“When 30 percent of the economy is composed of income produced in one sector -- in the case of Armenia construction -- and when 40 percent of your exports are mining exports, then you are at risk,” Aristomene Varoudakis, head of the bank’s Yerevan office, told RFE/RL in an interview. “So I think the main lesson that has been learned is that in order for Armenia to continue to grow as fast as in the past and reduce poverty in the future, the economy will need to be much more diversified.”
“A lot of things will need to be improved,” said Varoudakis. “In particular, the environment for doing business in sectors other than construction and mining will have to radically improve.” The Armenian authorities should also make the country more competitive by investing heavily in the transport and information technology infrastructures as well as labor education, he said.
The World Bank’s managing director, Ngozi Okonjo-Iweala, pinpointed the economic challenges facing Armenia in a far more blunt fashion when she visited Yerevan last month. Okonjo-Iweala said the country can not attain a higher level of development as long as the most lucrative sectors of its economy are controlled by a handful of government-linked businessmen.
She also stressed the importance of reforming tax administration, creating a “strong and independent judicial system” and combating government corruption in earnest. The stern warning was echoed by the International Monetary Fund.
Prime Minister Tigran Sarkisian has publicly acknowledged the need for such reforms. In a speech in parliament on November 18, Sarkisian vowed to markedly improve the investment climate, crack down on tax evasion by the rich and strengthen the broader rule of law. Government critics are highly skeptical about the implementation of the ambitious reform agenda, however.
Varoudakis said that Armenia, whose economy is on track to contract by at least 15 percent this year, will need renewed robust growth also in order to cope with its soaring debt burden. The global financial crisis and the resulting recession have forced the authorities to nearly double the country’s foreign debt over the past year.
It is currently approaching the $3 billion mark equivalent to about one-third of Gross Domestic Product. With the Armenian government needing more anti-crisis loans from the World Bank and other foreign donors, the debt/GDP proportion is expected to exceed 40 percent next year.
“The level of debt that a country can afford depends on several factors. I would say that first of all it depends on how fast this country can grow so as to get more tax revenues and repay the public debt,” said Varoudakis. He also stressed the need for sizable increase in Armenia’s modest exports.
“Armenia was growing by 12 percent per year for six or seven years,” added the World Bank official. “If a country that can reach similar rates of growth or even lower, at the range of 7 to 8 percent, it can certainly afford a level of public debt of up to 50 percent.”
In his words, the bank believes the authorities in Yerevan should therefore avoid raising the public debt “to a much higher level” unless they succeed in “considerably” improving tax administration. Varoudakis argued that their debt servicing payments will surge by 2013 and absorb “quite significant part of tax revenues.”