Fixing over-ambitious and unrealistic goals most dangerous - expert 

ArmInfo.Armenia's GDP growth by the end of 2024 will be within 5%, but not 7% according to the  approved state budget and not 5.8% expected by the financial authorities in the draft budget for next year, Vardan Aramyan, an international consultant on public finance management and former RA  Finance Minister, stated in an interview with ArmInfo

- Mr. Aramyan, on September 26, the government approved the draft  state budget for 2025.  According to the document, by the end of this  year, instead of the 7% envisaged by the budget, the authorities  expect growth at the level of 5.8%, and by the end of 2025 - a  <modest> 5.6%. Many were alarmed by the fact that the Cabinet was  forced to adjust its own forecasts, which were also included in its  program of activities to ensure an annual growth of at least 7%.  What's the matter?

<The root of evil>, first of all, lies in the economic policy pursued  by the country's authorities. In shock situations, the number one  task is always to protect the export sector, the backbone of the  country's economic potential. Only a diversified export sector can  ensure the stability of the economy of a country with such a small  economy as ours, its ability to withstand external shocks. Meanwhile,  Armenian exports had to withstand the blow alone and without  preparation. 

When large amounts of money flow into the country through various  channels, and high-quality adjustments to changes in economic policy  are not carried out, the export-oriented sector begins to lose income  and suffocate. Moreover, first of all, export producers are pressured  by the revaluation of the national currency due to the influx of  foreign currency and the uncompromising efforts of the Central Bank  to curb inflation, since in this case there are also major  inflationary threats. And, if the government does not interfere in  the process in order to help the Central Bank fight inflationary  threats on the one hand, and support the export sector on the other,  then central banksCentral banks give preference to a policy of  ensuring price stabilityinflation and allow the exchange rate to  rise, and sometimes even softensoften inflationary risks mainly  through the exchange rate, as was the case in our case by influencing  the exchange rate. In these conditions, losses in terms of priceour  export sector loses price competitiveness, which leads to and and  domestic products and, as a consequence, to a comparative comparative  decrease in comparative external demand for our domestically produced  goods.

Secondly, the threat to exporters comes from the so-called external  and internal real exchange rates. First, the external real exchange  rate, which characterizes the ratio of prices for goods in a given  country and abroad, expressed in one currency. If the real exchange  rate is high, then foreign goods are relatively cheap, and goods  produced in one's own country are relatively expensive. And vice  versa. And the internal real exchange rate is the ratio between  prices in the non-export sector, such as construction, as well as  some services, and the export sector. And if prices in the non-export  sector grow faster than in the export sector, leading to an increase  in the internal real exchange rate, then, all other things being  equal, profitability in the non-export sector grows, and it begins to  steal, pull financial and human resources from the export sector to  its side. As an example, if you remember, in 2002-2003. The  well-developed cutting sector in Armenia began to shrink, diamond  cutters began to close their enterprises and workshops, as the  revaluation of the Armenian dram made this business unprofitable.  Most of them went into the construction sector, where there was a  high degree of profitability. Today, a similar situation is  developing - capital flows into the construction sector and into  services - tourism, restaurant business.

The third problem is that when money flows into the domestic economy,  the Central Bank, in order to maintain price stability, begins to  raise the key interest rate in opposition to the ongoing and pressing  inflation. These two factors hit the demand curve of the average  total costs, due to which expenses grow both in the exported and  non-exported sectors. And if for the latter the growth of expenses is  not so painful, since its domestic income grows in parallel and much  faster, then for the exported sector these expenses become unbearable  due to the growth of the cost of manufactured products and the  reduction of income due to the appreciation of the national currency,  the dram.

- I think the world knows how to solve such problems. The Armenian  authorities would not have to reinvent the wheel:

Absolutely. The situation could have been saved by coordinated work  of the fiscal and monetary instruments. That is, first of all, the  government should have strengthened coordination of actions with the  Central Bank and moved to joint implementation of the sterilization  policy - that is, the Central Bank would have bought up large amounts  of dollar surpluses in large volumes, preventing the strengthening of  the national currency (before the Russian-Ukrainian conflict, the US  dollar in the Republic of Armenia cost about 4820 drams per $, but  since mid-2022 and to this day, with some deviations, it has remained  at the level of 380 drams per $ - Ed.). At the same time, as a result  of coordinated work with the government through an unplanned issue of  government bonds, pumping out dram surpluses from the market (formed  in the economy through the purchase of a large volume of US dollars),  it was necessary to put these financial resources at the same  interest rates or even slightly lower in the Central Bank in order  not to increase the fiscal burden.

Meanwhile, in addition, due to the low level of coordination of work,  some of the dram surplus was pumped out of the economy, but in order  to prevent an increase in interest rates, the Ministry of Finance  went to reduce the maturity of the domestic debt - the issue of  short-term government bonds. And this is a rather dangerous and  alarming relatively problematic phenomenon, since it increases the  volume of current debt. 

Secondly, in terms of fiscal policy, it was necessary to focus on  taxation of the non-export sector in order, on the one hand, to cool  the expectation of supernatural growth in the non-export sector and,  on the other hand, to withdraw from the economy the dram surplus that  appeared as a result of large purchases of foreign currency by the  Central Bank, and either keep the entire amount in government  accounts with the Central Bank, or redirect part of this amount to  support the export sector. . Meanwhile, in 2022-23, on the contrary,  taxes were mainly provided by the export sector. In addition, due to  the low level of coordination of work, dram surpluses were pumped out  of the economy, but in order to prevent an increase in interest  rates, the Ministry of Finance went to shortening the terms of  repayment of the domestic debt - the issue of short-term government  bonds. And this is a rather dangerous and alarming phenomenon, since  it increases the volume of current debt.

