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Improving the business climate in Armenia

By Lucia Sconosciuto

Improving the business climate in Armenia

Yerevan, capital city of Armenia

Commercial investments are the EBRD’s main tool for helping economies in their transition towards a well-functioning open market model. However, to make its impact even more effective, the EBRD uses another powerful lever for systemic change: policy dialogue.

To improve the business environment for small and medium-sized enterprises in the Caucasus and Central Asia, the EBRD’s Early Transition Countries (ETC) Initiative has, since 2007, helped establish investment councils that provide platforms for dialogue between businesses and policy-makers. These institutions have been supported by the donors of the ETC Fund.  

In Armenia, for example, this resulted in the creation of the Business Support Office (BSO). The BSO provides a structured framework for discussion between the private and public sector on issues affecting the business environment and investment climate.

It raises key issues, provides technical assistance to the government in developing reforms, facilitates consultations with the business community and transmits feedback on proposed reforms to the authorities.

Over the last decade, Armenia has made considerable efforts to upgrade its commercial, administrative, tax and financial legislation and to improve the business environment. Measures to reduce unnecessary regulation and burdensome tax inspections are under way.

However, according to the latest Business Environment and Enterprise Performance Survey (BEEPS), Armenian firms see tax administration as a top obstacle to the business environment. Tax inspections are on average 18 per cent higher than in other countries of eastern Europe and the Caucasus.

The BSO discusses such constraints in investment councils with enterprises, business organisations and government representatives to find suitable solutions. One of the councils focused on reforming the checking system by introducing risk-based inspections and EU standards.

The reform was adopted and continues to be supported by the BSO. This is expected to make the system more efficient and protect consumers, cut the number of unnecessary inspections and reduce cases of corruption.

Similarly, the BSO supported the work of the SME Development Council on tax reforms. This resulted in exemptions for family-run businesses with turnover under Dram 18 million (approximately €34,000), and for IT start-ups with fewer than 30 employees.

The impact is significant, as the example of IT start-up TeTech shows. Its Deputy Director Vahag Minasyan sees the newly introduced tax reform as a real boost for the IT industry.

 “We have more and more orders and clients who look into automating processes,” said Mr Minasyan. “We produce the software for them, which means we will gradually increase the number of our employees.”

The BEEPS also found that young Armenian firms complained heavily about customs and trade regulations: on average, it took 8.6 days to clear customs for direct exports and 17.6 days for direct imports, more than elsewhere in the region. This is of particular concern for the Armenian economy which relies considerably on international trade.

The BSO has helped simplify the procedure for exporters to obtain certification of country of origin, cutting both waiting time and costs.

“This shows how policy dialogue activities can improve governance and business development,” said Franklin Steves, Senior Counsellor for Investment Climate and Governance. “That’s why the EBRD is enhancing its policy reform dialogue to improve the investment climate in its countries of operations, including through the investment councils the Bank supports.  

“This enhanced engagement is aimed at re-energising transition by strengthening the Bank's capacity to address the challenges arising, for instance, from corruption, insufficient private-public dialogue, a weak judiciary and inadequate business regulations.”

*ETC Fund donors include: Canada, Finland, Germany, Ireland, Japan, Korea, Luxembourg, the Netherlands, Norway, Spain, Sweden, Switzerland, Taipei China and the United Kingdom.

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