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Armenia on road to reforms


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The country has made good progress in stabilising its economy but desperately needs to win foreign investment, says David Stern - May 13 2001 18:19:35

 

 

When armed men burst into Armenia's parliament less than two years ago and shot dead the prime minister, the speaker and six others, the country's reputation with foreign investors suffered accordingly.

 

The following year, Armenia's already meagre levels of foreign investment dropped by nearly half. More political uncertainty followed, with two more changes of prime minister. The government of one of the smallest and poorest states of the former Soviet Union seemed unwilling to push through significant reforms, and privatisation slowed.

 

But last week in New York, Robert Kocharian, the Armenian president, told an investment conference that "while not everything is perfect", things were changing for the better in his country. "Public life in Armenia is becoming more reliable and predictable. We can confidently state that we have passed the no-return point on the road to democracy and a new economic order," he said.

 

The conference was the first of its sort for the Caucasus region to be directly sponsored by the World Bank and its affiliate, the International Finance Corporation, with support also coming from the US's Trade and Development Agency.

 

World Bank officials say the event recognised the considerable progress Armenia has made in stabilising its economy and creating a business-friendly environment. GDP has grown at an average of 4-5 per cent over the past five years. Inflation is near zero and the country's exchange rate has stabilised. Parliament in the past six months has passed a package of pro-business legislation.

 

"The World Bank and related institutions have given the country's reform process a positive rating," President Kocharian said in an interview. "And there is a mutual recognition that direct investment into the private sector can push the country forward."

 

But Armenia also faces a number of considerable constraints. Neighbours Azerbaijan and Turkey have closed their borders over the unresolved Nagorno Artsax conflict, severely restricting the country's access to outside markets.

 

President Kocharian told the New York conference that differences with Azerbaijan had been "substantially narrowed" in recent peace talks. But investors are keeping a worried eye on the dormant dispute, fearful for its effect on regional stability.

 

Armenia's lack of natural resources and agriculture, as well as decrepit Soviet-era industry, has also limited interest. Foreign investment totalled only some $120m last year, with only $606m invested in total at the end of 2000. With one third of the population living in "absolute poverty", according to the European Bank for Reconstruction and Development, Armenia also remains heavily dependent on foreign aid, with the US contributing some $1.4bn this year.

 

"We need investment like we need air," says finance and economics minister Vardan Khachatryan.

 

Owaise Saadat, the World Bank's representative in Armenia, sees future opportunities for investors in high-tech, high value-added areas of the economy, such as diamond cutting and information technology, which would take advantage of the country's highly-skilled workforce.

 

The New York conference highlighted possible investments in tourism, metallurgy and food processing.

 

But many say the biggest concern for the country is the huge loss of its skilled workforce to emigration. Mr Kocharian maintains that this is mainly due to Armenians' "historical mobility" and that the number of emigrants since independence in 1991 is comparable with the numbers that have left Azerbaijan and Georgia.

 

Exact figures will not emerge until a census at the end of the year, but western officials believe emigration may have halved the population over the past 10 years, to about 2m people.

 

Despite the problems, the World Bank and other international agencies believe Armenia's progress in both political and economic reform can be an example for the rest of the region.

 

"Armenia is our flagship product in the Caucasus," said the World Bank's Mr Saadat. The test will be whether foreign investors agree.

 

Financial Times: http://news.ft.com/ft/gx.cgi/ftc?pagename=...cid=FT30AS52PMC

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The primary success in my view has been the stabilization of the monetary system without and assistance from the international monetary organizations.

 

The main failure behind the economic growth I think is in the legislative and legal arenas - lack of adequate climate protecting the investmens, and lack of sufficient legislative framework for promoting investments.

 

Additionally, some of the taxation policies, such as VAT are to be blamed for the slow rate of flow of investments.

 

Finally, the political (in)stability is the major obstacle to development of Armenia.

 

To summarize, the failures of the Armenian Economy are due to the factors of Political and Legal character, and not of purely economic.

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Armenia's legal framework, and most of the laws are carbon copies of French laws. Even the constitution is very similar to French consitution. VAT, as you mentioned MJ, is an accepted form of taxation in EU countries. So I don't think the legal framework or VAT can be blamed for the failures. If it works in other countries why shouldn't it work in Armenia.

 

I personally think it's the inability of state to implement the laws (that's a problem all 3rd world countries face). State is not strong enough to protect its interests against the interest of powerful oligarchs. So I think strengthening of state is crucial to development of economy. I think one other reason for such dire economy is the Armenian society. It wasn't ready for market economy. Everything happened so fast (independence, reforms, new currency) that people either lost most of their life savings (which could have served as an investment capital), or were literally forced to immigrate. I think gradually the society is learning the rules of the game.

 

One think that amazes me is how can country sustain such macroeconomic activity for so long without any microeconomic growth. That's an anomaly. The tight monetary policy of Central Bank, curbs inflation, but as a result the country has an astronomical unemployment rate (mostly underemployment). I think if Central Bank can loosen the monetary policy more economic activity will promote growth.

 

Current government has high hopes on foreign investments (the symposium in New York was supposed to generate interest in Armenian economy). Foreign investment can serve as a two edge sword (1995 crisis in Mexico was mainly a result of foreign capital flight, which was mainly in very liquid assets). If foreign investment is mainly in liquid assets, than a little scare will lead to a major capital flight. A region as volatile as Caucasus, instability is imminent. The example of Asian Tigers and China, where foreign investments are mostly in illiquid assets should serve as an example to current Armenian government.

