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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 66166-AM
INTERNATIONAL DEVELOPMENT ASSOCIATION
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT
FOR A
PROPOSED CREDIT
IN THE AMOUNT OF SDR 32.60 MILLION
(US$50 MILLION EQUIVALENT)
AND A
PROPOSED LOAN
IN THE AMOUNT OF US$30 MILLION
TO
THE REPUBLIC OF ARMENIA
FOR A
THIRD DEVELOPMENT POLICY OPERATION
January 19, 2012
Poverty Reduction and Economic Management Department
South Caucasus Country Unit
Europe and Central Asia Region
This document has a restricted distribution and may be used by recipients only in the performance of their official
duties. Its contents may not otherwise be disclosed without World Bank authorization.
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GOVERNMENT FISCAL YEAR
January 1 – December 31
CURRENCY EQUIVALENTS
(Exchange Rate Effective as of January 17, 2011)
Currency Unit Armenian Dram US$1.00 389
WEIGHTS AND MEASURES
Metric System
ABBREVIATION AND ACRONYMS
ADB Asian Development Bank ILCS Integrated Living Conditions Survey
AMD Armenian Drams IMF International Monetary Fund
BEEPS Business Environment and ITU International Telecommunication Union Enterprise Performance Survey MOF Ministry of Finance
BPR Business Process Reengineering MOH Ministry of Health
CAR Capital Assets Ratio MTEF Medium-Term Expenditure Framework
BNPP The Bank Netherlands Partnership Program NCD Non-Communicable Diseases
CBA Central Bank of Armenia NCO Non-Commercial Organization CIS Commonwealth of Independent States NPL Non-Performing Loans
CPAR Country Procurement Assessment Report OECD Organization for Economic Co-operation and
Development CPIA Country Policy and Institutional Assessment OOP Out-of-pocket
CPS Country Partnership Strategy OSS One Stop Shop
CSO Civil Society Organizations PEFA Public Expenditure and Financial Accountability DB Doing Business PER Public Expenditure Review
DCFTA Deep and Comprehensive Free Trade
Agreement
PFM Public Financial Management
DPO Development Policy Operation PHC Primary Health Care
EC European Commission PPA Project Preparation Advance
ECA Europe and Central Asia PPP Public-private Partnership ECF Extended Credit Facility PPW Paid Public Works
EFF Extended Fund Facility PRSC Poverty Reduction Support Credit
EIA Environmental Impact Assessment PRSP Poverty Reduction Strategy Paper EITI Extractive Industries Transparency Initiative PSIA Poverty and Social Impact Analysis
ENP Eastern Neighboring Partnership PV Present Value
EQRP Education Quality and Relevant Project RER Real Exchange Rate EU European Union SBA Stand-By Arrangement
FB Family Benefits SCPEC State Commission for the Protection of Economic
Competition FDI Foreign Direct Investment SDP Sustainable Development Program
FSAP Financial Sector Assessment Program SDR Special Drawing Rights
GDP Gross Domestic Product SHA State Health Agency GTZ German Agency for Technical Assistance SME Small and Medium Enterprise
IAS International Accounting Standards SRC State Revenue Committee
IBRD International Bank for Reconstruction and Development
TA Technical Assistance
ICR Implementation Completion Report TOR Terms of Reference
ICT Information and Communication Technology USAID United States Agency for International Development
IDA International Development Association USD United States Dollars
IFC International Finance Corporation VAT Value Added Tax
IFRS International Financial Reporting Standards WB World Bank
Vice President:
Country Director:
Sector Director:
Sector Manager:
Country Manager:
Task Team Leaders:
Philippe Le Houérou
Asad Alam
Yvonne Tsikata
Ivailo Izvorski
Jean-Michel Happi
Souleymane Coulibaly and Gohar Gyulumyan
iii
TABLE OF CONTENTS
CREDIT AND PROGRAM SUMMARY v
I. INTRODUCTION 1
II. COUNTRY CONTEXT 2
A. RECENT ECONOMIC DEVELOPMENTS IN ARMENIA ................................................................................ 3 B. POVERTY AND SOCIAL DEVELOPMENTS ............................................................................................... 4 C. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ................................................................... 6
III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES 10
A. GOVERNMENT PROGRAM .................................................................................................................... 10 B. CONSULTATIONS ................................................................................................................................. 10
IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM 11
A. LINKAGES TO THE COUNTRY PARTNERSHIP STRATEGY ...................................................................... 11 B. RELATIONSHIP TO OTHER WORLD BANK GROUP OPERATIONS ........................................................... 11 C. COLLABORATION WITH THE IMF AND OTHER DONORS ...................................................................... 12 D. LESSONS LEARNED .............................................................................................................................. 13
V. THE PROPOSED ARMENIA DPO-3 14
A. PILLAR I: ADDRESS VULNERABILITY BY PROTECTING THE POOR AND SUPPORTING HUMAN CAPITAL
DEVELOPMENT .................................................................................................................................... 16 B. PILLAR II: STRENGTHEN COMPETITIVENESS FOR POST-CRISIS GROWTH ............................................. 20
VI. OPERATION IMPLEMENTATION 26
A. POVERTY AND SOCIAL IMPACTS ......................................................................................................... 26 B. FIDUCIARY ASPECTS ........................................................................................................................... 27 C. DISBURSEMENT AND AUDITING ARRANGEMENTS ............................................................................... 28 D. ENVIRONMENTAL ASPECTS ................................................................................................................. 29 E. IMPLEMENTATION, MONITORING, AND EVALUATION ......................................................................... 29 F. RISKS AND RISK MITIGATION ............................................................................................................. 30
FIGURES
Figure 1: Real GDP Growth, Per Capita GDP, and Poverty ...................................................................................... 3 Figure 2: Changes in Rural and Urban Poverty in the Aftermath of the Crisis (as % of population) ....................... 5 Figure 3: Social Protection Programs Provided the Most Protection During the Crisis ............................................. 5 Figure 4: Indicators of Public Debt Under Alternative Scenarios, 2010-30 ............................................................... 8 Figure 5: Indicators of Debt Service Burden Under Alternative Scenarios, 2010-30 ................................................ 8
TABLES
Table 1: Central Government Operations 2009-11 .................................................................................................... 4 Table 2: Macroeconomic Trends and Baseline Projections, 2007-14 ........................................................................ 7 Table 3: Simulation of External Financing Requirements, 2011-2013 ...................................................................... 9 Table 4: DPO-3 Prior Action Implementation ......................................................................................................... 16 Table 5: Progress on E-Filing .................................................................................................................................. 25
iv
BOXES
Box 1: Good Practice Principles on Conditionality ............................................................................................. 14 Box 2: The New Mining Code in Brief ................................................................................................................ 23
ANNEXES
Annex 1: Matrix of Policy Actions and Expected Outcomes ............................................................................... 31 Annex 2: Governmental Additional Reform Program ......................................................................................... 38 Annex 3: Social Safety Net Spending, 2009-11(million dram and percent of the total) ...................................... 42 Annex 4: DPO Outcomes and Performance Indicators Framework, 2009-2011/12 ............................................ 43 Annex 5: Letter of Development Policy ............................................................................................................... 46 Annex 6: Letter of Development Policy (Armenian Version).............................................................................. 60 Annex 7: IMF Board Statement ........................................................................................................................... 88 Annex 8: Armenia At-A-Glance .......................................................................................................................... 90
MAP
IBRD 33364 ……. ............................................................................................................................................... 93
The proposed Third Development Policy Operation (DPO-3) was prepared by a World Bank Group team
consisting of Anarkan Akerova, Ron Anderson, Ida Car, Souleymane Coulibaly, Adriana Eftimie, Ruxandra
Floroiu, Joseph Formoso, Gohar Gyulumyan, Susanna Hayrapetyan, Darejan Kapanadze, Sachiko Kataoka,
Munawer Sultan Khwaja, Tigran Kostanyan, Martha Martinez Licetti, Davit Melikyan, Arsen Nazaryan,
Siddhartha Raja, Sandra Sargent, Owen Smith, Ramya Sundaram, Arman Vatyan, John Strongman, and Michel
Zarnowiecki with a much appreciated support from Sarah Nankya Babirye, Nelli Khachatryan, and Zakia
Nekaien-Nowrouz. Jean-Michel Happi, Armenia country manager, and Larisa Leshchenko, country program
coordinator, provided useful and timely comments. The team is grateful for overall guidance provided by Pedro
L. Rodriguez, Lead Economist and CSC of the South Caucasus region and Asad Alam, regional director of the
South Caucasus region.
The team gratefully acknowledges the excellent collaboration of the Armenian authorities, development
partners, as well as the support and guidance of peer reviewers Humberto Lopez, Alexandra Posarac, and Robert
Taliercio.
v
CREDIT AND PROGRAM SUMMARY
REPUBLIC OF ARMENIA
THIRD DEVELOPMENT POLICY OPERATION
Recipient Republic of Armenia
Implementing Agency Ministry of Finance
Financing Data IDA credit of SDR 32.60 million (US$50 million equivalent) on blend IDA
terms with a maturity of 25 years including a 5 year grace period. IBRD loan of US$30 million with a maturity of 25 years, including a 10 year
grace period. Operation Type Third Development Policy Operation (DPO-3)
Main Policy Areas The DPO supports the Government’s two strategic objectives: (i) addressing
vulnerability by protecting the poor and supporting greater human capital
development; and (ii) strengthening competitiveness by providing a more
favorable private sector environment and strengthening governance. To protect
the poor, the operation supports spending levels of pro-poor and social
protection programs and strengthening of the management of the education
and health sectors. To strengthen competitiveness for recovery and resilience,
the operation focuses on improving the business climate for SMEs,
modernizing the regulatory framework for mining, reducing compliance cost
for the tax and the customs administration, and enhancing the enforcement
powers of the State Commission for the Protection of Economic Competition.
Key Outcome Indicators The key outcome indicators (detailed in Annex 4 and the policy matrix)
include: protection of the poor and vulnerable; strengthened management and
financing systems in health and education; lower costs of doing business;
improved governance and the investment environment for mining sector;
enhanced competitiveness of Armenian firms; and eased compliance with tax
and customs regulations.
Program Development
Objective(s) and
Contribution to CPS
The program development objective (PDO) for the series is to address
vulnerability by protecting the poor and supporting greater human capital
development, while improving competitiveness by alleviating a selected set of
private sector and governance constraints.
Risks and Risk Mitigation The proposed operation is subject to several external and internal risks:
i) The underlying macroeconomic framework is vulnerable to negative
global developments, particularly a contagion from the Eurozone crisis.
The primary channels of transmission would be through trade, FDI and
remittances. The EU accounting for about 50 percent of Armenian
exports, any significant slowdown in Europe will have a large impact on
Armenia’s economy. Possible declines in international prices for copper
and molybdenum – Armenia’s key exports – would also lead to an income
loss. And inflows of FDI are significant at about 6 percent of GDP a year,
with a risk of a decline sharply in the medium term. At about 17 percent of
GDP, remittances are also very important for Armenia. Most of the
remittances are from Russia and may not be immediately impacted by a
Eurozone crisis. Banks are well regulated and have low external
vi
indebtedness, but high dollarization, with more than 60 percent of loans
and 70 percent of deposit in foreign currency, remains a source of concern
for financial stability;
ii) Commitment to continue implementing the program may falter if
opposition by vested interest to key measures gains strong political
support, particularly with coming general election season (National
Assembly elections are due in May 2012 followed by Presidential elections
in February 2013); and
iii) Reform efforts could be compromised by weak implementation capacity
(particularly at middle management levels of the civil service), or if the
legislative and regulatory changes are not followed up by proper
institutional building in the implementing agencies.
To manage risks to the macroeconomic framework, the government is seeking
donors’ assistance as a cyclical response in case the macroeconomic context
worsens. The bulk of this assistance would focus on sustaining the 10 percent
nominal increase in pensions and the Family Benefit program, which aim to
offer proper protection of the poor and vulnerable. The government is also
committed to prudent macroeconomic management and is working with the
IMF and the Bank to further analyze the country’s vulnerability to external
shocks and spell out possible mitigation measures.
To mitigate the risk of vested interests undermining program implementation
the authorities have increased outreach efforts to broaden the political support
for the reforms. The Bank is actively supporting the authorities in these
outreach efforts. Having already secured passage for the new Mining Code
and the amendments to the Natural Resource User Fee Law, the Competition
Law and the Public Service Law—including the conflict of interest chapter—
the authorities are now focused on the implementation of these Laws and the
associated regulations.
The Government mobilized IDF funding for strengthening of the Revenue
Committee (which covers both tax and customs administration), and is
preparing a full-fledged program for the modernization of the Tax
Administration that is expected to be supported by IDA. The Government is
also ready to allocate internal funds to support line ministries and agencies’
institutional strengthening (e.g., for implementing mining and environment
related legislation), but is also making efforts to leverage donor funding for
key tasks. The Bank (including IFC advisory services) is complementing these
efforts by selectively providing technical assistance in key areas, such as social
protection, mining taxation, mining social and environmental regulations, and
competition policy; furthermore, and as mentioned above, several Bank
investment projects or donor-supported programs are expected to continue to
provide institution-building in key policy areas covered by the DPO. The IMF
is also providing support in the area of tax policy to ensure consistency
between the mining sector specific taxation and the profit tax, and to maintain
continuity on the taxation of non-metallic mines. Operation ID AM-P122195
1
INTERNATIONAL DEVELOPMENT ASSOCIATION
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT FOR A
PROPOSED THIRD DEVELOPMENT POLICY OPERATION
TO THE REPUBLIC OF ARMENIA
I. INTRODUCTION
1. After a large economic contraction in 2009, the economy recovered in 2010-11. Armenia
was hit hard by the global crisis with real GDP falling by more than 14 percent in 2009. Growth
resumed in 2010 at 2.1 percent and is expected to reach 4.6 percent in 2011. The economy has
benefitted from gradually rising remittances, stronger inflows of foreign direct investment (FDI) and
increased exports (mainly in the mining and tourism sectors). Both poverty and inequality increased
significantly in the wake of the crisis.
2. The recovery remains fragile in the context of Armenia’s vulnerability to the Eurozone
crisis. The primary transmission channels are likely to be trade and remittances, and inflows of FDI
could be reduced over the medium term in case of a protracted Eurozone crisis. Any significant
economic shock would worsen the fiscal and current accounts and halt the economic recovery. This
could also quickly translate into an income shock for households.
3. This operation completes the programmatic series that started in 2009. The
programmatic DPO series is central to the Bank’s current Country Partnership Strategy (CPS) for
Armenia which was prepared against the background of the 2009 global economic crisis to support
the efforts of the government to address vulnerabilities resulting from the crisis and to strengthen
competitiveness for post-crisis growth. The first DPO (approved by the Board on July 2, 2009)
focused on addressing vulnerabilities revealed by the 2009 crisis with a view to protecting the poor,
while starting to lay the groundwork for strengthening business environment. The second DPO
(approved by the Board on January 11, 2011) focused more on measures to improve conditions for
post-crisis growth and recovery (overall and in specific sectors such as telecommunications and
mining) and competitiveness, although continuing to protect social safety net spending as the impact
of the crisis on the poor was protracted.
4. The Third Development Policy Operation (DPO-3) in the amount of US$80 million
supports a reform program to: (i) address vulnerability by protecting the poor and supporting
greater human capital development; and (ii) strengthen competitiveness by providing a more
favorable private sector environment and strengthening governance. Measures supported by the
DPO-3 program include expenditures on key social safety net programs along with their improved
targeting, and improving access and quality of basic social services for pre-school and hospital
services. The program also supports measures to establish a one-stop shop for business registry,
amendments to the Law on Inspections to reduce discretion and increase transparency, introducing a
fully functioning green channel by default for customs clearance, and issuing regulations to
implement the new Mining Code to enhance investments.
5. Significant results have been achieved from the DPO series. For instance, the share of
social protection and pensions in total spending increased from 24.8 percent in 2008 to 31.7 percent in
2011 even as a fiscal consolidation program was implemented. This permitted the government to
avoid a major reduction in the coverage it offers to poorest households (from all social protection and
insurance programs) despite a significant increase in their number (coverage by all social programs
2
fell only from 80 to 78 percent of the poor, while the number of poor increased by 270,000). At the
same time targeting of poorest households increased, with 76 percent of the benefits paid going to
poorest households in 2010 (whereas only 67 percent of the benefits paid went to poorest households
in 2008). Finally, the average benefit paid out from all social programs was also maintained between
2008 and 2010 at about 43 percent of the consumption basket of the poor. On broader social policies,
new funding was provided for the one year school readiness program for 41/2
-51/2
year-old. The public
sector spending on health as a share of GDP was also increased from 1.4 percent in 2008 to 1.7
percent in 2011. On the tax and custom administration side, the estimated number of electronically
filed returns increased from 0 to 20 percent between 2008 and 2011, and the share of green channel
releases (as a percentage of all declarations) increased from 0 to 15 percent over the same period. The
Doing Business ―Trading across Borders‖ ranking has improved from 143 in 2008 to 104 in 2011 as
reported in the 2012 Doing Business Report and the country’s overall ranking also increased by 6
positions over the last year (to 55 out of 183 economies) given improvements in starting a business,
dealing with construction permits, getting credit, paying taxes, and resolving insolvency.
6. The authorities’ policy reform program has gone beyond the DPO-3 prior actions. For
instance, in addition to the new mining code, the government is reviewing the Environmental Impact
Assessment Law to ensure conformity with the new Mining Code and reflecting good international
practices. The amendments to the Natural Resource User Fee Law (where the Royalty for mining is
defined) that focused on metallic minerals as per the DPO program has been complemented by a
government decree increasing the royalty rate for non-metallic minerals in line with the amendments
to the Natural Resource User Fee Law. In the area of tax administration, Armenia has introduced risk-
based selection criteria for audit as of January 1, 2012 which should reduce the number of inspections
to less than two percent of taxpayers. Furthermore, amendments to the Law on Inspections to mandate
risk-based selections for all inspections are now moving into its full enforcement phase. On the social
side, the government has developed a new concept of disability aiming at reflecting good international
practices and, upon adoption, should lead to improvements in the efficiency of spending on disability
programs.
II. COUNTRY CONTEXT
7. Armenia has been a consistent reformer over the years. These reforms—in the context of
a highly favorable external environment— facilitated a steady increase in output and living standards
over the past decade. After a severe transition recession in the first half of the 1990s, the economy
recovered gradually, with growth averaging 6 percent a year during 1994-2000 although with limited
impact on poverty reduction due to limited job creation. Then growth rates increased to double-digit
levels, with economic growth averaging 12 percent a year during 2001-2008, which resulted in
poverty reduction gains and created more jobs. Per-capita GDP at market exchange rates increased
from US$620 to US$3,700 during this period. Higher incomes and improved safety nets led to a
sharp reduction in the poverty incidence from 56 percent of the population in 1999 to about 27.6
percent in 2008 (Figure 1).
3
Figure 1: Real GDP Growth, Per Capita GDP, and Poverty
Source: World Development Indicators.
8. Growth during this period was also aided by external factors. A highly favorable external
environment and the efforts to mobilize Armenians abroad (recent emigrants as well as the more
established diaspora) contributed all to the substantial improvement in income per capita. The
Armenia’s diaspora and migrant population have particularly helped ease external constraints. They
continue to play an important role in the country’s growth through remittances, inflows of FDI and
tourism. Also, the diaspora has funded public works and invested in the country’s infrastructure (e.g.
airport), banking sector, ICT, and, to a lesser extent, agriculture. This allowed FDI to average 6
percent of GDP over the last decade. After contracting 35 percent in 2009, inflows of remittances
recovered to about 17 percent of GDP in 2010.
9. The global financial crisis hit Armenia hard and revealed some underlying
vulnerabilities. Armenia’s overdependence on commodities and remittances, excessive growth in
construction and other non-tradables, and structural bottlenecks in the economy contributed to the
sharp contraction in GDP in 2009 and to the subsequent slow recovery. Armenia’s closed borders to
the east and the west also add to its vulnerabilities.
A. RECENT ECONOMIC DEVELOPMENTS IN ARMENIA
10. A fragile economic recovery is underway, following the deep contraction in 2009. Real
growth was 2.1 percent in 2010 and is estimated at 4.6 percent in 2011. This recovery was driven by
mining, stimulated by higher commodity prices, and tourism, but also by the strong agriculture
performance in 2011. Performance in construction remained weak throughout 2011 reflecting large
inventories and weak real estate prices. Based on preliminary estimates, consumption recovered last
year at rates similar to those of GDP growth, but investments remained weak.
11. Fiscal consolidation is proceeding, driven mainly by the phasing out of the counter-
cyclical expenditures. The overall fiscal budget deficit has been reduced from 7.6 percent of GDP in
2009 to 4 percent in 2011 (Table 1). Much of this reduction has taken place on the expenditure side,
though key social safety net expenditures have been protected. Revenue collection efforts remain
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
0
500
1000
1500
2000
2500
3000
3500
4000
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
p
Per capita GDP, USD
Real GDP growth, % (RHS)
Poverty rate, % of total pop. (RHS)
4
limited, particularly for indirect taxes reflecting the decline in imports. The approved 2012 budget
maintains this trajectory.
Table 1: Central Government Operations 2009-11
(In percent of GDP)
2009 2010 2011 2012*
Revenues and grants, of which: 21.5 21.6 22.0 21.0
Taxes 16.1 16.3 16.3 16.9
Social contributions 3.3 3.0 3.2 3.3
Total expenditures 29.2 26.6 26.0 24.2
Recurrent, of which 22.4 21.1 21.6 20.7
Wages 2.7 2.4 2.4 1.7
Interest payments 0.5 0.9 1.1 1.1
Capital 6.7 5.5 4.4 3.4
Fiscal balance -7.6 -5.0 -4.0 -3.1
Memorandum items:
Public debt stock, of which 40.2 39.2 42.1 43.2
External 35.7 34.2 36.8 37.7
Domestic, of which 4.5 5.0 5.3 5.5
T-bills 0.3 0.2 0.3 0.5
Sources: Ministry of Finance, IMF and World Bank staff estimates.
*Approved budget.
