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The World Bank announced on Friday the release of a new $60 million loan to Armenia that will help its government offset a shortfall in tax revenues resulting from the ongoing economic crisis.

The allocation further increased chances of the Armenian government avoiding major cuts in its record-high budgetary expenditures projected for this year. A part of almost $900 million in separate loans provided to Armenia by Russia and the International Monetary Fund (IMF) this year will also be used for financing the widened state budget deficit.

Citing the tax shortfall, the government delayed last March 131 billion drams ($359 million) worth of spending until the fourth quarter of this year. The sum is equivalent to almost 14 percent of its full-year spending target.

In a statement, the World Bank said the budgetary loan, called First Development Policy Operation (DPO-1), will mitigate the global recession’s impact on the Armenian economy by enabling its government to spend more on pensions, poverty benefits and other social programs. “This Operation supports the implementation of the Government's program to help mitigate the social impact of the externally-driven crisis and attract private investment for strong post-crisis growth,” Asad Alam, the World Bank director for the South Caucasus, was quoted as saying.

The disbursed loan stems from a four-year lending strategy for Armenia that was approved by the World Bank’s board of directors on June 11. It envisages at least $670 million in total financing.

This and other external assistance is vital for the success of the Armenian authorities’ strategy of coping with the crisis. The authorities have already borrowed over $1 billion from the World Bank, the IMF and other sources since January, nearly doubling the country’s external debt. It is expected to rise further and make up about half of Gross Domestic Product next year. The proportion stood at just 13 percent last year.

Armenia -- Aristomene Varoudakis, head of World Bank's Yerevan office, 12Jun2009

Speaking at a news conference on Friday, Aristomene Varoudakis, head of the World Bank office in Yerevan, said Armenia should have little trouble servicing the increased debt if it improves tax collection and achieves renewed economic growth. Varoudakis stressed that GDP growth should be primarily driven not only by construction, as has been the case in recent years, but export-oriented sectors of the Armenian economy. To that end, he said, the authorities should make the economy more competitive by strengthening rule of law and improving the business environment.

Incidentally, better governance and a more favorable investment climate were one of the conditions for the release of the $60 million loan, according to the World Bank statement. The statement said the authorities in Yerevan have committed themselves to reducing costs of business registration, reforming the State Revenue Committee and passing a law on conflict of interests.

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