Challenge
Armenia made significant progress in reducing poverty from a peak of close to 54 percent in 2004 to 25.7 percent in 2017, due largely to double-digit growth in the early 2000s. However, poverty reduction slowed considerably following the 2008–09 global financial crisis, when Armenia’s economy contracted by over 14 percent and the poverty incidence bumped back up to 35.8 percent, indicating that the preceding growth period had been neither inclusive nor sustainable. Armenia managed to weather the impact of the 2014 Russia crisis, but its vulnerability to external economic conditions and low level of export diversification have remained important obstacles to further growth.
The country’s unemployment rate, at 17.7 percent (2018), is among the highest in Europe and Central Asia, stemming largely from low job creation and a mismatch between workers’ skills and available jobs. Armenia faces tremendous challenges in diversifying its economy, addressing regional disparities, and enhancing the quality and coverage of education, health, and social services. Concerns include low productivity in almost all economic sectors, poor social and economic infrastructure, reduced fiscal space, and ineffective public administration. The population is aging, and many young people are leaving in search of better opportunities.
As a landlocked country held back by geopolitical constraints and demographic challenges, Armenia requires a decisive shift to a new economic model for inclusive, resilient growth through economic diversification, enhanced connectivity, and strengthened institutions and socioeconomic infrastructure. The new Government is trying to address these challenges to enable a rebalancing from domestic demand to higher productivity and export orientation.
Approach
The historical drivers of poverty reduction and shared prosperity in Armenia—remittances, social transfers, and foreign direct investment in the construction sector, which generated demand for low-skilled workers—have become less effective since the 2008–09 global financial crisis. The World Bank Group is supporting Armenia’s effort to build a new, more inclusive growth model and seeking to catalyze development and private sector partners around high-priority projects. The viability of this approach is anchored around the “One World Bank Group” e.g. the IBRD set the stage through upstream policy support which allowed IFC and MIGA to crowd in private sector investments principle of engagement.
The Bank has used a mix of new instruments (including Program for Results (a development financing instrument which links disbursement to achievement of tangible results in support of government programs), guarantees, and analytical work) that have helped build substantial private sector interest in the energy sector and identified innovative development solutions customized to Armenia’s context, including an Information Technology (IT) venture fund, regional technology centers, interactive learning and innovation labs in tertiary education institutions, and efficient preschool services.
Results
Over the past decade, the Bank has financed roughly 50 projects (17 International Development Association [IDA] and 30 International Bank for Reconstruction and Development [IBRD]), focusing on infrastructure and institutional development in transport, agriculture, social services, information and communications technology (ICT), energy, finance, and public administration. In addition, Bank- and trust fund–financed analytical and advisory products have provided robust analytical underpinning for lending interventions.
Key outcomes include:
ICT
- Two new regional technology centers and a seed and early-stage venture fund supported the growth of 102 firms during project implementation (2010-2016).
- The sector’s contribution to GDP rose from 1.5 percent in 2010 to 5.3 percent by project closing (2016) and 7.4 percent in 2018.
- IT employment grew 2.5 times (2010-2016).
Agriculture
- 85,000 families managing livestock in rural areas were supported in applying modern practices, increasing their product sales by over 2.5 times and leading to the adoption of the Law on Pastures (2012) and Law on Agriculture Cooperatives (2015). (2011-2018)
Rural Roads
- Over 900 kilometers (around 21 percent) of lifeline roads were rehabilitated, facilitating access to health, education, and social services equally benefitting 438,000 men and women about 15 percent of the population. (2009-2019)
Energy
World Bank Group engagement in the energy sector helped create markets and maximize finance for development. Energy sector regulation and tariff methodology were aligned with international standards, and the financial restructuring of state-owned power generation and distribution companies created space for international financial institutions (IFIs) and private sector investment. The World Bank Group:
- Supported privatization of the Vorotan hydropower Cascade through the International Finance Corporation’s (IFC) mobilization of US$95 million in long-term debt, Armenia’s first long-term project-financed privatization. (2017)
- Improved the regulatory and legal framework for renewables, helping attract roughly US$600 million in private investment in more than 328 MW of small hydropower. (2011-2018)
- Supported the first utility-scale, commercially financed solar plant (55 MW) and first competitively tendered independent power project (2016-2018).