12. With the nominal exchange rate roughly at its end-2010 level, the dram remains
overvalued. The IMF estimated that the real effective exchange rate is overvalued by 10-15 percent.
The authorities have continued to intervene to smooth volatility, although with concerns about
inflation, sales of foreign exchange have exceeded purchases.
13. The external accounts have improved. After experiencing substantial deterioration in
external imbalances during the crisis, the current account deficit has declined from nearly 16 percent
of GDP in 2009 to an expected 12.5 percent in 2011. The CAD is equally financed by continued FDI
inflows of about 6 percent of GDP and private and public capital inflows.
14. The Armenian banking system continues to show recovery, but banks remained exposed
to currency induced credit risk. Indeed, although both deposit and credit dollarization remain high,
the rapid growth of foreign currency lending—by 35 percent through January-October, 2011—has
increased vulnerabilities to exchange rate changes. Banks are well regulated and had low external
indebtedness, low exposure to the booming construction sector and relatively high capital-to-asset
ratio (of 28 percent) before the 2009 crisis (15.8 percent as of September 2011). The sector thus
endured the crisis well. The NPLs peaked at 7.9 percent in August 2010 and have since declined to
5.4 percent by end September, 2011 (IMF definition). However, persistently high dollarization, with
more than 60 percent of loans and 70 percent of deposit in foreign currency, remain a source of
concern for financial stability.
B. POVERTY AND SOCIAL DEVELOPMENTS
15. The 2009 economic crisis had a serious impact on poverty incidence in Armenia. The
effect of the crisis on poverty has been dramatic, with 270 thousand more people joining the ranks of
the poor between 2008 and 2010, raising the number of the poor in 2010 to around 1.2 million (Figure
5
2). The poverty headcount increased from 27.6 percent in 2008 to 35.8 percent in 2010, an increase of
8.2 percentage points. Urban areas other than Yerevan experienced the largest increase in poverty
incidence (from 36 percent in 2008 to 42 percent in 2009 and 45 percent in 2010). Extreme poverty
has also increased due to the crisis. The percentage of the population living below the food poverty
line increased from 1.6 percent in 2008 to 3 percent in 2010. Once again, the highest incidence of
extreme poverty, at 6.1 percent of the population, occurred in urban areas outside of Yerevan.
16. The poverty response to GDP decline has been significant. Between 1999 and 2008,
poverty incidence was halved, from 56 percent to 27.6 percent, lifting over one million Armenians out
of poverty. However, in the wake of the crisis, about 30 percent of this reduction has been reversed.
An increase in income inequality has contributed to the increase in the poverty rate. Consumption
inequality measured in Gini coefficient increased from 0.242 in 2008 to 0.257 in 2009, a more than 6
percentage increase. The average monthly real consumption declined by 8 percent when compared to
2008; decreases were seen in every quintile of consumption except for the wealthiest quintile (the top
20 percent of the population).
17. Female headed households, particularly those with at least one child under the age of 6
were deeply affected. The poverty rate for these households doubled, from 30.9 percent in 2008 to
62.3 percent in 2010. Poverty rates increased for other female headed households and for male headed
households as well, but less dramatically. Dramatic increases in poverty were also seen in households
with children – the poverty rate increased from 34.8 percent in 2008 for households with three or
more children to 60.1 percent in 2010. By contrast, the poverty rate decreased in households with a
single elderly person with no other household members – from 23.4 percent in 2008 to 22.5 percent in
2010.
Figure 2: Changes in Rural and Urban Poverty
in the Aftermath of the Crisis
(as % of population)
Figure 3: Social Protection Programs
Provided the Most Protection During the
Crisis
Source: Armenia ILCS 2008, 2009 and 2010.
18. In 2008-2010, the increase in poverty was substantially lower than what would have
occurred in the absence of public policy measures. The authorities made a concerted effort to
lessen the impact of the crisis on the poor and the vulnerable and to protect the gains Armenia made
during the last decade in reducing poverty. Government efforts to maintain public spending on social
protection and to improve targeting of safety net programs—both supported by the DPO—were the
28
20
36
28 28
34
27
42
35 3436
27
45
36 36
0
5
10
15
20
25
30
35
40
45
50
Urban areas
Yerevan Other urban
Rural areas Total
2008 2009 2010
6
main factors that helped Armenia avoid worse outcomes. This is evident from what the levels of
poverty would have been in the simulated absence of these transfers before and during the crisis
(Figure 3). In 2008, before the impact of the crisis was felt, poverty incidence would have been 43
percent without both pensions and Family Benefit (FB) Program, as opposed to the actual 27.6
percent. In 2009, on the other hand, poverty would have gone from the actual 34.1 percent to about
51.7 percent in the absence of these transfers. In 2010, the before-transfers poverty level would have
been 54.2 percent, instead of actual 35.8 percent.
19. Armenia’s social protection programs, mainly old age pension and FB, helped reduce
child poverty in 2010. Some 47 percent of all children live in households where at least one person
is reportedly receiving an old-age pension, while 22 percent live in households receiving the FB. If
pensions were deducted from total monthly household expenditure and the remaining amount brought
into equivalent terms, the extreme child poverty rate would increase from 4 to 14 percent, while the
total child poverty rate would go up from 41 to 54 percent. If family benefits were deducted from the
total household expenditure, the extreme child poverty rate would be more than double, going from 4
to 11 percent. The total child poverty rate would go up by 5 percentage points, from 41 to 46.
20. In response to the economic crisis, Armenian households employed several coping
strategies, including some which are potentially harmful in the long run. In 2010, the main
coping mechanisms remained reduced food consumption, less spending on healthcare, increased use
of public transportation and less spending on entertainment. 32 percent of affected households report
cutting back on food consumption, which has implications for nutritional adequacy for adults and
children. According to a special coping strategy module added to the ILCS 2009, households
reported significant cuts in health spending in response to the crisis. While all income groups had to
adjust their budgets, the crisis was more challenging for the poor and the vulnerable. Over 50 percent
of the poorest quintile reported consuming poorer-quality food, reduced visits to health centers, and
reduced purchases of medicines.
C. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY
21. The outlook for the medium term depends on several external factors. Global and
regional growth rates are not expected to return to their pre-crisis levels for some time. Furthermore,
the Eurozone debt crisis is likely to affect negatively Armenia growth prospects, by means of
decreasing mineral export volumes and prices as well as declining FDI, tourism and remittances.
22. Our baseline scenario projects growth at around 4¼ percent annually over 2012-2014. The baseline scenario assumes inflation stable at 4 percent, fiscal parameters in line with the fiscal
consolidation assumed by the MTEF and external variables in line with global recovery. Remittances
are likely to grow little, though they will remain important for domestic private demand. The current
account deficit is projected to decline from nearly 15 percent of GDP in 2010 to less than 10 percent
of GDP by 2013. The construction sector, which was nearly 30 percent of GDP in 2008, is unlikely to
grow by more than 2-3 percent in the near term as it goes through a major correction. The tradable
sector will recover from the slump of 2009, but its sustained growth depends critically on the private
investment response to reforms aimed at improving competitiveness and incentives. Mining and
telecom are already showing signs of benefitting from such investment earlier than manufacturing, as
has been the case in many emerging economies. Finally, the ongoing fiscal consolidation over the
next three years could dampen growth rates but the positive output results of 2011, if continued,
suggests such an impact will be minimal (Table 2).
7
Table 2: Macroeconomic Trends and Baseline Projections, 2007-14
(In percent of GDP unless indicated otherwise)
Source: Armenian authorities and Bank staff calculations.
23. Given the large fiscal expansion in 2009, the debt outlook has deteriorated. Government
debt amounted to 40 percent of GDP in 2009 and 2010 but was projected to reach 42 percent in 2011,
driven by the increase in the primary deficit -- and the corresponding borrowing from international
financial institutions and bilateral sources. The increase in debt over the past several years was
warranted to shore up the domestic economy and protect employment, the poor and vulnerable. But
rising debt levels has reduced Armenia’s fiscal space to face another major crisis. Furthermore, the
increasing stock of debt demand skillful debt management, and improved medium-term expenditure
planning, including the introduction of a sound public investment appraisal system.
24. With continued recovery, and in the absence of major shocks, the DSA indicates that
government debt will decline from 43 percent in 2012 to 26 percent by 2030. The net present
value of public sector debt initially would increase gradually from about 33 percent of GDP in 2009
to about 36 percent of GDP in 2012, reflecting the increase in external borrowing (Figure 4). The net
2007 2008 2009 2010 2011 2012 2013 2014
Actuals Projections
National income and prices
Real GDP (percent change) 13.7 6.9 -14.1 2.1 4.6 4.3 4.2 4.2
Gross domestic product (in millions of U.S. dollars) 9,206 11,662 8,648 9,371 10,101 10,535 10,853 11,085
Gross national income per capita (in U.S. dollars) 2,580 3,340 3,050 3,220 3,340 3,590 3,790 3,920
CPI inflation, end-of-period (percent change) 6.6 5.2 6.5 9.4 6.9 4.9 4.1 5.2
Investment and saving
Investment 36.9 39.8 36.4 33.1 29.8 28.7 28.5 34.4
Public 6.2 5.1 6.7 5.5 6.0 6.0 5.9 6.0
Private 30.7 34.7 29.7 27.6 23.8 22.8 22.6 28.4
National savings 31.5 32.0 17.6 15.6 17.8 18.0 19.5 27.9
Public 5.5 1.9 -0.9 0.5 0.4 0.3 1.1 1.2
Private 26.0 30.1 18.5 15.1 17.4 17.7 18.4 26.7
Government operations
Revenue and grants 21.4 22.0 21.5 21.6 22.0 21.0 20.4 20.5
Of which: tax revenue 18.7 19.7 19.4 19.3 19.5 20.2 20.0 20.5
grants 0.8 0.4 0.7 0.9 1.5 0.4 0.3 0.2
Expenditures 22.9 22.7 29.2 26.6 26.0 24.2 22.8 23.2
Current expenditures 15.9 20.1 22.4 21.1 21.6 20.7 19.3 19.3
Of which: interest payments 0.3 0.3 0.5 0.9 1.1 1.1 1.0 1.1
Capital expenditures 7.0 2.6 6.7 5.5 4.4 3.4 3.5 3.9
Overall balance -1.5 -0.7 -7.6 -5.0 -4.0 -3.1 -2.4 -2.7
Primary balance -1.2 -0.4 -7.1 -4.1 -2.9 -2.0 -1.4 -1.6
External sector
Exports of goods and services 19.3 15.1 15.5 20.7 22.6 22.9 22.6 23.6
Imports of goods and services 39.0 40.7 42.6 44.9 46.3 44.6 44.1 45.4
Net remittances 12.3 13.2 10.4 8.7 9.9 10.8 11.3 12.0
Current account -6.4 -11.8 -15.8 -14.7 -12.5 -11.2 -9.5 -8.0
Capital and financial account 4.9 10.5 14.6 13.3 11.4 10.2 8.5 7.0
Of which: foreign direct investments 7.6 7.9 8.4 6.0 6.1 6.2 6.3 6.3
Change in gross international reserves -5.9 2.0 -6.9 1.2 -1.5 -0.8 -2.3 -2.5
Gross international reserves (in months of imports) 5.5 4.0 6.5 5.3 5.4 5.5 5.5 5.6
Public debt 16.1 16.1 40.2 39.2 42.1 43.2 41.9 40.5
8
present value of the stock of debt is then projected to gradually drop to reach 22 percent of GDP by
2030. Assumptions for the baseline scenario are conservative, with real growth projected to be 4.6
percent for 2011 after which it will return to about 4 percent per year during 2012–15 and beyond
(below the 10-year historical average of 8.7 percent). The RER depreciation/appreciation is projected
to range between ± 3 percent and the financing gap is expected to be filled at historical average terms.
Under the baseline scenario, liquidity indicators point to some medium term pressures with public
debt service to revenue increasing from 11 percent in 2011 to 27 percent in 2013, due to the bunching
of repayments, before decreasing to 14 percent by 2030 (Figure 5). Smoothing the repayment spike
is a key challenge for debt management.
Figure 4: Indicators of Public Debt Under
Alternative Scenarios, 2010-30
(In percent of GDP)
Figure 5: Indicators of Debt Service Burden
Under Alternative Scenarios, 2010-30
(In percent of GDP)
Source: ―Armenia: Fiscal Consolidation and Recovery‖, World Bank (2011).
25. The debt situation is vulnerable to domestic and external shocks. Simulations suggest the
country’s public debt outlook would be most adversely affected by another major growth shock or
another major depreciation shock. A major contraction of the economy (e.g., by -7 percent in 2012)
would place Armenia’s debt to GDP ratio at around 70 percent over the medium term (Figure 4). In
net present value terms the increase would not be as sharp, as the public debt to GDP would increase
from 46 percent in 2012 to only about 52 percent by 2030. A major depreciation of the dram (e.g., 30
percent in 2012) would also bring Armenia’s debt to GDP ratio close to 70 percent but it would fall
and stabilize around 32 percent by 2030. Such shock would increase the net present value of debt to
54 percent of GDP in 2012 before slowly coming back to 25 percent by 2030. These adverse
scenarios also worsen the liquidity situation of the country over the medium term. A growth shock
increases the debt service to revenue ratio from 12 percent in 2011 to 27 percent in 2013 before
stabilizing between 14 and 15 percent over the medium to long term (Figure 5). A real depreciation
shock increases the debt service to revenue ratio from 12 percent in 2011 to 33 percent in 2013 and
stabilizes below 15 percent by 2022 (Figure 5). These results reinforce the importance of prudent
fiscal and debt management policies to safeguard macroeconomic stability over the medium term.
26. Armenia would likely be significantly affected by a potential Eurozone crisis. Economic
simulations suggest that a widespread recession in the EU could cause the Armenian economy to
contract by 3 percent in 2012, with declines in net exports, net transfers, and inflows of FDI. These
would worsen the current account -- and notwithstanding a possible adjustment in consumption and
use of foreign exchange reserves -- the expected financing gap would widen to about 4.2 percent of
9
GDP in 2012 with a further gap of about 1.8 percent of GDP in 2013 (Table 3). However, the public
debt to GDP ratio is expected to remain well below the 60 percent limit mandated in the Law of
Public Debt. The actual impact of a Eurozone crisis on Armenia would depend not only on the
potential realization of such a crisis, but also on the actual response of the Armenian economy to the
shock—which might be different from the response in 2008-09.
Table 3: Simulation of External Financing Requirements, 2011-2013
(In percent of GDP unless otherwise indicated)
Sources: IMF and Bank Staff calculations based on official statistics.
* Sum of the following items: current account balance, net capital transfer, net FDI, net portfolio investment,
net public borrowing and errors and omissions.
27. The primary channels of transmission would be through trade and remittances. The
risk of transmission of the Eurozone shock through the banking system is likely to be small, given
limited exposure to European banks and debt. However, trade linkages with Europe are strong with
about 50 percent of all exports going to the EU. Possible commodity price falls for copper and
molybdenum, which are Armenia’s key exports, would lead to an income loss. FDI is also significant
in the country, at an average of 6 percent of GDP over the last decade, which could fall sharply in the
medium term if the Eurozone crisis is protracted. Remittances are also very important for Armenia,
equivalent to about 17 percent of GDP in 2010; however, most of them are from Russia and may not
be immediately impacted by a Eurozone crisis. Any significant economic shock would also quickly
translate into an income shock for households. If this scenario were to materialize a significant
financing gap would likely emerge, requiring significant domestic and external adjustment as well as
additional concessional financing.
28. The Government’s macroeconomic policy framework is adequate for this operation. Starting from a strong position going into the crisis, the Government took appropriate and timely
policy actions to adjust to the global crisis. Following the rise in fiscal deficit and debt in 2009, the
Government adopted a program of substantial fiscal consolidation for 2010-12, which has been
confirmed in the 2012 annual budget law approved late last year, and the associated 2012-2014
MTEF that targets a fiscal deficit of 2.4 by the end of 2014. A public debt management strategy
covering the period 2011-2013 guides the Government borrowing: preference given to concessional
creditors, to loans with freely convertible currency and fixed interest rate, and to loans with at least 5
Est.
2011 2012 2013 2012 2013
Real GDP growth 4.6 4.3 4.2 -3.0 2.0
Fiscal deficit -4.0 -3.1 -2.4 -5.2 -3.0
o/w external financing 2.1 1.5 1.0 3.6 1.6
Current account balance -11.7 -10.7 -9.4 -16.9 -11.8
Overall balance -0.8 -1.1 0.0 -5.7 -2.3
Financing of the balance 0.8 1.1 0.0 5.7 2.3
Reserves variation -0.1 0.7 0.4 0.9 0.6
Net use of IMF credit 0.3 -1.5 -2.6 -1.5 -2.6
Financing gap 0.6 1.9 2.2 6.3 4.2
Additional financing gap (relative to baseline) 4.4 2.0
Baseline Simulation of Crisis Impact
10
years grace period. Particular attention is paid to the coordination between fiscal and monetary
policies.
III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES
A. GOVERNMENT PROGRAM
29. This DPO series supports policies and strategies developed under the “Sustainable
Development Program” (SDP) approved by the government in October 2008. The SDP had four
goals covering initially the period 2009–21 (with specific medium term targets set for the period
2009–15): (a) economic growth and diversification aimed at deepening competition and fostering
private sector development; (b) improve civil servants’ performance through better incentives and
stronger management of conflict of interest issues while strengthening core systems in the judiciary,
public financial management, and e-government; (c) human development through improved
management and financing in health and education, as well as strengthened social protection
programs; and (d) better infrastructure services through higher public investment and strengthened
regulation of service providers.
30. The DPO series has helped support the government’s anti crisis measures as well as
support the government’s agenda for strengthening competitiveness and growth. The DPO series
is a key part of the donor support to the government during the crisis. It provided input to the
Government’s Emergency Response Program (approved by the Government Decree N1016-A from
December 17, 2008) aimed at mitigating the crisis implication on the economy and providing fiscal
stimulus to the real sector. The DPO-3 also supports the government’s policy for spending on key
functions as reflected in the Medium Term Expenditure Framework (MTEF) for 2012-14.
31. The Government has started to produce a new Strategic Development Plan. This is
expected to set strategic policy directions for the period up to 2020. The plan is expected to be short
and focus on job creation, income acceleration, poverty reduction, and strengthening competitiveness
for growth.
B. CONSULTATIONS
32. The Armenian government has a good record in promoting consultations, ranging from
organizing public hearing for key legislations submitted to Parliament to ad-hoc consultation
groups such as the SDP working group. The DPO program benefited from this consultation
framework. For instance as part of DPO-3 consultations, workshops were organized by the
Government (with Bank’s participation) on specific topics related to the program, including inter-
alia, the public financial management strategy, higher education finance, education quality assurance,
e-filing of tax returns, green channel of customs clearance, competition and the various aspects of the
new Mining Code. In addition, the Government published all policy initiatives related to the DPO
program on its website and provided interviews with the media and the civil society when
appropriate. Communication has not always been easy, but there is a strong Government’s
commitment to maintain this dialogue as many reforms are consolidated or implemented.
33. The Bank also conducted frequent direct consultations on issues of mutual interest. The
Bank team, for instance, benefit from a continuous interaction with key parliamentarian commissions,
mining companies, and the relevant CSO’s, on the changes the government proposed to introduce as
part of the new Mining Code and the amendments to the mining specific taxation regime. More
11
broadly, prior to DPO-3 appraisal, representatives of CSOs were invited to exchange views on the
overall reform and results of this operation, and to provide direct feedback on implementation and
enforcement issues on the ground. Consultations revealed that there is high interest among
professional circles about the reform program supported by the DPO series and there is a request to
maintain the public outreach and reporting on further implementation progress. This is particularly
important for issues related to the environmental practices, both those that have been introduced in the
mining sector as part of the new Mining Code and related regulations, as well as the broader
environmental issues for other economic activities.
34. Government’s communication on the implications of fiscal consolidation has also been
proactive. The budget process in Armenia is transparent, with the media and the population at large
able to review online monthly revenue collections (aggregate and for the 1,000 largest tax-payers) and
spending (aggregate and with disaggregation by function and regions). This helped manage
expectations for the budget at the heat of the crisis, when resource shortfalls required tight control
over new commitments. During the preparation of the 2010, 2011, and 2012 budgets, cautious
assumptions about growth and revenue levels were discussed with parliament resulting in moderate
expectations of spending increases. The approved State Budget for 2012 benefitted from the analysis
and dissemination (including a joint presentation by Government and the Bank to a selected set of
parliamentarian committees in October 2011) of the Fiscal Consolidation and Recovery report
produced by the World Bank in 2011.
IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM
A. LINKAGES TO THE COUNTRY PARTNERSHIP STRATEGY
35. The Bank’s 2009 Country Partnership Strategy (CPS) and the proposed DPO support
the Government’s two strategic objectives of addressing vulnerability and strengthening
competitiveness. The CPS and the recent CPS Progress report have strong client ownership. In the
context of the recent mid-term Progress report on the CPS, both the Government and the Bank
recognized that given the challenges to the country’s development strategy posed by the uncertainties
over the duration of the global economic crisis, it would be essential to maintain flexibility in the
design, timing, and sequencing of interventions.
36. The DPO series is a key instrument of Bank support under the CPS. A good deal of
technical work and policy dialogue underpins the DPO prior actions. This work and dialogue cover
macroeconomic and fiscal stability, tax administration reform, improved social safety nets, increased
utilization of health and education services, especially for the poor and vulnerable, a strengthened
public financial management strategy, more credible conflict of interest management, enhanced
regulatory regimes for infrastructure, including telecommunications and public-private partnerships,
and a more favorable climate for the private sector, including mining. The CPS indicates that
development policy lending will remain the core instrument to support the Government reform
program.
B. RELATIONSHIP TO OTHER WORLD BANK GROUP OPERATIONS
37. The DPO program supports other Bank operations and at the same time is reinforced
by them. For example, for health, education, social protection and poverty, energy, e-society, public
financial management, tax administration, conflict of interest and wage policies, ongoing or planned
investment projects and grant facilities provide continuity to the reform dialogue and build the
12
institutions needed to ensure the full benefits of policy reforms. At the same time, the DPO provides
a framework for the authorities to monitor and move forward policy actions of new investment.
