1. Armenia Public Expenditure Review the Report by the World Bank 2002

2. 2 Armenia: country background 3 mln people, $2.5 bn economy More 6 mn in the Diaspora IDA post-conflict country Leading reformer in the CIS Average growth in 2000-03 – about 8%

3. 3 Improve a revenue performance by at least 2% of GDP; Provide for major improvements in budget accountability; Ensure an additional reduction in budget deficit relative to the 2001 level and full elimination of quasi-fiscal deficit; Channel incremental revenues to increase expenditures on basic health and education as well as on old-age pensions; Accelerate sectoral and civil service reforms to ensure much more efficient use of budget resources, primarily in social sectors and public administration. Core recommendations:

4. 4 Innovative Technical Features Attention to the off-budget and quasi-fiscal issues Coverage of revenue performance Incidence analysis of public spending in health and education Combination of institutional analysis with the analysis of policy outcomes at both macro and sectoral levels Emphasis on cross-country comparisons

5. 5 The Pace of Fiscal Adjustment

6. 6 Off-budget Grant Assistance, US$ mn

7. 7 Energy system The rest of the world Nairit IrrigationWater Other Budget POPULATION Scheme of QF Subsidization

8. 8 Tax collections in transition economies

9. 9 Under-financing of Health and Social Protection/Insurance vs. Education Very low level of spending on Government Administration Defense and Real sector – really too high Expenditure Ratios in Selected Economies

10. 10 Non-realistic budgeting Budget is over-committed Budget discipline is weak High dependence on external financing Sources of budget uncertainty:

11. 11 Switching to the new GFS (2001) budget classification and transition to the new accounting standards Consistency in presentation between annual budget Laws and budget execution reports Improvements in reporting on budget arrears, guaranties, on multi- sectoral donor projects, non-cash external grants Reporting on salaries in the budgetary sector and public employment Transparency of operations of the Reserve Fund Making budgetary support for public utilities more transparent Reduce share of spending classified as “other expenditures” Establishment of a modern system of financial reporting by state enterprises, including in education and health -- Quality of classification, coverage, budget accounting Budget transparency

12. 12 Features of Policy Dialogue Joint PER with the Government Working Group chaired by the 1 st Dep Minister of Finance Local Consultants as a bridge to the senior MOF staff Direct link to the TA programs of the IMF and DFID Expanded consultations at the final stage of the report preparation – 8 months of editing

13. 13 Links to the Lending/TA (1) 1. SAC5: several core conditions: a)Plan to Improve Budget Management – 15 specific benchmarks b)Action Plan on Tax and Customs Administration – 12 specific benchmarks c)School Rationalization Program d)Hospital Optimization Plan in Yerevan e)Advancing Pension Reforms (collections and increase in the benefits)

14. 14 Links to the Lending/TA (2) 2. Education Credit: funding to consolidate reforms – per capita funding, downsizing, attrition (15,000 redundant teachers) 3. IDF Grant: Expanding Treasury Capacity 4. New Stage of the DFID Program: capacity building for the MTEF

15. 15 Specific Outcomes Making a MTEF an annual exercise Increase in health Spending:by more than 1/3 in 2002 vs. 2001 Improvements in budget transparency: share of non-classified budget expenditures – from 1/3 to 12% in 2003 Increased number of active taxpayers to the Pension Fund by more than 10% Improved administration of excise taxes