On May 19, President Robert Kocharian ratified a law canceling the privatization of Armenia’s electricity distribution sector. Passed by the National Assembly on April 25th, the law removed Armenia’s electricity distribution system from the government’s 1998-2000 privatization program, thereby effectively annulling tenders that the government had announced for each of the four distribution networks in June 1999 (see the Monitor, May 2). According to the law, the privatization of the distribution networks will still occur, though under the auspices of a separate program controlled by parliament. The move nevertheless raises substantial risks.
By canceling tenders for major state assets just a month prior to the scheduled announcement of the winners, the government has undermined its credibility in the eyes of potential foreign investors. The financial losses sustained by the four foreign power companies competing for the tenders–AES (United States), Union Fenosa (Spain), Electricite de France and ABB (Switzerland, Sweden)–threaten to discourage other firms considering investing in Armenia. Further compounding the erosion in investor confidence are the widely held suspicions that the National Assembly’s vote to cancel the tenders was politically motivated, driven by pro-Russia factions in parliament and the government seeking to appease Moscow following the elimination of ITERA (a subsidiary of Russia’s Gazprom) as a candidate in the privatization of the distribution networks (see the Monitor, May 2). A sharp slowdown in direct foreign investment represents a clear threat to Armenia’s economic outlook. The government hopes that direct foreign investment will play an integral role in the restructuring of key manufacturing branches and the modernization of Armenia’s transport infrastructure. Moreover, in light of Armenia’s large current account deficit (13 percent of GDP) and ballooning foreign debt (45 percent of GDP), greater inflows of direct foreign investment will be key if Armenia is to avoid a balance-of-payments crisis this year.
Equally as ominous as a loss of investor confidence, the World Bank is delaying the disbursal of the final US$11 million tranche from Armenia’s Structural Adjustment Credit (SAC-3) because of the government’s failure to privatize the electricity distribution networks. The cancellation of the tenders has also stalled negotiations between Armenia and the World Bank regarding a new US$45 million SAC agreement. World Bank lending provides the bulk of the foreign financing needed to cover Armenia’s central government budget deficit, which is scheduled to amount to US$79.5 million (4.1 percent of GDP) this year. With little ability to secure alternative financing internationally or domestically, the government will likely be forced to cut expenditures from this year’s already meager budget.
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