38. In addition, the IFC advisory group supports areas of the DPO related to the business
environment. In particular, IFC Advisory Services provided support to the Ministry of Economy on
the amendments to the Inspections Law to introduce risk-based approaches to inspections. In addition,
the IFC technical assistance was instrumental in assisting the DPO-3-supported action to establish a
One Stop Shop (OSS) for business registry in Yerevan. The OSS is operational since April, 2011.
Findings of the IFC-funded Tax Compliance Cost Survey also informed both tax administration and
business environment related measures of the DPO program as well as the PER assessment of the
revenue potential.
39. The design of the DPO program was based on wide-ranging economic and sector work
done jointly by the Bank and the Government. The DPO draws on the ongoing analytical work on
poverty, on skills and education system, on the results of the Doing Business and BEEPS surveys and
on the ongoing programmatic fiscal work and the sources of growth study. In addition, an
Institutional and Governance Review analyzes competition issues as well as issues of state capture.
Finally, a South Caucasus regional trade program financed by a BNPP Trust Fund and joint initiatives
with the EU delegation in the field provide an analysis of the demand and supply side constraints to
export growth aimed at facilitating the authorities’ ongoing discussions on a possible DCFTA with
the European Union.
C. COLLABORATION WITH THE IMF AND OTHER DONORS
40. Armenia has an ongoing program with the IMF. An IMF Stand-by Arrangement was
approved in March 2009 for SDR 544 million (of which only SDR 350 million were withdrawn). The
IMF replaced the Stand-by with an Extended Fund and Credit Facility in June 2010. In mid-
December 2011 the IMF Executive Board completed the Third Review under EFF/ECF arrangement
for Armenia and approved USD 56.1 million for disbursement. The preparation of the DPO has been
coordinated with the IMF, including frequent consultations between the Bank and Fund teams as well
as collaboration on the changes to the mining sector specific taxation. The consultations have focused
on the scope of the required fiscal adjustment, the debt situation in the medium-term, the financial
sector policies, the poverty impact of the crisis, and PFM reforms, including tax administration.
41. The EU is rapidly expanding its program in Armenia to support the implementation of
the Eastern Neighborhood Partnership (ENP) Action Plan and preparations for a DCFTA. The
feasibility studies on the DCFTA were completed and in February 2009 the EU prepared a detailed
plan for the Government highlighting the need for progress on areas such as competition, sanitary and
phytosanitary conditions and policy and institutions for the protection of intellectual property rights.
Currently the EU has contracted a second group of over a dozen resident advisors in Yerevan to
provide technical assistance on these issues as well as on customs and trade issues. Twinning
arrangements in these areas are also been mobilized. The EU also maintains a program of financial
assistance for Armenia and is also funding the modernization of the customs infrastructure in all three
border crossing points with Georgia. Under this DPO series, the EU/Bank teams collaborated closely
on areas, such as competition, trade, customs, and conflict of interest.
42. The Bank has been collaborating with other partners in a number of areas. The Bank
collaborates with the UNDP to support the government’s efforts in the SDP update process,
coordinates with ADB on the overall policy framework and infrastructure, with GIZ on the SDP and
13
PFM fronts, with USAID on tax administration reform, and with the Eurasian Development Bank on
debt sustainability and the macro-economic framework.
D. LESSONS LEARNED
43. Between 2004 and 2007, the government, with support from the World Bank, designed
four annual Poverty Reduction Support Credits (PRSCs) to support reforms specifically
directed at fighting poverty. Based on the ICR for the PRSCs series, key lessons learned include:
a. To ensure ownership, policy-based lending needs to be anchored in the
government’s reform program. The reforms were successful largely because the
PRSCs were rooted in the government’s poverty reduction strategy which was prepared
with wide societal consultation and participation.
b. To ensure relevance, policy-based lending needs to be flexible. The PRSC series
adopted a flexible approach that allowed for adoption of new measures identified as
priorities in ongoing analytical works.
c. The DPO program can be a useful tool to promote intra-governmental coordination.
The policy reforms supported by the PRSCs were the basis around which ministries and
partners conducted policy discussions and developed a common understanding of how
each could best help. While this was not always straightforward, the series helped further
cooperation and thus increased the Government’s capacity to implement reforms.
44. The current DPO series built on these lessons. DPO-1 was fully anchored on the
Government Sustainable Development Plan covering the period 2009-2021 and aiming to reduce
poverty (including the elimination of extreme poverty), ensuring human development and deepening
economic development and accelerating development of lagging regions. To foster intra-
governmental coordination, the Government established a Steering Committee for the DPO, chaired
by the Minister of Finance, to manage and monitor reform measures. To provide timely support to the
Government to address vulnerabilities as the global economic crisis unfolded, a flexible approach was
adopted and allowed to modify or shift emphasis on some actions in subsequent operations as
exemplified in the revisions of the 3-year policy matrix.
45. Most of the legislative reforms envisaged at the beginning of the series were however
delayed. The legislative process is very uncertain, particularly as general elections approach, and a
DPO policy dialogue heavy on legislative initiatives can stall. This is exemplified by the recently
adopted Mining Code, for which the Bank team strove to find appropriate formats for engaging with
the Parliament on legal amendments such as the fiscal regime, and carrying out sufficient
consultations. Going forward, it would be advisable that DPO policy matrices be very selective on
legislative initiatives. Adequate technical assistance would also need to be ensured to support
legislative changes and the associated institutional modernization. Such approach is supported by
DPO good practice principles on conditionality developed by OPCS (Box 1).
14
V. THE PROPOSED ARMENIA DPO-3
46. The DPO series has two policy objectives: (a) addressing vulnerability by protecting the
poor and supporting greater human capital development; and (b) improving competitiveness by
alleviating private sector and governance constraints. Under the two broad objectives of the DPO,
which are based on the CPS pillars, there are six sub-objectives at the sectoral level. The DPO series
was designed to strike the appropriate balance between crisis management and structural reform, with
the first two years of the series heavily weighted toward crisis management. At the same time, the
government was fully committed to advancing the structural reform agenda in order to position
Armenia for post-crisis growth. The coverage of the DPO series also reflected the importance the
government placed on both a comprehensive reform agenda and on using development policy lending
to drive the changes needed.
Box 1: Good Practice Principles on Conditionality
Principle 1: Reinforce ownership
This operation is based both on the Government’s crisis response package and the Sustainable Development
Program (SDP) developed in 2008, although sectoral spending targets were adjusted to reflect the negative
impact of the 2009 crisis. The SDP was prepared with wide consultation, including parliamentary involvement.
The track record in the previous PRSC series (2004-07) is one of strong ownership and adherence to the PRSP.
The MTEF and the annual budget were derived from PRSP objectives and guidelines. The Authorities set
policy choices with inputs from public and civic institutions. Analytic work supported by the Bank feeds into
policy analysis and debate (notably economic reports, poverty assessments, tailored studies on governance,
infrastructure reforms and sector reforms, as well as comments on the annual MTEF and annual budgets).
Principle 2: Agree up front with the Government and other financial partners on a coordinated
accountability framework
The policy matrix is the central accountability tool in conjunction with the Letter of Development Policy. The
environment is results oriented and progress is tracked using agreed monitoring indicators.
Principle 3: Customize the accountability framework and modalities of Bank support to country
circumstances
Bilateral aid is provided for investment projects. Through dialogue with the Government and with donors, such
aid is designed to be complementary and tailored to country needs. TA from bilaterals and other IFIs is also
well coordinated. Policies reflect Government ownership in sensitive areas such as governance, as detailed in
presidential speeches and Government statements.
Principle 4: Choose only actions critical for achieving results as conditions for disbursement
All triggers in programmatic development policy lending take the form of agreed prior actions to reflect the
Government reform priorities and the Bank’s CPS objectives. DPO-1 and DPO-2 are limited to ten triggers
each, while DPO-3 has eight.
Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based
financial support
Reviews focus on actions and on their contribution to results within the accountability matrix and the draft
CPS-supported results framework. Performance reviews will be held quarterly, support will be provided within
the annual budget cycle and built into the budget financing estimate, and the level of Bank support are made
known well in advance.
15
47. The proposed operation is the last of the series, whose rationale and approach are still
valid. Indeed, this operation continues to strike the appropriate balance between crisis management
and structural reform, with more emphasis on structural measures to sustain the economic recovery,
although actions initiated earlier to protect the poor and vulnerable and promote human capital
development are reinforced with follow up measures either as prior actions or benchmarks. Since the
Board approval of the DPO-2 document there has not been substantive changes in the wording of
prior actions. The eight prior actions were just reworded to accommodate the language used in the
Financial and Loan Agreements. The only significant rewordings refer to the prior action #3 on the
implementation of co-payment policy in the health sector to specify two important programs of the
sector (emergency and gynecology) to apply the co-payment policy to and reflect the focus on the
dialogue on the need to offer ―expanded protection‖ to the poor instead of only the ―appropriate
waivers.‖ Wording on the mining prior action (#6) was slightly modified to indicate that the
authorities adopted only one single unified regulation for environmental, social and mining closure
practice rather than three separate ones.
48. The first DPO, initiated in 2009, focused on addressing vulnerability and strengthening
competitiveness. To protect the poor in the face of the global crisis the DPO-1 supported increased
funding for social safety net programs like family benefits, pensions and unemployment insurance;
restoration of funding for selected priority programs for the poor in health, education and agriculture;
and completion of a review to remove ineligible households from the Family Benefit Program and
improve its targeting. The reforms of education and health were continued. To enhance
competitiveness, actions were also taken to ease the process of business registration, provide liquidity
and enhance surveillance for banks and enact a Public Service Law.
49. DPO-2 focused on measures to improve conditions for post-crisis growth and recovery,
while at the same time seeking to maintain social safety net spending. To strengthen
competitiveness, DPO-2 actions sought to improve the legislative framework and institutional
capacity for reducing anti-competitive behavior, continued reforms for facilitating business
registration and operation, supporting designing a new Mining Code and submitting it to Parliament
for encouraging more mining investment, further modernized key aspects of telecommunications in
relation to the management of the spectrum, made progress towards lowering firms’ costs of tax and
customs compliance, supported comprehensive strategy development in the PFM field and setting the
framework for introducing a public investment appraisal system (PIAS) and continued reform
programs in education and health to ensure better outcomes.
50. DPO-3 continues supporting the reform program through eight prior actions. It builds
in particular on the recently approved pieces of legislation, including the Mining Code, the
amendments to the Competition Law, and the Law on Public Service which reflects also conflict of
interest legislation for high level government officials in the executive branch. Table 4 lists the prior
actions supported by DPO-3, and Annex 1 provides the Matrix of Policy Actions and Expected
Outcomes.
16
Table 4: DPO-3 Prior Action Implementation
I. Address vulnerability by protecting the poor and supporting greater human capital development
1 Maintained social safety nets, pensions, and priority social spending programs for the poor and vulnerable by
maintaining their shares in the 2011 budget.
2 Issued a Decree No. 978 - N on the ―Status of the State Accreditation of Tertiary Level Institutions and
Academic Programs in the Republic of Armenia‖ including tertiary education quality assurance policy,
standards, criteria, procedures and guidelines after consultation with stakeholders, institutions, and employers.
3 Implemented: (a) comprehensive policy for copayments by issuing a Decree 1762-N dated December 23,
2010; and (b) co-payment for emergency and gynecology programs, including expanded protection for the
poor by issuing Decrees Nos. 91-N dated January 27 2011, 101-A dated January 31, 2011, 232-A dated
February 18, 2011, 314-A dated February 25, 2011, and 613-A dated April 6, 2011.
II. Strengthen competitiveness for sustained post-crisis growth by providing a more favourable private
sector environment and strengthening governance
4 Made the One Stop Shop for business registry fully operational in the city of Yerevan and established online
linkages for enterprise registry in other municipalities.
5 National Assembly has adopted amendments to the Law on ―Organizing and Conducting Inspections in the
Republic of Armenia‖ dated June 23, 2011, to introduce risk-based approaches, reduce discretionary powers
and increase transparency.
6 Implemented measures to ensure efficiency, transparency, and accountability in private sector participation, in
accordance with the extractive industries transparency initiative principles and increased mining sector
attractiveness to private investors by issuing: (a) a Decree of the Government No. 1901-N dated December 29,
2011 on the ―Approval of Procedure for Calculation of Royalty on Earnings from Sales‖; and (b) an Order of
the Minister of Energy and Natural Resources No. 249-A dated December 30, 2011 on the ―Requirements for
the Mine Closure Plan and Nature and Environmental Impact Assessment as an Attachment to the Application
Requesting the Mineral Extraction Right‖.
7 Has achieved further progress in Business Process Reengineering (BPR) by: (a) approving a BPR, satisfactory
to the Bank, and the associated time bound action plan by the Government’s decree No 1017-N dated June 30,
2011 for its implementation; (b) putting in place fully operational system of risk based audits based on
Government’s Decree No. 1636 -N dated November 10, 2011; (c) implementing e-filing of tax returns
pursuant to the Laws on Amendments to the Law on Taxes (No 194-N dated October 27, 2009, No 197-N
dated December 8, 2010 and No 218-N dated June 23, 2011.
8 Has implemented a fully functioning ―green channel‖ to facilitate the operation of customs clearance by
default (backed by post release verifications, controls, audits, and investigations) and to strengthen the customs
preventive and enforcement capacity by amendments to the Customs Code dated January 15, 2011 (25-N).
A. PILLAR I: ADDRESS VULNERABILITY BY PROTECTING THE POOR
AND SUPPORTING HUMAN CAPITAL DEVELOPMENT
51. Poverty reduction and human capital development remain important goals for
Armenia. The poor and vulnerable rely on public social safety net programs for a large share of their
income and on other public programs for education and health services. The crisis made protection of
funding for the safety net a top priority. The reforms of education and health services have been
going on for some time, and the Government was keen to continue improving their effectiveness and
coverage even in face of the crisis. Preschool education and improved financing and quality of
17
tertiary education were priorities in the SDP. In health, the authorities envisaged improved
copayment policies and the introduction of performance-based contracting with health care provided
for selected non-communicable diseases.
52. Pillar 1 supports the following objectives in social protection, education and health:
Strengthening the effectiveness and efficiency of social safety nets and protecting sectoral
programs for the poor and vulnerable;
Improving the quality of education, by strengthening the quality and financing of higher
education ;
Providing more affordable services for the poor and other beneficiaries by: a) reforming
health financing and expanding service delivery; and b) by strengthening non-communicable
disease interventions.
The above objectives were supported by the following three prior actions of the DPO-3.
Prior Action 1: The government maintained social safety nets, pensions, and priority social
spending programs for the poor and vulnerable by maintaining their shares in the 2011 budget.
53. Notwithstanding significant reduction during the last decade, poverty reduction will
continue to be one of the most important goals for Armenia in the medium term. The poor and
vulnerable rely heavily on government transfer programs. Public transfers account for 60 percent of
the income of the extreme poor either in the form of pensions or Family Benefit (FB) program. The
2011 approved budget increased the share of the priority social programs to 29.6 percent of the total,
relative to the 29.1 percent in the 2010 execution. The allocation to priority social programs was also
increased as a share of GDP, from 7.8 to 8.2 percent, over the same period. Budget execution of
priority social spending program has proceeded satisfactorily during the first 9 months of 2011
reaching 8 percent of GDP. Furthermore, the government re-affirmed its commitment to maintaining
the share of priority social spending by allocating 29.2 percent of public resources to this in the
approved 2012 State Budget (See Annex 3). This budget also increased the size of the FB program
benefit by about 10 percent (reaching US$76 per month on average), and pensions (with the average
monthly pension increasing from about US$75 to about US$82). The suggested budget increase
combined with the government’s plans to further improve the administration of both FB and pension
programs will help to reduce the leakage and increase the targeting of both programs. The 2012 State
Budget envisages to expand the FB program to include 104,800 eligible families.
54. As this operation is the last of the series, it is essential to ensure that the agreed social
spending is sustained for the 2012 budget and over the medium-term. The 2012-14 MTEF
provides sufficient assurances that this will be the case, but the realization of this hinges crucially on
expected improvements in the overall revenue collection rates. In any case, progress in improving
targeting of the FB program to the poorest quintile – as well as the various steps taken on key health
and education programs – hints that effectiveness of a given level of spending can be expected to be
higher in the future than what has been in the past. For instance, although the coverage of the poor
decreased from 33.8 percent in 2008 to 24.5 percent in 2009 because of the exclusion of ineligible
families, it increased to 26.3 percent in 2010. Furthermore, the leakage of the FB program resources
to non-poor families decreased from 28.8 percent in 2007 to 23 percent in 2009, and further down to
22.3 percent in 2010.
Prior Action 2: The Government issued a Decree No. 978 - N on the “Status of the State
Accreditation of Tertiary Level Institutions and Academic Programs in the Republic of
Armenia” including tertiary education quality assurance policy, standards, criteria, procedures
and guidelines after consultation with stakeholders, institutions, and employers.
18
55. The Government has boosted investment in education over the past ten years, but access
to education and quality assurance remain a challenge. In general secondary education the
Government has aimed to reduce poverty by increasing access, improving quality, and boosting
public spending. Tertiary education, on the other hand, has seen a dramatic decline in public funding,
and the lack of needs-based financing schemes limits access among the poor. Governance and quality
assurance are still weak, thus failing to tackle what appears to be pervasive corruption. These
constraints call for fundamental financing reform and a strong quality assurance system geared toward
increasing equitable access. In response the Government adopted in 2011 an overall tertiary education
financing strategy. Development of a strong quality assurance (QA) system and a governance strategy
for tertiary education are critical for modernizing the sector. Strengthening the capacity of the
Armenian National Quality Assurance Agency (ANQA) to establish a national quality assurance
system is a critical measure.
56. The preparation of the quality assurance policies favored a broad discussion between
the Government and all the key stakeholders and was successfully completed by the adoption by
the Government tertiary education quality policy. The PPA mobilized for DPO-2 reform actions
provided support to the capacity building of ANQA. This resulted in ANQA developing a draft 3-year
action plan as well as draft higher education quality assurance standards, procedures and guidelines.
ANQA and the Ministry of Education have presented those documents at the international conference
held in September 2010. Besides, the package has shared with higher education institutions,
employers and other stakeholders for their consideration and feedback. In January 2011, ANQA
revised the papers taking into consideration the results of their piloting in 5 public and private
universities. Web-based comments were also received from universities and other key stakeholders
and the final draft has been submitted to the Government in late April 2011. The Government Decree
N 978 - N on the Statue on State Accreditation of Tertiary Level Institutions and Academic Programs
in the Republic of Armenia was adopted on July 30, 2011. ANQA will continue implementing the
pilot institutional and program accreditation and gradually expand it to all universities and programs.
57. The objective of expanding access to preschool education started under DPO-2, with a
prior action establishing a financing mechanism for the one-year school readiness program for
4.5-5.5 year old children (senior preschool age children). The government began establishing a
one-year School Readiness Program for 4.5-5.5 year olds mostly in general education school
premises, and some in kindergartens in 2008/09 with support under the EQRP1. To ensure the
sustainability of the program, the Decree 1427-N on ―Financing of the Expenses of the Organization
of Upper Pre-School Children's Education‖ dated November 4, 2010 was adopted, which
institutionalized state funding for the program offered in general education school premises. The
schools offering the program receive formula-based funding per 4.5-5.5 year-old child (which is the
same as the unit cost for primary school children). The Decree excluded to finance the program
offered in kindergartens because they belong to hamainks (local governments) as opposed to general
education schools which belong to marzes (the regional education authority that are deconcentrated
bodies of the MOES). This program will result in enrolling 72 percent of the 4.5-5.5 year olds by
2014, which is still far below the government’s target to enroll 90 percent of the age group by 2015.
The government will need to accelerate the expansion of the program to meet its goal.
58. These two prior actions largely cover the second objective of Pillar 1, which is to
improve the quality of education, by facilitating one-year preschool education for 4.5-5.5 year
olds and strengthening the quality and financing of higher education. The government also
adopted the Higher Education Financing Strategy in June 30, 2011. While the strategy addresses the
essential reform needs to improve equity, efficiency, quality and relevance of higher education,
primarily due to the severe budget constraints of the government, the strategy is short of large scale
19
reforms that require significant investment by the government. Most notably, the government has
decided to postpone the introduction of a student loan scheme and decided to drop the piloting of the
student loan scheme with support from the on-going Bank-funded Second Education Quality and
Relevance Project (EQRP2). Reallocating part of the saving of the project fund (approximately USD
1 million), the Ministry of Education and Science (MOES) has proposed to the government to
establish and implement the Competitive Innovation Fund (CIF), the design of which has been
developed under the EQRP2. A detailed action plan for the implementation of the strategy together
with Terms of References for technical assistance required for the implementation will be prepared by
the end of October, 2011. Such TAs will include the development of the methodologies for
determining the unit costs for scholarships, setting-up needs-based scholarships, introducing portable
(more demand-driven) scholarships, and the analysis of potential consolidation of research functions
between research institutions (academy) and universities. On the CIF, the MOES needs approval from
the government on the establishment and implementation of the CIF. It is expected that the CIF will
be piloted on a small scale first under EQRP2 and scaled up when more funds become available,
possibly with contributions from the private sector and other donors, and a future Bank operation.
Prior Action 3: The Government implemented: (a) comprehensive policy for copayments by
issuing a Decree 1762-N dated December 23, 2010; and (b) co-payment for emergency and
gynecology programs, including expanded protection for the poor by issuing Decrees Nos. 91-N
dated January 27 2011, 101-A dated January 31, 2011, 232-A dated February 18, 2011, 314-A
dated February 25, 2011, and 613-A dated April 6, 2011.
59. The co-payment scheme was launched nationwide for two state order programs:
emergency and gynecology. An amendment to the 2004 co-payment decree was passed on
December 23, 2010 and on February 1st, 2011 the co-payment scheme was launched nationwide for
emergency and gynecology. Co-payment introduction was accompanied by new stipulations on how
revenues should be distributed to salaries within hospitals. For the population, fee schedules have
been posted in all hospitals, there has also been a public information campaign and the establishment
of a hotline. The Ministry has also established a monitoring system to get daily reports from
hospitals.
