Thursday, May 24 2012 19:51

Armenia shall create competitive and enabling/friendly environment for foreign investors

ArmInfo Interview with Rosa Chiappe, COP of the PALM project to ArmInfo news agency

Ms. Chiappe, the USAID pension and labor market reform project is coming to end in the fall this year. What has the project managed to do within this four-year period?

PALM has been helping implement the new multi pillar pension system, initiated and continuously held discussions, working group meetings, exchanges of information and experience and provided expertise that ensured the following achievements:
Development and provision of two modeling tools, improved capacity of PALM Government of Armenia counterparts in analyzing data and providing simulations on pension system behavior over time including the fiscal implications of reforming the pension system.
Key Laws regulating the new multi-pillar pension system has been adopted in December 2010; PALM has led the regulatory framework building: there are over 50 regulations needing to be formed out of those 8 have been adopted and 17 are in the process of drafting.

Design the record-keeping system to make it secure, reliable and to achieve a high level of transparency, making it trustable for all beneficiaries. Provide the approach to develop the System itself. Develop the new business process based on the approach reflecting the laws and the document based on future system development.

Conducted a nationwide Baseline Survey, the results of which will serve as a benchmark for further public awareness campaigns (the launching of the public awareness activities planned by the Government is in December 2011). The PR within PALM has targeted public awareness and promoted financial literacy activities. PALM, developed 2 two brochures for employers and youth, “63 Questions and Answers” brochure printed and distributed among current and future beneficiaries. Currently a brochure on financial literacy is being prepared.

You have worked in many countries, which have shifted to funded pension system. And that is why I would like to know your expert opinion about the effectiveness of the new system. What can the system give to our country?

Definitely it will provide the country with a pool of long term assets that will allow the economy to grow and at the same time promote job creation. These assets certainly will allow the securities market to develop and the issuance of new financial instruments. Another important aspect will be the decrease of the shadow economy and that, in its turn, will increase the income of the state budget. In the new Pension System, each individual will have its individual account. Everyone will be able to follow its contributions and how its money grows. Everyone will be keen to have its contributions made into the pension system. If the Asset Manager Company is not investing well the pension savings, the individual can change and switch Pension Fund. Gradually individuals will understand that the responsibility of providing for the future pension will not be on the State solely but after the introduction of the new pension system, it is also responsibility of each individual to save money for their retirement.

I would like to ask about the labor potential of Armenia. Is it that big? Don’t you think that labor community of our country is not satisfied with its financial situation? We still have high unemployment, specifically among the rural population. Do you think this is a challenge for the introduction of the funded pension system?

I agree that this is a big issue for the country. Nevertheless, it might be solved. The country should consider introducing a Universal Flat Old-Age Farmer Pensions. Old-age individuals in rural areas represent one of the most vulnerable groups in Armenia today. Currently, higher percentage of old-age individuals living in urban areas is covered with the public retirement system than is the case with rural areas. Extended coverage of old-age support is also included in the United Nations Millennium Goals to reduce poverty. A “National Aging Strategy” should be adopted by the Government and should envision the (eventual) introduction of universal flat old-age pensions. But, introducing a universal flat old-age pension for the entire population at the time being would represent an unacceptably high fiscal burden. Furthermore, granting universal flat pensions to urban population might introduce a disincentive for existing workers and their employers to declare (and pay contributions on) the full amount of their salaries. On the other hand, introducing universal flat old-age pensions for farmers in rural areas could be fiscally sustainable and would not be associated with potential negative effects on contribution collections. Suitable administrative system must be developed in order to prevent abuses of the proposed system featuring explicit subsidies targeted exclusively at old-age farmers living in rural areas Data on the number of old-age farmers from different sources show some contradictions which should be resolved before proceeding with further analysis.

How the problem of the lack of investment tools should be addressed. The only tool, where the pension assets might be invested is state bonds. For example, as the reformers in Kazakhstan state, first one should develop the capital market and only after that, carry out a pension reform…

I worked in Kazakhstan during the pension reform. There, indeed, was a problem with the supersaturation of the internal security market. But in a year and a half after the reform, the problem was solved: alternative investment tools appeared in the country. So the experience shows that if there is money, issuers will appear. You can see how the stock market in Kazakhstan is active today. How many billions their pension system has now. And how did they start? There was no life insurance, no corporate bonds before the pension system, there as in Armenia they thought for long time on what was necessary to develop first: capital market or pension system. But the government of Kazakhstan was very determined and consistent in their plans. Before the reform, there were no rating companies in Kazakhstan either. But now internationally recognized Standard & Poors is present there.

All that took place in Kazakhstan literally in several years; they managed to achieve quite serious progress in a limited period of time. I am very optimistic about your country. The country has all the preconditions for creating a dynamically growing economy, there is a good banking sector, stable macroeconomic environment, competent supervisory body, which is the Central Bank and there is also political will. Consequently, I think when the pension assets of citizens will flow into the pension funds, the alternative investment tools will emerge. The experience of many countries, not the developed countries, but the ones that are on the same development level with Armenia, I have observed, shows all this. This is the reason for me to believe in the success of the pension reform in Armenia.

You are an expert in this field and you should know better. But our country, as many others, suffers hard time because of the crisis. I mean the second wave of the crisis…

The current phase of the crisis has a negative impact on the economies of the European countries. Currently they evidence high level of unemployment. But look at Latin America, Brazil for example. There I see growth, less unemployment in comparison with the European countries and also a flow of foreign investments. The same is with Asian countries like Malaysia and Indonesia. These countries tackle the issues related to unemployment and attraction of foreign investments. The same way Armenia should pass. Armenia should create competitive and favorable environment for foreign investments, otherwise it will not be able to compete with other countries in the sphere of attracting foreign investments.

Do you think Armenian leadership does enough in that direction?

The USAID launched a separate program directed at increasing the competitiveness and attractiveness of the country for investments. I am sure the leaders of your country work in this direction.

For the quantity assessment of the new pension system by you, as you have already mentioned, actuarial calculations were performed. What is the annual volume of pension savings according to those calculations?

Actuarial calculations are done now as well, and there are some estimates on the quantity figures of the pension reform, but there might not be precise calculations, as the situation in the country changes all the time. As per approximate calculations, the new pension system, Pillar 2, will comprise 260 000 participants. The volume of assets roughly we calculate in the first year could be approximately USD $120 million dollars.

Aren’t you surprised with the absence of pension funds in the country so far? As the voluntary component of the funded pension system was introduced at the beginning of last year. There is also normative basis for the operation of pension funds.

You are right. The creation of pension funds requires the establishment of tax incentives for all the parties of the system: potential managers, employers and employees. But the economic leadership of Armenia either has not fully developed the system of tax incentives or the existing one is not very efficient. Besides, the government has not explained the employers the essence of the new system that is why, maybe, many employers have distrustful attitude towards government’s initiative.

Inactivity is the segment of the voluntary pension system is explained also with the fact that the leadership was not able to involve commercial banks of the country in that system. They have been working in the market for long years, are financially stable, that is why it would be easier and cheaper for them to develop pension-related mechanisms in comparison with, for example, investment companies, for which the development of such mechanisms requires big investments.

The interview was conducted by Elita Babayan

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Armenia shall create competitive and enabling/friendly environment for foreign investors