Publication: Eurasia Daily Monitor Volume: 2 Issue: 212

On November 11 Armenia’s parliament approved the national budget for next year. The budget volume is due to exceed $1 billion for the first time in the country’s post-Soviet history. The administration of President Robert Kocharian presented the planned 22% increase in government spending as a vindication of economic policies largely endorsed by Western donors. The 2006 budget also envisages a further increase in military spending. Officials in Yerevan say it is needed to keep Armenia in what increasingly looks like an arms race with Azerbaijan.

The budget passed by the Kocharian-controlled National Assembly commits the Armenian government to spending 482.2 billion drams ($1.1 billion) and collecting 412.4 billion drams in revenues. The government’s 2000 budget, for example, was worth less than half of that.

Civil servants, schoolteachers, and other public sector employees will be key beneficiaries of the increased spending targets. Their still-modest salaries are expected to rise by 15-30% in 2006. The government plans a similar increase in pensions and poverty benefits. Also, for the first time since independence Armenia will cover most of its budget deficit from domestic sources, as opposed to low-interest loans provided by the World Bank.

Successful implementation of the budget is contingent on continued economic growth and improved tax collection. Government statistics put the Armenian economy on track to grow at a double-digit rate for the fifth consecutive year. Officials expect Gross Domestic Product to rise by at least 7.5% in 2006. The authorities’ macroeconomic track record regularly draws praise from Western governments and lending institutions. “Armenia is on a promising path toward sustained high growth and the alleviation of poverty,” Agustin Carstens, deputy managing director of the International Monetary Fund, said during a visit to Yerevan in July.

However, the picture becomes less rosy on closer inspection. The Armenian budget, though record-high, will still be quite modest in both absolute and relative terms. The government’s tax revenues may be set for another increase in 2006, but they will make up less than 16% of the anticipated GDP. This proportion is low even by ex-Soviet standards, reflecting the scale of tax evasion in Armenia.

Kocharian and his cabinet announced a major crackdown on widespread tax fraud last January in a bid to ensure the 20% rise in tax revenues envisaged by the 2005 budget. While the target is being met, many of Armenia’s largest corporate taxpayers connected to the government continue to get away with grossly underreporting their profits. The experience of neighboring Georgia, which has more than doubled its state budget since the 2003 Rose Revolution, suggests that the problem can not be addressed without more radical measures such as a genuine fight against government corruption. Kocharian’s regime is clearly unwilling to take such measures.

Observers also note the fact that the Armenian military will remain the single largest recipient of the scarce public funds. Its official budget is to grow by 21% to 74.3 billion drams ($163 million) next year. Armenian leaders say this was necessitated by Azerbaijan’s skyrocketing military spending, which will total $300 million this year and will be doubled in 2006. Azerbaijani President Ilham Aliyev has repeatedly stated that his country intends to use proceeds from its growing oil exports for a massive military build-up that will force the Armenians into making more serious concessions in the Karabakh conflict.

In a speech last August, Aliyev said his immediate objective is to make Azerbaijani defense spending equal to Armenia’s entire state budget. Azerbaijan, he claimed, has already gained the military and economic upper hand over its Christian foe. “Within a few years, the gap between us will become even wider,” Aliyev told the personnel of Azerbaijan’s State Border Guard Service.

But according to macroeconomic indicators (including GDP per capita) cited by international organizations, Azerbaijan remains essentially on the same level of socioeconomic development as Armenia despite nearly a decade of large-scale oil exports. Armenia, for example, ranks 83rd out of 177 nations in the United Nations’ latest “human development index,” which measures prosperity around the world. Azerbaijan is in 101st place in the annual rankings.

Analysts say the growing disparity between the defense budgets of the two impoverished neighbors should also be taken with a grain of salt. The Armenian armed forces are believed to enjoy other, unpublicized sources of funding. More importantly, Armenia’s close military ties with Russia give it privileged access to Russian weaponry. According to Russian expert estimates cited by Nezavisimaya gazeta on November 11, the Azerbaijani army outnumbers its Armenian adversary only with manpower and military aircraft, which is Soviet-made and mainly old. The Armenians, said the Moscow daily, boast more tanks, armored personnel carriers, and artillery systems.

All of which suggests that Baku will need years to convert its oil wealth into military superiority, assuming that the Karabakh conflict will remain unresolved in the near future. Kocharian revealed on November 10 that international mediators want him and Aliyev to hold another face-to-face meeting this January. Given recent months’ progress in Armenian-Azerbaijani peace talks, the meeting might clear the final hurdle to a long-awaited Karabakh settlement.

(Azg, November 12; Mediamax, Nezavisimaya gazeta, November 11; RFE/RL Armenia Report, September 28, September 22; Interfax, August 17)