60. Basic protection to the poor was introduced and there are plans to increase it if budget
conditions allows. A fee exemption has been included in the new policy, applied to those poor who
have a score above 36 (as per Government decree No-318-N of 04.03.2004). This covers about the
poorest 100 thousand individuals, or about one-fourth of those identified as poor for the family
benefit (e.g., those with a score above 30 as under the FB program, or about 425 thousand
individuals). Additional coverage was offered by empowering hospital directors to waive the fee for
poorest patients requesting such waiver (applied to 9,502 cases last year with an implied additional
coverage, based on the probability of a poor using the service, of about 100,000 to 150,000
households).
61. The Ministry of Health fully costed the possibility of formally extending coverage to all
the poor. However, after discussions with the Ministry of Finance such step proved to be
unaffordable at this point in time. In particular, the Ministry of Health considered offering complete
coverage of the poor for copayments via a combination of: (1) changing the eligibility threshold to a
score of 30 (total cost: approximately AMD 4.4 billion per year, or US$12million, basically needed
for the government to extend free of charge healthcare service to families under FB program); and (2)
raising hospital’s reimbursement prices under this program (total cost: approximately AMD 2.9
billion per year, or US$8 million, to make up for foregone co-payment revenue and thereby reduce
incentives for ongoing informal payments). The total cost of offering full coverage to the poor was
therefore estimated to be an additional annual outlay of AMD 7.3 billion, or US$20 million.
20
62. Discussions on the possibility of offering full protection to the poor against copayments
will continue this year. In particular, fiscal savings might arise from the various initiatives of the
Ministry of Labor and Social Protection to tighten other related social spending to increase their
efficiency (e.g., generous exemptions for health care copayments are offered to various categories of
disable and, thus, revising disable benefits might results in savings). Alternatively, the revenue effect
from recently introduced measures (e.g., mining specific taxation, excises) might be greater than
anticipated. These discussions will formally be part of the preparation of the 2013-15 MTEF, but
technical discussions among staff from the Finance and Health Ministries are nonetheless
ongoing.Following up on the issue of offering full social protection to the poor is important since,
notwithstanding the efficiency gains achieved by increasing formal copayments coming from the
implementation of this prior action, the parallel objective of providing more affordable services for
the poor should also be reached. International experience suggests that informal copayments tend to
be progressive (as doctors would tend to bargain less with poorest households) and, thus, an earlier
decision of this should be welcome.
B. PILLAR II: STRENGTHEN COMPETITIVENESS FOR POST-CRISIS GROWTH
63. Though recovery is underway, Armenia's challenges are to foster entry and competition,
including in tradable sectors, and to diversify the sources of growth. Towards this end, Pillar II
supports the following objectives:
Increasing economic competition through improvements in the financial sector, business
environment, the competition agency and corporate governance;
Addressing critical infrastructure needs and improving the regulatory environment in ICT;
Improving competitiveness through sustainable use of energy and natural resources;
Adopting best international management standards to improve efficiency and effectiveness in
tax, customs, and public expenditure;
Preventing conflict of interest in public service and improve wage policy.
64. Armenia has already made progress on business registration and related procedures.
For DPO-1 the minimum information required for registration was specified formally; the
requirement for approval of a charter at registration was removed (a standard charter document has
been developed, but firms are not required to use it); the minimum capital requirement was removed
(capital must be greater than zero); and permission from the police is no longer required to obtain a
seal. The Government also adopted a decree to establish and implement a One Stop Shop for business
registration. A related priority reform area concerns the inspections regime, which imposes
inordinately high financial and transaction costs on firms. Inspections are not focused on the key risks
(and are often not transparent), while inspectors' discretion is excessive.
65. Fostering domestic competition is also crucial. Amendments to the Competition Law and
related legislation were adopted by the National Assembly in late 2010. The amendments specify
instances in which the SCPEC should carry out inspections and clarify its ability to act in case of
anticompetitive behavior. They also introduce international best practices for anticompetitive
agreements, abuse of dominance, collusion, fines, leniency and state aid. The SCPEC has prepared a
Program for 2010-12 which outlines the capacity building initiatives, and identifies changes in
regulations and procedures that will be needed once the amendments are approved. The Program also
includes strategies for improved management of the human, financial and technical resources of the
SCPEC. Moreover, the Program includes efforts to improve public awareness of competition issues
21
and policy. The program will be underpinned by a twinning arrangement supported by the German
Government.
66. These actions are helping to increase economic competition through improvements in
the financial sector, business environment, the competition agency and corporate governance. The performance indicators being tracked to assess progress are: (1) strengthened resiliency of the
banking sector as measured by an increase in the Capital Assets Ratio (CAR); (2) increased number
of enterprises using the One-Stop-Shop for business registry; (3) reduced time and cost to register a
business; (4) improved level of disclosure and investors' protection indexes.
Prior Action 4: The Government made the One Stop Shop for business registry fully
operational in the city of Yerevan and established online linkages for enterprise registry in
other municipalities.
67. The business registry One Stop Shop was officially launched on April 2011. As a result
of IFC partnership with the Government of Armenia in the framework of the project Regulatory
Simplification-Doing Business Reform Project, the legislation that streamlines procedures for
company registration was amended in fall 2010. This allowed establishment of the business registry
One Stop Shop with the goal to ease business entry and reduce administrative burden on businesses.
The newly opened OSS aims at streamlining start-up procedures for new businesses and reducing the
business registration process by approximately 10 days, thus enabling Armenian businesses to save
significant resources/time. Moreover, business online registration system was also launched for
individual entrepreneurs and LTD’s through a project funded by ADB and EU, allowing the linkage
of enterprise registry in other municipalities to Yerevan central database. All together these reforms
resulted in Armenia’s advancing in the Starting a Business Indicator of Doing Business by 10
positions last year (from 20th to 10
th place).
Prior Action 5: The National Assembly has adopted amendments to the Law on “Organizing
and Conducting Inspections in the Republic of Armenia” dated June 23, 2011, to introduce
risk-based approaches, reduce discretionary powers and increase transparency.
68. The Ministry of Economy developed a set of amendments of the existing Law, focusing
on the concept of risk-based approach. The reporting system has been revised to introduce more
transparency and the amendments identify three types of activities (low, medium and high risk), with
only high-risk activities to be submitted to annual audits. IFC technical assistance helped in
developing the specific amendments. After review and approval by the Cabinet, the amendments to
the Law on Organizing and Conducting Inspections in the Republic of Armenia (HO-243-N) were
approved by the Parliament on June 23, 2011and were ratified by the President on July 18, 2011. As a
result, beginning on January 1st, 2012, all inspecting agencies must select the subjects of their
inspections based on risk based criteria.
Prior Action 6: The Government implemented measures to ensure efficiency, transparency, and
accountability in private sector participation, in accordance with the extractive industries
transparency initiative principles and increased mining sector attractiveness to private
investors by issuing: (a) a Decree of the Government No. 1901-N dated December 29, 2011 on
the “Approval of Procedure for Calculation of Royalty on Earnings from Sales”; and (b) an
Order of the Minister of Energy and Natural Resources No. 249-A_dated December 30, 2011 on
the “Requirements for the Mine Closure Plan and Nature and Environmental Impact
Assessment as an Attachment to the Application Requesting the Mineral Extraction Right”.
22
69. The old mining sector law and regulations were conflicting and overlapping, the fiscal
regime was light and based on soviet-type of basis and criteria, and the regulatory and
institutional set-up lacked transparency and public accountability. This decreased the
attractiveness of the industry for investors, and resulted in foregone revenues. Moreover, the old
mining code regulations governing licensing of exploration and mineral exploitation activities were
sub-optimal. More importantly, the regulations governing environmental issues were missing to
ensure that appropriate environmental risk assessment, management, and impact mitigation measures
are implemented. To tackle these problems and help revitalize the mining sector, the Government
developed a new mining code with support of DPO-2, which provides the legal foundation for an
appropriate fiscal, environmental, social, and licensing regime. The National Assembly adopted the
New Mining code and the amendments to the Natural Resource User Fee (where a proper royalty was
introduced for metallic mining activities) on December 5, 2011, and the President ratified them on
December 17, 2011 (Box 2). This action enabled the government to complete the secondary
legislation required for prior action by DPO-3. In particular, the following documents were issued at
the end of December 2011:
Adoption by the Cabinet the decree No. 1901-N Dated December 29, 2011 on
"Procedure for Calculation of Royalty on Earnings from Sales". The royalty regime for
the metallic minerals incorporated in the December amendment to the law "On
Environmental and Natural Resources Use Fees" (ENRUF) consists of two parts: (1) a flat
rate of 4 percent applied to earnings before interest and taxes (EBIT); and (2) an increased
(but capped) rate that applies to the same base when profitability of a mine
increases/decreases with global conditions. The recently enacted Decree on "Procedure for
Calculation of Royalty on Earnings from Sales" provides greater context on the definition of
the base and the tax administration procedures to be followed (including greater clarity on the
implicit transfer-pricing rule embedded in the new royalty rule). The Government carried out
consultations with key stakeholders for their feedbacks, and remains open to further
communication on the questions that might arise during implementation of the new regime.
The Bank is supporting the Ministry of Finance and the SRC on the communication and
technical efforts related to the implementation of the new regime, by funding via an IDF an
international expert team in early 2012.
Issuance by the Ministry of Energy and Natural Resources the Order No. 249-Adated
December 30, 2011 on "the Requirements for the Mine Closure Plan and Nature and
Environmental Impact Assessment as an Attachment to the Application Requesting the
Mineral Extraction Right". The Ministry of Energy (in close collaboration with the
Ministry of Environment) enacted an Order on mine closure, and the environmental and
social impact assessment that mines are require to prepare as part of the application for a
permit for either exploration or exploitation. The Order mandates the companies to comply
with the environmental and social provisions of the new Mining Code and other relevant
legislations. Furthermore, it builds on the principles of good international practice on mining
environmental and social related aspects..
70. In addition, the authorities are committed to support the implementation of the new
Mining Code and ensure appropriate capacity building for implementation in various
ministries and agencies. The authorities are aware that satisfactory implementation of the Mining
Code will require securing sufficient human and financial resources to ensure that: (1) remaining
secondary legislations (about 30 identified) are issued timely and following the highest international
standards, (2) key processes are made electronic (e.g., permit requests) and key documentations are
compiled both electronically and manually, and (3) that resources are devoted to the training and
familiarization with the important set of new policies and procedures that the Mining Code has
23
introduced, both for Government’s staff responsible for the implementation of the Mining Code in the
Ministries of Energy, Environment, and Labor and Social Protection, and for key stakeholders
including parliament staff, CSOs, and the business communities. The Bank will continue to assist the
Government in this process through various vehicles.
71. The prior action #6 set into motion an institutional modernization process, that is wholly
owned by the Government. In particular, the Bank has been invited to provide support to this
process by providing: feedbacks on the amendments to the environmental impact assessment Law,
and assistance for the preparation of the secondary legislations on licensing and other related mining
aspects.
72. The authorities have also expressed interest in joining the Extractive Industry
Transparency Initiative (EITI), but given the relatively small scale of its mining operation and
the already existing transparency of its fiscal operations it is considering the costs and benefits.
The Bank team has shared with the authorities the principles and processes associated with EITI,
which aims squarely at strengthening revenue transparency and management. Given that the
Box 2: The New Mining Code in Brief
The draft Mining Code is applicable to all minerals except oil and gas. It reflects good international practice and is a
significant improvement over existing practices. The new Code is expected to encourage more mining investment for three
reasons. First, the licensing process has been simplified, thereby reducing transaction costs for investors. Second, the new
code clearly identifies the rights and responsibilities of mining investors/operators and makes the transition from exploration
to production in case of a discovery more transparent, stable and predictable. Third, mineral taxation has been made
simpler, more transparent and competitive. Also other changes in the Code ensure adequate environmental and social
safeguards.
The main changes are:
Coverage - All minerals except oil and gas (to be regulated by separate law), radioactive minerals and underground drinking
water (exploration only).
Licensing Systems - The simplified regime provides for technical and financial qualifications of the potential investors,
clearly specifies the rights and responsibilities of mining operators, and delineates a clear role for the Government as
regulator and not operator.
Environmental and social safeguards, including mining closure - Clear requirements for environmental stewardship
(environmental impact assessment and management and monitoring plan), pre-development social planning (social impact
assessment and mitigation plan), mine closure process (initial mine closure plan, covering physical, environmental and
social closure aspects, financial surety for mine closure, and post closure monitoring plan).
Information disclosure - The geo-information belongs to the state and remains confidential during the period of permit
validity, but after that period the state has the right to use it for sector promotion and to share it with other interested parties
without any financial obligations to the initial permit holder.
The revised fiscal regime for mining introduced a clear and competitive royalty approach for metallic minerals and
strengthens the natural resource user fee approach for non-metallic minerals. The changes consolidate different aspects of
mining-specific taxation in a single law through amendment and supplements to the law "On Environmental and Natural
Resources User Fees". Key features include: (1) Concept of natural user fee for non-metallic minerals and royalty for
metallic minerals - to compensate for the depletion of mineral resources; (2) Base for royalty calculation - applied to the
sales value of ore or a product from it, specified as a turnover (excluding the VAT) as for profit and sales taxes; (3)
Procedure for setting royalty rates - profitability-triggered mechanism; and (4) Implementing agency - the State Revenue
Committee. The proposed royalty mechanism simplifies administration by using concepts such as turnover and
profitability, which companies report for regular taxation purposes. Consequently, the State Revenue Committee can verify
royalty easier than before, but SRC will require significant capacity building to properly implement the regime.
The draft Mining Code was discussed with the representatives of CSOs and academia during consultations organized by the
Ministries of Energy and Natural Resources and Environment.
24
payments by the large mining enterprises are publicly available, the authorities have shown strong
interest and are discussing appropriate next steps.
Prior Action 7: The State Revenue Committee has achieved further progress in Business
Process Reengineering (BPR) by: (a) approving a BPR, satisfactory to the Bank, and the
associated time bound action plan by the government’s decree No 1017-N dated June 30, 2011
for its implementation; (b) putting in place fully operational system of risk based audits based
on Government’s Decree No. 1636 -N dated November 10, 2011; (c) implementing e-filing of tax
returns pursuant to the Law on Amendments to the Law on Taxes (No 194-N dated October 27,
2009, No 197-N dated December 8, 2010 and No 218-N dated June 23, 2011).
73. Given Armenia’s relatively low revenue to GDP ratio, and the envisaged fiscal
adjustment, revenue administration reform is a key Government priority. In the past, tax
administration reform was slow compared to neighboring and middle-income countries. As a result,
tax evasion is high and voluntary compliance low because of the high compliance costs due to
weaknesses in audit, processing third party information, and detecting tax fraud. Improvement in
revenue performance needs to be accomplished by measures to encourage voluntary compliance and
detect tax evasion, but these need to start with a proper review of the way processes are being
conducted.
74. Progress towards the specific actions is as follows:
The report on Business Process Re-engineering covering the tax administration part of
SRC has been finalized and delivered to the government in December 2010. As a follow
up measure, KPMG facilitated a study tour for a small group of tax officials to the Inland
Revenue Office of the Great Britain. The SRC translated the BPR report into a time-
bound Action Plan which was approved by the government in June 30, 2011.
Furthermore, most of the BPR findings will be addressed by the upcoming Tax
Administration Modernization (TAM) investment loan currently under preparation. The
tax project team reviewed the draft medium-term Action Plan and made a few comments
to make it more specific and aligned with the Tax Administration Modernization
investment loan.
Starting from Jan. 1, 2012 all tax inspections is done based on risk criteria. Amendments
to the Law on Inspections provided the umbrella for the Government’s Decision on Tax
Risk Based Audit that was adopted on Nov. 10, 2011. The State Revenue Committed has
already published its program for 2012 inspections on its website
(http://www.taxservice.am/uploads/pdf/2012_Stugman_Cragir-1.pdf) which
envisages inspecting less than 2 percent of all taxpayers. This was possible in part
because of USAID TAIP project that supported developing manuals and helped with few
case audits. In addition, the government allocated funding for installing an automated
system of risk-based audits.
The practice of e-filing has been introduced since August of 2010 after approval of the
Law on Amendments to the Law on Taxes. During the first phase e-filing became
mandatory for banks, credit organizations and state commercial organizations. The
second phase of this reform started on January 1, 2011 after the subsequent amendments
to the Law on Taxes which made the e-filing practice mandatory for all businesses whose
annual turnover exceeds 100 million AMD. Currently about 7,000 taxpayers (20 percent
of active taxpayers) are filing their tax returns electronically (Table 5). Starting from
January 1, 2012 the government started the third phase of e-filing reform, which made
mandatory the practice for all VAT-payers. To ensure secure functioning of the e-filing
25
processes the IT-enabling infrastructure of SRC needs to be substantially improved. It is
envisaged that the Tax Administration Modernization project will allocate funding to
upgrade the technical infrastructure at SRC to be prepared to facilitate the increasing
number of taxpayers filing electronically. The Bank will consider the full introduction of
e-filing fulfilled if e-filing is available to any operator willing to use it.
Table 5: Progress on E-Filing
Inception February 2011 October 2011 Percent of total
taxpayers
Number of taxpayers filing electronically August 1, 2010 4,900 7,000 20%
E- accounts maintained by VAT-payers January 1, 2011 344,625 accounts
maintained by
1,560 taxpayers
10%
Source: SRC.
Prior Action 8: The State Revenue Committee has implemented a fully functioning “green
channel” to facilitate the operation of customs clearance by default (backed by post release
verifications, controls, audits, and investigations) and to strengthen the customs preventive and
enforcement capacity by amendments to the Customs Code dated January 15, 2011 (25-N).
75. Armenia has recently improved its ranking in the indicators on “Trading across
Borders” in the Doing Business Report. Armenia ranked 143 out of 183 countries in the ―Trading
across Borders‖ indicator in 2008, but improved to 102 in 2009 and 82 this year. The improved
rankings resulted from introduction of self-declaration desks at customs houses and warehouses,
investments in new equipment to improve border operations and introduction of a risk management
system. The country, however, still ranks low in the Logistic Performance Index (#111 of 155
countries) due to inefficient clearance process (speed, simplicity and predictability of formalities) in
border control agencies including customs. Further modernization of customs administration and
other border management organizations could thus help facilitate cross-border trade.
76. This prior action introduces a Green Channel by default for easier customs processing. Amendments to the Customs Code to include a Green Channel by default were approved by the
Government on August 26, 2010 and submitted to the National Assembly. Furthermore, the
international firm contracted (Web-Fontaine) to upgrade the customs TWM software has completed
this work. In particular, the TWM software has now fully introduced e-filing, e-payment and e-
signature modules in the system. The system has also been tested for smooth functionality. The other
components of green channel (verifications, controls, audits, and investigations) are also being
introduced. In October, the SRC signed a Memorandum of Understanding with two commercial banks
to join the new system and facilitate e-payment practice. Consultations are underway with 4 more
commercial banks to expand the coverage of the banking system. Although the system is in place and
could be utilized, lack of dissemination among the trading community has delay wide-spread usage of
e-based customs clearance practice. The SRC is fully committed to widely advertize the availability
of the fully authorized e-declaration system and initiate benchmarking and baseline performance
surveys. Furthermore, the on-going World Bank supported e-Society project has a component that
will upgrade Armenia e-signature to a full international standard, which full further enhance
functionality over the medium term.
26
VI. OPERATION IMPLEMENTATION
A. POVERTY AND SOCIAL IMPACTS
77. The policies and the programs supported by the DPO series are expected to help the
poor and vulnerable. In the short term, the DPO series aims to support the Government to withstand
the social impact of the global economic crisis, including possible adverse impacts of the second
wave. Over the medium term, the DPO series will assist the authorities in removing key binding
constraints to more rapid and diversified growth in the post-crisis period, and promote poverty
reduction.
78. The DPO-3 supports maintaining the spending on social safety nets, pensions and
priority social spending programs for the poor and vulnerable in an otherwise fiscally
constrained environment. Overall coverage of the poorest 20 percent of the population by the social
protection system is high in Armenia. About 96 percent of all individuals in the poorest quintile
receive some form of transfer from the government. Although the poverty rate continued to increase
in 2010, reaching 35.8 percent, it would have been much higher in the absence of government
transfers, at 54.2 percent. Pensions and the family benefit program (FB) are the main social protection
transfers, in terms of coverage of the poor (the percent of the poor population who receive the
transfers). The pension program is a contributory program, where benefits go to families who have
contributed to the pension system in the past while the FB is a non-contributory social assistance
program.
79. The family benefits program targets the most vulnerable families. The DPO-3 supports
the maintenance of spending on the family benefits program, which is Armenia’s flagship social
assistance program. The FB program accords priority to poor and vulnerable social groups, such as
the elderly, persons with disabilities, and families with children. These groups experience a higher
poverty rate compared to the rest of the population. For instance, households with 4 or more children
experience a poverty rate of 71 percent and the family benefits program covered 81 percent of such
families in 2010. Similarly, households without a working member experience a poverty rate of 47
percent, and the family benefit program covered 79 percent of such families.
80. The government issued a decree No 1859-N dated December 29, 2011 modifying the
eligibility criterion so as to allow more poor families to qualify for the FB program. The
government is committed to improving the efficiency of the family benefits program and has
instituted measures to detect errors and fraud by aligning the family benefit system database with a
number of other relevant sources of information. Families who are not found in compliance with the
other databases are removed. This has helped increase the targeting accuracy of the program to the
poor – with 76 percent of the benefit amount going to the poor in 2010 compared to 66 percent in
2008. At the same time, these targeting efforts and a unification of benefits for recipients of disability
pension and FB also led to a decline in coverage. The government is taking some steps to increase the
coverage of the FB program by modifying the eligibility criterion. The scoring formula for computing
the poverty score for a family is adjusted to allow for an increase in the level of the minimum wage.
This decree should make it possible for families with slightly higher monetary incomes to become
eligible for the FB program.
