IMF adviced against institute of tax representatives in Armenia

The mission of Nienke Oomes in Armenia will finish soon. She will leave Armenia by the end of 2009, and will celebrate New Year with her family in Holland. After that, she will return to the United States and work at IMF headquarters in Washington DC as deputy head of the division that is in charge of Armenia, Georgia, Azerbaijan and Turkmenistan.

Mrs. Oomes, what is the last IMF projection of the 2009 annual GDP decline in Armenia, as it seems to have been revised several times?

We actually have not revised our projection of a 15.6% drop in GDP in 2009 since September. While earlier this may have been reported as a 15% or 15.5% percent decline, our projection has not changed since September.

Does the IMF agree with the authorities’ growth projection for next year?

Yes, we expect that growth will resume next year. Since September, we have projected that GPD will grow by 1.2% in 2010. In the last few months we have already noticed positive trends in the economy. For example, starting from August, seasonally adjusted monthly GDP growth has been positive. Thus, the economy has already started to recover and we believe that the worst is behind us.

What is the IMF assessment of the tax reforms implemented in 2009, in particular, the introduction of tax representatives in large companies? Don’t you think that this step could lead to additional corruption risks given that the tax administration authority will be in the hands of a single tax inspector and it could be possible to bribe him?

Carrying out tax reforms during a crisis is of course difficult. However, in 2009, a number of serious tax administration reforms were implemented in Armenia. Many of them were part of IMF conditionality and were supported by IMF technical assistance. As an example, I can mention the provision of timely VAT refunds to exporters. We have already observed some progress this year, as the number of late VAT refunds has been substantially reduced. Under the new legislative amendments, the government will have to pay interest on late VAT refunds starting from 2010. We think that is a serious achievement, because timely VAT refunds are extremely important for the efficiency of businesses. In addition, tax credits have been reduced. Previously, tax authorities often asked taxpayers for advance payments against future tax liabilities. During this year, this practice has diminished.

Is this issue settled by law or did the tax authorities simply decide to give up the practice of asking for advance tax payments?

This was a government decision that was in accordance with IMF conditionality. As for the decision to install tax representatives in large companies, we certainly hope that this will be an effective measure, but unfortunately, the experience of other countries shows that it could lead to higher corruption. We believe that the government took this step with the sincere intention to increase revenue collection from the large taxpayers. However, it is very difficult to get large taxpayers to pay as much taxes as they should. Theoretically, a tax representative can improve tax collection, but in practice, it will be very difficult for him or her to monitor everything that happens inside a company; moreover, he can be cheated or colluded. International experience shows that the higher the human factor and the more physical contacts with tax inspectors, the higher the risks that someone will ask or offer something that will make others close their eyes.

What you say now is quite correct, and our authorities have been expressing the same approaches, however in fact they just did the opposite. It is interesting to know whether the IMF recommended the authorities to introduce the institute of tax representatives, or objected against it or whether both sides came to a compromise?

No, the IMF did not recommend this. In fact, we adviced against it.

We know that the IMF provided a Stand-By Arrangement of around $822 million to the Government and the CBA. Is this amount sufficient for support the CBA’s international reserves and for ensuring the sustainability of the exchange rate in 2010?

Out of this amount, we actually allocated around $300 million to the government for budget support. The government has already received around $150 million in 2009 and will probably receive equal amount in 2010, provided that it complies with the IMF conditionality. The rest of the loan, which is around $522 million, will go to the Central Bank. This should definitely be sufficient for supporting its international reserves. Until now, the IMF has already disbursed $480 million, of which $150 million to the government and $330 million to the CBA. The CBA may receive another $200 million by June 2011.

I would like to stress that these resources are provided to the CBA not for supporting any particular exchange rate, but for smoothing sharp short-term exchange rate fluctuations. The CBA should not resist exchange rate changes if there are objective depreciation or appreciation trends.

What is the IMF projection for 2010 inflation?

Several months ago our forecast for end-2009 inflation on a year-on-year basis was 5.2 %. Now, it seems that this may have been a bit optimistic. We hope that inflation will stay within the inflation target range of 4% ±1.5%, but there is a risk that it can exceed 5.5%.

What could be the impact of inflation on interest rates?

Usually, inflation leads to higher nominal interest rates. Interest rates have already been notably reduced, resulting in a significant growth of banking sector liquidity. At present, banks have sufficient liquidity and capital to provide loans. We expect that, due to the economic recovery, banks will increase the level of lending. At the same time, we think that it is still early to raise interest rates. We therefore approve last week’s CBA decision to keep the repo rate at 5%.

You said that in 2010 banks will provide more loans. Does it relate to SMEs only?

As the economy recovers, lending to all sectors should grow. During the crisis, profits of banks have fallen. Furthermore, several profitable banks incurred losses after the sharp depreciation of the dram in March. However, compared to other countries, the Armenian banking system has successfully withstood the crisis.

How does the IMF assess monetary policy conducted in Armenia? Do you still think that this policy should be tightened?

We think that it is still early to tighten monetary policy, which would imply higher interest rates.

How do you assess the 2010 state budget indicators?

In our view, the 6% deficit programmed in the 2010 budget is high, but appropriate. What is important to us is a gradual lowering of the deficit, which is needed to avoid excessive debt growth. In general, the IMF recommends not to cut the deficit too rapidly, because there is a risk that this could prevent the economic recovery of the country. According to our preliminary projections, Armenia should be able to reach the pre-crisis 3% budget deficit level no later than by 2013. These projections are still preliminary, and may be adjusted after discussions with the government during the next year.