By Emil DanielyanThe International Monetary Fund has secured fresh government pledges to improve tax collection and will disburse its next $13 million loan tranche to Armenia “very soon,” the IMF’s resident representative in Yerevan said on Tuesday.
The official, James McHugh, said that the two sides now only need to “work out a few technicalities,” and that the fifth installment of the fund’s $95 million Poverty Reduction and Growth Facility (PRGF) loan is likely to be made available before the end of this year.
“We are very, very close to an agreement,” McHugh told RFE/RL in an interview. “I am fully confident that we will get it in the next couple of days.”
Launched in 2001, the PRGF program is aimed at reinforcing macroeconomic stability in Armenia which has had a relatively low inflation and stable economic growth since the mid-1990s. The main beneficiary of IMF funds is the Central Bank of Armenia (CBA) which regulates the country’s monetary environment. Their release also makes it easier for the Armenian government to obtain vital low-interest loans from the World Bank and suggests an overall donor confidence in its economic policy.
The IMF said in early August that disbursement of the fifth PRGF tranche is contingent on more government efforts to address “significant shortcomings” in the collection of taxes and customs duties. According to McHugh, the Washington-based fund believes that the Armenian authorities should take additional fiscal measures to ensure a further increase in their budget revenues next year.
“What we are discussing at the moment is the issue of what happens if certain moneys that they are expecting do not materialize,” he said. “Essentially, we are making sure that the budget for next year is prudent and careful.”
The IMF, McHugh continued, is particularly keen to have the government reduce the number of imported goods from which the Armenian customs does not levy a 20 percent value-added tax (VAT) at the point of their entry into Armenia. The government began taxing the bulk of imports on the border in 2001under IMF pressure. The fund believes that the remaining exemptions from immediate payment of VAT leave a loophole for tax evasion.
McHugh said the government has agreed to abolish some of those exemptions and also take “significant measures” to complicate the even more widespread evasion of profit taxes by many Armenian firms. “We have an agreement on all those areas,” he added.
A sustained increase in tax revenues will be critical for the success of a recently unveiled government plan to significantly reduce poverty by raising social expenditures and ensuring a more even distribution of incomes. Prime Minister Andranik Markarian’s cabinet intends to increase the tax revenues by 26 percent to 269 billion drams ($472 million) this year. The figure is modest in both absolute and relative terms.
“Over the medium term the government has committed to raising the tax-to-GDP ratio by 0.4 percent each year,” McHugh said. “If they achieve that target, they will be able to provide additional resources for things like health, education and social security, which will start to address the poverty issue in Armenia.”
The promised increase in tax revenues is a key element of the Markarian government’s 12-year poverty reduction strategy which forecasts a stable economic growth rate of at least 5.5 percent per annum. Official figures, dismissed as a fraud by the opposition, show Armenia’s Gross Domestic Product expanding by a record-high 14.8 percent in the first half of this year.
The IMF official admitted that the Armenian economy is “undoubtedly growing at a very fast rate,” but cautioned that it results, to a large extent, from tens of millions of dollars injected by the Lincy Foundation of U.S.-Armenian billionaire Kirk Kerkorian into various construction projects this year. He argued that with most of those projects slated for completion by November 1, Armenia’s economic outlook for next year is “a little bit more uncertain.” “And this explains why we need to be so careful in the way the budget is designed,” he said.
McHugh added that he is also worried about recent months’ increase in inflation which he said might have been caused by the robust growth. Armenia’s consumer price index, according to government data, rose by 2.5 in September, or nearly as much as during the whole of 2002. The inflation rate has already hit 7.4 percent on the year-on-year basis.