The Council of the Eurasian Fund for Stabilisation and Development (the EFSD, the Fund) has approved disbursement of the second tranche of the EFSD financial credit of US$ 100 million to the Republic of Armenia. The key areas of reforms supported under the EFSD programme include strengthening the financial soundness of the energy sector, raising the efficiency of the public finance management, and improving the investment climate. In the framework of the programme, the reforms to promote de-dollarization of the economy, greater credibility of the banking sector, and higher exports have also been continued. The assessment of Armenia’s performance prepared by the Manager is generally positive.
Implementation of the tranche’s conditionalities had a positive effect on strengthening the financial sustainability of the energy sector. Owing to improved methodologies of tariff margin calculation and the forecast of electricity generation and distribution aimed at greater flexibility of the tariff policies and enabling demand and supply shock smoothing, the Electric Network of Armenia CJSC [closed joint-stock company] has fully repaid accumulated arrears to the Armenian NPP, Yerevan CHP, and the High-Voltage Network totalling US$ 50 million that is equivalent to 56% of the companies’ electricity supply (turnover) over the period of the arrears repayment (December 2015 – July 2016).
A range of legislative acts have been developed to improve the efficiency of the public finance management. In early October 2016, the National Assembly of Armenia adopted the first ever national Tax Code that streamlines and improves the tax legislation in the framework of a single document. With the Tax Code coming into effect, the tax potential of the economy will be significantly strengthened—the cumulative growth of tax revenues in 2017-2021 is estimated at 2% of GDP—and the tax policies will become more stable and predictable. Amendments to the Procurement Law have been presented for the consideration of the National Assembly of Armenia to expand the practice of electronic public procurement for the needs of government bodies, thus facilitating more efficient budget spending and reducing risks of corruption. The reforms to improve the investment climate have been continued. Simplified and expanded access of potential investors to information detailing the rules of doing business in construction, as well as expanded practice of using an electronic system of issuing construction permits will help reduce transaction costs in the construction sector and make the sector more attractive for investors.
A register of moveable assets has been created to improve accessibility of credit for the private sector by introduction a secured transaction framework and to reduce the cost of loans by lowering the risk premium. The country’s monetary authorities have adopted a range of regulatory and legal acts aimed at reducing the level of dollarization of deposits and loans, strengthening the credibility of the banking system and promoting exports. These measures have serves as an additional incentive for exports development that has been the key driver of Armenia’s economic growth in recent years.
One indicative condition had not been met by the control date for the second tranche (1 October 2016). It is related to establishing 10 new centres of integrated social services operating as ‘one stop shops’ to supplement the 18 centres created under the first tranche. The failure to implement this measure is explained by the fact that the premises transferred to the Ministry of Labour and Social Affairs in late 2015 – early 2016 to house the centres of integrated social services did not meet the seismic resistance standards, therefore a range of additional measures had to be taken resulting in delays in implementing the steps. The Ministry has drafted a new schedule of launching 20 centres of integrated social services, under which only two centres are to become operational by the control date for the third tranche (1 October 2017), while the remaining centres will become operational in 2018. The Fund Council has recommended the Government of the Republic of Armenia to reconsider and agree with the Manager the parameters of this condition for the third tranche in accordance with the new schedule of launching the centres of integrated social services.
The EFSD Council has also recommended to supplement the conditionality of the third tranche of the financial credit with new control targets aimed at maintaining the fiscal and debt sustainability and present the updated reform programme for the consideration of the EFSD Council in early 2017. These adjustments will, in particular, facilitate lowering the budget deficit in 2017 to the level of 2.8% of GDP planned by the Government against 5.9% of GDP forecasted for 2016, and bringing the debt burden down in the medium-term perspective.