Vardan Aramyan: the Government is much more ambitious than the GDP level forecasted

ArmInfo. "We are yet in the limits  of scenario assuming 3,2 economic growth by the end of 2017 and we  have targeted to provide the growth of GDP in upcoming years for 4,8  and higher up to 5,7%". Vardan Aramyan, thie Finance Minister of  Armenia, in his interview to ArmInfo comments on the plans on budget  capital expenditures , talks about those being justified and notes  the positive signals in the economy of Armenia within the activities  of Armenian Government led by Karen Karapetyan. According to the   minister, sometimes  positive expectation, including those in  economy, play a much more essential role than it was supposed. 

Mr Minister, the Gvernment goes for AMD 50  bln  increase of capital  expenditures set forth by the budget. Meanwhile, the 2017 budget was  presented by the Government as a conservative one, aimed at the  sustainability of foreign debt and keeping the state budget at the  level less than 3%. At the same time, based on the results of Q, an  economic activity at the level of 6-6,6% was fixed, and the state  budget incomes exceeded the expectations, and  due to this the  Government thinks about new loans and about capital expenditures  increase. Does it  contradict the principles of state budget  formation declared earlier?

There are no any contradiction at all. While planning the budget, we  are oriented not only at economical indicators inside the country,  but also to the tendencies and forecasts of global economy growth  speed in average - term prospective. Based on that, we form our  expectations in respect to certain future economic processes. It is  obvious, that if in trade-partner countries of Armenia the forecasts  regarding the economic growth change many times, than we have to  review our initial estimations as well. Russian Federation, which is  the main trade partner of Armenia, has reviewed its  2017 forecasts  several times, reviewing it from 0,8% up to 32%, while in August,  when we were planning our budget,  the economic growth was forecasted  in the limits  of 1%. Accordingly, we were aimed  at 1% growth, too.  The indicators were also the factors of international situation -  Presidential elections in USA and the prices dynamics at the stock  markets, particularly, a 10% growth of copper prices is fixed for  today. And that is very important for us. 

Besides, the economic growth has also an inert character, and the  steps of the Government, taken in the past, make a certain impact on  the economic activity today. For the first look, in this respect it  seems  more feasible to forecast lower indicators based on key  developments of the past, particularly , in respect to investments,  which demonstrated slow dynamics during recent several years. That is  why it would be of a very high risk to forecast any higher growth,  and the  3,2 %  growth assumed by the budget  is the minimum we are  targeted to reach. In average-term prospective we are aimed at  indicators much higher - form 4,8 to 5,7%. We should not also forget  that beside main basic factors in economy, the reforms and changes  implemented to capsulate positive expectations of the public, are  very important as well. Yet  in 2006, American  Edmund Phelps was  awarded a Nobel prize in Economy for his macroeconomic studies of  interconnection of unemployment and inflation, and the key stone of  his concept became the theory of "national expectations revolution".  Which claimed that inflation expectations also affect the process. 

Hence, in our case, we got more positive signals for our activities  than we expected.  At the same time, we never forget about the  sustainability of tax-monetary policy and debt  tranquility, not to  allow the exaggeration of the foreign debt. In this respect, I would  like to mention, that the result of the literate management of state  debt is that today the profitability of sovereign state bonds  decreased, and they became more expensive than they were at the  moment of their placement. It turns that international investors are  ready to purchase Armenian securities within the consideration of  their lower profitability, which states the trust of international   market players to our country.  Will the appreciation of American  currency affect the Armenian economy in the context of state debt  management? 

The depreciation of Armenian dram to US dollar, almost  up to AMD  600/USD 1,  according to the stress- tests of the Ministry of  Finance, could hardly cause problems for the tax-budget system of  Armenia. Of course, we see some threat and the sharp dropdown of  national currency, for instance, 30%, down to AMD 650/USD 1, could  become something like Rubicon, but such a prospective is almost zero.  But in this case also we will never pass  threshold of state budget  manageability.  

The Government reviewes the capital expenditures to the  side of  their increase. What the additional expenditures will be allocated  for?  First to infrastructure projects - roads and irrigation  systems. This strategy  also has its philosophy - for today, it is  very hard to motivate people to invest in economy under the  conditions of absence of roads and communications.  Does it mean You  think the profitability  of this approach is much higher than if AMD  50 bln additional expenditures were allocated for the particular  funding of state deficit formingAMD 150,1 bln, or to particular  covering  of foreign debt?  Yes, for sure. I think it would be more  justified to invest these resources and to generate added value in  economy, which, in its turn, will be aimed at state debt maintenance  in the future. 

In three first initial months of 2017 the Government has overfilled  the quarterly plan in respect to taxes collection, and the economic  activity has also exceeded the expectations, reaching the point of  6-6,6%.  Menawhile, the similar increase has been fixed in the first  semester of 2016, after which a period of economic slow down came. At  the same time, You have stated many times that the economic activity  indicator could slow down a little proceeding from the basic effect  of its growth from the middle of last year. In this context, have you  any scenarios developed, so called "B-plan", for any force majeure  situation? 

Armenian economy has a  traditional "postponed" effect depending on  Russian one, and negative tendencies there impact the local economy  with a certain delay. "  Let's suppose for a moment  that  international market shows a sharp  dropdown, which is reflected  on  export, financial flows and, as a result, we get lower speed of  economy growth. In this case, within  the framework of anti- cycle  policy, when the demand has already  fixed its natural dropdown, the  Government has to go in other way - reasonably increasing the capital  expenditures through involving new  loans, allowing with that some  increase of budget deficit.

 Mr. Aramyan, the forecasts of Armenian Government and International  Monetary Fund and World Bank in respect to Armenian economic growth  use to be very different. What it could be described with?  If we   consider the average indicator of Armenia's economic growth since   2009, it can be noted that a relatively high growth of 7.2% was   recorded only in 2011. Then we permanently hold in the areas of 3%  growth, and the 2016th was closed with 0.2-0.3% GDP, and economic   activity was 0.5%. Against this background, it would be unrealistic   to forecast a 4-5% GDP growth, since all econometric models are based   on backward-looking (orientation to past results, ed.). In this   connection, it is not surprising that the forecasts of international   structures on the rates of Armenia's economic growth range from 2.7%   to 3.2%, in keeping with the principles of conservatism. 

Meanwhile, setting the 3,2% GDP  in the budget, we have stated many  times, that this is the minimum we plan to reach. This indicator is  not related to our team's ambitions, and the ambitions are much  higher, so we expect for higher indicators in the middle-term  prospective.