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I suspect there is a little bit of difference between France and Armenia, however insignificant it may be. Therefore, not everything which works in France may work for Armenia.

 

What “powerful” oligarchs are you aware of in Armenia?

 

Sustaining of macroeconomic activity without microeconomic growth is not anomaly in Armenia. It is resulted from the significant cash inflow from the Armenian population abroad – primarily those who have family and relatives in Armenia.

 

In what way is the unemployment in Armenia related to the tight economic policy? If the industry is paralyzed due to lose of the traditional markets, primarily, how is the Central Banks activity going to change it? All the Central Bank does as a function of Central Bank, it either dumps currency/gold or withdraws.

 

 

Indeed there has to be well thought out policy of having the foreign investments serve their purpose.

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Dear Alpha,

 

I think you make a number of valid points, especially in terms of the lack of savings and the structural defficiencies that enable sustainable development, such as enforceability of contracts and the like.

 

As to monetary policy I disagree. I think the issue is not its tightness. Although it does seem to be a bit tight, the problem is more related to the same structural problems you were refering to. It is very difficult to borrow at all not because interest rates are high, but because credit is simply not available. On the other hand monetary policy has been quite effective in keeping inflation under control, and that is very important.

 

We need to creat a credible framework to allow investments to take place in a natural manner. This is not an economy where monetary stimulus by itself will work. Actually in the current circumstances it might even backfire.

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DESPITE STRONG MACROECONOMIC PERFORMANCE, ARMENIA HAS NOT BENEFITED FROM COMMENSURATE JOB CREATION OR POVERTY REDUCTION

 

YEREVAN, May 24. /Mediamax/. Despite strong macroeconomic performance, Armenia has not benefited from commensurate job creation or poverty reduction.

Mediamax informs that this is said in the press release spread today by the World Bank Yerevan office concerning the approval by the WB Board of the new Country Assistance Strategy for Armenia on May 22. "Human capital has deteriorated through migration. This has had deleterious effects on the economy. The new CAS emphasizes the need to expand budget allocations to education, health and other," is noted in the press release.

"We expect the government to emphasize facilitating private sector investment, and eliminating distortions, particularly corruption and red tape," Judy O'Connor, WB Country Director for the South Caucasus said. "We are especially pleased with the very constructive Investors Conference for Armenia held in New York earlier this month. The presence of both Presidents of Armenia and the WB emphasized the commitment of the government and the WB to making the private sector the engine of balanced growth of economy," Judy O'Connor noted.

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Armenpress: Economic

24 May, 2001

 

 

IMF AND WORLD BANK APPROVE LOANS FOR ARMENIA

 

YEREVAN, MAY 24, ARMENPRESS: The Board of Directors of the International

Monetary Fund (IMF) has approved a strategic program for reduction of poverty

volumes in Armenia deciding May 21 to allocate an $87 million worth loan.

The loan will be disbursed in three equal tranches in three years to the

Central Bank of Armenia which will be directed to the enlargement of state

foreign reserves and to the fund for stabilization of prices.

Speaking to reporters on Wednesday Armenia's economy and finance minister

Vartan Khachatrian said the approval of the loan program was the result of a

serious work conducted by the government. The indices of economic progress,

particularly, the macroeconomic situation in the recent months, submitted by

the government to the IMF were approved and praised.

The minister also said that the Board of Directors of the World Bank approved

May 22 a $50 million worth SAC-4 loan, which is supposed to be used for

improvement of business-friendly environment. This loan will be given for a

period of 40 years repayment at 0.75 percent interest rates with a ten years

grace period.

The World Bank loan is composed of three tranches, the first tranche of $15

million will be received as soon as the loan program is approved by the

parliament, the second tranche will be disbursed in September or October and

the last, the so-called "floating" tranche of $20 million will be disbursed

only after the government's success to privatize energy distributing

companies.

Hence, Armenia will get a total of $140 million worth loans. The minister

said that the negotiations with the IMF and World Bank had concluded and

whether these two lending organizations would provide new loans was dependant

on Armenia's future economic indices.

 

 

FINANCE AND ECONOMY MINISTER SATISFIED WITH HIS MINISTRY'S PERFORMANCE

ARMENIA ABLE TO REPAY ITS DEBTS TO RUSSIA, MINISTER SAYS

IRAN-ARMENIA TRADE VOLUME HITS $1.3 BILLION OVER PAST 10 YEARS

WORLD BANK CONSIDERS NEW YORK BUSINESS FORUM TO BE SUCCESSFUL

SWITZERLAND HURRIES TO EXTEND HELPING HAND TO ARMENIA

 

 

INTERNATIONAL ECONOMIC CONFERENCE ON ARMENIA TO BE HELD IN YEREVAN

 

YEREVAN, MAY 23, ARMENPRESS: An international economic conference, entitled

Eurasian Economic Cooperation: Situation and Prospects, Armenia as a Bridge

between Eastern Europe and Middle East is to be held in Yerevan June 14-17.

The conference's goal is to promote Armenia's economic rehabilitation and

development.

The conference is being organized by the Armenian government and by the Union

of Domestic Producers. Businessmen from around 25 countries, also a 20-member

team of Russian law-makers are expected to attend the conference.

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