Publication: Eurasia Daily Monitor Volume: 4 Issue: 133

Armenia’s recently reshuffled government has pledged to embark on “second-generation” reforms that it hopes will sustain robust economic growth. According to government statistics, the Armenian economy expanded by 10.2% during the first five months of 2007, putting it on track to register a double-digit growth rate for the sixth consecutive year. This performance has earned Yerevan fresh praise from the International Monetary Fund.

Official macroeconomic data show that the construction and services sectors remain the driving force of Armenian growth. The country has also been greatly helped by a continuing rise in multimillion-dollar remittances from hundreds of thousands of Armenians living and working abroad. The precise extent of the country’s post-Soviet economic recovery is still a matter of contention, with skeptics insisting that it has primarily benefited the wealthiest segment of the population. They also point to an increased development gap between the capital, Yerevan, and the rest of Armenia.

Still, recent years’ growth does seem to have had a significant impact on overall living standards. Gross Domestic Product (GDP) per capita tripled, in nominal dollar terms, between 2001 and 2006 to almost $2,000, leading the World Bank to declare in March, “Armenia is entering the ranks of middle-income countries.” Official statistics, trusted by the World Bank and the IMF, also show that the proportion of Armenians living below the poverty line fell from 55% to just under 30% during the same period.

Convening on June 26, the coalition cabinet of Prime Minister Serge Sarkisian, formed as a result of the May 12 parliamentary elections, pledged to bring the poverty rate down to 12% and all but eliminate extreme poverty by 2012. The government expects the Armenian economy to grow at an annual rate of at least 8% over the next five years. The growth targets are set in its five-year action plans approved by the National Assembly.

At the heart of the government program are wide-ranging “second-generation reforms” that Sarkisian and other top officials claim will result in better governance, an “unconditional rule of law,” less government corruption, and fair business competition. The need for such reforms had been emphasized in a 2006 World Bank study that referred to Armenia as the “Caucasian Tiger.”

A lack of a level playing field for all entrepreneurs has long been a major obstacle to Armenia’s faster economic development. The most lucrative forms of large-scale economic activity in the country, notably imports of fuel and other basic commodities, have been effectively monopolized by millionaire businessmen close to Sarkisian and President Robert Kocharian. Many of the so-called “oligarchs” are affiliated with Sarkisian’s Republican Party of Armenia (HHK) and hold seats in parliament.

Addressing the parliament, the Armenian prime minister claimed that they would not enjoy illegal privileges and get away with tax evasion anymore. “We must not tolerate a lenient approach within our ranks and we must start from ourselves,” he said. “We must not take into account family ties and must not regard as friends those individuals who will avoid paying taxes.”

Government critics are unconvinced by the sincerity of such statements. “If the government really wants to ensure [fair competition,] it must immediately dissolve itself, write self-incriminating testimony, and imprison itself,” commented the pro-opposition daily Haykakan Zhamanak.

However, a high-level IMF mission that visited Yerevan from June 26 to July 3 was far more positive in its evaluation of the government program. The head of the mission, Martha Castello-Branco, praised the Armenian authorities for their stated intention to improve the business environment and crack down on tax evasion in earnest. Although the amount of taxes collected in Armenia has increased considerably in recent year, the total is still less than 14% of GDP, one of the lowest ratios in the former Soviet Union. The government is targeting a tax/GDP ratio of 15.2% for 2007 and has committed itself to annually raising it by at least 0.3 percentage points.

The government has already collected more taxes and other revenues than were projected for the first few months of this year. Meeting for an extraordinary session on July 3, the parliament allowed the government to add the extra revenues to the 2007 state budget. Projected government expenditures will grow by over 4% to 584 billion drams ($1.7 billion) as a result.

Castello-Branco also expressed the IMF’s satisfaction with the macroeconomic situation in Armenia and its continuing growth. But she warned that inflationary pressures will likely grow in the coming months due to rising fuel and wheat prices on world markets and growing cash remittances sent home by Armenians living in Russia, the United States, and Europe. The Armenian authorities and their Western donors say a surge in those remittances has been responsible for a dramatic appreciation of the national currency, the dram, that began in late 2003. The Armenian currency has since appreciated by 60% against the U.S. dollar and 50% against the euro and is continuing to strengthen.

Local manufacturers are increasingly worried about the trend, criticizing the authorities for their refusal to heavily intervene in the foreign-exchange market. In a recent report, the European Bank for Reconstruction and Development warned that a further strengthening of the dram would “threaten the country’s competitiveness” unless local firms ensure “faster productivity gains.”

(168 Zham, July 5; Noyan Tapan, July 3; RFE/RL Armenia Report, June 26; Haykakan Zhamanak, June 22)