push for a sizable decrease in Armenia’s budget deficit when it submits its spending bill for next year to the parliament later this week.
Ministers approved the draft budget’s tentative indicators on Thursday. The cabinet hopes to cut the deficit by over 40 percent to 31 billion drams ($55 million) or 2.6 percent of GDP mainly through a corresponding increase in its revenues. They are projected at 217 billion drams, up from 193 billion drams set by this year’s budget. The expenditures will remain essentially unchanged at 248 billion drams.
Under Armenian law, the government must formally send its proposed budget to the parliament no later than November 1. Finance and Economy Minister Vartan Khachatrian said the draft may undergo only minor amendments by then. He said its main indicators “seem to satisfy” the International Monetary Fund, whose approval is essential for the release of the World Bank’s deficit-funding loans to Armenia.
An IMF mission was in Yerevan last week, holding meetings with senior government officials. According to Khachatrian, the IMF’s approval paves the way for the disbursement “by mid-December” of the second $15 million tranche of a crucial World Bank loan. The bank’s fourth Structural Adjustment Credit (SAC-4) is designed to cover a considerable part of this year’s deficit.
The finance minister admitted that its final $20 million instalment, conditional on a successful privatization of Armenia’s power grids, is unlikely to be made available this year and that the government will have to cut spending as a result. “That means we will not make that much expenditures this year,” Khachatrian told reporters, adding that he will try to rule out socially “painful cuts.”
The money will be added to other expenditure arrears that have built up in recent years, bringing up their total amount to 54 billion drams. Approximately one fifth of the sum is delayed social security benefits and public sector salaries. The arrears will be included in the overall expenditures of the 2002 budget, meaning that government spending could be lower than this year in real terms.
The release of the third SAC-4 tranche is in question due to World Bank concerns over the government’s handling of the international tender for state-run Armenian electricity distribution companies. The bank and other Western donors are worried that the outcome of the bidding might have been predetermined in favor of the Russian utility RAO Unified Energy Systems (UES). They have argued in the past that RAO UES, which is the only foreign firm to have submitted a bid, does not meet tender criteria.
Meanwhile, negotiations are already underway on the fifth SAC loan to be pegged to the 2002 budget. Armenian officials hope that it will be worth at least $40 million.
A senior IMF official who visited Armenia in July said the authorities should gradually reduce their reliance on external borrowing for closing budget gaps. “Armenia cannot go on forever relying so heavily on budgetary financing from external sources,” John Odling-Smee, who heads the Fund’s Second European Department, said in a speech in Yerevan. “If it is going to be able to afford the size of government it now has, it will have to collect more taxes to support those expenditures.”
The proposed budget aims to achieve that objective. The government improved tax collection in the first half of this year, but fell short of its revenue targets in the third quarter, raising the possibility of a fiscal crisis later this year. Analysts therefore think that ensuring considerably more tax revenues next year will be an extremely difficult task.