"Continuing best traditions": Armenia again lags behind capital  expenditures plan, biggest shortfall in defense sector. Luys  Foundation

ArmInfo.The sharp increase in capital expenditures announced by the Armenian government in 2023  threatens to become "a manifesto of good wishes". The experts of the LUYS Foundation, who analyzed the report on the execution of the state budget of the Republic of Armenia for H1 2023, reached this conclusion.

Thus, experts note that due to the factors that have a positive  impact on the economy of the Republic of Armenia, which have  developed as a result of the Russian-Ukrainian conflict, a high  growth in economic activity has been recorded in Armenia. However, it  is clear that the growth rate is significantly slowing down. In  particular, in June of this year, compared to May, the economic  activity decreased by half.  Economic growth also slowed down: the  growth rate in Q2 compared to Q1 2023 decreased by 3.0 1%, p.p.  and  totaled 9.1%, while the growth rate in H1 2023 was 10.5%, which is  2.1 p.p. below the 2022 y-o-y rate.  <Taking into account the  abovementioned, as well as certain recent trends, it is possible that  a significant slowdown in growth rates will be recorded in the near  future. This point of view is shared by a number of international  organizations, as well as the Central Bank of the Republic of  Armenia, according to the forecasts of which, compared with the high  rates of economic growth last year, growth this year is expected to  be much more modest, according to various estimates at the level of  4.5-7.5% >,  the authors of the study note.

The state budget of Armenia for H1 2023 was executed with a surplus  of 134.3 billion drams, with a planned deficit of 125.5 billion  drams. By the way, over the same period last year, the budget surplus  was less by 53.1 billion drams. At the same time, over the same  period, the execution of the RA state budget deviated from the plan  by about 259.8 billion drams. The main reason is budget  underperformance, which means that the government collects taxes from  the economy but does not spend them, thus reducing economic activity.  Meanwhile, in the context of the current sharp increase in domestic  demand spending, it is necessary to significantly increase spending,  aimed at implementing measures aimed at increasing supply.

The Foundation experts note that the ongoing underperformance of  state budget expenditures is a cause for concern. The backlog from  the plan has increased both in absolute terms and in percentage terms  compared to the same period last year. At the same time, both current  and capital expenditures were under-fulfilled.  <Transactions with  non-financial assets in Jan-June 2023 totaled 114.5 billion drams,  and expenses on non- financial assets (capital expenditures) totaled  116.9 billion drams, which is 105.3 billion drams or 47.4% less than  planned in revised budget plan. Capital expenditures in the same  period of the previous year lagged behind the planned ones by 40.7%,  that is, the indicators not only did not improve, but even worsened  to some extent. The largest under-fulfillment of capital expenditures  was recorded in the line of programs implemented under the  responsibility of the Ministry of Defense of the Republic of Armenia  (the Ministry of Defense under-fulfilled the adjusted program  indicator by 30.7%)>, the authors of the document said, noting that  low performance indicators show that the problem of managing and  implementing capital projects remains unresolved.

According to the Foundation's experts, if this trend continues,  capital expenditures will be under-fulfilled on a y-o-y terms, and  the sharp increase in capital expenditures announced by the financial  authorities will become only "a manifesto of good wishes".

The capital expenditures of the state budget in 2022 (expenditures on  non-financial assets) reached 389.1 billion drams or 17% of the total  state treasury expenditures, against 218.4 billion drams in 2021 (an  increase of 78.2%). The increase in capital expenditures last year  was mainly due to an increase in defense spending - by 129.6 billion  drams compared to the previous year. As a result, actual state capex  in 2022 exceeded the government's original plan by about 11%. At the  same time, capital expenditures in 2020 totaled 227.7 billion drams,  193 billion drams -in 2019 and 152 billion drams- in 2018.