External factors only hope or Armenia`s shoestring budget

ArmInfo. The current government is proud of the tax overfulfillment in Armenia over the past two years.  However, already at the end of the first quarter of 2024, the authorities, albeit in a low voice, began to talk about the possible underfulfillment of the target state budget indicator, and by the end of June they officially announced that tax arrears had reached approximately 9%.

The problem of tax collection was acknowledged back in

May by Finance Minister Vahe Oganesyan and Chairman of the State Revenue Committee Rustam Badasyan. The head of the State Revenue Committee did not specify the amount of "shortfall", but indicated that the problems were caused by changes in the structure of the economy, which contributed to the sharp growth of areas "without tax potential". The republic's chief financier, in turn, stated that there is a risk of not collecting 60 billion drams from the amount fixed in the approved state budget for the current year. At the same time, according to him, the deviation from the plan will not exceed 3-4%, which will be within the norm. "If there is a need to reduce expenses due to shortfall in tax collection, then we can do that," concluded the chief financier of Armenia.

However, according to the Finance Ministry's report, the shortfall in the first half of the year has already reached 9%: it was planned to collect taxes and duties for 1 trillion 305 billion drams, but the deductions amounted to only 1 trillion 187.6 billion, or 117.4 billion drams less than planned. It is noteworthy that during the reporting period, the revenues of the Armenian state treasury from the most common indirect taxes - excise tax and value added tax (VAT) - decreased. , - said the head of the Central Bank Martin Galstyan at a press conference on July 30.

Economists cite almost identical reasons for the underperformance in collections. They also agree that after the high figures recorded in the previous 2 years for economic growth, as well as unprecedented tax collections in 2023 in the amount of 2 trillion 221.7 billion drams, the government should have been more in its expectations. It turns out that the financial authorities planned to collect about 400 billion drams more, while the over the past two years was mainly the result of exogenous factors, and not structural changes in the country's economy.

"In essence, the government expected greater economic growth, which, as we see, is slowing down. In fact, the effects that were present last year, namely the unprecedented growth in the export (re-export) of gold and gold products, the growing indicators of inbound tourism and the presence of a large number of relocated IT specialists working in the country, who ensured high economic activity and, as a result, tax deductions, began to decline and the country's budget began to receive less," says Edgar Aghabekyan.

In particular, over the past two and a half years, precious stones and metals, mainly gold exports, have become the dominant export sector - re-export of precious stones and metals accounted for about 1/3 of the total export volume in 2023. In the first quarter of 2024, precious and semi-precious stones and metals accounted for 75% of Armenia's exports. , - notes Aghabekyan.  Transfers coming to Armenia are also decreasing, the economist notes. Thus, the influx of remittances from abroad to Armenia, which peaked in 2022, has gradually begun to decline since this year. In January-April 2024, individuals transferred $1 billion 672 million from abroad to Armenia, or $373 million (18%) less than in the same period of 2023.  During the same period, $1.1 billion came from the Russian Federation to the RA, which is $442 million (29%) less than last year.  "Exogenous factors that contribute to our growth are still working, but we are gradually returning to our usual environment," says the expert.

"When forecasting the volume of tax collection, the financial authorities are guided by a number of indicators, and first of all, by expectations for economic growth>, - in turn, notes Suren Parsyan.  According to the results of the first half of the year, economic growth amounted to 11%, with the annual GDP growth recorded by the state budget at 7%. At the same time, according to statistical data, annual inflation in July amounted to 1.4% with a deflationary 1.3% for January-July 2024. And, if the reduction in the price of goods and services is good for the pocket of an ordinary citizen, then for the budget it is bad, since more taxes are paid on expensive goods, the economist notes. The duty on gold exports, introduced in May by the RA government, could have become a . However, as luck would have it, it was in May that the volumes of gold imports and exports sharply decreased. Thus, Russia has revised its decision to introduce customs duties for all countries except for members of the EAEU, canceling the export duty on gold, which eliminated the need to involve Armenia as a transit country, Parsyan adds.