Thus, it can be stated that adequate measures were not taken, and  economic growth at the end of 2023 and the beginning of 2024 was  ensured mainly by re-exporting gold for about $5-6 billion. As a  result, we have what we have, and today only the non-export-oriented  sector is in the black. Therefore, when one not very fine day, as  suddenly as they arose, external factors that promote growth are  neutralized, we risk finding ourselves in the situation of 2009. In  this regard, I consider the 5.8% GDP growth for 2024, expected by the  draft state budget for 2025, to be quite ambitious and optimistic. I  think that in the current conditions, growth within 5% growth in the  current conditions is more realistic. The 5.6% growth for the coming  years is also optimistic, unless another wave of positive shock  occurs, as was the case with the re-export of gold.  By the way, in  the explanation attached to the draft budget for 2025, the Ministry  of Finance also talks about the risks of economic growth, and it  should be noted that the distribution chart of these risks of  economic growth, the so-called fan table, also shows that a decline  in growth rates in 2025 is much more likely than the opposite...

At the same time, due to geopolitical turbulence, at this stage it is  extremely difficult to assert anything with a very high degree of  probability, one hundred percent impossible. After all, just over a  year ago no one could have known about <manna from heaven> in the  form of a <transit channel> for the export and subsequent re-export  of Russian gold and diamonds. Without this factor, we could not even  dream of 5%, at best we would pray for 2-3% at best <pray> for 2-3%.  Therefore, given that the RA economy is still quite dependent on the  Russian Federation, even in the conditions of the collapse of the  difficulties of the local economy, the smallest window opened by the  $1.8 trillion Russian economy, in the amount of all the same $5  billion, can play the role of a lifeboat for the Armenian economy.

- In May of this year, Armenian Finance Minister Vahe Hovhannisyan  assured ArmInfo that the potential for growth in Armenia's GDP  generation has increased to 5.5-6% from the earlier 4-4.5%, thanks to  structural reforms, investments, and programs to support the  development of various spheres as a result of the government's work  over the past 2 years. Do you share the minister's optimism in this  regard?

No. I would very much like it to be so, but no, unfortunately, I do  not share it. Look, if, for example, we were to analyze statistical  data for the pre-crisis years 2002-2006, it might seem that we had  formed a certain potential for economic growth. Econometric estimates  for these years for this period showed an increase in the overall  productivity of production factors, or, in simple terms, showed that  overall productivity in the economy is growing. growing. But these  indicators also included the so-called <noise> factor (the  rationality factor from the 2002 Nobel Prize laureate in economics,  psychologist Daniel Kahneman - Noise - Ed.). Today I can say that the  GDP growth potential today is even lower than the previously  announced 4-4.5%. This will become obvious when the economic crisis  hits. All external temporary factors that had a positive effect on  our growth will disappear, as happened to us in 2001-2008.  Then  there was a similar growth situation, and if in 2001 Armenia  registered economic growth of 9.6%, then already in the pre-crisis  years of 2002-2008 our economy of the RA grew by leaps and bounds,  showing double-digit values. In particular, in 2002 the indicator  reached 12.9%, in 2003 - 14%, in 2004 - 10.5%, in 2005 - 13.9%, in  2006 - 13.2%, in 2007 - 13.7%. Then we boasted that our potential had  reached at least 7%. But already in 2008 the rates dropped to a  single-digit 6.8%, and in 2009 the economy crashed to 14.2%. Then,  for several years, we were quite <content> with an average growth of  around 3.5%.

Today, the most dangerous thing for us is incorrect targeting in the  state budget - that is, fixing over- ambitious and unrealistic goals.  Including because of this, I did not believe, and, as it turned out,  quite justifiably, in the ability of the economy in 2024 to ensure an  improvement in the tax/GDP indicator by 0.7 p.p. in addition to the  already improved indicator by 0.8 p.p. for 2023 (according to the  results of the first half of this year, the tax shortfall amounted to  about 8-9% - Ed.). Similarly, I do not confidently believe that in  2025 the tax-to-GDP ratio, compared to the expected indicator for  2024, will be increased by 0.7% (0.1% compared to the approved  budget) and brought to the target indicator of 25%.

Thus, it is safe to say that the financial authorities are in a  difficult situation and will most likely not be able to collect 304.1  billion drams more next year than expected by the end of 2024.  Firstly, the RA GDP is not so taxable and, secondly, the country has  not made any significant and rational despite some positive shifts in  tax policy - the transition to the income tax declaration system,  revision of the preferential turnover tax system, etc. - all this  will not be enough to ensure such a significant improvement in the  tax/GDP ratio; tax reforms.  And, what is most dangerous - you cannot  set the inspection body, in this case the State Revenue Committee,  the task of plugging the budget hole by any means. They will do it as  best they can - in our case - by trying to completely criminalize  arrears. The consequence of this policy will not be to ensure the  desired indicator, but to migrate businesses and flee capital. I see  that many entrepreneurs are already close to the "suitcase mood".