81. The introduction of co-payments is a positive step with respect to creating a more
transparent and predictable environment for health service payments by the population. However, it may also have a disproportionate effect on the poor. In particular, past survey evidence
for other health services has suggested that informal payments can be progressive, as medical staff
27
charged lower informal payments to poorer segments of the population. For instance, prior to the
introduction of the maternity voucher for deliveries in July 2008, informal payments for child-birth
were estimated by survey data to be about AMD 25,000 for the lowest quintile, and approximately
AMD 40,000, or 60 percent higher, for the richest quintile. The Government is considering all
possible options to address this issue, including by increasing the number of beneficiaries by
reviewing the scores.
82. At present the extreme poor are exempted from co-payments. Those with a score above
36 based on the proxy means test used for the Family Benefit Program are currently exempted from
co-payments, covering about 100,000 individuals. There is also a mechanism for discretionary
exemption from co-payments by hospitals. Extensive discussions have been held through the DPO
process about the prospect of expanding eligibility for the co-payment exemption among the poor by
lowering the eligibility threshold from 36 to 30, thereby equalizing it with the Family Benefit
Program. The authorities are committed to exploring options for financing this expansion during the
MTEF deliberations.
83. The introduction of funding for 4.5 to 5.5 year olds is targeted to start in the poorest
regions of the country. Although the institutionalization of this measure is a benchmark in DPO-3, it
was a major prior action for DPO-2. This measure seeks to prevent inter-generational transfer of
poverty in addition to increasing education access for all. As a result, the Law on Budget for 2011
secured 97 million AMD for this program. The increase of allocations for pre-school education is
envisaged in the latest MTEF with 246.9, 423.2, and 546.5 million AMD planned for that purpose for
2012-2014.
84. Finally, the DPO supports measures to ensure medium-term growth. This will have an
indirect effect on poverty reduction over time. Some of the measures supported by the program—
such as on the mining code and business environment reforms—address binding constraints to
Armenia’s growth prospects and hold promise of new job creation. Job creation needs to play a major
role, and hence the growth story with its corollaries such as investment (public, private and foreign) to
increase domestic productivity and export to tap into a large demand.
B. FIDUCIARY ASPECTS
85. The Bank’s assessment is that the overall foreign exchange and public financial
management risks are acceptable for this operation. The Bank’s knowledge of the country’s PFM
system was summarized in the DPO-1 and DPO2 program documents. The Government’s PEFA
assessment was published in 2008. DPO-2 supported adoption of an integrated PFM reform strategy
which brings all the PFM reforms under a single umbrella in a sequenced manner. The Law on
Internal Audit has been adopted with roll out of a modern internal audit system currently taking place.
These reforms are supported by the Bank. The government with the Bank’s assistance develops
Armenian Public Sector Accounting Standards (APSAS) based on International Public Sector
Accounting Standards (IPSAS). Moreover, a comprehensive fiduciary control framework over NCOs
have been also designed which would help to manage the fiscal risk posed by NCOs as well as
improve the quality of service delivery by these state organizations. The Treasury has a robust system
in place. As a result all Bank-financed projects designated/special accounts were transferred into the
State Treasury in December 2010. The Chamber of Control (Armenian Supreme Audit Institution)
has been made independent from Parliament and a new law enhancing the COC mandate was enacted
as a result of amendments in Constitution in 2005. The Bank currently plans to assist the COC to
strengthen its professional capacity to conduct financial and compliance audits (as a priority). The
IMF’s 2005 central bank safeguard assessment found that the procedures used by the CBA for sales
28
of its foreign exchange are transparent and its safeguards are adequate. The CBA adopted the IAS
(now IFRS) in 1996 and has been audited by internationally recognized auditing firms. Independent
auditors have issued unmodified opinions on recent CBA financial statements. As a result the
fiduciary risk for the operation is assessed as moderate.
C. DISBURSEMENT AND AUDITING ARRANGEMENTS
86. The Borrower/Recipient of the Loan/Credit will be the Republic of Armenia. Upon
effectiveness of the Loan/Financing Agreement, the proposed single-tranche loan/credit (loan amount
of US$30 million and credit amount of US$50 million equivalent) will be made available to the
Republic of Armenia, represented by the Ministry of Finance (MOF). Provision of a legal opinion by
the Republic of Armenia that it has followed its laws and procedures for the ratification of the
loan/credit agreement will be the effectiveness condition. The proposed operation amount will be on
standard IDA blend terms for Armenia, and an IBRD Flexible Loan denominated in US dollars.
87. The Bank/Association will disburse the single tranche as follows: the IDA and the IBRD
tranche will be disbursed in US dollars and the amounts deposited in a dedicated account of the
Treasury at the Central Bank of Armenia. The disbursed proceeds of this development policy
operation will form part of the country’s official foreign reserves. The Borrower/Recipient shall
ensure that upon deposit of the proceeds into the said account, an equivalent amount will be credited
in the Borrower/Recipient’s budget management system, in a manner acceptable to the Association,
that is, the MOF’s budget account will be credited with the dram equivalent at the official exchange
rate (as reflected in the Law on State Budget for 2012) within 30 days of disbursement. The foreign
exchange proceeds of the proposed DPO-3 will be sold by the CBA or held in reserves, in accordance
with the objectives of monetary policy. The MOF will be responsible for the operation’s
administration and for preparing the withdrawal application, maintaining the deposit account at the
CBA, as required. The MOF, with the assistance of the CBA, will maintain records of all DPO-
related transactions in accordance with sound accounting practices.
88. Reporting, auditing and closing date: The audits of deposit accounts under the previous
Poverty Reduction Support Credits (PRSCs) were unqualified and revealed no issues of concern.
Considering the Association’s knowledge of the public finance management systems and the ongoing
improvements of these systems, the positive assessment of the CBA made by the IMF, previous
unqualified audits of deposit account under PRSCs with no audit required under DPO-1 and DPO-2,
and clean opinions issued by the CBA’s auditor on the recent years financial statements, no additional
fiduciary arrangements (including audit) will be required for the deposit account.
89. Confirmation and eligible expenditure: The Borrower/Recipient will provide to the
Bank/Association a confirmation that the amounts of the DPO-3 have been credited to the account
that is available to finance budget expenditures (the format of the confirmation letter should be
acceptable to the Association). If, after the proceeds are deposited in the CBA account, the proceeds
of the loan/credit are used for ineligible purposes as defined in the Loan/Financing Agreement, the
Bank/Association will require the Borrower/Recipient to promptly, upon notice from the
Bank/Association, refund an amount equal to the amount of said payment to the Bank/Association.
Amounts refunded to the Bank/Association upon such request shall be cancelled. The administration
of the credit will be the responsibility of the MOF.
29
D. ENVIRONMENTAL ASPECTS
90. The DPO series is not expected to have any negative effects on the environment and
natural resources. The DPO design also builds on the analytical framework of the Armenia
Country Environment Analysis (CEA, FY10) and aims to addresses some of the specific
shortcomings in environmental policy specific to the mining sector. .Furthermore, the DPO-3 aims to
strengthen the national regulatory capacity for implementation of the mining regulations specific to
social and environmental impact. Other policy actions supported by the DPO are not likely to result
in any significant environmental effects. These include, inter alia, education, health, and tax and
customs administration measures.
91. The new Mining Code promotes good international practice and environmental and
social stewardship. Furthermore, the new Mining Code includes requirements for conducting
environmental impact assessment, including the preparation of an environmental management and
monitoring plan for both exploration and exploitation stages. The Code also includes requirements on
pre-development social planning (social impact assessment and mitigation plan), and mine closure
process (initial mine closure plan, covering physical, environmental and social closure aspects,
financial surety for mine closure, and post closure monitoring plan).
92. The Authorities prepared and submitted to the National Assembly draft amendments to
the Environmental Impact Assessment (EIA) Law. To improve the horizontal environmental
framework the Ministry of Environment and Nature Protection drafted amendments to the EIA Law,
which were considered and harmonized within the new procedures for mines (in the new Mining
Code). These amendments are generally rational and progressive in terms of (i) introducing
environmental classification of activities into A, B, and C categories out of which A and B are
subject to differing levels of environmental impact assessment procedure as opposed to having only
two categories of activities which are either subject to the assessment or not at all; (ii) introducing
environmental assessment of spatial planning, sectoral, regional, and strategic development
documents, while previously only investment projects were subject to the environmental assessment;
(iii) bringing assessment of trans-boundary environmental impacts of the proposed activities into
focus, which had not been the case so far; and (iv) imposing better control over the time span of the
environmental assessment process, which is currently considered by some clients to be stretched out
for an uncertain and excessive length.
E. IMPLEMENTATION, MONITORING, AND EVALUATION
93. The Government tasked the Ministry of Finance as the main counterpart for the DPO
series. The Government has established a multi-ministerial steering committee to take responsibility
for DPO implementation and monitoring, under the chairmanship of the Minister of Finance. At the
working level, the Deputy Minister of Finance (Macroeconomics) is the counterpart responsible for
policy coordination and overall program implementation, together with assigned contact officials in
each respective agency. As the overall coordinator, the MOF tracks results as summarized in Annex
4. These arrangements are expected to be maintained until the Implementation Completion Report is
prepared. They might also be extended for the possible future DPO series.
94. There has been good progress towards achieving the outcome indicators. While the
details are provided in the Annex 4, the outcome indicator for electronic filing of tax returns, for
instance, have been already exceeded since SRC reported 7,000 e-filers on October 2011 against the
3,000 targeted for 2011/12. Social protection and pensions as a share of total spending is also likely to
exceed the 24.8 percent target since the nine month execution is currently at 29 percent of nine month
30
total spending. On the other hand, not all the expected outcomes indicators might turn out to be
reached, but this is something that cannot be judged at this time (for instance, the utilization of health
service by the poor remains uncertain until the government decides how much to augment the funding
for offering protection against the cost of full copayments – a discussion that would only take place
during the course of this year). A more rigorous evaluation of the outcomes achieved by the DPO
series will be carried out as part of the preparation of the Implementation Completion Report.
F. RISKS AND RISK MITIGATION
95. Global macro risks could lead to a sharp slowdown in growth, which would make
continued structural reforms and macroeconomic management more difficult. At the aggregate
level, the envisaged fiscal and external adjustments might not be feasible, which in turn would
increase further the debt-to-GDP and debt service ratios and require larger fiscal adjustment than
planned or additional concessional financing. And given that lower growth implies lower revenue
collections, a number of DPO measures—particularly those related to the maintenance of public
spending in priority social sectors, or the introduction of a comprehensive policy on copayments—
could become unsustainable. However, for 2012 the Government set the important target of
increasing tax revenue by around 100 billion AMD.
96. The Government’s implementation capacity is stretched by demands of a difficult
growth and fiscal situation as well as sustaining challenging reforms undertaking in the DPO
program. So far the Government has implemented the DPO program, showing strong commitment
and legislative will. However, the full implementation of many of the legislation changes require
concerted efforts in implementation and enforcement of the legal and regulatory changes. This would
be particularly challenging in the context of the coming 2012-13 elections. This is particularly true in
cases where the impact of a reform measure depends on appropriate improvements in capacity, for
example, to get the full benefit of the Mining Code and its regulations, technical capacity of certain
agencies needs to be expanded and a risk exists that this may not happen as quickly as planned.
97. Macro risks are likely to be mitigated through the government’s commitment to a
prudent macroeconomic management as evidenced by Armenia’s track record over the last
several years. It will also be supported by adherence to the IMF financial programs.
98. Several measures have been taken to enhance implementation capacity. The
Government has set up a steering committee for the program chaired by the Minister of Finance
which is able to allocate resources to agencies in need. At the same time, the Bank (including IFC
advisory services) has complemented these efforts by selectively providing technical assistance in key
areas, such as social protection, public financial management (including revenue administration), and
private sector development. More fundamentally, several Bank investment projects or donor
supported programs are helping with thorough institutional capacity building for key policy areas
covered by the DPO. For instance, the Government is in the process of mobilizing IDF funding for the
strengthening of the Revenue Committee (which covers both tax and customs administration), and is
ready to use its contingency fund to support line ministries and agencies’ institutional strengthening
(e.g., for implementing mining and environment related legislation).
99. However, despite the above risk-mitigating efforts, residual risks remain, and if they
materialize Armenia may experience lower growth with particularly adverse effects on the
poor. Given the vulnerability of Armenia to external shocks and materialization of the impact of the
Eurozone crisis, risk of lower growth cannot be fully mitigated. In the event of these downside risks
materializing, Armenia could require more concessional assistance to manage the situation.
31
Annex 1: Matrix of Policy Actions and Expected Outcomes
Sectors and
Objectives
Actions 2009
(DPO-1)
Actions 2010
(DPO-2)
Prior Actions 2011
(DPO-3)
Outcomes and Performance
Indicators
I. Address Vulnerability by Protecting the Poor and Supporting Greater Human Capital Development
A. Strengthen the
effectiveness and
efficiency of social
safety nets and protect
sectoral programs for
the poor and
vulnerable.
Increase funding for
social safety net
programs, including
Family Benefits (FB) and
pensions in the 2009
budget law (relative to
2008), increase funding
for unemployment
insurance (based on
actual numbers of
unemployed), and
protect from any
reductions.
Restore funding for
selected priority
programs for the poor
and vulnerable in health,
education, and
agriculture in
accordance with the
original 2009 budget.
Undertake a review of
FB program
beneficiaries and exclude
non-eligible households
to improve targeting
efficiency, and use FB
budget savings to expand
program coverage of the
Ensured protection of social
safety nets, pensions, and
priority social spending
programs for the poor and
vulnerable by maintaining
their shares in the 2010 State
Budget (as compared to
2009) approved by
Parliament on December 10,
2009 and by making
available, via the
Government Decrees # 275-
N and 276-N/ dated March
25, 2010 and # 1238/N dated
September 9, 2010, an
additional 6.1 billion
Armenian Drams for public
spending for the poor and
vulnerable.
Strengthened the
management and monitoring
of social safety net programs
to improve targeting
efficiency and increase
public awareness by
establishing an inter-agency
working group through a
Government Protocol Decree
#23, dated June 17, 2010 and
by the Order of the Minister
Maintained social safety
nets, pensions, and priority
social spending programs
for the poor and vulnerable
by maintaining their shares
in the 2011 budget.
Social protection and
pension spending
maintained at 24.8% of
total spending between
2008 and 2011/12,
consistent with the
MTEF.
Coverage of the poor by
the FB program
increased from 34% in
2007 to at least 40% in
2011/12, consistent with
the MTEF.
Leakage of FB resources
to the non-poor (3 upper
quintiles of ISHSL of
32
Sectors and
Objectives
Actions 2009
(DPO-1)
Actions 2010
(DPO-2)
Prior Actions 2011
(DPO-3)
Outcomes and Performance
Indicators
poor. of Labor and Social Issues #
N86-A/1 dated July 9, 2010.
NSS of RA) decreases
from 28.8% of total
program coverage to
20% between 2007 and
2011/12.
B. Strengthen the
overall quality and
management of higher
education and improve
the preschool system,
especially in rural
areas.
Issued a Government
Protocol Decree #38 dated
September 30, 2010 adopting
financing mechanisms to
cover recurrent costs for the
one-year school readiness
program for 4.5-5.5 years
old children.
Issued a Decree No. 978 - N
on the “Status of the State
Accreditation of Tertiary
Level Institutions and
Academic Programs in the
Republic of Armenia”
including tertiary education
quality assurance policy,
standards, criteria,
procedures and guidelines
after consultation with
stakeholders, institutions,
and employers.
Maintain the State
Budget spending on
pre-school education in
real terms, increasing it
from nil in 2008 to about
156 mln AMD in
2011/12, consistent with
the MTEF (2012-214
MTEF suggests further
increase to 546.5 mln
AMD in 2014).
C. Provide more
affordable services for
the poor and other
beneficiaries by
reforming health
financing and expand
service delivery by
strengthening non-
communicable disease
interventions.
Issued a Government
Protocol Decree #3 dated
January 29, 2010 on Non-
Communicable Diseases
(NCDs) and launched
performance-based
contracting at primary
health care level, including
defined NCD services.
Implemented: (a)
comprehensive policy for
copayments by issuing a
Decree 1762-N dated
December 23, 2010; and (b)
co-payment for emergency
and gynecology programs,
including expanded
protection for the poor by
issuing Decrees Nos. 91-N
dated January 27 2011,
101-A dated January 31,
2011, 232-A dated February
18, 2011, 314-A dated
February 25, 2011, and 613-
Health spending on poor
and vulnerable is
extended to cover
beneficiaries of the
Family Poverty Benefit
with score between 34
and 36.
Increased utilization of
health services by the
poor from 16% in 2008
to 20% in 2011/12.
33
Sectors and
Objectives
Actions 2009
(DPO-1)
Actions 2010
(DPO-2)
Prior Actions 2011
(DPO-3)
Outcomes and Performance
Indicators
A dated April 6, 2011.
II. Strengthen Competitiveness for Sustained Post-Crisis Growth by Providing a More Favourable Private Sector Environment and Strengthening
Governance
A. Strengthen
economic competition
through fortified
financial sector, a better
business environment, a
strengthened pro-
competition institution,
improved corporate
governance, and
facilitation of public-
private partnerships.
Strengthen banking
sector surveillance and
liquidity by undertaking
frequent banking system
stress tests and
introducing enhanced
reporting requirements,
and making available
liquidity to banks on a
temporary basis through
accepting a wider range
of collateral.
Strengthened resiliency
of the banking sector as
measured by maintaining
the Capital Assets Ratio
(CAR) at its 2008 level.
Reduce costs of business
registration by
removing: minimum
capital requirement, seal
requirement, and
charter approval.
Submitted to the National
Assembly through Prime
Minister’s letter #
01/23.6/14392-10 dated
November 16, 2010 revisions
to competition-related
legislation which aims at
strengthening the autonomy
and enforcement capacity of
the State Committee for
Protection of Economic
Competition (SCPEC), and
harmonizing key elements of
the legislation with
international best practice.
Made the One Stop Shop
for business registry fully
operational in the city of
Yerevan and established
online linkages for
enterprise registry in other
municipalities.
National Assembly has
adopted amendments to the
Law on “Organizing and
Conducting Inspections in
the Republic of Armenia”
dated June 23, 2011, to
introduce risk-based
approaches, reduce
discretionary powers and
Increased number of
enterprises using the
One-Stop-Shop from
zero in 2008 to at least
500 in 2012.
Reduced time (from 18
to 3 days) and cost (from
3.6% to 2.9% of p.c.
income) to register a
business, between 2008
and 2011/12 as measured
by the ―starting a
business‖ indicator in
Doing Business (DB).
Maintain level of
disclosure and investors’
protection indexes at 5
34
Sectors and
Objectives
Actions 2009
(DPO-1)
Actions 2010
(DPO-2)
Prior Actions 2011
(DPO-3)
Outcomes and Performance
Indicators
increase transparency. between 2008 and 2012
as measured by (DB).
B. Address critical
infrastructure needs and
improve regulatory
environment in
Informational and
Communication
Technology (ICT).
Conducted an assessment of
the improvement in
spectrum management and
monitoring, discussed it with
all spectrum stakeholders,
and submitted to the Bank
the minutes of the
Borrower’s Board of the
Broad Band and IT Security
meeting of October 27, 2010
which includes key next
steps in this area.
Reduction in monthly
cost of broadband
Internet access for
1Mbps from US$98 to
US$49 between 2008
and 2011.
Double the broadband
internet penetration from
16% in 2008 by 2011/12.
C. Improve
competitiveness
through sustainable use
of energy and natural
resources.
Submitted to the National
Assembly through Prime
Minister’s letter
#01/24.1/13011 dated
November 10, 2010 a new
Mining Code adhering to
international best practice
for fiscal, environmental,
social, and licensing
standards.
Implemented measures to
ensure efficiency,
transparency, and
accountability in private
sector participation, in
accordance with the
extractive industries
transparency initiative
principles and increased
mining sector attractiveness
to private investors by
issuing: (a) a Decree of the
Government No. 1901-N
dated December 29, 2011
on the “Approval of
Procedure for Calculation
of Royalty on Earnings
from Sales”; and (b) an
Order of the Minister of
Energy and Natural
Number of new general
exploration licenses for
metallic minerals issued
increased from 1 in 2008
to at least 6 in 2011/12.
35
Sectors and
Objectives
Actions 2009
(DPO-1)
Actions 2010
(DPO-2)
Prior Actions 2011
(DPO-3)
Outcomes and Performance
Indicators
Resources No. 249-A dated
December 30, 2011 on the
“Requirements for the
Mine Closure Plan and
Nature and Environmental
Impact Assessment as an
Attachment to the
Application Requesting the
Mineral Extraction Right”.
D. Start the process of
adopting international
management standards
to improve public
sector efficiency and
effectiveness in tax,
customs, and public
expenditure
management.
Adopt an action plan
with a timeline and key
performance indicators
for priority State
Revenue Committee
reforms, and commit to
adequate funding from
2009-2011.
Achieved satisfactory
progress towards business
process reengineering (BPR)
by:
(a) Contracting an external firm
to advise on the BPR
(contract # 09/101) with
KPMG dated February 26,
2010 and submitting to the
Bank on November 1, 2010
the full draft report after
formal discussions within the
State Revenue Committee;
(b) Issuing a Government’s
Protocol Decree # 36 dated
August 26, 2010 on the
Relevant Legislative Changes
to Streamline Tax
Registration Procedures and
sending to Parliament by the
Government letter #
01/23.2/1899-10 dated
September15, 2010;
(c) Developing a Concept Note
on Risk-based Audit
Has achieved further
progress in Business
Process Reengineering
(BPR) by: (a) approving a
BPR, satisfactory to the
Bank, and the associated
time bound action plan by
the government decree No
1017-N dated June 30, 2011
for its implementation; (b)
putting in place fully
operational system of risk
based audits based on
Government’s Decree No.
1636 -N dated November
10, 2011; (c) implementing
e-filing of tax returns
pursuant to the Law on
Amendments to the Law on
Taxes (No 194-N dated
October 27, 2009, No 197-N
dated December 8, 2010
and No 218-N dated June
23, 2011.
Improve the quality of
tax administration to at
least the ECA average as
measured by the Paying
Taxes index in DB.