- Through IFC, arranged US$163 million in financing for a greenfield 250 MW combined cycle gas turbine plant that will benefit from US$50 million in Multilateral Investment Guarantee Agency (MIGA) risk insurance (2019).
Health
- Constructed 17 regional medical centers equipped with modern medical technology, benefiting 2 million people in nine regions. (2007-2019)
- Constructed 97 ambulatories serving 630,000 rural residents. (2007-2019)
- Strengthened access to health care, increasing inpatient services among the poorest income quintile from 3.8 percent in 2011 to 6.8 percent in 2016.
- Increased access to qualified family health care from 85 percent in 2010 to 95 percent in 2018.
IDA Box on Results
Education
- Created preschool classes in 380 rural communities (80 percent of which lacked them in 2008).(2009-2019)
- Increased enrollment of 5–6-year-olds in preschool education by 20 percent.
- Promoted inclusion of preschool financing in the school per capita funding framework, ensuring sustained investments and the enrollment of 35,000 girls and boys in preschool education during 2009–18.
- Increased the Early Development Index (EDI provides a measure of child development in five domains: language and cognitive skills; emotional maturity; physical health, and well-being; communication skills and general knowledge; and social competences) by 4.5 times in the treatment group compared to the control group for three consecutive years (annual surveys 2016–18).
Social Protection and Community Infrastructure
- 405 rehabilitated or newly constructed social and economic community infrastructure facilities, including schools and kindergartens, primary health care facilities, potable water networks, and community cultural centers in vulnerable communities (2009-19).
- 40 percent of Armenian families are benefiting today from integrated delivery of social protection services through newly established one-stop-shop service centers with full population coverage expected by 2022.
Tax
- Introduced new tax code, helping streamline the taxation system and expand the tax base by combining tax administration improvement and policy changes (reduced value added tax [VAT] threshold; increased excise rates on hydrocarbons, alcohol, and tobacco; new tax on dividends; and elimination of several tax exemptions).
- Launched new VAT refund mechanism, raising the number of VAT and corporate income tax payers by 35 and 30 percent, respectively, between 2014 and 2018.
- Increased tax-to-GDP ratio from 17.5 percent in 2012 to 20.8 percent in 2017.
- Decreased time required to pay taxes from 500 hours in 2011 to 262 hours in 2018, yielding reduced compliance costs.
Bank Group Contributions
As of August 1, 2019, the IDA/IBRD lending portfolio in Armenia consisted of 13 active projects, with a total commitment of US$563.6 million (including IBRD loans of US$482.7 million and IDA funds amounting to of US$80.8 million) in sectors such as education, health, social protection, roads, energy, water, agriculture, rural development, tourism, and finance.
The trust fund portfolio includes 31 activities: nine recipient-executed and 22 Bank-executed projects totaling US$29.2 million. Most are funded by multi-donor trust funds, including the European Union and the Russian Federation, and support analytical and technical assistance programs, innovation pilots, and the preparation of new lending operations or provide complementary financing to ongoing projects.
The Bank’s analytical and technical assistance program consists of 14 tasks, including support for: conducting an impact evaluation of health system reforms, strengthening educational assessment capacity, designing and implementing an innovative education pilot to promote the uptake of science, technology, engineering, and math (STEM) fields of studies, advancing disaster risk management, studying forestry-poverty-energy linkages, deepening financial sector work, maximizing finance in the power sector, supporting tax administration and public financial management, and working jointly with IFC to realize Armenia’s technological potential.
