By Emil Danielyan
The Armenian government fell short of its revenue target for last month after registering a 25 percent rise in collected taxes and customs duties in the first half of this year. The ministry for state revenues and the customs department collected 12 billion drams ($22 million) worth of revenues or 17 percent less than was planned.
The worse-than-expected figure came after the tax authorities’ strong first half performance which saw them raise a total of 78 billion drams to the state treasury, in line with their target. The July drop also followed sweeping changes in the two agencies. Minister for State Revenues Andranik Manukian was on July 6 removed from his post and named transport minister over his reported disagreements with Prime Minister Andranik Markarian. In another decision, Markarian separated the customs department from the tax ministry
Widely credited with the improved tax collection of the preceding eight months, Manukian has also been criticized by the premier and President Robert Kocharian for what they see as a too heavy-handed work style. Many local businesses have alleged frequent unjustified inspections and harassment by tax officials.
The government budget for this year calls for 168 billion drams in tax revenues. The overall budget revenues are projected to be at 17 percent of the country’s Gross Domestic Product in 2001. The ratio is very low by international standards and reflects the government’s continuing inability to significantly scale down the huge informal sector of the Armenian economy.
A senior official from the International Monetary Fund last week warned that the authorities must achieve a substantial rise in the revenues in the coming years if they are to ensure continued fiscal stability. John Odling-Smee, who heads the Fund’s Second European Department, said in a speech in Yerevan that Armenia must not count on external borrowing to continue to cover a large part of its budget deficit.
He said: “While the improvement over the past twelve months in tax collection is welcome news, much more needs to be done on the taxation side. Armenia cannot go on forever relying so heavily on budgetary financing from external sources. 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. This, we believe, is a feasible objective.”
Approximately half of Armenia’s deficit has been financed by low-interest loans from the World Bank over the past several years. The bank’s fourth Structural Adjustment Credit (SAC) to Armenia worth $50 million is to be fully disbursed in the course of the year. A delay in the release of the previous SAC loan was one of the causes of a last year’s serious budgetary crisis. The government’s resulting expenditure arrears reached five percent of GDP late last year. Although they have since been reduced to three percent, many public sector employees are still not being paid on time.
Odling-Smee said the government should increase its revenues primarily by “expanding and accelerating” reforms in tax administration. “The government needs to make it absolutely clear that it is not only morally wrong to understate or to fail to honor one’s tax liability but that it is illegal and it will be punished without favoritism,” he said.
The IMF official criticized the existing practice of the government setting specific tax targets for large businesses. He said: “Tax liabilities must be calculated according to the law and not negotiated between the government and taxpayers. Such negotiations typically lead to a loss of revenues as well as involving corruption. Toleration of an unfair tax system full of exemptions and negotiated settlements has a major corrosive influence on the moral authority of the government and it discourages the development of a competitive and broad-based private sector.”