Cost of tax compliance
to be less than 600 hours
according to forthcoming
compliance survey.
Increase the number of
e-filed returns from 0 in
2008 to 3000 in 2011/12.
36
Sectors and
Objectives
Actions 2009
(DPO-1)
Actions 2010
(DPO-2)
Prior Actions 2011
(DPO-3)
Outcomes and Performance
Indicators
Selection and adopting it
through Government
Protocol Decree # 23 dated
June 4, 2010; and
(d) Submitting to the National
Assembly through a
Government letter #
01/23.2/3412-10 dated March
31, 2010 Amendments to
Legislation or Procedures on
the Review of high risk value
added tax refund claims.
Approved by a Government
Protocol Decree # 36 dated
August 26, 2010, the
necessary legislative
framework for improving
functioning of Green-
Channel operation, including
allowing the incorporation of
the e-signature module to the
trade world manager
software.
Has implemented a fully
functioning “green
channel” to facilitate the
operation of customs
clearance by default
(backed by post release
verifications, controls,
audits, and investigations)
and to strengthen the
customs preventive and
enforcement capacity by
amendments to the
Customs Code dated
January 15, 2011 (25-N).
Increase in the share of
Green Channel releases
in the total from 0 in
2008 to 30% in 2011/12.
Increase overall Logistic
Performance Index from
2.14 in 2008 to 2.6 in
2011/12 9 (the ECA
region average in 2010 is
2.74).
Increase Doing Business
ranking in ―trading
across borders‖ indicator
from 143 in calendar
year 2008 to at least 104
by end calendar year
2011.
Prepare and publish
official PEFA assessment
to serve as a baseline for
Approved by a Government
Decree # 42 dated October
28, 2010, a Public Finance
37
Sectors and
Objectives
Actions 2009
(DPO-1)
Actions 2010
(DPO-2)
Prior Actions 2011
(DPO-3)
Outcomes and Performance
Indicators
future reforms. Management (PFM) Reform
Strategy.
E. Prevent conflict of
interest in public
service and improve
wage policy.
Submit to the National
Assembly the Law on the
Public Service, including
conflict of interest
provisions necessary to
ensure the framework
for further
implementation.
Number of individuals
submitting an income
and asset declaration
form expressed as
percentage of the number
required to submit
(should reach 100% in
about two years after the
framework is approved).
38
Annex 2: Governmental Additional Reform Program
Sectors and Objectives Actions Updates
I. Address Vulnerability by Protecting the Poor and Supporting Greater Human Capital Development
A. Strengthen the effectiveness and efficiency of
social safety nets and protect sectoral programs
for the poor and vulnerable.
B. Strengthen the overall quality and
management of higher education and improve
the preschool system, especially in rural areas.
Further institutionalize the funding
mechanism for the one year school readiness
Program for 4.5-5.5 year-old to assure
funding to meet the increasing needs as the
Program expands, and fully entrench the
financing mechanism into legislation or
budget procedures as might be required.
Cabinet to adopt an overall higher education
financing strategy.
The Decree 1427-N on Financing of the Expenses of
the Organization of Upper Pre-School Children's
Education dated April 11, 2010 institutionalized
state funding for the program offered in general
education school premises. The 2012-2014 MTEF
reflects this financing mechanism.
The government adopted the Higher Education
Financing Strategy in June 2011. The government's
decisions on priority reforms in the strategy requires
a reallocation of project proceeds under the EQRP2.
The MPES is currently preparing a detailed action
plan for the implementation of the strategy together
with Terms of References for technical assistance
required for the implementation.
C. Provide more affordable services for the poor
and other beneficiaries by reforming health
financing and expand service delivery by
strengthening non-communicable disease
interventions.
II. Strengthen Competitiveness for Sustained Post-Crisis Growth by Providing a More Favorable Private Sector Environment and
Strengthening Governance
A. Strengthen economic competition through
fortified financial sector, a better business
environment, a strengthened pro-competition
institution, improved corporate governance, and
Strengthen economic competition through
fortified financial sector, a better business
environment, a strengthened pro-competition
institution, improved corporate governance,
The World Bank supported SCPEC work in
developing a subset of competition regulations
critical for effective enforcement which include: (a)
assessment of dominance and significant market
39
Sectors and Objectives Actions Updates
facilitation of public-private partnerships. and facilitation of public-private partnerships.
Submit amendments to the National
Assembly of the Joint-Stock Company Law
to increase disclosure and direct liability in
related-party transactions.
power, (b) criteria and regulations for application of
penalties; and (c) regulation of procedures for
defining concentration. The Competition Law was
approved by the Parliament in late-April and ratified
by the President in May, 2011. This support was
offered as part of the follow up dialogue to DPO-2
Prior Action that included the significant
improvement of the previous competition law. The
SCPEC expects to issue these regulations before
June 2012.
On May 25, 2011, the RA National Assembly
adopted and the RA President ratified the RA Law
―On making amendments and supplements to the
RA Law on Joint Stock Companies‖, which
improves the mechanisms of detecting transactions
executed with interests in company transactions
(economic activity) and expands the responsibility of
directors.
B. Address critical infrastructure needs and
improve regulatory environment in ICT. Adopt new regulation with reasonable rules
and tariffs to allow other telecom operators to
use the incumbent’s backhaul data
transmission network.
Update the National Frequency Allocation
Table to incorporate the newest
recommendations of the ITU, align with best
current EU practices and to facilitate
allocation of additional spectrum for the
commercial use of new technologies.
The PRSC approved the resolution No 414-N, dated
September 7, 2011 on ―Monthly Fees For Lease of
Free Transmission Capacities of the Public Fixed
Telephone Network Ducts by the Leading Operator
of Public Telephone Network to Other Operators‖
setting reasonable rules and tariffs for the use of
incumbent’s backhaul data transmission network.
No progress has been report on this action.
40
Sectors and Objectives Actions Updates
C. Improve competitiveness through sustainable
use of energy and natural resources. Submit new environmental impact assessment
law to National Assembly based on
international good practice.
The amendments to the EIA law were submitted to
the Parliament and they are with the Environment
Commission, but no debate took place so far. The
draft is open for public comments at this stage. The
Sr. Environmental specialist of the team prepared
comments to the draft EIA law that was shared with
the Ministry of Nature Protection and Environment.
There are several inconsistencies on the approach to
environmental aspects between the new Mining
Code and the current amendments to the EIA Law,
which relates mainly to the different terminology
used to describe same documents required by both
laws (the preliminary assessment in Mining Code vs
notification in EIA law; Environmental Management
Plan in Mining Code vs no requirement in EIA law
for example). It would be important that the
inconsistency in terminology be either harmonized
or explained via the EIA amendments.
D. Start the process of adopting best
international management standards to improve
public sector efficiency and effectiveness in tax,
customs, and public expenditure management.
Develop appropriate regulations for public
investment appraisal system.
Some preliminary actions have been taken to revisit
the current PIAS and develop methodological and
regulatory framework for appraisal, selection and
screening of public investments and clarifying roles
of different stakeholders involved in the process.
E. Prevent conflict of interest in public service
and improve wage policy. Demonstrate progress in implementation of
conflict of interest provisions in the Public
Service Law.
The Conflicts of Interest provisions of the Public
Service Law have been adopted by the Parliament.
The Law defines conflicts of interest as actions or
decisions an official might take which would enrich
the official or a close relative or result in the award
of a contract to a relative or to an entity in which the
official has an interest. Hiring a relative is also a
conflict of interest. In the event of a potential
conflict, the high level official must disclose it to his
supervisor who will decide whether to require
recusal or waive the conflict. High level officials
with questions about the application of the conflict
of interest rules can ask for advice from the Ethics
41
Sectors and Objectives Actions Updates
Commission for High Level Officials. If the advice
is followed, the official is protected from legal
action. These provisions reflect both the Bank’s
advice and best practice. However, the law expressly
excludes legislators and judges from its reach,
suggesting that separate Laws will be passed to
cover them. Furthermore, the Law leaves two
important issues open: (i) it does not specify the
consequences for failing to file a declaration or filing
a false declaration; and (ii) Article 37(2) gives the
Government the discretion to decide what part of the
financial disclosure will be published.
42
Annex 3: Social Safety Net Spending, 2009-11(million dram and percent of the total)
Source: The MoF, Bank staff, and the IMF.
2009 2010 2011 2012
Budget Annual Budget Annual Budget Q1 Q1 1st half 1st half 9 months 9 months Budget
11/27/08 actual 12/10/09 actual 12/09/10 plan actual plan actual plan actual 12/8/2011
I Health care total pro-poor exp, o/w 1.9% 1.8% 1.8% 1.7% 2.2% 2.0% 2.3% 2.0% 2.2% 2.0% 2.1% 2.1%
1. Hospital services for vulnerable groups of population 0.4% 0.4% 0.4% 0.2% 0.4% 0.3% 0.4% 0.3% 0.4% 0.3% 0.4% 0.4%
2. Maternal and child health-care 1.0% 1.0% 1.0% 1.0% 1.4% 1.2% 1.4% 1.2% 1.3% 1.2% 1.3% 1.3%
3. Tuberculosis 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1%
4. Treatment of Cancer 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
5. Medical care for Mentally ill people 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
6. Treatment of Infectious diseases 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
II. Social Safety Net total exp for vulnerable, o/w 3.8% 3.7% 3.9% 3.8% 4.1% 4.4% 4.1% 4.1% 3.9% 3.9% 3.6% 4.0%
1. Public Works programs 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
2. Unemployment Insurance 0.3% 0.5% 0.5% 0.5% 0.5% 0.5% 0.4% 0.5% 0.4% 0.4% 0.4% 0.4%
3. Poverty Family Benefit 3.4% 3.1% 3.3% 3.2% 3.5% 3.9% 3.8% 3.6% 3.5% 3.4% 3.2% 3.6%
III. Education, o/w 9.1% 8.7% 8.5% 8.2% 8.2% 6.2% 8.0% 6.8% 8.6% 6.7% 8.4% 6.9%
1. Remuneration of text-book fees for children from socially
vulnerable families 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
2. Basic education allocation 8.0% 7.7% 7.5% 7.2% 7.1% 6.2% 7.2% 6.8% 7.6% 6.7% 7.4% 6.9%
3. Pre-school spending (municipal level) - - - 0.9% 1.1% 0.0% 0.8% 0.0% 1.0% 0.0% 1.0% 0.0%
4. Pre-school state top ups for readiness program - - - 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
IV. Pension
1. Old age pensions 15.6% 15.9% 15.8% 15.5% 16.4% 17.9% 20.1% 16.6% 18.3% 15.8% 17.5% 16.2%
43
Annex 4: DPO Outcomes and Performance Indicators Framework, 2009-2011/12
DPO Area Key Monitoring Indicators Baseline (2008) Status (2009) Status (2010) Expected Outcome
(2011/12)
I. Address Vulnerability by Protecting the Poor and Supporting Greater Human Capital Development
A. Strengthen the effectiveness and
efficiency of social safety nets and protect
sectoral programs for the poor and
vulnerable
Social protection and pensions
as a share of total spending
Coverage of the poor by the FB
program
Leakage of FB resources to the
non-poor1
26.2%
34.0% (2007)
28.8% (2007)
26.2%
24.7%
23.0%
25.6%
38.3%
22.3%
27.2%
40.0%2
20.0%
B. Strengthen the overall quality and
management of higher education and
improve the preschool system, especially
in rural areas
Consolidated Government
spending on preschool education
7.5 bln AMD 9.3 bln AMD 8.7 bln
AMD
10.9 bln AMD
C. Provide more affordable services for the
poor and other beneficiaries by reforming
health financing and expand service
delivery by strengthening non-
communicable disease interventions
Health spending (as a share of
GDP)
1.4% 1.8% 1.6% 1.7%
Utilization of health services by
poor
16% N/A N/A 20.0%
II. Strengthen Competitiveness for Sustained Post-crisis Growth by Providing a More Favourable Private Sector Environment and Strengthening
Governance
A. Strengthen economic competition
through fortified financial sector, a better
business environment, a strengthened pro-
competition institution, improved
Capital adequacy ratio 27.5% 28.4% 22.2% 27.5%
Number of enterprises using the 0 0 0 500
1 Defined as the three upper quintiles according to the integrated survey on household living conditions of the National Statistical Service of the Republic of Armenia. 2 Note that coverage of all social programs and pensions combined is very high in Armenia (79% of the poor and 94 for the lowest quintile), so this is still a challenging target and
it might not be required to be fully fulfilled as long as coverage by all social and social insurance programs remains high.
44
DPO Area Key Monitoring Indicators Baseline (2008) Status (2009) Status (2010) Expected Outcome
(2011/12)
corporate governance, and facilitation of
public-private partnerships.
one stop shop per year
―Starting a business‖ (according
to the Doing Business)
Time (days)
Cost (% of per capita income)
17
3.6%
14
2.6%
14
3.1%
8
2.9%
―Protecting investors‖
(according to the Doing Business)
Disclosure index
Investor protection index
5
5.0
5
5.0
5
5.0
5
5.0
B. Address critical infrastructure needs and
improve regulatory environment in ICT. Monthly cost of broadband
Internet access for 1Mbps
US$ 98 (ADSL
only)
US$ 98
(basket)
US$ 903 US$ 49
Broadband internet penetration
(subscriptions per 100 inhabitants)
0.16 0.19 2.14 0.32
C. Improve competitiveness through
sustainable use of energy and natural
resources.
Number of new general
exploration licenses issued for
metallic minerals
1 0 55 6
D. Start the process of adopting best
international management standards to
improve public sector efficiency and
effectiveness in tax, customs, and public
―Paying taxes‖ (according to the
Doing Business)
Number of payments per year
50
50
50
34
3 The monthly cost of broadband internet access for 1 Mbps for both the ADSL technology and a basket of available broadband technologies is calculated as the average of prices
for service offerings by different ISPs (taken from the company websites as of January 2010). The recent significant decline in the retail prices for the mobile broadband and
ADSL services is likely to imply a very large reduction of these prices in 2011 (i.e., target will likely be more than fulfilled). 4 The number of broadband users have increased from 6000 in 2008 to 64,890 (2.1 per 100 inhabitants) as of July 1, 2010 if users via USB modems and routers are excluded (and
to 124,000 if they are included). Either way, this indicator has increased by at least ten-fold during 2010. 5 Ten special exploration licenses were issued.
45
DPO Area Key Monitoring Indicators Baseline (2008) Status (2009) Status (2010) Expected Outcome
(2011/12)
expenditure management. Time (hours per year)
Cost (percent of profit) 581
40.7%
581
40.7%
581
40.7%
500
40.9%
Cost of tax compliance
according to the tax compliance
costs survey (hours per year)
N/A N/A N/A 600
Number of electronically filed
returns
0 0 2000 3000
Share of green channel releases
(% of all declarations)
0.0% 0.0% 15.0%6 30.0%
Logistics Performance Index
Overall score
Customs
Timeliness
―Trading across Borders‖
(ranking according Doing
business)
2.14
2.10
2.67
143
2.52
2.10
3.40
103
2.52
2.10
3.40
103
2.59
2.357
3.40
104
E. Prevent conflict of interest in public
service and improve design of wage
policy.
Number of individuals
submitting an income and asset
declaration form expressed as
percentage of the number required
to submit
N/A N/A N/A 100% (2013)
6Source State Revenue Services, but the raw number is adjusted given that the green channel is only partially functioning. The Expected Outcome by the end of the project is based
on a fully functioning green channel with e-signature and e-payment modules incorporated into the TWM software. 7 ECA average for 2010 (for the overall index, the ECA average is 2.74).
46
Annex 5: Letter of Development Policy
December 30, 2011
No A-219
UNOFFICIAL
TRANSLATION
Republic of Armenia
Letter of Development Policy
Mr. Robert B. Zoellick
President, the World Bank
Washington DC, USA
Dear Mr. Zoellick,
1. There are many uncertainties about the outlook for economic developments in the post-crisis
period as evidenced by continuous downward adjustments to global economic growth forecasts.
Expectations for the coming year are estimated to be lower than projected due to deterioration of the
situation in financial markets that could have long-term implications for developments in both the
global and Armenia’s economy.
In such uncertain situation the Government of the Republic of Armenia (hereinafter, the
Government) is attaching high importance to ensuring a stable macroeconomic environment, which
requires us to: (a) manage external shocks that undermine macroeconomic stability; (b) implement
economic growth-promoting policies, and (c) maintain and strengthen a pro-poor social policy
irrespectively of circumstances.
(a) Despite our efforts to foster diversification, the ability of the Armenian economy to withstand
major external shocks is quite low. As a small open economy Armenia is highly dependent on
remittances and a few commodity exports. Economic shocks in partner countries quickly transmit and
influence Armenia’s economic developments. Thus, uncertainties about the global economy prospects
require increasing the economy’s resilience through diversification on the one hand, and by
strengthening the ability to quickly offset risks that have occurred, on the other.
(b) The headroom of the government to implement growth-enhancing fiscal policies has shrunk.
To cope with the 2009 economic crisis the Government had to implement a countercyclical fiscal
policy for increasing aggregate demand. But this increased external debt, which although is well
below any unsustainable thresholds, our own debt sustainability exercise by the Government pointed
at the need to maintaining a tight fiscal policy, while at the same time implementing pro-growth
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12.30.2011
47
policies. Thus, if the pace of economic growth slows down, the Government would need to take such
steps as to put the fiscal policy on expansionary track, which, to the extent possible, should not occur
at the expense of widening the current account deficit. Under these circumstances, the key priority for
economic growth-promoting polices will be to boost private sector activities -- by further improving
the business environment and fostering possibilities for export.
(c) Continued implementation of pro-poor social policies is very important for the country given
the considerably deepening poverty incidence caused by the 2009 crisis and in spite of our efforts to
timely implement (and often also to increase the scope) of our key social programs. Essentially, the
decline in the level of disposable income of the population led to undesirable poverty incidence.
According to the findings of the 2010 Integrated Living Standards Survey poverty incidence was 35.8
percent compared to 34.1 percent in 2009. In order to prevent the deepening of such poverty
incidence, the Government should be prepared to maintain the level of social spending unchanged.
2. In light of these listed challenges, the Government has been implementing policies for
addressing the consequences of the global financial and economic crisis; including reforms set we had
in mind even before the crisis.
This means that long-term targets and policies postponed because of the crisis have not lost
their relevance and will rather be achieved with some delay. We now consider these policies as
essential for an efficient operation of our economy in the post-crisis situation, and more badly needed
and urgent than in the past. This is of course the case with a number of policies supported by DPO
series, which we consider as a key roadmap for both the crisis and post-crisis phases.
3. Our development strategy continues to have two pillars. On the one hand, we strengthen
policies ensuring social protection for the poor and addressing human capital development and on the
other, focus more on increasing the country’s competitiveness and more quickly returning to income
growth, which will be more sustainable than the pre-crisis growth. In both cases we are focusing on
policies that will help to attain the long-term targets that we have set.
4. The World Bank support has been of key importance for the recovery after the 2008-09 crises
and for sustainable future growth. The proposed third development policy operation is the last in a
series of three programmatic operations supporting the key elements of our policy reform agenda that
will support creating the necessary conditions for post-crisis growth.
Post-Crisis Economic Policy
5. Economic growth resurged during the first quarter of 2010, but it slowed down during the
third and fourth quarters due to bad weather conditions in agriculture and closed at only 2.1 percent
by year’s end. During 2010 the Armenian economy faced inflationary pressures were mainly supply-
driven, particularly, the deep decline in the agricultural sector and significant increases in
international prices of some food products and raw materials (wheat, sugar and oil). About 7.5
percentage points of the 9.4 percent 12-month inflation at yearend 2010 was due to increased food
prices with bread products accounting for 2 percentage points and agricultural food products for 5
percentage points. During 2010, the Government together with the Central Bank of the Republic of
Armenia (hereinafter, the CBA), refrained from suddenly making fiscal and monetary policies more
rigid in view of stagflationary risks, as well as the fact that inflation was mainly supply-driven.
However, at the beginning of 2011, after inflationary pressures fell, the CBA's policy rate was
gradually increased, while fiscal policy continued a conservative approach. The Government also
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12.30.2011
48
introduced policies to promoting an agricultural supply response, as well as a de-dollarization policy
developed and carried out in conjunction with the CBA, namely the revision of the prudential
standard on required reserve of foreign currency deposits. As a result, the 12-month inflation sharply
fell from 11.5 percent in March 2011 to 5.0 percent in November. According to projections end-year
inflation will be within the permissible band of the 4 percent inflation target of the CBA, mainly due
to the rebounding agricultural sector, tightened monetary conditions, the curbing effect of the fiscal
policy, the low inflationary impact of the labor market. Weakening inflationary pressures transmitted
from the outside world will also have some impact. These circumstances enabled reducing the policy
rate; by the decision of the CBA Board the policy rate was reduced by 0.5 percent and set at 8 percent
in September, which will be a further incentive for future growth.
6. In 2011, the economic activity index (IEA)8 suggests the economy advanced by 5.5 percent
between January and November, 2011 compared to the same period the previous year. All sectors,
excluding construction, contributed to this expansion of economic activity. Post-crisis recovery
developments indicated that Armenia’s growth model has been evolving and will continue to change
in the coming years. Particularly, the construction sector, which expanded significantly before 2008
fueled by overseas remittances will gradually be outpaced by the exportable sector of the economy.
The latter is currently one of the drivers of economic recovery mainly influenced by high growth rates
in mining. Strengthening these trends is necessary to secure external stability, but the challenge
remains in terms of broadening the bases of our exports. This indicates that the macroeconomic
policies implemented since the 2009 crisis to date were sound in terms of providing a cushion against
external shocks and securing macroeconomic stability. Economic growth is expected at 4.6 percent in
2011, and we expect that medium-term growth will stabilize at around 4-5 percent if external
conditions (in Europe and Russia) are favorable.
7. In order to achieve sustainable economic growth, and to broaden our export and employment
- the key targets of our post-crisis economic policy - we will focus on identifying and introducing
additional growth incentives, improving business entry and competitiveness in all economic sectors,
deepening economic diversification and expanding our export-orientation with parallel, continued
implementation of already launched reforms and priority policies targeting development.
