UCLA Conference in Honor of Professor Armen Alchian May 6, 2006 Growth and Poverty Reduction in Armenia: Achievements and Challenges Enrique Gelbard, International Monetary Fund

Outline 1. Background 2. Recent developments 3. Main lessons 4. Challenges to sustain growth

Background Motivation Early reforms Removal of subsidies and price controls Privatization of land and enterprises Trade and foreign exchange liberalization (removal of import and export barriers, setting up of simple and low tariff rates, no restrictions on payments for goods and services) Basic tax and banking legislation

Recent Developments Remaining imbalances in late 1990s Poverty Weak fiscal position (large deficit and arrears) Corruption in state-owned utilities Banking sector crisis (8 banks in distress intervened by the central bank)

Recent Developments The Economic Program Boost growth through tax reforms Simplified and reduced corporate and income taxes Removal of exemptions Enhance tax legislation Disseminate laws and regulation

Recent Developments The Economic Program Restore confidence on fiscal management Clear domestic and external arrears Cut non-priority spending Increase public investment

Recent Developments The Economic Program Clean up the energy sector Privatization Deregulation New management structure in state companies Cut service to non-paying customers

Recent Developments The Economic Program Restructure the banking system Close or rehabilitate problem banks Bank bankruptcy law Stronger provisioning requirements Strengthen banking supervision

Recent Developments The Economic Program Improving the business climate Simplified licensing Sharing credit information Shortening time for enforcing court judgments New criminal code

Recent Developments Topped CIS countries in all reform dimensions

Economic indicators But tax revenues remained low

Economic indicators Closing the gap with the Baltics

Economic indicators Key factors: fiscal and quasi-fiscal consolidation

Economic indicators And prudent debt management

Economic indicators Leading to subdued inflation

Economic indicators And enabling strong economic growth

Economic indicators Poverty and inequality fell by about one-third

Main lessons 1.Policy package (well-sequenced reforms and right mix of policies) 2.Commitment to reforms 3.Minimal government intervention (low tax rates, no distortionary subsidies, limited assistance without guarantees) 4.Higher public investment 5.Role of the Diaspora (intermediation of investment, transfers, trade links)

Challenges ahead Income per capita still under US$1,000 Growth was ignited making Armenia one of the fastest low-income countries since 2001 But sustaining long-term growth will be challenging

Challenges ahead Fiscal framework Banking system Institutions and anti-corruption policies Regional cooperation

Challenges ahead Fiscal framework Revamping tax and customs administration primarily through risk-based methods Efficient provision of public services and improvements in basic infrastructure (especially in rural areas) Save for decommissioning of the nuclear power plant and funding the pension system

Challenges ahead Banking system Transparent bank ownership Judiciary to enforce creditor rights and collateral recovery

Challenges ahead Closed borders Effect large, suggests open borders could increase trade by about 40 percent But this requires resolving disagreements with Turkey and Azerbaijan Improving customs administration will also help in the near term

Concluding comments Armenia has made impressive progress in recent years, but the reform agenda needs to be completed and economic institutions should function adequately Key element: a renewed dose of political resolve regarding policy implementation and fighting corruption

UCLA Conference in Honor of Professor Armen Alchian May 6, 2006 Growth and Poverty Reduction in Armenia: Achievements and Challenges