Better Policies. Better Future.

Yelling at Yerevan

Business New Europe Magazine
February 27, 2012

If a series of reports on the Armenian economy are any indication of the country's fiscal health, it's going to be a tough year for Yerevan. 

A February report from the US-based think-tank Policy Forum Armenia (PFA), entitled "Armenia: Averting an Economic Catastrophe," paints a dire picture of the country's prospects heading into 2012. 

It details a laundry list of economic ills that could create turmoil in the tiny South Caucasus nation, especially homegrown problems such as the probable devaluation of the dram and the government's tarnished legitimacy. "An unsustainable de facto exchange rate peg and structural policies are resulting in massive external imbalances, which will eventually lead to abandonment of the peg with very serious implications for the over-exposed banking sector and already high public debt levels," the paper notes. "The elements of the same crony capitalist practices… have been reinforced at the expense of growth, public health, education and national security." 

"Armenia's window of opportunity to build a viable economy and address its severe social and demographic problems is closing rapidly," it warns. 

PFA's negative assessment of the economy is just the most recent in a series of efforts to sound an alarm about Armenia's problems. 

In July, Forbes magazine named Armenia the second worst economy in the world, after Madagascar. With inflation at 7% in 2011 and the economy still shaky after a 15% contraction in 2009, Armenia is "struggling to keep up with the rest of the world," according to the magazine. Transparency International also weighed in, ranking Armenia at 129 out of 183 countries in its 2011 Corruption Perceptions Index. The World Bank's 2012 "Doing Business" report was only slightly more positive, bumping Armenia up six slots to rank 55 out of 183 economies due to reforms in starting a business, dealing with construction permits and getting credit. But the country continues to rank near the bottom of the list in paying taxes, resting at a low number 150. 

Yerevan's struggles to control rampant tax evasion and an entrenched "cronyism capitalism" have amplified the country's problems, according to the PFA report. "There are widespread concerns about corruption in the tax and customs agency, as well as about failures to collect taxes from government-connected oligarchs," the report states, noting that tax reforms stop short of forcing "top government officials and parliamentarians" to comply. "In all, several hundred million dollars are embezzled annually in the form of non-payment of taxes and outright budgetary theft," it estimates. 

Tax revenue is just 16.3% of GDP in Armenia, compared with 24.9% in Georgia and 31.4% in Moldova, according to IMF statistics provided by the report. 

Tax evasion is "now a direct threat to the state," notes analyst Richard Giragosian, the director of the Regional Studies Center (RSC) in Yerevan. "The so-called oligarchs… are not paying taxes," he says, noting they are mainly commodities-based cartels that control the supply of imported goods. "They are undermining the state." 

New tax reform is good on paper, but bad on implementation, Giragosian notes. "The [tax] reforms are quite good on paper. The problem is in the implementation, not in the formulation. They are not implemented adequately across the board. They are not fairly implemented because of the political weight of the oligarchs [help them get around the law]." 

Giragosian adds that while there is political will to combat tax evasion, the government is threatening its own support base by going after the oligarchs – something that might be possible following the May parliament elections, but not before. 

Debt burden 

The country's large amount of outstanding foreign debt is adding to the problems by exacerbating the country's lack of income. 

Tatoul Manasserian, head of the Alternative Research Center in Yerevan, said in an October presentation at the Armenian Center for National and International Studies (ACNIS) that the country's debt is near "dangerous" levels and requires more effective tax and customs policies. 

The PFA report says the government borrowed heavily following the 2008 crisis, but said it did little to bring economic relief to the country over the past three years. "Armenia reacted to the crisis by a massive fiscal stimulus that was largely financed through external borrowing. However, not only did the stimulus not prevent the economy from nose-diving in 2009, but its effects were short-lived," the report states, noting the foreign debt is now 40% of the country's GDP. 

Giragosian stresses that the staggering debt has left Armenia without a "cushion" for future shocks. "The Armenian government's immediate response to the financial crisis was not typical – it did not [attempt] stimulating the economy or creating jobs programmes. It was an immediate response to seek foreign loans [from] the World Bank, IMF, Russia, Persian Gulf, China," he says. "Now there is no one left to lend to the Armenian government… so there is no more cushion or source of [financing]."