8. However, potential risks of a new wave of the crisis should not be disregarded. Deepening
difficulties in meeting sovereign debt obligations in European countries, as well as a decline in metal
prices in international markets could have an adverse impact on Armenia's economy reducing the
pace of export growth consistent with a reduced demand in partner countries.
If these risks materialize, for Armenia they will have a significant impact on budget execution
in 2012, especially in terms of lower-than-expected tax revenue collections. The size of a decline in
GDP will be highly dependent on the extent to which these risks occur. However, if the economic
growth is within +2/-2 percent range, even with suspension of some budget expenditures, an
additional 33-60 billion drams will be required for budget financing.
8 Since 2011 the RA National Statistics Service moved from monthly GDP to calculating the indicator of economic activity (IEA). In
contrast to the GDP number calculated according to the National Accounts methodology (at quarterly and annual frequency), monthly IEA describes the change in the output of goods and services in the economy, rather than the change in added value. In addition, monthly IEA
does not include net taxes on products and Financial intermediation services indirectly measured (FISIM), which are included in the
quarterly and annual calculation of GDP by production approach.
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49
If the indicated set of risks occurs, Government actions will be both to attract additional
financial resources without breaching debt sustainability principles9 and suspend the execution of
some budget expenditure ensuring full execution of recurrent social expenditure.
Macroeconomic and Fiscal Framework
9. Armenia’s economy is projected to grow at approximately 4 percent per annum over 2012-
2014, which will mainly occur through the development of the industrial and exportable sectors
indicated as a priority by our Government. The final outcome, however, is likely to be largely driven
by the growth forecasts in European and Russian economies. Uncertainties notwithstanding, we plan
to continue the implementation of strong domestic reforms in the country, particularly those fostering
development of industrial and agricultural sectors, as well as negotiations between the Republic of
Armenia and the European Union on establishing a Deep and Comprehensive Free Trade Agreement
zone, which should send a positive signal of our commitment to improve the investment climate in
Armenia. In this respect we are also considering the implementation of an export-led industrial policy
on a priority basis. To this end, we have already developed The Strategy for Export-led Industrial
Policy in the Republic of Armenia supported by the World Bank and endorsed by the RA
Government. The latter is a set of balanced and phased actions aimed at export growth and
diversification. The policy primarily targets the processing industries. As a result of implementation
of the Strategy it is expected to achieve exports/GDP ratio of 16 % over the medium term (2015) and
19% over the long-term (2020) with exports volume of 1.8-2.1 million dollars over the medium term
(2015) and 2.8-3.3 million dollars in the long term (2020). All these measures are all designed to
offset the potential weakening effect of our fiscal consolidation process without increasing the debt
burden (to the extent possible should be carried out without widening the current account deficit).
10. Although the external balance and fiscal sector bore most of the burden of the economic crisis
in the past, the external sector did recover significantly from early 2010 mainly due to increased
global demand for goods and the support extended to the exportable sector by the Government as part
of anti-crisis measures. Positive developments in the external sector have continued in 2011, in
particular, export growth was higher than that of imports. Despite the projected slowdown in global
economic growth in 2012, in line with the Government policy of promoting investment in the
exportable sector of the economy, high growth in exports will continue at a pace somewhat slower
than the previous year. We expect that the current account deficit will gradually improve to reach
around 7.5 percent of GDP by the end of 2014.
11. High fiscal deficits were a common behavior among country governments during the 2008-
2009. However, from fiscal and macroeconomic perspective it is important to implement ―an exit
strategy,‖ using the headroom provided by the closing of the negative output gap as economic activity
recovers. This implies that the country should adopt a counter-cyclical fiscal stance by narrowing the
fiscal deficit smoothly – in order not to face the risk of a domestically generated crisis. The
macroeconomic policy adopted by the Government calls for a steady reduction of the fiscal deficit
from 7.6 percent of GDP in 2009 to 2.4 percent in 2014, which we expect to result in a sharp
reduction in the current account deficit (from 15.8 percent of GDP in 2009 to 7.5 percent in 2014) that
will ensure Armenia's macroeconomic stability.
9 According to the findings of joint analyses by the RA Ministry of Finance and the World Bank, despite the
sharp increase in the volume of debt in 2009 Armenia still has room to borrow additional debt without
breaching debt sustainability thresholds.
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50
12. Implemented anti-crisis measures led to a sharp increase in the public debt burden (at the end
of 2010 external public debt accounted for 35.2 percent of GDP, while domestic public debt for an
additional 5 percent of GDP), since it would prove to be difficult to restore and promote economic
growth without increasing debt. Subsequently, the Government paid special attention to debt
sustainability. Fiscal sustainability analyses carried out jointly with the World Bank and based on the
models used in international practice show that Government debt indicators are and will continue to
be within a manageable level.
However, the Government has taken steps to lessen the RA external debt service coverage burden
in future years and is currently exercising caution in attracting new debt. According to the
Government Debt Management Strategy for 2012-2014, in the medium term the public debt/GDP
ratio will not exceed the threshold stipulated in the Republic of Armenia Law on Public Debt10
and
the debt distress threshold for developing countries. 11
13. Under these circumstances, from a fiscal stability perspective it is very important to ensure
high economic growth and to accelerate reforms in tax and customs policy and administration. Due to
this, in 2012 the Government will improve sharply the level of tax revenue to reach 20.7 percent of
GDP compared to a level of 20 percent that remained stable in recent years. On tax policy, the
Government focuses on taxation of the mining sector, on closing the loopholes in excises and
expanding taxation and such changes that would deepen the tax equity (higher tax from high
economic result). The tax and customs administration will continue to improve by increasing
possibilities for identifying new domestic tax revenue.
Managing Social Risks and Human Development
14. The priority of the Government social risk mitigation policy in the coming years is to
safeguard the envisaged key social transfers and investments, but we will manage allocations
carefully given the tensions in our budget created by ongoing fiscal consolidation efforts. In the
meantime, given the potential increase in social vulnerability amid the crisis and poverty incidence of
35.8 in 2010 compared to 34.1 percent the previous year, we plan first to increase the number of
needy beneficiaries to the extent possible through improved targeting of social transfers and improved
overall efficiency in our programs.
15. Social Safety Nets: Coverage and targeting for our flagship poverty reduction program, the
Family Benefit, and for other social safety net programs such as unemployment insurance and public
works have been the focus of our interventions over the past several years. During the crisis and post-
crisis years, and with support of the DPO series, the Government has maintained the share of priority
social spending programs in the budget—with emphasis on programs that benefit the most the poor
and the vulnerable, including safety nets, pensions, and priority health and education programs.
Currently the Government attaches importance to carrying out agreed social spending as planned for
the fiscal year and within the MTEF. The State Budget Proposal for 2012 envisages an increase of
about 4 billion drams in financing of Family Benefits providing a 10 percent increase in the size of
the family benefits compared to the previous year.
10 «As of December 31 of a given year public debt shall not exceed 60 percent of the Gross Domestic Product in the Republic of Armenia
in the previous year‖ and paragraph 7: ―If public debt as of December 31 of a given year exceeds 50 percent of the Gross Domestic Product in the Republic of Armenia in the previous year, the state budget deficit for the subsequent year shall not exceed 3 percent of average GDP
figure in the Republic of Armenia in the last three years.‖
11 According to ―Maastricht Treaty‖ the minimum debt/GDP threshold is set at 60 percent of GDP In the previous year.
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16. The Government has also focused on strengthening the management and monitoring of social
safety net programs to improve targeting efficiency. In order to improve the mechanisms for obtaining
online information on state benefits, the Law on Amendments and Supplements to the Law on State
Benefits was passed in June 2011. The norms for calculation of received income were also changed
in the family benefits system effective January 2011. Cross-checking of data declared by the families
registered in the Family Benefits system continued, by comparing them with the data available in the
databases of other ministries and agencies. As a result, about 3000 ineligible families were excluded
from the family benefit system in 2010. From January 2011 a requirement was introduced for
producing a reference from the state registry of the population (passport desks) for determining family
composition in order to be registered in the family poverty assessment system. Changes to the
registration process have led to improved targeting of the family benefit system and as a result of
increasing the amount of financial aid provided to members of families of deceased rank-and-file
(contractual) military, the number of beneficiary families was reduced to about 86 thousand in
September—with those excluded from the Family Benefits and removed from our social security
system directly paid through the veterans benefits. In the meantime, in order to address issues that
have arisen in the registration process, changes were made in key decisions on eligibility for family
benefits, as well as organizational activities were implemented leading to improved quality of issued
online references. Activities to introduce the system of integrated social services are underway and
aim at using the one—stop-shop principle in the provision of social services. Activities are also being
carried out to enhance information infrastructure in the area of pension security. In particular,
information necessary for the pension system available in the state population registry has been
obtained and is being used (automatically). Works to develop the appropriate software are underway.
Procedures for obtaining data from the Border Electronic Management Information System and using
in the pension system are being clarified. As a result of all these efforts we expect to reduce the risks
of corruption and the probability of mistakes. In the near future, the internal management systems for
pensions will be fully electronic. Drastic changes were made in the area of military pensions and
financial aid provided to families of deceased military servants enabling to improve the targeting of
the policy implemented in this area. As a result, the sizes of provided financial aid have increased.
The Government implemented reforms in this area not only by improving the current pension system
but also providing legislative grounds for introducing a new, funded pillar of pensions directly linked
to salaries and based on personal responsibility. It should be highlighted that a social benefits package
of 18 billion drams (about US$50 millions) has been planned for 2012 to meet the social needs of the
staff in government bodies as well as educational, cultural and social protection organizations.
17. Education. The Government continued to focus on maintaining funding our basic education
programs, on expanding access to the system for senior preschool children (a measure supported by
DPO-2), and on developing ways and approaches to increase quality and effectiveness of our
financing of tertiary education (the focus of DPO-3).
18. On pre-school education, the goals set in the Strategic Program for 2008-2015 Reforms in
Preschool Education will continue to be implemented. Towards that end, we established a financing
mechanism for the central government to cover the recurrent costs of the one-year school readiness
program for 4.5-5.5 year olds. In fact, we included appropriate funds in the RA 2011 State Budget and
2012-2014 MTEF for preschool education. 156.7 million drams were included in the 2012 state
budget for pre-school micro projects implemented in 8 regions under the Pre-school Education
program that would enable to include around 1600 upper pre-school age children in these projects.
For children in this age group and in the stage of regular development, our focus is on preparing them
for elementary school, creating equal starting conditions for entering general education schools,
ensuring continuous education, and socializing children into mainstream society. This is a very
important second step (the first step was to start rehabilitating facilities for villages in greatest need)
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to implement a policy of gradually enrolling all senior preschool age children into mandatory
preschool education programs. We are targeting a 90 percent enrollment rate by 2015, and we plan to
further institutionalize the proposed financing mechanism in the budget process next year, to ensure it
is systematic and sustainable.
19. While the main focus of the Government has been on basic (primary and secondary) and pre-
school education, we have initiated work on ways to improve quality and financing for tertiary
education. We see the improvement of financing mechanisms for vocational and tertiary education as
highly important for the long-term development of education and for the development of our
economy. In this regard, we are working on introducing flexibility and competitiveness to the
financing of tertiary education, and plan to introduce it in 2012 by putting in place the legal
framework and hopefully also implementing some pilots. To this end, the Government approved the
higher education financing strategy, reviewed the conditions and requirements for licensing
professional curricula, regulated the issue of student mobility, and introduced a credit system for post-
graduate researcher education program. The Government is willing to continue and improve the
envisaged policy and as a priority, we have already introduced criteria for university accreditation
standards having developed clear guidelines and procedures.
20. Health: The Government plans to increase the low level of spending, but only with a parallel
introduction of measures to improve its efficiency. We have completed the preparation of the co-
payment strategy aimed at increasing reimbursement for hospital services, introducing (or often
formalizing) copayments and achieving a lower overall out-of-pocket spending for the poorest
households. From July 1, 2010 we started piloting this initiative in Yerevan, which was assessed
positively. As a result, it was decided to launch the program countrywide in 2011 in reimbursements
for emergency and gynecological care services.
Official revenues increased as a result of increasing the prices of for-fee services (including
co-payment) in hospital care institutions, regulating pay arrangements for medical personnel leading
to increased salaries of medical personnel.
20,759 cases were served and reimbursed under the copayments in the period between
February and October 2011, of which 8,259 people made copayments 324 were granted a discount
based on request, 2,121 were exempted from payment based on request, 373 refused to make a
copayment and copayments were not applied to 9,502 cases based on the RA Government decision.
These numbers indicate that the process of introducing the copayment mechanism is accompanied
with administrative flexibility aiming at mitigating the potential negative impact of this measure
among the poorest households.
Despite the reduced health financing in the 2012-14 MTEF, the Government will take
respective steps to ensure that poor families are not deprived of basic means of their viability. The
Government will consider all possible options for addressing this issue, including by increasing the
number of beneficiaries by reviewing the scores.
The Government will make efforts to mitigate the potential impact of the copayments strategy
in the health sector on the poor given that the coverage is not yet adequate. All possible mechanisms
for improvement will be discussed including the issue of equalizing the eligibility score for this
program with the score of the family benefits program. During the 2013-2015 MTEF preparation as
part of the budget process, options for increasing the coverage of the poor will be considered. The
issue of mitigating the significant impact on the poor will also be discussed in case the second wave
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of the global crisis materializes in 2012. Allocation of additional resources for this program will be
envisaged if the needed resources are available.
Improved Business Environment and Competitiveness
21. We have a comprehensive set of measures in this area. Naturally not all of them are directly
supported by the DPO-3, although we are using the DPO as a framework to either enforce or monitor
several initiatives in this area. We have included as prior actions the reforms we consider will have
the greatest impact on our objectives. This is also evidenced by the findings of the Doing Business
2012: Doing Business in a More Transparent World report issued by the International Finance
Corporation and the World Bank shows that between June 2010 and May 2011 Armenia implemented
5 reforms in the regulatory and institutional framework, the highest number in the region and the
world. As a result the country’s rating improved by six points in the report and is ranked 55th among
183 countries.
22. Competition: We are aware that strong competition is a key element for our economic
performance. Our aim is to introduce a level playing field for all firms, and eliminate all possible
formal and informal barriers to entry, so that firms in Armenia start to compete on the merits of their
own competitiveness. For this, it is important to strengthen the institution aimed at protecting
competition. We want SCPEC, our Competition Agency, to be able to verify that market agents play
by the rules, that the Government agencies or officials do not impose anti-competitive regulation or
unnecessary barriers to entry and expansion, and those firms do not cartelize and abuse any dominant
position. To this end, the law on amendments and supplements to the Law on Protection of Economic
Competition enacted in April 2011 strengthens the definition of dominance and provides greater
enforcement capacities to the SCPEC. Although institutional capacities of the Commission improved
with the adoption of legislative amendments, there are still issues concerning the expansion of SCPEC
powers, particularly in terms of carrying out full-fledged inspections that are typical of competition
agencies and improving SCPEC's financial resources. To this end in November 2011 the World Bank
provided a document entitled Armenia: Review of the Framework of the RA Economic Competition
Law- WB Development Policy Operation and Technical Assistance to SCPEC – a comparative
analysis of revisions proposed by WB experts in 2010 and provisions of those revisions not included
in the law that subsequently became effective. The objective of the comparative analysis is to include
the proposed provisions in forthcoming legislative amendments. Also, the World Bank is mobilizing a
South-South peer learning Trust Fund to support the improvement of professional capacities of
Commission members and sharing experience for 2012.
23. Business Entry and Business Environment: In April 2011 the Government introduced a
one-stop-shop principle for business registration; as a result, a person, who wishes to set up a business
or sole entrepreneur has to visit one organization - Agency of State Business Registry operating under
the Republic of Armenia Ministry of Justice- that takes care of all procedures itself after accepting the
documents. Thus, if previously one had to visit 6 agencies to be able to register a firm, today visiting
one agency will suffice. As a result, the procedure for setting up firms was simplified; the required
time was reduced from 20 to a maximum of 2 days. Also the requirement for state registration of sole
entrepreneurs was eliminated and instead, an individual desiring to engage in entrepreneurial activity
is registered with the recording body. The www.e-register.am website is up and running through
which the service provided by the Agency of State Business Registry to businesses has become
accessible electronically. The system allows the full registration of businesses in case of sole
entrepreneurs, recording all the required information about individuals within a few minutes and thus
minimizing the time consumed by the process. During the first 4 four months of launching the one-
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stop-shop and www.e-register.am website, the Agency of State Business Registry made 9533 state
registrations/records, of which 7117 were sole entrepreneurs and 2416-limited liability companies. In
addition the process for state recording of sole entrepreneurs through the system took 13-14 minutes
on average.
24. As a result of reforms in the area of paying taxes introduced by the Government since March
2011, the number of tax returns filed during the year for profit tax prepayments and minimum profit
tax payments was reduced by 8, for property tax and land tax payments by 2 and for mandatory social
contributions filed by employers with the tax authorities by 8. The ban on on-site inspections of
entities engaged in business activities with turnover above 70 million drams has been extended. An
automated tax credit refund, including VAT refund system has been put in place.
As a result of reforms in the area of foreign trade the required certification process takes place
after customs clearance rather than at the border, before sale; the type of means of measurement are
verified after clearance before sale or exploitation. The time spent by and costs of businesses for
being issued a certificate of country of origin has been reduced. Particularly, the certificate of country
of origin for serial goods will be regularly issued only by undergoing the expert review for the first
time. An electronic customs declaration system was introduced, and activities are underway for
introducing an electronic filing system of documents for being issued a certificate of country of
origin. A risk management system was introduced for customs control.
From now on, customs related applications, enquiries and other letters can be accepted and
responses sent to addressees also through tax and customs units located outside the city of Yerevan.
The use of a total of 21 types of applications, references, permits and contents previously filed with
the customs headquarters and field offices has been stopped.
As part of electronic services the Government provided the economic entities a possibility for
electronic filing of tax returns. Through the electronic filing system as of December 1, 2011 one can
file 45 types of reports with the system being constantly upgraded to cover new types of reports. The
number of taxpayers using the electronic system, mainly the large taxpayers in the Republic of
Armenia that contribute 70 percent of the tax receipts of the state budget filed more than 171,797
electronic returns with the tax agency as of December 1, 2011. Despite the significant increase in the
number of users of the electronic filing system, the Government will continue the steps aimed at
increasing the coverage of system users targeting to achieve such result that each taxpayer desiring to
use this system, will have that possibility. The RA Law on Amendments to the Law on Taxes, HO-
218-N, passed by the Republic of Armenia National Assembly on July 23, 2011, will serve that
purpose, according to which, filing of returns, calculations, other documents and information
provided for in the tax legislation is mandatory from January 1, 2012 for companies and sole
entrepreneurs having exceeded the VAT threshold of 58.35 million drams in VAT taxed turnover
based on the results of the previous year. The envisaged WB-financed Public Financial Management
and Tax Administration Modernization project is expected to allocate funding for regularly upgrading
the technical infrastructure within SRC in order to be prepared to support the increasing number of
taxpayers filing returns electronically.
25. Reforms to Business Inspections. As part of these overall reform efforts, the Government
also aimed at increasing the transparency of inspections and differentiate risk levels (e.g., low,
medium and high risk businesses). Towards this goal, we introduced amendments to the RA law on
Organizing and Conducting Inspections in the Republic of Armenia and obtained endorsement from
the National Assembly. Activities are underway for introduction of a risk-based audit system. The
methodology of risk-based audits and general description of criteria defining the risks has already
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been approved by a Government Decree. Steps are being taken towards its adoption in various pilot
institutions (fire department, technical standards, and the tax service). Pursuant to this Law on
Inspections the list of taxpayers subject to audit in 2012 has already been posted on the official
website of the tax agency. Nonetheless, the Government will continue more intensively the steps
aimed at making the risk-based audit system functional as part of which an Action Plan will be
submitted on the risk-based audit system in line with the new requirements in the Law on Organizing
and Conducting Inspections in the Republic of Armenia.
We also introduced amendments to the Law on Amendments and Supplements to the Republic of
Armenia Law on Joint Stock Companies (HO-210-N), which were passed on June 18, 2011, aiming at
improving the mechanisms for identifying transactions (economic activities) with vested interests and
expanding the responsibility of directors.
Improved Public Sector Governance
26. Improved public sector governance is a key Government priority. Reforms in this area will
yield significant fiscal and economic gains related to government revenue and spending efficiency as
well as improved conditions for business and competition. These are highly important resources for
overcoming the crisis and ensuring post-crisis growth. Squarely, our focus is on improving the
legislative base for key sectors of our economy (telecommunications and mining), and to improve the
behavior of public officials. By introducing transparency and clarifying roles and responsibilities of
the public and the private sector in the fields of telecom and mining, we expect to increase private
investments and job opportunities in these two key sectors of our economy.
27. Telecommunications: The telecom sector in Armenia has been improving rapidly after a
long period of stagnation caused by monopoly. Thus, by its decision No. 414-N of September 7, 2011
the Public Sector Regulatory Commission adopted rules for leasing out free bandwidth of public
fixed-line telephone network by dominant operators to other operators and charges for lease. Adopted
rules and charges are seen as an important factor for ensuring competition in the market for
broadband internet access services. They will contribute to operations by alternative operators in the
telecom market.
A number of recommendations were prepared regarding the updating and revising the National
frequency allocation table, which mainly referred to changing the status of frequency spectra from
government to civil. The suggested change is driven by the development trend in the mobile
broadband internet access services segment in the telecom market and additional demand for the
frequency resource.
28. Mining. Mining regulation, including the taxation regime and procedural matters require
reforms in public sector governance. Our activities in this area have focused on developing and
introducing a legal and regulatory framework for mining in line with international standards.
Particularly, the National Assembly approved on November 28, 2011 our proposed new Mining Code
and the amendments to the Natural Resource User Fee, which adheres to best international practice
for fiscal, environmental, social and licensing standards.
