Council of ESDF approved changes in reform program of Republic of Armenia, supported by Fund`s financial loan

ArmInfo. The Council of the  Eurasian Stabilization and Development Fund (ESDF) on June 26, 2017  approved changes to the reform program of the Republic of Armenia,  supported by a financial loan from the Fund. The changes reflect the  recommendation of the Council of the Fund of 6 December 2016 to  supplement the program with an indicator aimed at increasing debt and  fiscal sustainability, as well as the need to update a number of  conditions for the third tranche in the context of progress achieved  in the implementation of the first and second tranches. The press  service of the EADB informed ArmInfo about this.

To reduce the debt  burden on the state budget, the program includes a benchmark that  limits the value of the budget deficit as of October 1, 2017 to no  more than 75 billion AMD, without taking into account targeted loans  financed by foreign creditors. Fulfillment of this condition will  lead to a reduction in the budget deficit to 2% of GDP, against 2.7%  of GDP for the same period in 2016. The threshold level of the  indicator was established in accordance with the budget rule,  according to which the budget deficit in 2017 should be reduced to  2.8% of GDP against 5.6% of GDP in 2016. The changes also touched  upon the indicator for the commissioning of integrated territorial  centers of social services. This indicator is assigned the status of  a control. Its implementation envisages the commissioning by October  1, 2017 of two new centers, in addition to the 18 centers put into  operation in the first tranche, as well as the announcement of a  tender for construction work on two additional centers.  The  reduction in the target level for the commissioning of the integrated  territorial centers of social services from 38 according to the  initial plan to 20 is explained, first of all, by the need to reduce  the state budget deficit and the debt burden. Other additional  indicators, approved by the Council of the EADB as conditions for the  third tranche, are mainly aimed at improving the investment climate  in the country and provide the implementation of the following key  measures:

Amendments to the legislation aimed at expanding the rights of  investors and strengthening the protection of their interests.  Amendments to the law "On Investments", in particular, lead to the  definition of foreign investment in accordance with international  practice, and also introduce the right of direct treatment of foreign  investors to the international arbitration court, bypassing the  process of the investigation of the issue within the national  judicial system. Amendments to the law "On Free Economic Zones" (FEZ)  are aimed at harmonizing the provisions of this law with the  requirements of the Eurasian Economic Union (EEC) regarding the  establishment of unified rules for the operation of the FEZ in the  EEU area, and clarify the rights and obligations of the parties on  the basis of the accumulated experience of two Pilot FEZ in Armenia;

Expansion of the participation of business representatives in  lawmaking activities through the change in the procedure for the  preparation of regulatory legal acts, providing public discussions of  draft NLB based on the created electronic platform;

Continuation of reforms to liberalize the energy sector by  eliminating the monopoly on the supply of electricity to end users  and giving them the right to choose an electricity supplier;

Continuation of reforms to create a more favorable environment for  doing business, including through the reduction of tax audits based  on improved risk criteria for taxpayers;

Increase the access of the population and small business to credit  resources through the inclusion of banks and post offices in the list  of institutions that provide services for registering the rights of  entities to movable property for collateral purposes;

Ensuring the timely entry into force of all provisions of the Tax  Code in 2018, which will improve the effectiveness of tax policy, by  bringing the regulatory framework in line with the provisions of this  code;

Improving the transparency and efficiency of public spending through  the introduction of a mechanism that prohibits the simultaneous  participation of affiliated persons in the decision-making process on  public procurement, and the targeted use of budgetary expenditures in  the road sector based on the database of technical condition of  roads; 

Strengthening the banking system of the country through the  introduction of the Basel III requirements, which provide for the  introduction of new prudential standards for commercial banks aimed  at reducing the credit risks of banks by tightening the requirements  for the size of the collateral and the income of the borrower and the  debt sustainability of banks by reducing the maximum threshold of the  ratio of loan and equity.

To recall, Armenian Minister of Finance Vardan Aramyan stated in an  interview with ArmInfo in March that the process of coordinating  adjustments and changes in the conditions for granting the third  tranche of the budgetary loan from the Eurasian Development Bank  (EADB) is conditioned by the desire of the Armenian government to  strengthen fiscal discipline and improve the manageability of the  country's national debt. The Finance Minister reminded that earlier  Armenia announced plans to follow the path of fiscal consolidation in  order to achieve stabilization of the state debt in the medium term.  "This implies a more conservative approach in 2017-18, which means a  small delay in some programs planned during this period," Aramyan  said.

At the same time, as the head of the financial department assured,  this does not mean a complete refusal to attract external financial  resources or a higher degree of caution on the part of international  creditors in providing loans. "According to the credit obligations  signed by Armenia, which should be implemented before 2021-2022, the  volume of loans is about $ 2 billion. If we divide by years, it turns  out that about $ 350-400 million will be attracted annually. Thus,  the budget this year allows to attract only $ 300 million and it  turns out that the implementation of some programs should be  postponed," the minister explained, adding that as the country's  economy develops, it will be possible to return to the implementation  of the planned programs in 2018-2019. "It is necessary to gradually  reduce the deficit, and in the future to manage it is consonant with  economic growth, not allowing the overage of the national debt, which  hampers the attraction of investments," the head of the Armenian  Ministry of Finance summed up.

To recall, in 2016 the state debt of Armenia amounted to $ 5.9  billion, in 2017 it will reach $ 6.250 billion.  In the structure of  the aggregate debt, the government debt was $ 5.4 billion, and the  Central Bank's debt is about $ 503 million. The ratio of state debt  to GDP 2016 was 54.5%. As for 2017, according to Vardan Aramyan, in  case of ensuring budgeted indicators, the volume of Armenia's public  debt in 2017 is projected at $ 6.250 billion, including the Central  Bank's debt, which is expected at $ 530 million. The creditors of  Armenia's national debt are the International Development Association  (IDA), part of the World Bank Group - 38.8% of the national debt,  International Bank for Reconstruction and Development - 15.8%, Asian  Development Bank - 13.2%, International Monetary Fund - 4.8%,  Eurasian Development Bank- 3,4%, EU - 2,4%, European Investment Bank  - 2,2%, International Fund for Rural Development - 2,1%.  OPEC Fund  for International Development of - 1.4% and the European Bank for  Reconstruction and Development - 0.6%. Among the creditor countries,  Japan is leading - 8.2% and Germany - 3.6%, while the US and Russia  lent to Armenia at the rate of 0.8% and 0.3% respectively.

To note, the team of experts of the Eurasian Development Bank (EADB),  which is the Fund Manager of the Eurasian Stabilization and  Development Fund (ESDF), headed by the Project Group Director Alisher  Mirzoyev, visited Yerevan from February 6 to 9, 2017 to consult with  the authorities on adjustments and changes in the terms of the third  tranche of the financial loan of $ 100 million. The EADB said that  the Armenian authorities fully support the recommendation of the  Council of the Fund on the need to ensure fiscal and debt  sustainability, and take all necessary measures to this end. The  Eurasian Stabilization and Development Fund of $ 8.513 billion was  established on June 9, 2009 by the governments of the same six  countries. The objectives of the European Council are to assist the  participating countries in overcoming the consequences of the global  financial crisis, in ensuring their economic and financial stability  and supporting integration processes in the region. The member states  of the ESDF granted the EADB the functions of the Fund Manager and  signed with the Bank an Agreement on the management of the funds.