By Emil Danielyan
Armenia’s economy has performed “remarkably well” since 2001 and is well placed to continue to expand robustly in the coming years, according to the International Monetary Fund. The IMF has cautioned at the same time that further growth would be hampered the Armenian authorities’ failure to tackle widespread corruption and tax evasion in earnest.
“Armenia’s economic outlook is favorable, but it is not without risks,” concludes an extensive report posted on the fund’s web site. “The most important risks are on the domestic front, where intermittent political turmoil and insufficient resolve to deal with problems in tax collection and strengthen the legal, judicial and banking systems could damage growth prospects and impede a meaningful reduction in poverty rates.”
“Effective political leadership will be required to fight corruption and vested interests and counterbalance these risks,” it says, adding that the continuing Azerbaijani and Turkish blockades are also taking their toll on the country’s economic development. “Lastly, Armenia’s dependence on grants and foreign financing means that any disruption in their disbursement could have an adverse effect on fiscal and macroeconomic stability.”
The release of the 64-page report follows the completion earlier this month of the IMF’s three-year $105 million lending program designed to bolster macroeconomic stability in Armenia. The fund’s governing board, which disbursed of its final $13.7 million tranche, praised the authorities in Yerevan for their “prudent” economic policies.
The report mentions the fact that the Armenian economy grew by an average of 12 percent between 2001 and 2003 but does not make specific forecasts for the near future. The Armenian government says the economy, still reeling from the Soviet collapse, is on course to expand by 11percent this year. Finance and Economy Minister Vartan Khachatrian expects the growth rate to “naturally” slow down to single digits starting from next year.
The IMF report endorses government claims that the growth has reduced widespread unemployment and poverty. Government statistics show the proportion of Armenians living below the official poverty line, which some economists say is set too low, falling from almost 50 percent to 43 percent in the course of last year.
The report admits that even that figure is high and says the authorities’ “weak” tax collection is one of the key reasons for the highly uneven distribution of the growth’s benefits. “While [the government’s] tax revenues increased rapidly in both real and nominal terms since 2000, they have not fared well as a share of GDP,” it says.
One of the most vivid manifestations of the problem is the routine evasion of profit tax by large companies, among them some of Armenia’s most lucrative businesses owned by government-connected individuals. In dollar terms, the government’s profit tax revenues in 2003 were below the 1996 level, suggesting that much of recent years’ extra economic activity has not been taxed.
The government has tried to address this by forming a special taxation unit dealing with the 200 largest corporate taxpayers and imposing a 1 percent turnover tax on all ostensibly loss-making businesses. The measures have had little impact so far, however.
The IMF diplomatically described the problem as a “large gap between actual and potential [tax] collection.” “The large taxpayers unit collects just 23 percent of total revenues, while it could potentially collect up to 75 percent,” says the report, calling for a major reform of the tax-collecting agencies and Armenia’s tax legislation.
The IMF also noted with alarm that the government’s recent attempt to enact some amendments was scuttled by “vested interests in parliament,” an apparent reference to dozens of wealthy businessmen sitting in the National Assembly. “These developments are worrisome as they put the country’s prospects for lasting reform at risk.”