Armenia: Addressing Social Vulnerabilities and Strengthening Competitiveness

Challenge

The crisis revealed deep-seated vulnerabilities in Armenia’s precrisis period: overdependence on the export of copper and other minerals and remittances for the financing of imports, and excessive growth in the non-tradable sectors, particularly construction. After double-digit growth rates for five consecutive years, Armenia was hit hard by the global crisis and real GDP fell by more than 14 percent in 2009. Unemployment soared and the poverty headcount index increased from 27.6 percent in 2008 to 35.8 percent in 2010. The need for social spending increased at the same time that the fiscal space shrunk due to a sharp fall in revenues. An expansionary fiscal stance was thus warranted in the immediate aftermath of the crisis, but concerns about fiscal sustainability pointed to consolidation. The most binding constraints to growth included weak conditions for fair competition, high administrative and regulatory costs to firms, insufficient and low quality infrastructure, the shallow nature of financial intermediation, and underinvestment in human capital.

Solution

The DPOs were developed to mitigate the consequences of the global crisis on vulnerable groups in Armenia and to strengthen resilience and competitiveness for post-crisis recovery and growth. To help those most at risk, the operations supported the government in managing a sound macroeconomic and fiscal framework, while protecting the poor and strengthening the management of social transfer, education, and health programs. To boost competitiveness for recovery and growth, the DPOs assisted the government in improving economic competition and the business climate, strengthening the regulatory environment in infrastructure, improving competitiveness through the sustainable use of energy and natural resources by amending the fiscal regime for the mining sector, and enhancing public sector efficiency and effectiveness.

Results

The 2009–12 DPOs supported improvements in several areas:

• following the 2009 recession and the 14 percent decline in GDP, the economy is estimated to have expanded by 7 percent in 2012;
  
• the share of social protection and pensions in total government spending increased from 24.8 percent in 2008 to 31.7 percent in 2011, raising the number of Family Benefit Program (FBP) beneficiaries from 89,000 in 2008 to about 95,000 families in 2011;
  
• the cash transfers share to the poorest households under the FBP increased to 76 percent in 2010 from 67 percent in 2008, boosting the coverage of the poor from 34 percent in 2007 to 37 percent in 2011;
  
• funding was introduced and expanded for the school readiness (preschool) program, benefiting about 20,000 children during 2011–12;
  
• a quality assurance system for higher education to increase equitable access was introduced by the DPOs;
  
• tax administration improved, with 20 percent of tax returns filed electronically in 2011 from 0 percent in 2008;
  
• customs administration improved, with the share of green channel releases increasing from 15 percent in 2008 to over 65 percent in 2012;
  
• Armenia’s overall Doing Business ranking improved from 44 in 2008 to 32 in  2012; the Trading across Borders ranking improved from 143 to 107 over the same period.

Bank Group Contribution

The analytical underpinnings of the DPOs in Armenia, in total US$165 million, of which US$131 million from the International Development Association (IDA) and US$34 million from the International Bank for Reconstruction and Development (IBRD), included poverty and social assessments (2006–08), the economic report on Armenia (2007), programmatic public expenditure reviews (2005–08), the reports under the International Monetary Fund (IMF)-World Bank Financial Sector Assessment Program (FSAP, 2005 and 2008), and Policy Notes (2008).

Partners

For the DPOs, the Bank coordinated with the IMF, the European Commission (EC), the United Nations Development Programme (UNDP), the Asian Development Bank (ADB), the German Agency for International Cooperation (GIZ), the U.S. Agency for International Development (USAID), and the Eurasian Development Bank (EADB). On fiscal adjustment, debt assessment, and the monitoring of macroeconomic and financial sector performance, the team collaborated with the IMF. On the crisis’ poverty impact, development partners included UNDP and ADB. Tax administration-related reforms were supported in partnership with the USAID-sponsored Tax Administration Modernization Technical Assistance Project. On competition, trade, customs administration, and public financial management (PFM), partners were the EU delegation and GIZ (on PFM issues). The team held close consultations with ADB and EU to align the DPOs with these donors’ budget support operations.

Moving Forward

Structural transformation and poverty reduction efforts received a much-needed boost by the 2009–12 DPOs, which contributed to a robust recovery of the Armenian economy. However, the government’s financing needs still exceed its revenue mobilization capacity, and private capital flows are not sufficient to finance a high current account deficit. A follow-up series of DPOs is under preparation, building on the achievements under the 2009–12 series and supporting further measures aimed at strengthening competitiveness and enhancing fiscal, social, and environmental sustainability.