Another negative factor for tax collection was the reduction in the volume of car re-export to the Russian Federation. Aikaz Fanyan reminds that last year, the re-export of cars to the EAEU countries and, most importantly, to the Russian Federation, provided the state treasury of the Republic of Armenia with quite solid tax revenues.  Thus, according to the State Revenue Committee, about 46 thousand passenger cars were imported in 2022, and about 84 thousand in 2023, an increase of about 83%. But from August 1, and then from September 26, 2023, Georgia introduced restrictions on the export/re-export of cars imported from the United States, and then from Europe. In addition, in August and October 2023, the recycling fee for imported cars increased significantly in Russia. This naturally made car imports to the Russian Federation less attractive, but it is unlikely that the country's financial authorities were not aware of such a risk, the economist notes.

According to experts, risks caused by external risks are difficult to predict. "We live in conditions of uncertainty, sometimes we do not keep up with external political changes, which makes it quite difficult to predict the possible development of the situation and make accurate forecasts based on this," Edgar Aghabekyan notes. Suren Parsyan, in turn, notes that the effectiveness of fiscal policy in Armenia, unfortunately, is at a fairly low level. "Armenia itself is currently unable to generate its own economic growth, which is why tax revenues to the state budget increase when external factors are active, and vice versa. And all the authorities' forecasts were based on expectations of the continued effect of external factors," the economist emphasizes. At the same time, Parsyan is convinced that the Ministry of Finance cannot be turned into a scapegoat, since all this is the result of the tax-budget, monetary and economic policies as a whole. , he points out.

According to Suren Parsyan, if nothing changes by the end of the year, for example, the Armenian dram maintains its position, and inflation does not approach the target range, then the shortfall in tax collections will reach about 10%.

"The Armenian authorities have set a very high bar by adopting a 3 trillion budget for 2024. Obviously, today they already understand that in the future, in the absence of external factors, it will be increasingly difficult to meet this bar, in connection with which the government is already trying to create a safety cushion for itself.  In particular, the Cabinet has already thought about reducing expenses by revising tax policy. Discussions about taxing income returned through mortgage lending fit into the framework of this logic," he notes. The awareness of new realities led to the fact that the Ministry of Finance of Armenia in the new , approved on July 4, set more modest expectations both for economic growth at 6.3% and for tax revenues and expenditures, notes Edgar Aghabekyan.

According to the document, this year the shortfall in tax revenues and duties will amount to 116.7 billion drams, which is 4.5% of the plan, and the budget expenditure will be underfulfilled by 88.9 billion drams, or about 2.8% of the approved budget. However, the budget deficit will not increase. Instead, the authorities plan to cut current and capital expenditures. However, it is not specified for which programs the sequestration is planned. According to Edgar Aghabekyan, this of the financial authorities is due to the fact that they are still at the stage of expectations. , the expert notes, hoping that after the decision is made, the authorities will share it and indicate which expenses will be cut and what impact this decision will have on the country's economy.

After the approval of the PSSR for 2025-2027, ArmInfo sent a request to the Ministry of Finance, asking to clarify what caused the underfulfillment of revenue and expenditure items of the state budget, as well as what expenses (capital and current) are planned to be reduced. ArmInfo also asked to explain on what basis the Ministry of Finance plans to increase the expenditure side of the budget to 3.5 trillion drams in 2025, and the collection of tax revenues to 2.9 trillion drams, while this year they expect only 2.5 trillion drams (with the budget fixed at 2.6 trillion drams).

ArmInfo proceeded from the fact that uncertainty in the economy is a very dangerous thing. Meanwhile, the press service of the Ministry of Finance refused to comment on the situation, advising ArmInfo to to look for answers to the questions posed in the relevant sections of the MTEP (Medium-Term Expenditure Program) for 2025-2027, where supposedly are given. The department also advised the updated indicators by comparing the MTEP and the Budget Message for 2024. Moreover, they noted that .  Therefore, as the Ministry of Finance believed, the information is available, and its further processing is part of journalistic analysis, and they in the department are not supposed to engage in additional analysis and answer questions. It's ridiculous, and that's all