armenia focus areas

Business environment and competition

Remittances from Russia, previously accounting for about 80 per cent of overall remittance inflows, have declined significantly. The construction sector – the main pillar of economic growth – has suffered the most as a consequence and the need for diversification has become even more pressing. Improving the overall business climate can be an effective means of fostering diversification. The 2008/09 Business Environment and Enterprise Performance Survey (BEEPS IV) identified anti-competitive practices, particularly in the informal sector, and taxes as key impediments to the development of SMEs. While competition policy has limited impact on the informal sector, the government has made some progress in 2009 with simplifying the tax code for SMEs. Tax policy changes include the introduction of a threshold below which enterprises need not register for VAT and ongoing administrative reform to reduce delays in VAT refunds.

Infrastructure

In 2009 Armenia made significant progress in expanding and diversifying its energy infrastructure. In May the Iran-Armenia gas pipeline became operational, allowing both countries to start implementing their substantially increased gas-for-electricity swap programme in which Armenia will import Iranian gas and use it to generate electricity and export part of it back to Iran. This is the first of a number of planned joint Iran-Armenian infrastructure projects forming part of a broader diversification strategy to reduce Armenia’s dependency on energy and goods transit through Georgia. An agreement was reached with Turkey in March 2009 that provides for Armenia to export 1.5 billion kWh per year once the electricity grid in eastern Turkey has been upgraded.
The inadequate irrigation network has been one of the most acute problems facing Armenian agriculture since the break-up of the Soviet Union, compounded by under-investment in rural infrastructure. With funding from the Millennium Challenge Account and the World Bank, a large-scale reconstruction project of the canal network started in September 2008. Many rural farmers in the intensively cultivated Ararat valley nevertheless remain without access to an efficient irrigation system.

Financial sector

Although the direct impact of the global financial crisis on Armenian banks has been limited to date, greater economic uncertainty has resulted in banks slowing their lending to the private sector. Annual credit growth slowed to 25 per cent in the first quarter of 2009 from 67 per cent a year earlier. New consumer loans in particular have fallen sharply – by more than 40 per cent year on year by the end of the first quarter 2009 – and mortgage lending has come to a near standstill. The government has reacted by establishing a state mortgage fund, which offers funding to commercial banks at an annual interest rate of 9 per cent for on-lending to households.
The switch to a free-floating exchange rate regime in March 2009 went relatively smoothly and did not adversely affect banking sector stability. After a rapid increase in the volume of US dollar deposits in anticipation of the depreciation, this trend levelled off later in 2009 (at around 65 per cent from only 35 per cent in November 2008) partially undermining the authorities’ efforts to increase confidence in the Armenian dram. The depreciation, however, did not trigger a significant outflow of deposits. Non-performing loans as a percentage of gross loans increased from 4.4 per cent at the end of 2008 to 7.6 per cent in March 2009 and to 10.2 per cent in June 2009.

Social sector

The sharp slow-down in economic growth has led to a substantial decline in tax revenues, putting pressure on the government’s expenditure plans. The government has ring-fenced part of the 2009 budget to keep the existing social safety net in place and to ensure that progress with poverty alleviation will not be reversed. The government has also signed several multilateral and bilateral agreements (including an International Monetary Fund stand-by facility, additional World Bank funding and a large bilateral loan from Russia) that will enable it to spend more on capital investment. This will target new housing projects (especially in the 1988 earthquake zone) and infrastructure, particularly the rehabilitation of rural roads.