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Fiscal, licensing, environmental regulations including those related to mine closure, social
and community development matters that follow the new Mining Code are being drafted and
preliminary drafts are planned to be submitted by the end of the year. The Government will continue
to develop the legislative framework and secondary legislation in line with international standards in
cooperation with international organizations interested in this area with a focus on sector specific
taxation issues. The Government should also develop and adopt a relevant legal act that would closely
clarify the estimation for royalty payments and rates to be applied.
Appropriate regulations for implementation of the fiscal, environmental and social impact
assessment under the new mining legislation have been drafted with technical support from the World
Bank and will be in force starting January 1, 2012. Consultations with key stakeholders (NGOs,
Mining companies, Accounting companies and international community) have been held through the
process of preparing the Mining Code, which continue as part of the Parliamentary discussions, as
well as the drafting of our regulations. We are committed to continue engaging stakeholders through
the process of the adoption of the draft amendments to the Environmental Impact Assessment Law, as
well as the implementation of the mining code regulations. It is estimated that about 50 bylaws will be
drafted and issued during 2012 as part of improvements to the secondary legislation framework.
Within the existing human and financial resources as well as with the World Bank support the
Government of Armenia will make efforts to 1) draft the remaining regulations in line with
international standards; 2) discuss the possibilities for making key processes electronic.
29. Tax Administration: Drastic reforms in revenue collection require investments in
modernizing our procedures and management. This will take time and with support of DPO-1, our
Revenue Committee adopted a time-bound action plan of priority reforms with key outcome
indicators for 2008-2011. While the initial plan was clearly overambitious in the targets it set for the
Revenue Committee, the implementation of this plan has been satisfactory. The Government adopted
the timetable for 2012-2014 actions on business process re-engineering in the State Revenue
Committee that will increase the efficiency of business processes in the system and will simplify tax
administration when introduced. The 2012-2014 Tax Administration Strategy that follows on 2008-
2011 strategy, has been prepared and is under discussion. It sets the strategic goals and their
achievement, describes the risks and assumptions that provide an understanding of the environment in
which it will be implemented in the coming three years. The State Revenue Committee has set a clear
objective to bring all tax inspectorates up to one common standard, increase the level of services and
improve the conditions in facilities. A critical step for service quality improvement is launching of
modern service centers in inspectorates. Six such centers have already been launched and are in
operation in Yerevan, and four centers are in operation in regions. The key objective of service
centers is that irrespective of which region they belong to, it would be possible to carry out both tax
and customs service related operations in any service office of SRC.
30. Customs administration. As a result of the fully functioning Green-Channel by default in
the customs the time of customs formalities was reduced, which is a key prerequisite for
simplification of customs procedures and improving customs administration. In this context,
introduction of the e-signature module in the TWM Software is important and will ensure the full use
of the green channel by default. The electronic payment system for customs declaration, a critical
component of the green channel operation in customs control, has already been introduced and thus
payment of fees to customs is verified to the automated customs declaration system operating in
customs by an electronic message confirming the payment sent electronically from a bank or by
producing to customs by the declarant of a copy of the payment order marked by the bank as paid.
Two commercial banks have already joined this process. Upon acceptance of the customs declaration
by customs in such way, it is treated as a document of legal importance for customs control. In the
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meantime, the RA Government passed a decision on releasing paid customs declarations
electronically in the TWM system, which allows monitoring the time of customs formalities. As a
result of implemented measures green channel releases as a share of the total were 68.7 percent during
2011. The Government will not be satisfied with results and will continue reforms focusing on the
following areas: (a) improving post-release verifications process in line with EC standards, (b)
statistically assessing the cost effectiveness of physical inspections, (c) introducing benchmarking and
performance baseline review, (d) consolidating reforms under a strategic package to be developed
jointly by the Government and SRC and if possible, with donor support.
31. Public Financial Management: We would like to continue strengthening the PFM system’s
basic processes; in particular towards deepening the budget’s performance orientation while at the
same time strengthening managerial accountability and revenue management. On this, we have
embarked on public finance management reforms. The PFM reform strategy was approved by the
Government. A new program structure has already been developed for all agencies implementing
spending programs under the state budget and a system of new classifiers for these, and the requests
for budget financing in 2012-2014 MTEF and RA State Budget were received in line with them. In
addition, advice was given to filers of budget requests on the new program structure and the use of
their new classifiers. As a result, the 2012 State Budget proposal, parallel to the traditional format,
was also prepared in a format meeting program-budgeting requirements by using the new program
structure and their new classifiers and was included in the 2012 state budget proposal package that
has already been submitted to the Parliament (in the Government’s Address to Parliament). In
addition, methodological guidelines were developed and provided to government bodies as part of
methodological instructions on preparation of the budget program description (passport). Three pilot
agencies included in the program (Ministry of Labor and Social Affairs, Ministry of Agriculture and
RA Police) , as well as the Ministry of Culture as part of their 2012-2014 MTEF request submitted
one draft budget program description (passport) each. Their finalized versions were posted on the
official website of the Ministry of Finance. The program-budgeting practice will be continuously
deepened by improving the program expenditure assessments and including non-financial indicators
for program monitoring.
32. Public Investment Appraisal System: During the implementation of our anti-crisis policies,
it became clear that we need mechanisms that help select public investment with the greatest potential
economic and social impact. For this reason RA Ministry of Economy, in close collaboration with the
RA Ministries of Finance and Transport, among others, developed in 2010 a position paper on a
Public Investment Appraisal System (PIAS). The Government approved the Public Investment
Appraisal System Strategy on February 24, 2011, point 12 of Protocol No.7. The latter sets out the
principles of developing PIAS in Armenia, the purpose of appraisal, methodological and
organizational grounds, steps to develop the institutional structure and its development. It is planned
to have a phased introduction of PIAS. A pilot will be implemented in the first phase. A specific
sector focus will be selected for this purpose (for example, road construction), and investment
projects in that sector will be appraised according to the approaches and principles in the Strategy in
cooperation with the World Bank experts. In the second phase appraising and coordinating bodies will
be formed and methodological instructions, procedures and formats necessary for PIAS will be
drafted and approved.
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33. Public Private Partnerships: Earlier in the pre-crisis period we have declared that it is
necessary to consistently deepen the public-private partnership (PPP). Due to this, the concept note
for public-private partnership was approved by the Government in 2008. The objective was to create
prerequisites for implementing large investment projects through a public-private partnership (PPP)
model. Public-private partnership is a way to develop and provide infrastructure that attracts private
sector resources and incentives. Under limited competition the Government acts as a party to the
contract and a regulator. We have several PPPs already in place, such as for the water company in
Yerevan, the Airport, and perhaps the most vivid example is Tatev Revival Project. Under the project
the government rehabilitated Shinuhair-Halidzor road and built a gas pipeline, while the private sector
built the tramway connecting to Tatev Monastery and did improvement and renovation works in the
Monastery. However, with continuing importance attached to reforms in this sector the Government is
aiming at introducing a basic framework for PPP that allows leveraging government managerial and
financial resources in these and other sectors such as roads and strengthening Government's ability to
monitor/supervise existing PPPs.
34. Conflict of Interest: The Government approved the new form for calculating the annual
income of individuals. According to this decision, declarations will not be collected from 15 thousand
public servants. The logic behind the enacted law is that they, if need be, will at the end of the year
file information under the current law for taxation purposes, while the 500 high-ranking officials will
be the target and the control of them will already be carried out by the newly formed Ethics
Committee. The Ethics Committee will, within three days of receipt of public information, place it in
the declarations register planned also to be provided online.
35. Civil Service Compensation Policies: Tackling the economic crisis and fostering a
sustainable recovery would require that we be able to attract and retain the best human capital
available. This will improve communication between the private and the public sector, and through
the channel of improved regulations the government can foster rather than inhibit the competitiveness
of Armenia’s economic system. While the introduction of a competitive remuneration and
compensation policy is a long-term objective—much depending on our fiscal capacity—we decided
to introduce one of the tools, the performance–based remuneration for the civil service, in the near
term to be enacted once the Law on the Public Sector is approved. Under this legislation, budget
managers in spending units will be able to link compensation to performance based on the results
coming from the existing evaluation system.
In the meantime, it is planned to provide social benefits to civil servants. They will be able to
access the benefits in 2012, in particular, pay interest on mortgage loans from these funds, cover
health expenses through insurance policies, pay tuition fees for students in their families and cover
vacation expenses. These benefits have a social focus and first of all will benefit low-income civil
servants, since the benefits package will be equally provided to them.
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Project Monitoring and Evaluation
36. The Ministry of Finance is the main counterpart for implementation of the DPO series. To
facilitate coordination of reforms the Management Board was set up by the Prime Minister’s Decree
№1078-N dated December 25, 2009, which is chaired by the Deputy Minister of Finance in charge of
macroeconomic policies. The Board has met regularly over the past several months since its
establishment and contributed to effective performance monitoring on our overall program, as well as
served as a vehicle to fine-tune our measures. Critical reforms supported by DPOs were implemented
through a participatory process with stakeholders (particularly, Higher Education Strategy,
introduction of copayments in the health sector, etc.). The Government also issued a decree on May
13, 2010 to set a time-table for implementation of the DPO-2 and DPO-3 prior actions with clear
responsible government bodies for each prior action.
37. The Ministry of Finance has also regularly collected key monitoring and evaluation indicators
on the results of reforms planned under DPO-s.
Tigran Sargsyan
Prime Minister
Republic of Armenia
60
Annex 6: Letter of Development Policy (Armenian Version)
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Annex 7: IMF Board Statement
The Acting Chair’s Statement
Armenia—Third Reviews Under the Extended Financing Facility
and Extended Credit Facility, and Request for Modification of
Performance Criteria
Executive Board Meeting 11/120
December 12, 2011
1. The Armenian authorities should be commended for continued implementation of
sound policies under the Fund-supported program, which have helped underpin the
moderation of inflation this year and the continuing post-crisis recovery.
2. Fiscal policies have been prudent, with the budget deficit reduced significantly again
in 2011, and further consolidation planned for 2012 and beyond. This should help ensure
fiscal and debt sustainability and reduce vulnerabilities. The 2012 tax package is welcome, as
it will ease the adjustment burden on spending. Further measures are expected in the
forthcoming tax strategy paper.
3. Monetary policy helped to mitigate inflationary pressures, and more active liquidity
management has kept market rates more in line with the policy rate. Further efforts are
needed, however, to reduce volatility. In addition, while private inflows have continued and
banking indicators remain strong, ongoing efforts to improve banking sector monitoring and
resilience are welcome.
4. Structural reforms should help strengthen growth and contribute to external
adjustment. Broad-based reforms should aim at enhancing the business environment and
promoting competitiveness, greater productivity, and higher exports. While progress is being
made, a decisive breakthrough is needed to reduce regulation, improve transparency and
89
evenhandedness, and promote domestic competition.
5. Armenia faces increasing downside risks from the global environment, which may
exacerbate its existing vulnerabilities. While the ongoing fiscal adjustment and higher
reserves targets have helped strengthen buffers, the elevated post-crisis public debt burden
now limits policy space. Timely and prudent policy responses will be needed in the period
ahead, involving greater exchange rate flexibility and steadfast progress to strengthen the
business environment and increase competitiveness.
90
Annex 8: Armenia At-A-Glance
Armenia at a glance 1/11/12
Europe & Lower
Key D evelo pment Indicato rs Central middle
Armenia Asia income
(2010)
Population, mid-year (millions) 3.1 404 3,811
Surface area (thousand sq. km) 30 23,549 31,898
Population growth (%) 0.2 0.3 1.2
Urban population (% of to tal population) 64 64 41
GNI (Atlas method, US$ billions) 9.9 2,746 8,846
GNI per capita (Atlas method, US$) 3,200 6,793 2,321
GNI per capita (PPP, international $) 5,410 12,609 4,784
GDP growth (%) 2.1 -5.8 7.1
GDP per capita growth (%) 1.9 -6.1 5.9
(mo st recent est imate, 2004–2010)
Poverty headcount ratio at $1.25 a day (PPP, %) <2 4 ..
Poverty headcount ratio at $2.00 a day (PPP, %) 12 9 ..
Life expectancy at birth (years) 74 70 68
Infant mortality (per 1,000 live births) 20 19 43
Child malnutrition (% of children under 5) 4 .. 24
Adult literacy, male (% of ages 15 and o lder) 100 99 87
Adult literacy, female (% of ages 15 and o lder) 99 97 74
Gross primary enro llment, male (% of age group) 97 100 109
Gross primary enro llment, female (% of age group) 100 98 105
Access to an improved water source (% of population) 96 95 86
Access to improved sanitation facilities (% of population) 90 89 50
N et A id F lo ws 1980 1990 2000 2010 a
(US$ millions)
Net ODA and official aid .. 3 216 528
Top 3 donors (in 2008):
Japan .. 0 9 99
United States .. 0 103 78
European Union Institutions .. 0 12 39
Aid (% of GNI) .. 0.1 11.0 6.0
Aid per capita (US$) .. 1 70 171
Lo ng-T erm Eco no mic T rends
Consumer prices (annual % change) .. 7.7 -0.8 8.2
GDP implicit deflator (annual % change) .. 79.4 -1.4 9.2
Exchange rate (annual average, local per US$) .. 0.0 539.5 373.7
Terms of trade index (2000 = 100) .. .. 100 70
1980–90 1990–2000 2000–10
Population, mid-year (millions) 3.1 3.5 3.1 3.1 1.4 -1.4 0.0
GDP (US$ millions) .. 2,257 1,912 9,371 .. -1.9 9.2
Agriculture .. 17.4 25.5 19.6 .. 0.5 6.0
Industry .. 52.0 39.0 36.0 .. -7.4 9.2
M anufacturing .. 32.8 18.5 10.7 .. -4.3 5.8
Services .. 30.7 35.5 44.5 .. 6.6 10.4
Household final consumption expenditure .. 45.9 97.1 80.9 .. -0.1 7.4
General gov't final consumption expenditure .. 18.3 11.8 13.1 .. -1.5 8.2
Gross capital formation .. 47.1 18.6 33.4 .. -1.9 16.3
Exports o f goods and services .. 35.0 23.4 20.6 .. -18.4 5.3
Imports of goods and services .. 46.3 50.5 44.8 .. -12.7 7.7
Gross savings .. .. 3.7 15.6
Note: Figures in italics are for years other than those specified. 2010 data are preliminary. Group data are for 2009. .. indicates data are not available.
a. A id data are for 2009.
Development Economics, Development Data Group (DECDG).
(average annual growth %)
(% of GDP)
10 5 0 5 10
0-4
15-19
30-34
45-49
60-64
75-79
percent of total population
Age distribution, 2009
Male Female
0
10
20
30
40
50
60
1990 1995 2000 2009
Armenia Europe & Central Asia
Under-5 mortality rate (per 1,000)
-50
-40
-30
-20
-10
0
10
20
95 05
GDP GDP per capita
Growth of GDP and GDP per capita (%)
91
Armenia
B alance o f P ayments and T rade 2000 2010
(US$ millions)
Total merchandise exports (fob) 300 1,011
Total merchandise imports (cif) 885 3,783
Net trade in goods and services -519 -2,275
Current account balance -278 -1,373
as a % of GDP -14.6 -14.7
Workers' remittances and
compensation of employees (receipts) 87 769
Reserves, including gold 314 1,866
C entral Go vernment F inance
(% of GDP)
Current revenue (including grants) 16.7 21.6
Tax revenue 14.8 19.3
Current expenditure 16.3 21.0
T echno lo gy and Infrastructure 2000 2009
Overall surplus/deficit -4.9 -5.0
Paved roads (% of to tal) 96.8 90.5
Highest marginal tax rate (%) Fixed line and mobile phone
Individual 20 20 subscribers (per 100 people) 18 105
Corporate 20 20 High technology exports
(% of manufactured exports) 4.5 3.7
External D ebt and R eso urce F lo ws
Enviro nment
(US$ millions)
Total debt outstanding and disbursed 916 6,103 Agricultural land (% of land area) 46 61
Total debt service 46 913 Forest area (% of land area) 10.8 9.3
Debt relief (HIPC, M DRI) – – Terrestrial protected areas (% of land area) .. ..
Total debt (% of GDP) 47.9 65.1 Freshwater resources per capita (cu. meters) 2,241 2,232
Total debt service (% of exports) 8.2 30.7 Freshwater withdrawal (billion cubic meters) 1.7 2.8
Foreign direct investment (net inflows) 104 935 CO2 emissions per capita (mt) 1.1 1.6
Portfo lio equity (net inflows) 0 -1
GDP per unit o f energy use
(2005 PPP $ per kg of o il equivalent) 3.5 5.8
Energy use per capita (kg of o il equivalent) 651 974
Wo rld B ank Gro up po rtfo lio 2000 2009
(US$ millions)
IBRD
Total debt outstanding and disbursed 8 53
Disbursements 0 49
Principal repayments 0 1
Interest payments 0 0
IDA
Total debt outstanding and disbursed 388 1,161
Disbursements 54 142
P rivate Secto r D evelo pment 2000 2010 Total debt service 3 21
Time required to start a business (days) – 15 IFC (fiscal year)
Cost to start a business (% of GNI per capita) – 3.1 Total disbursed and outstanding portfo lio 0 36
Time required to register property (days) – 7 o f which IFC own account 0 36
Disbursements for IFC own account 0 3
Ranked as a major constraint to business 2000 2010 Portfo lio sales, prepayments and
(% of managers surveyed who agreed) repayments for IFC own account 0 3
Tax administration .. 43.8
Tax rates .. 37.8 M IGA
Gross exposure 3 0
Stock market capitalization (% of GDP) 0.1 0.3 New guarantees 3 0
Bank capital to asset ratio (%) 14.3 21.8
Note: Figures in italics are for years other than those specified. 2010 data are preliminary. 1/11/12
.. indicates data are not available. – indicates observation is not applicable.
Development Economics, Development Data Group (DECDG).
0 25 50 75 100
Control of corruption
Rule of law
Regulatory quality
Political stability
Voice and accountability
Country's percentile rank (0-100)higher values imply better ratings
2009
2000
Governance indicators, 2000 and 2009
Source: Kaufmann-Kraay-Mastruzzi, World Bank
IBRD, 106IDA, 1,161
IMF, 741
Other multi-lateral, 247
Bilateral, 1,042
Private, 2,188
Short-term, 618
Composition of total external debt, 2010
US$ millions
92
Millennium Development Goals Armenia
With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)
Go al 1: halve the rates fo r extreme po verty and malnutrit io n 1990 1995 2000 2009
Poverty headcount ratio at $1.25 a day (PPP, % of population) .. 17.5 11.0 <2
Poverty headcount ratio at national poverty line (% of population) .. .. 50.9 34.1
Share of income or consumption to the poorest qunitile (%) .. 5.4 7.6 10.3
Prevalence of malnutrition (% of children under 5) .. .. 2.6 4.2
Go al 2: ensure that children are able to co mplete primary scho o ling
Primary school enro llment (net, %) .. .. 91 84
Primary completion rate (% of relevant age group) .. 105 101 98
Secondary school enro llment (gross, %) .. 90 90 93
Youth literacy rate (% of people ages 15-24) 100 .. 100 100
Go al 3: e liminate gender disparity in educat io n and empo wer wo men
Ratio of girls to boys in primary and secondary education (%) .. .. 104 103
Women employed in the nonagricultural sector (% of nonagricultural employment) .. 51 47 50
Proportion of seats held by women in national parliament (%) 36 6 3 9
Go al 4: reduce under-5 mo rtality by two -thirds
Under-5 mortality rate (per 1,000) 56 48 36 22
Infant mortality rate (per 1,000 live births) 48 42 32 20
M easles immunization (proportion of one-year o lds immunized, %) 93 96 92 96
Go al 5: reduce maternal mo rtality by three-fo urths
M aternal mortality ratio (modeled estimate, per 100,000 live births) .. .. 34 29
B irths attended by skilled health staff (% of to tal) .. 96 97 100
Contraceptive prevalence (% of women ages 15-49) .. .. 61 53
Go al 6: halt and begin to reverse the spread o f H IV/ A ID S and o ther majo r diseases
Prevalence of HIV (% of population ages 15-49) 0.1 0.1 0.1 0.1
Incidence of tuberculosis (per 100,000 people) 33 47 71 73
Tuberculosis case detection rate (%, all forms) 50 77 61 70
Go al 7: halve the pro po rt io n o f peo ple witho ut sustainable access to basic needs
Access to an improved water source (% of population) .. 92 93 96
Access to improved sanitation facilities (% of population) .. 88 89 90
Forest area (% of land area) 12.0 11.5 10.8 9.3
Terrestrial protected areas (% of land area) .. .. .. ..
CO2 emissions (metric tons per capita) 1.1 1.1 1.1 1.6
GDP per unit o f energy use (constant 2005 PPP $ per kg of o il equivalent) 1.4 3.4 3.5 5.8
Go al 8: develo p a glo bal partnership fo r develo pment
Telephone mainlines (per 100 people) 15.8 18.1 17.3 20.4
M obile phone subscribers (per 100 people) 0.0 0.0 0.6 85.0
Internet users (per 100 people) 0.0 0.1 1.3 6.8
Personal computers (per 100 people) .. 0.3 0.8 9.7
Note: Figures in italics are for years other than those specified. .. indicates data are not available. 1/11/12
Development Economics, Development Data Group (DECDG).
A rmenia
0
25
50
75
100
125
2000 2005 2009
Primary net enrollment ratio
Ratio of girls to boys in primary & secondary education
Education indicators (%)
0
20
40
60
80
100
120
2000 2005 2009
Fixed + mobile subscribers
Internet users
ICT indicators (per 100 people)
0
25
50
75
100
1990 1995 2000 2009
Armenia Europe & Central Asia
Measles immunization (% of 1-year olds)
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To Gäncä
To T’bilisiTo T’bilisi
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43°E
44°E
44°E
45°E
46°E 47°E
39°N
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41°N 41°N
43°E
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ARMENIA
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.
0 10 20 30 40
0 10 20 30 Miles
50 Kilometers
IBRD 33364
SEPTEMBER 2004
ARMENIASELECTED CITIES AND TOWNS
PROVINCE (MARZ) CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
PROVINCE (MARZ) BOUNDARIES
INTERNATIONAL BOUNDARIES