IFC’s committed investment portfolio stands at US$200 million, focusing on long-term finance that prioritizes energy, access to finance, and trade for micro, small, and medium enterprises (MSMEs).
Partners
World Bank Group support in Armenia has achieved successful results primarily because of its close cooperation with the Government of Armenia and other development partners.
The country’s well-organized donor coordination platform has helped to mobilize and leverage partners’ resources in support of key development goals, including: regional development to address territorial disparities, with the United States Agency for International Development (USAID), European Union (EU), and Swiss Agency for Development Cooperation (SDC); school rehabilitation with a greater focus on seismic resilience with the Asian Development Bank (ADB) and the United Nations Children’s Fund (UNICEF); development and implementation of a preschool program with UNICEF; cross-country improvements in health care with the World Health Organization (WHO), UNICEF, ADB, World Vision, and Save the Children; policy reforms with the Agence Française de Développement (AFD), ADB, Eurasian Development Bank (EDB), and International Monetary Fund (IMF); public financial management reforms with the German International Cooperation (GIZ); energy and private sector development with the European Bank for Reconstruction and Development (EBRD) and KfW (German Aid Agency); and road rehabilitation with ADB and the European Investment Bank (EIB).
An important lesson drawn from the Country Partnership Strategy for Fiscal Year 14–17 was that “engaging steadily with development partners across investment operations, supported by analytical work and policy dialogue, helps to leverage partners’ resources for maximum impact.”
Moving Forward
The World Bank Group will continue to support Armenia in strengthening the resilience and inclusiveness of its growth model. The Country Partnership Framework (CPF) for FY19–23 includes three interrelated and mutually reinforcing focus areas that support the twin goals of eliminating extreme poverty and promoting shared prosperity.
Focus Area 1, boosting export enablers and firm competitiveness, is expected to lead to more job creation through enhanced private sector participation and exports, notably in sectors that can extend externally oriented growth to those who have been excluded thus far, particularly in remote regions.
Focus Area 2, enhancing human capital and equity, will support the development of human capital and skills to boost labor productivity and more inclusive labor market participation while expanding social assistance coverage to those most in need.
By supporting improved environmental and natural resource management, Focus Area 3 will help strengthen the resilience and livelihoods of low-income populations that depend on agriculture and are thus highly vulnerable to climate change, and will also support the competitiveness of job-creating, nature-dependent sectors such as agriculture and tourism.
Each focus area will incorporate key elements of good governance and inclusion, such as improving accountability and transparency across all sectors, utilizing citizen engagement mechanisms to strengthen demand for good governance, mainstreaming gender inclusion, ensuring better spatial inclusion to support wide-ranging opportunities and job creation across the country, and exploring digital connectivity solutions to support further improvements in public service delivery, government transparency, agriculture productivity, natural resource management, and citizen engagement.
The CPF will also explore the benefits that digital solutions could bring to each focus area. (Source: Armenia CPF for FY19–23)
Beneficiaries
In the Shirak region, the Gyumri Technology Center (GTC), established in 2014 with support from the World Bank’s E-Society and Innovation for Competitiveness project, has been highly successful. The GTC houses 28 companies with over 200 employees and up to 2,000 students and has business connections with over 10 countries. It is not a local phenomenon but a regional IT hub. The Vanadzor Technology Center consistently follows the same path to success.
Both technology centers empower regional development beyond the capital city and support the development of the IT industry in the provinces. The right mix of skills and talent is being created locally and nationally through economically and socially rewarding investments.
Vahe Aloyan is a 16-year-old high school student and works for the company, X-Tech. A true polyglot, he knows eight programming languages. At the age of 14, Vahe designed his first game and won a contest organized by the Vanadzor Technology Center. His second game won an award for best design.
“My desire is to work for a company that produces only games,” Vahe says. “But my biggest dream is to see the gaming industry in Armenia fully developed and supporting the economy.”
For more information see "Connecting Armenia’s Regions with Technology to Ensure Greater Opportunities for Young People."